Also known as: preemptive right · pre-emptive rights · pre-emption rights · preemption rights · rights of preemption · preemption right
Written by attorneys · grounded in primary & secondary sources — see below
A right of existing shareholders to purchase a pro rata portion of a corporation's unissued shares before they are offered to outsiders. The right arises only to the extent the articles of incorporation expressly elect it or use words of similar effect. When elected, the right is granted on uniform terms set by the board and is subject to statutory exceptions for certain issuances such as those for noncash consideration.
Pilar Pena owns twenty percent of Progressive Healthcare. The board authorizes and sells a new class of shares solely to an outside investor for cash. Because the articles contain no language electing preemptive rights, Pilar has no right to demand a proportional allotment and the issuance proceeds without her participation.
Pamela Phillips holds shares in Prime Logistics. Directors circulate a misleading proxy statement describing a merger that will issue new shares exclusively to the merger partner. Shareholders who relied on the statement and failed to assert any preemptive claim later discover the dilution. The proxy violation supplies an independent basis for relief even though the articles never elected preemptive rights.
Select any source to read its text and confirm it supports the definition.
Priya Prasad leases commercial space from Prosperity Investments under a long-term ground lease containing a right of first refusal on any sale of the fee. When the landlord receives a third-party offer, the clause requires only that the landlord first offer the property to Priya on the same terms. The right does not compel a sale and therefore does not destroy alienability.
Pearl Porter and Perry Pratt each own forty percent of Prism Analytics, a closely held corporation whose articles are silent on preemptive rights. The majority shareholder causes the board to issue new shares to itself at a low price, reducing the minority stakes. The minority owners have no preemptive claim under the default rule and must instead pursue a fiduciary-duty challenge to the issuance.
Piper Patel owns a minority interest in a Massachusetts close corporation whose articles do not elect preemptive rights. The majority sells new shares to itself at a bargain price without offering Patel any opportunity to participate. Although the default rule denies preemptive rights, the transaction still violates the strict fiduciary duties owed among close-corporation shareholders.
Two co-venturers form a corporation to develop property. The articles omit any preemptive-rights provision. One venturer contributes additional capital in exchange for newly issued shares. The other venturer cannot invoke preemptive rights under the default statutory rule and must instead rely on any fiduciary duties arising from the original joint-venture relationship.
Shareholders possess preemptive rights only to the extent the articles of incorporation so provide. The statute creates a default rule of no preemptive rights. A statement in the articles electing preemptive rights or using words of similar effect triggers the statutory scheme unless the articles expressly modify it.
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A shareholder may waive preemptive rights. A written waiver is irrevocable even without consideration. Oral waivers remain revocable until acted upon.
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No preemptive right exists with respect to shares sold otherwise than for cash. The statute expressly excludes such issuances from the operation of preemptive rights even when the articles have elected them.
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Even when the articles do not elect preemptive rights, majority shareholders in a close corporation still owe strict fiduciary duties to minority shareholders. An issuance that disproportionately benefits the majority may be challenged on fiduciary grounds regardless of the absence of statutory preemptive rights.
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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…