Preemptive Rights

Sometimes a company might issue additional shares of stock, and a shareholder might reasonably be concurred that with this new issuance, the shareholder's percentage of ownership will decrease. That would, of course, be true if the shareholder retained the same number of shares in a corporation that now had a greater number of shares issued. 

A preemptive right is the right of an existing shareholder of common stock to maintain his/her percentage of ownership in a company by buying stock whenever there is a new issuance of stock for money. 

An example:

Assume a shareholder has 10 shares in a company with 50 shares outstanding. The shareholder, thus, owns 10 of the 50 outstanding shares, or 20% of the company's shares. Company plans to issue an additional 450 shares. With a preemptive right, the shareholder will have the right to purchase a number of shares that will allow the shareholder to retain that 20% ownership. 

The company, once those additional 450 shares are issued, will have 500 outstanding shares. To retain the 20% ownership, shareholder will need to own 100 of those 500 shares. Because the shareholder already owns 10 shares, a preemptive right will give the shareholder the option of purchasing 90 of the 450 additional shares. 

Importantly, preemptive rights are not the default rule. Shareholders do not have preemptive rights to purchase newly issues shares unless the articles of incorporation provide that right. And even if the articles of incorporation do provide for that right, shareholders generally will not have a preemptive right in shares that are issued for consideration other than money or for shares issued within 6 months of the corporation incorporating.