A privilege possessed by certain shareholders that gives them the right to purchase additional shares in the company prior to the release of additional shares to the public. Usually issued only to early-round investors and majority shareholders as a benefit of their contributions to the company’s growth. Also known as “subscription rights.”
After a company goes public by completing the process of an initial public offering, that corporation may still have unissued authorized shares subject to the terms of its charter. Even if a company has issued all of its authorized shares, it may be able to issue additional shares if an amendment to its charter specifically permits this action. When a company exercises a release of additional authorized shares, this event is called either a secondary offering or a follow-on offering. Just like an initial public offering, a secondary offering is generally undertaken in an effort to raise capital. Preemptive rights allow select existing shareholders to purchase secondary offering shares before the secondary offering is made public. In general, preemptive rights give a shareholder a right to buy a proportional interest in follow-on shares.
There is no obligation for shareholders with preemptive rights to buy additional shares. They are simply given the option to do so and may refuse if they wish to.
Husband: “Did you hear that Facebook just announced that it plans to hold a secondary offering?”
Spouse: “No, I didn’t. Due to our preemptive rights tied to our existing stock, we should be allowed to buy an equal number of shares before the secondary offering goes public. Does that option interest you?”
Husband: “There has been a lot of scandal surrounding Facebook lately. I am not sure exercising our preemptive rights would be the wisest call. Let me talk to our financial adviser and get back to you.”
Spouse: “In the meantime, how do you feel about taking out the garbage?”
Husband: “I feel like declining to exercise my right to engage in trash removal.”
Spouse: “Then I will be exercising my right to insist that you sleep on the couch.”