Investing for Beginners , investing

A preemptive right is a right of company’s shareholders to acquire more shares in case of new share issue proportionally. Usually such right is described in shareholder’s agreement.

Such right is important for corporate law and smaller shareholders. If such right would be ignored, then non-control shareholders could be easily pushed-out of the company’s ownership. Without such right main shareholder could decide to issue new shares at very cheap price and to sell these shares exceptionally for himself. However, this scheme is used by some ‘business sharks’ to push out other shareholders even in accordance to preemptive right rule. It is simple if they know that other shareholders do not have the required funds to purchase additional stocks.