Preemptive Rights

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Definition of 'Preemptive Rights'

Preemptive rights, also known as a right of first refusal, are a type of shareholder right that gives existing shareholders the first opportunity to purchase additional shares of a company's stock before they are offered to the general public. This allows shareholders to maintain their proportionate ownership in the company and to prevent dilution of their shares.

Preemptive rights are typically granted in the company's articles of incorporation or bylaws. They can also be granted through a shareholder agreement.

There are two types of preemptive rights:

* **Full preemptive rights** give shareholders the right to purchase all of the new shares being issued.
* **Fractional preemptive rights** give shareholders the right to purchase a portion of the new shares being issued, based on their percentage ownership of the company's existing shares.

Preemptive rights are important because they protect shareholders from dilution. When a company issues new shares, the value of each existing share is diluted because there are now more shares outstanding. Preemptive rights allow shareholders to purchase new shares at the same price as the general public, so they can avoid this dilution.

However, preemptive rights can also be disadvantageous to companies. They can make it more difficult for companies to raise capital by issuing new shares, because they may have to offer existing shareholders a higher price than they would like.

Overall, preemptive rights are a valuable tool for shareholders. They can help to protect shareholders from dilution and to maintain their proportionate ownership in a company. However, they can also be disadvantageous to companies, making it more difficult for them to raise capital.

Here are some additional details about preemptive rights:

* Preemptive rights are typically exercised on a pro rata basis, meaning that each shareholder is allowed to purchase new shares in proportion to their existing ownership stake in the company.
* Preemptive rights can be waived by shareholders. However, if a shareholder waives their preemptive rights, they may not be able to exercise them in the future.
* Preemptive rights can be terminated by the company. However, if a company terminates preemptive rights, they must provide shareholders with fair compensation.

Preemptive rights are a complex topic with many nuances. If you have any questions about preemptive rights, you should consult with an experienced securities attorney.

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