Pre-emptive right
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Pre-emptive rights give investors the right to maintain their percentage ownership of a company by purchasing additional shares when new shares are issued. This protects investors from dilution of their stake if new shares are issued at a lower price than what the investors originally paid. Pre-emptive rights also incentivize companies to issue stock at higher valuations. However, some companies choose not to offer these rights because it can make raising equity capital through new share issuances more inconvenient.
Pre-emptive right
- 2. Definition • Pre-emptive rights are a clause in an Derivative, security or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the security. • Pre-emptive rights are sometimes called "subscription rights," "anti- dilution provisions," or "subscription privileges." Pre-emptive rights are particularly relevant for convertible preferred stock. • Pre-emptive rights protect investors from the risk of new shares being issued at a lower price than the investors previously received.
- 3. Why they are issued? • They also are an incentive for companies to perform well so they can issue stock at higher valuations when need be. • They can arise on the allotment, transfer or transmission of shares. • Such rights may be important to ensure that a shareholder's proportion of the voting and other rights in the company (such as dividend rights) are not diluted. • Some companies choose to do away with the pre-emptive right because it can be inconvenient when attempting to raise cash from equity issuance.
- 4. Cont’d • This provision entitles investors to participate in later securities issuances on a pro rata basis (assuming conversion of all preferred stock). • The right can be limited to investors who hold a certain large amount of preferred stock. • The right does not apply in the case of issuances that are excluded from issuances that trigger the anti-dilution adjustment, such as stock issued upon the conversion of preferred stock or stock issued as part of an equity compensation plan