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What Are Preemptive Rights?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 August 2014
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    Conjecture Corporation
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Also known as preemption rights or simply preemption, preemptive rights are the rights to have precedence in the acquisition of additional shares of any stock option currently owned by an investor. In general, rights of this type allow the investor to purchase an amount that is equal to the number of shares he or she currently owns. A purchase option of this type is associated with the acquisition of new shares just released for sale, and not shares that have been on the market for some time.

The actual function of preemptive rights varies from one country to another, depending on any regulations that qualify this process of offering new shares to current investors. In some nations, a shareholder may exercise preemptive rights and make the purchase prior to a public offering of the new shares. Other nations require that the release of the shares be made public first, but allow current shareholders to issue an order to purchase the shares for a short period of time after the public offering. During this period, any order placed by an existing shareholder takes precedence over orders issued by investors who do not currently own other shares of the same stock.

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Preemptive rights can be beneficial to both the investor and the issuing corporation. Investors have the opportunity to acquire additional shares of a stock that is already performing well for them, while competing with a relatively small number of other investors who are interested in the shares. For corporations, preemptive rights makes it possible to offer the shares to a collective group of investors who are highly likely to be interested in acquiring the new shares, thus making it possible to receive the proceeds from the sale sooner rather than later, a move that increases the amount of cash that is available for the uses of the corporation.

While the contemporary definition of preemptive rights focuses on the acquisition of shares of stock, the term has also been used historically to refer to a condition related to the acquisition of property. This concept was commonly employed in the United States during its gradual expansion after obtaining independence from Great Britain. During the 19th century, an individual who established a permanent home on frontier property was given the chance to become the legal owner of that property once the area was organized as a territory or a state.

Another time-honored application of preemptive rights focused on the right of a nation to detain vessels passing through territories or other holdings of that country, including the waterways controlled by the nation. Preemptive rights in this application allowed the country the right to require that the vessel remain in the area for a period of time, and make any merchandise in transport available to purchase by the nation’s citizens. This is an approach to preemptive rights that is still included in the legal codes of a number of nations around the world, but is only invoked in rare situations.

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