Pre-emption right
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A pre-emption right, right of pre-emption, or first option to buy is a contractual
right Rights are law, legal, social, or ethics, ethical principles of Liberty, freedom or entitlement; that is, rights are the fundamental normative rules about what is allowed of people or owed to people according to some legal system, social convent ...

right
to acquire certain
property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to Consumables, consume, alte ...
newly coming into existence before it can be offered to any other person or entity. It comes from the Latin verb ''emo, emere, emi, emptum'', to buy or purchase, plus the inseparable preposition ''pre'', before. A right to acquire existing property in preference to any other person is usually referred to as a ''
right of first refusal Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transactio ...
''.


Company shares

In practice, the most common form of pre-emption right is the right of existing
shareholders A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
to acquire new
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...

shares
issued by a
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...

company
in a
rights issue A rights issue or rights offer is a dividend of subscription rights to buy additional securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisd ...
, usually a public offering. In this context, the pre-emptive right is also called subscription right or subscription privilege. It is the right but not the obligation of existing shareholders to buy the new shares before they are offered to the public. In that way, existing shareholders can maintain their proportional ownership of the company and thus prevent
stock dilution Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new Equity (finance), equity. New equity increases the total shares outstanding which ha ...
. In many jurisdictions, subscription rights are automatically provided for by
statute A statute is a formal written enactment of a legislature, legislative authority that governs the legal entities of a city, State (polity), state, or country by way of consent. Typically, statutes command or prohibit something, or declare Public p ...

statute
, such as in the United Kingdom, but in other jurisdictions, there arise only if provided for under the constitutional documents of the relevant company. In the United States, for example, it is rare for publicly-listed companies to grant pre-emptive rights to shareholders, but it is common for unlisted companies to grant pre-emptive rights to venture capital and private equity investors. The European Union has brought an infringement action against Spain based on the claim that the lack of statutory pre-emptive rights under Spanish law violates the Second Company Law Directive. K. Grechenig, Discriminating Shareholders through the Exclusion of Pre-emption Rights? - The European Infringement Proceeding against Spain (C-338/06)
European Company and Financial Law Review (ECFR) 2007, p. 517-592
Other situations in which pre-emption rights are seen to arise are in property developments. Parties close to the investors are often given a right of pre-emption in relation to new flats or condominiums within a development. Overall, pre-emption right is similar to the concept of a
call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call Option (finance), option to exchange a Security (finance), security at a set price. The buyer of the call option has the righ ...

call option
.


British companies

The
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of Parliament, Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 Octobe ...
is the source of shareholder pre-emption rights in British
companies A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...

companies
. Under Section 561(1) of the Companies Act 2006 a company must not issue
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...
to any person unless it has made an offer (on the same or on more favourable terms) to each person who already holds shares in the company in the proportion held by them, and the time limit given to the shareholder to accept the offer has expired. By virtue of Section 562(5), the period given to the shareholders to accept such an offer must not be less than 14 days. Those provisions' effect is that a company cannot allot shares to new shareholders until it has offered them to its existing shareholders. The company must give the shareholders at least 14 days to decide whether or not they wish to purchase the shares. Private companies and sometimes public companies can choose to disapply or modify the statutory pre-emption rights either generally or in respect of a specific allotment (Sections 569 to 573 of the Companies Act 2006).


Historic meanings

Under international law, the right of preemption formerly referred to the right of a
nation A nation is a community of people formed on the basis of a combination of shared features such as language, history, ethnicity, culture and/or society. A nation is thus the collective Identity (social science), identity of a group of people unde ...

nation
to detain merchandise passing through its territories or seas to afford to its subjects the preference of purchase. That form of right was sometimes regulated by
treaty A treaty is a formal, legally binding written agreement between actors in international law. It is usually made by and between sovereign states, but can include international organizations, individuals, business entities, and other legal ...

treaty
. A 1794 treaty between the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
and
Great Britain Great Britain is an island in the North Atlantic Ocean off the northwest coast of continental Europe. With an area of , it is the largest of the British Isles, the List of European islands by area, largest European island and the List of is ...

Great Britain
agreed: In the 18th-century United States, when an individual bought the preemption right to land, he did not buy the land but only the right to buy the land. In the case of the
Phelps and Gorham Purchase The Phelps and Gorham Purchase was the purchase in 1788 of of land in what is now western New York State from the Commonwealth of Massachusetts for $1,000,000 ( £300,000), to be paid in three annual installments, and the pre-emptive right to ...
, the syndicate paid Massachusetts $1,000,000 for the pre-emptive rights, and then paid the Indians, who thought they owned the land, $5,000 cash, and an annual $500 annuity forever for their title to the land.


See also

* Drag-along right *
First-look deal A first-look deal is any contract containing a clause granting, usually for a fee or other consideration that covers a specified period of time, a pre-emption right, right of first refusal, or right of first offer (also called a right of first nego ...
*
Follow-on offering A follow-on offering, also known as a follow-on public offering (FPO), is a type of public offering of stock that occurs subsequent to the company's initial public offering (IPO). A follow-on offering can be categorised as dilutive or non-dilutiv ...
*
Option contract An option contract, or simply option, is defined as "a promise which meets the requirements for the formation of a contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and gov ...
*
Preemption Act of 1841 The Preemption Act of 1841, also known as the Distributive Preemption Act (27th United States Congress, 27 Cong., Ch. 16; ), was a US federal law approved on September 4, 1841. It was designed to "appropriate the proceeds of the sales of public lan ...
(U.S. land transfers) *
Right of first refusal Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transactio ...
*
Rights issue A rights issue or rights offer is a dividend of subscription rights to buy additional securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisd ...
*
Tag-along right Tag along rights (TARs) comprise a group of clauses in a contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract ...


References

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