preemptive right

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right giving existing stockholders the opportunity to purchase shares of a new issue before it is offered to others. Its purpose is to protect shareholders from dilution of value and control when new shares are issued. Although 48 U.S. states have preemptive right statutes, most states also either permit corporations to pay stockholders to waive their preemptive rights or state in their statutes that the preemptive right is valid only if set forth in the corporate charter. As a result, preemptive rights are the exception rather than the rule. Where they do exist, the usual procedure is for each existing stockholder to receive, prior to a new issue, a subscription warrant indicating how many new shares the holder is entitled to buy—normally, a proportion of the shares he or she already holds. Since the new shares would typically be priced below the market, a financial incentive exists to exercise the preemptive right.
See also subscription right.

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This entry contains information applicable to United States law only.

The privilege of a stockholder to maintain a proportionate share of the ownership of a corporation by purchasing a proportionate share of any new stock issues.

In most jurisdictions, an existing stockholder has the right to buy additional shares of a new issue to preserve equity before others have a right to purchase shares of the new issue.

A privilege extended to select shareholders of a corporation that will give them the right to purchase additional shares in the company before the general public has the opportunity in the event there is a seasoned offering. A preemptive right is written in the contract between the purchaser and the company, but does not function like a put option.

Also known as "preemption rights".

Investopedia Says:
When shareholders, usually a majority shareholder or a shareholder committing large amounts of capital to a startup company, purchase shares, they want to ensure they have as much voting power in the future as they did when they initially invested in the company. By getting preemptive rights in its shareholder's agreement, the shareholder can ensure that any seasoned offerings will not dilute his/her ownership percentage.

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