Also known as: preemptive rights · pre-emptive right · pre-emptive rights · right of preemption · preemption right
Written by attorneys · grounded in primary & secondary sources — see below
2 senses
A statutory privilege allowing existing shareholders to purchase a proportional share of a corporation's newly issued shares before they are offered to outsiders. The privilege arises only when the articles of incorporation expressly elect it. Absent such an election, shareholders hold no default entitlement to maintain their ownership percentages upon new issuances.
A right of first refusal that requires an owner who decides to sell property to offer it first to a designated holder on specified terms. The right does not compel a sale by an unwilling owner. It is evaluated as a potential restraint on alienation under rules that assess reasonableness of price and duration.
Each sense below has its own examples, sources, and questions.
A statutory privilege allowing existing shareholders to purchase a proportional share of a corporation's newly issued shares before they are offered to outsiders. The privilege arises only when the articles of incorporation expressly elect it. Absent such an election, shareholders hold no default entitlement to maintain their ownership percentages upon new issuances.
Select any source to read its text and confirm it supports the definition.
Patricia Patel owns twenty percent of Phoenix Technologies. The board approves a discounted issuance of new common shares to an outside venture fund. The articles contain only a vague recital about protecting founders from dilution and say nothing about preemptive rights. Patricia demands proportional participation but receives none because the statute supplies no right absent an express article election.
Philip Powell, a shareholder in a manufacturing firm, learns after a merger vote that the proxy statement concealed dilution of his stake through new share issuances. He sues alleging the omission deprived him of preemptive opportunities that would have preserved his percentage. The claim centers on whether the proxy process fairly informed shareholders of rights tied to the transaction.
No. The default rule provides that shareholders have no preemptive right to acquire unissued shares unless the articles of incorporation expressly so provide. Vague language about protecting founders from dilution does not satisfy the requirement of an affirmative election.
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No. When articles limit preemptive rights to voting common shares, the grant does not extend to a newly created nonvoting class. The statutory default supplies no rights at all, so courts do not expand the charter language beyond its express terms.
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A right of first refusal that requires an owner who decides to sell property to offer it first to a designated holder on specified terms. The right does not compel a sale by an unwilling owner. It is evaluated as a potential restraint on alienation under rules that assess reasonableness of price and duration.
Select any source to read its text and confirm it supports the definition.
Paige Porter receives property subject to a preemptive right held by a neighboring developer that lasts indefinitely and fixes price at an outdated formula. When she receives a market offer, the holder seeks to match at the stale price. She sues to invalidate the right as an unreasonable restraint because its duration and pricing terms exceed permissible limits.
Prosperity Investments holds a preemptive right created by an early nineteenth-century deed that requires any sale of adjacent land to be offered first at a fixed sum. When the current owner receives a modern market bid, the holder attempts to enforce the ancient price. The owner challenges the right as an invalid restraint given changed circumstances and indefinite duration.
Courts generally hold that rights of first refusal are not subject to the rule because they do not give the holder power to compel an unwilling owner to sell. Validity instead turns on whether the price and duration terms are reasonable under restraint-on-alienation doctrine.
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…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…
…transaction” that lasted beyond the statutory perpetuities period. In doing so, we explained that, unlike options , preemptive rights
…and corporate law contains self-defense mechanisms. Investors concerned about stock-watering often arranged for firms to issue
Pierce Patterson holds shares in a family corporation whose articles are silent on preemptive rights. The board issues new shares to an outside investor at a discount. Pierce claims an inherent right to participate to avoid dilution. The court rejects the claim because modern statutes require an affirmative article grant rather than implying rights from close ownership.
Pablo Perez, a minority shareholder, objects when the controlling group authorizes new shares sold exclusively to an affiliate without offering him a proportional block. The articles contain no preemptive language. He argues fiduciary duties should create participation rights. The court holds that statutory silence controls and no preemptive right exists without an article election.
No. Even when articles create an exception allowing preemptive rights if the board specifically provides for them by resolution, a resolution that directs shares solely to an outside party without mentioning preemptive rights leaves the general disclaimer in force.
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Yes. Even if articles elect preemptive rights, the statute excepts shares sold otherwise than for cash. A transaction bundling an endowment and long-term lending commitment therefore falls outside any preemptive obligation.
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