View random article

What Is a Pre-Emptive Right?

Shareholders of a corporation may wish to keep their stocks or buy available stocks before the general public comes into knowledge of available stocks for sale. This right is referred to as pre-emptive right or a call to option. It is also known as a subscription right. This kind of right is exercised by shareholders who wish to maintain control over a corporation by purchasing available stocks before the public is informed of such availability. Thus, it can be said that the purchasing power of the shareholders supersedes that of the general public.

A stock or share is a piece of the corporation that is bought by individuals who become shareholders or stockholders. These people are essentially the owners of the corporation and are entitled to certain rights. One such right is pre-emptive right. When a corporation has available stocks for sale or issues new stock for sale, it informs its shareholders in order for these individuals to determine a course of action. A letter will be sent to all shareholders informing them of the availability of stocks or shares for sale, and they are given a time period, usually 30 to 60 days, to act on the available stocks or shares.

Shares or stocks become available when the corporation issues new stocks or a shareholder sells his or her stocks. Shareholders exercise a pre-emptive right to either buy the stocks or let the public buy them. This is similar to the right of first refusal wherein an individual is given priority in purchasing a piece of property before anyone else.

Featured in Finance