WHAT IS PREEMPTIVE RIGHT
A pre-emptive right is essentially a right of first refusal. The shareholder may exercise the option to buy additional shares but is under no obligation to do so. It provides an “anti-dilution right” to the shareholders by giving them an opportunity to buy more shares before they are offered to new investors in order to maintain the same level of shareholding and/or voting rights as the company grows.
WHY ARE PREEMPTIVE RIGHTS IMPORTANT TO SHAREHOLDERS
The preemptive right is important to shareholders because it protects them from dilution of their share in a company. Whenever a company issues more shares, minority shareholders could lose their voting power because as more shares are issued the company’s ownership becomes more diluted. In such a scenario, a preemptive right can give those shareholders the opportunity to add more shares to their portfolio whenever a company issues more shares.
EXAMPLE OF PREEMPTIVE RIGHTS
For illustration purposes, Company JC’s initial public offering (IPO) consists of 500 shares and Dylan purchases 50 of the shares (that’s a 10% equity interest) and was granted a preemptive right.
Down the road, Company JC makes a secondary offering of 500 additional shares. Dylan who holds a preemptive right must be given the opportunity to purchase as many shares as necessary to protect his 10% equity stake. In this scenario, that would be 50 shares if the prices of both issues were the same.
Assuming Dylan opts not to exercise the preemptive right, he will still have 50 shares, but they will represent only 5% of the total issued shares.
Authored by Chin Kah Wei, Gavie
Managing Partner from JR Ng & Chin | JC Law. You may contact him at email@example.com
The contents of this publication are given as general information for reference purposes only and do not constitute the firm’s legal advice. For any specific matter or legal issue, please do not rely on this publication but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.