Preemptive Rights Definition

Rights delineated in the articles of incorporation, or in some cases by state statutes, granting shareholders the first opportunity to buy a new issue of stock when a corporation issues new stock so that the new stock does not dilute the shareholder's proportional interests (voting & ownership). The shareholder has the right to buy the new issue of stock, but is not required to make the purchase. If the shareholder elects not to exercise this right, the shares can then be sold in the open market. For example, if a shareholder owns 300 of 1000 outstanding common shares and the corporation wants to issue 200 more shares, a preemtive right would entitle the shareholder to acquire 60 more shares at the issue price, thus preserving the shareholder's 30 percent position.