Preemptive Rights: Should They Be Available?

When attempting to attract capital, many corporations issue larger amounts of shares. As discussed in other posts, there are many types of stocks that can be issued, each with their own form of enticement. These include common and preferred stock. One additional feature of stocks that a corporation may consider in order to entice investors is preemptive rights. Depending on the status of your corporation, it may be wise to include preemptive rights as a way to attract investors.

Preemptive rights refer to the right of a shareholder to maintain her percentage of ownership interest in the corporation when new shares are issued for money. If a corporation provides for preemptive rights, a shareholder will be given first priority to purchase new stocks as they become available. The amount of stock available for purchase will depend on the percentage the investor held prior to the issuance of new stock.

Preemptive rights are not automatic. They must be in articles of incorporation. Again, these preemptive rights will only trigger when new stocks become available for money. If, for example, new stock is issued and exchanged for property and not cash, the rights will not trigger, and the shareholder does not have the right to purchase a corresponding amount of shares.

To shareholders, preemptive rights provide stability and predictability. Preemptive rights are a wonderful tool to attract large shareholders who wish to invest heavily in a corporation. It allows them to know that their percentage of stock will never dip below a certain percentage threshold. In turn, investors may be keener on investing with your corporation. There are, however, detriments to allowing for preemptive rights. For example, larger shareholders may entrench themselves, and, aside from duties to the corporation that emerge due to the sheer volume of shares held, can have a large say in the corporation.

Many corporations include preemptive rights in their issued shares. They are a great tool to entice high volume investors. As a result, it may be in your corporation’s best interests to issue stocks with preemptive rights as well. Consulting with a legal team that can help your corporation issue preemptive rights can ensure you undertake the appropriate steps to do so. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.