Also known as:rights of preemption · preemption right · preemptive right · preemptive purchase right
Written by attorneys · grounded in primary & secondary sources — see below
2 senses
1
in corporate law
An option granted to existing shareholders to purchase newly issued shares in proportion to their current holdings. The option arises only when the articles of incorporation expressly provide for it under the default rule that shareholders otherwise hold no such right.
2
in property law
A right allowing a designated person to purchase property on specified terms before it may be sold to a third party. The right is enforceable when its price and timing terms are reasonable at the time of the donative transfer.
Each sense below has its own examples, sources, and questions.
Sense 1
1
in corporate law
An option granted to existing shareholders to purchase newly issued shares in proportion to their current holdings. The option arises only when the articles of incorporation expressly provide for it under the default rule that shareholders otherwise hold no such right.
Sources & Authorities· 2 primary sources
Select any source to read its text and confirm it supports the definition.
Model Codes
Examples1
Shareholder Demand for Pro Rata Shares
Valley Craft's articles contained a clause protecting existing shareholders from dilution. The board authorized a new class of patron shares and sold the entire class to First Studio for a non-cash endowment. Jason, a twenty percent common shareholder, demanded the opportunity to purchase a proportional portion on identical terms before the issuance closed. The corporation refused, citing the absence of an express election of preemptive rights in the articles.
Frequently Asked3
When do shareholders possess preemptive rights under the Model Business Corporation Act?+
Shareholders possess preemptive rights only to the extent the articles of incorporation expressly provide for them. The statute establishes a default rule of no preemptive rights. Language electing such rights triggers proportional purchase opportunities on uniform terms set by the board.
Supporting sources
Does a general anti-dilution clause in the articles create preemptive rights?+
A general anti-dilution clause does not create preemptive rights. The statute requires language that elects preemptive rights or achieves a comparable protective effect. A broad policy statement fails to satisfy this threshold.
Supporting sources
Sense 2
2
in property law
A right allowing a designated person to purchase property on specified terms before it may be sold to a third party. The right is enforceable when its price and timing terms are reasonable at the time of the donative transfer.
Sources & Authorities· 2 sources
Select any source to read its text and confirm it supports the definition.
Restatements
Cases
Examples1
Testamentary Right of First Refusal
Michael's will devised a law office suite to his son Daniel but granted Harper & Cole LLP a right of first refusal exercisable at a fixed formula price if Daniel ever sold. Years later a large firm offered more than triple the formula amount. Harper & Cole attempted to exercise within the stated period. Daniel sought a declaratory judgment that the clause unreasonably restrained alienation.
The Symphony Space, Inc. v. Pergola Properties, Inc.669 N.E.2d 799 (1996)
Frequently Asked2
When is a right of first refusal in a will an invalid restraint on alienation?+
A right of first refusal in a will is invalid when its price or timing terms are unreasonable at the time of the donative transfer. A fixed price that has become far below market or an excessively long exercise period renders the provision unenforceable.
Supporting sources
What factors determine whether a preemptive provision in a donative transfer is reasonable?+
Reasonableness turns on whether the designated holder must pay a price reflecting fair market value and whether the holder receives a commercially sensible period to decide. A matching right tied to a bona fide third-party offer satisfies the price requirement.
Are preemptive rights available for shares issued for non-cash consideration?+
Preemptive rights do not apply to shares sold otherwise than for cash. The statute expressly excludes such issuances even when preemptive rights otherwise exist.
Supporting sources
preemptive right
— and, second, if it is a
preemptive right
, whether the rule applies to it. Preliminarily, it is clear that before enactment of EPTL 9-1.1 in 1965 Bruken’s
right
to acquire the lots,…
, sometimes also referred to as a
preemptive right
, requires Hal or Martha Wallis to give Wildenstein at least 30 days prior notice of the terms of any proposed sale of a painting covered by the settlement agreement, and provides that…
to
purchase
the property on the same terms and conditions contained in any bona fide offer received by, and acceptable to, the grantee, his heirs, executors, administrators, and assigns.…
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