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 freedom or Entitlement (fair division), entitlement; that is, rights are the fundamental normative rules about what is allowed of people or owed to people according to some legal sy ...

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 consume, alter, share, re ...

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 corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

to acquire new

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

issued by a

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...

in a rights issue, 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. New equity increases the total shares outstanding which has a dilutive ef ...

. In many jurisdictions, subscription rights are automatically provided for by

statute A statute is a law or formal written enactment of a legislature. Statutes typically declare, command or prohibit something. Statutes are distinguished from court law and unwritten law (also known as common law) in that they are the expressed wil ...

, 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 ...

British companies

The

Companies Act 2006 The Companies Act 2006 (c. 46) is an 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 October 2009. It largel ...

is the source of shareholder pre-emption rights in British

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

. Under Section 561(1) of the Companies Act 2006 a company must not issue

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 type of social organization where a collective Identity (social science), identity, a national identity, has emerged from a combination of shared features across a given population, such as language, history, ethnicity, culture, t ...

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 sovereign states and/or international organizations that is governed by international law. A treaty may also be known as an international agreement, protocol, covenant, convention ...

. A 1794 treaty between the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

and

Great Britain Great Britain is an island in the North Atlantic Ocean off the north-west coast of continental Europe, consisting of the countries England, Scotland, and Wales. With an area of , it is the largest of the British Isles, the List of European ...

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 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.

References

{{Corporate finance and investment banking Corporate law Contract law Property law Aboriginal title id:Hak memesan efek terlebih dahulu it:Prelazione sv:Hembud

Company shares

British companies

Historic meanings

See also

References