A preemptive right is granted to shareholders under agreements such as Share Purchase Agreement, Investment Agreement, and Shareholder’s Agreement etc. This right allows shareholders to purchase additional shares in the company before offering the shares to third parties. A preemptive right prevents dilution. For example, two shareholders have equal parts in a company. If the company wants to go for second offering of shares (50% more), the shareholder’s will be diluted to 33% each. However, the preemptive right can keep the shareholder’s ownership percentage by giving the original shareholders the privilege to purchase the additional shares in the first place. A preemptive right can also prevent Hostile Takeover.
What is a “Preemptive Right”?
About the Author: Jouman Abbud
Third year Law & Accounting student at the IDC Herzliya. Dreams of becoming a leading lawyer and leaving a mark on the industry