Also known as: preemptive rights · pre-emption rights · preemption rights · pre-emptive right · preemptive right · shareholder preemption · rights of first refusal
Written by attorneys · grounded in primary & secondary sources — see below
A right granted to existing shareholders to purchase a proportional share of a corporation's newly issued shares before outsiders may acquire them. The right arises only when the articles of incorporation expressly elect it or contain language of similar effect.
Select any source to read its text and confirm it supports the definition.
Horizon Angels holds twenty percent of NimbusCloud common stock. The articles contain only a vague recital about protecting founders from dilution. The board approves a discounted issuance of new common shares solely to Apex Ventures. Horizon Angels demands the chance to buy a proportional block to maintain its stake. Because the articles do not elect preemptive rights, the demand fails and the issuance proceeds without Horizon Angels.
A shareholder of J. I. Case Company learns that a merger with American Tractor Corporation was approved after circulation of a false proxy statement. The statement concealed that the merger would deprive existing shareholders of their opportunity to maintain proportional ownership through new share issuances. The shareholder sues, alleging the misleading proxy deprived holders of preemptive rights in the post-merger entity.
Meinhard and Salmon form a joint venture to lease and renovate a building. Salmon later secures an extension of the lease in his own name and offers the new opportunity only to his own associates. Meinhard claims that the extension effectively issues new ownership interests and that his preemptive rights as co-venturer entitled him to a proportional share before outsiders could participate.
Controlling shareholders of a close corporation cause the board to issue new shares exclusively to themselves at a low price. The issuance reduces a minority holder's stake from ten percent to one percent. The minority shareholder asserts that the articles' general anti-dilution language created preemptive rights that the majority violated by excluding her from the offering.
Rodd Electrotype's board approves redemption of shares from one shareholder at a favorable price without first offering the same opportunity to other shareholders. A minority shareholder claims the selective redemption diluted her interest and that the close corporation's articles and fiduciary duties required equal participation rights akin to preemptive rights before any outsider could acquire the redeemed shares.
No. The Model Business Corporation Act provides that shareholders have no preemptive right to acquire unissued shares unless the articles of incorporation expressly so provide. A vague recital about protecting founders from dilution does not satisfy this requirement.
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A statement that the corporation elects to have preemptive rights, or words of similar effect such as a directive that existing shareholders shall be protected from dilution, can trigger the rights. Courts examine whether the language is sufficiently clear to displace the statutory default of no rights.
…Clark This is a civil action brought by respondent, a stockholder of petitioner J. I. Case Company, charging deprivation of the pre-emptive rights of respondent and other shareholders by reason of a merger between Case and the American Tractor Corporation. It is alleged that the merger was effected through the circulation of a false…
…Salmon, however, was to have sole power to “manage, lease, under-let and operate” the building. There were to be certain pre-emptive rights for each in the contingency of death. The two were coadventurers, subject to fiduciary duties akin to those of partners ( King v. Barnes , 109 N. Y. 267). As to this we are all agreed. The…
…in a by-law adopted by and subject to amendment only by the stockholders.” G. L. c. 156B, § 20. We do not here suggest that such
…and corporate law contains self-defense mechanisms. Investors concerned about stock-watering often arranged for firms to issue
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No. Even if the articles elect preemptive rights, the statute creates an exception for shares sold otherwise than for cash. A transaction that includes an endowment or long-term licensing commitment in exchange for shares falls outside the scope of preemptive rights.
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Only if the articles expressly condition the disclaimer on a specific board resolution granting the rights. A resolution that merely authorizes an issuance to a third party without mentioning preemptive rights leaves the disclaimer in force.
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It depends on the articles language. A clause granting participation rights in future equity rounds may reach a new class, but sparse or ambiguous wording that does not clearly address new classes or mixed consideration often fails to create enforceable rights.
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