A preemptive right is a legal concept that gives an entity, often a shareholder, the ability to purchase a portion of a company’s new securities issues before the public at large has access to them. This gives the entity a competitive edge, as the preemptive right allows them to invest in the company before the public has the opportunity to.
Preemptive rights are especially prevalent in companies that are closely held or are privately owned. This is so because the shareholders of such companies usually have an advanced knowledge of the company’s assets and performance before they are announced to the public. Preemptive rights also commonly exist when companies are going to be merging and need extra funds in order to do so.
In recent times, preemptive rights are being seen as a way for companies to reward their stakeholders, as they can offer ownership or compensation opportunities to the investors that are preempted. Companies can also use preemptive rights to ensure shareholder loyalty, as the investors would gain more ownership of the company and feel more secure knowing that they invested early on in the process and were rewarded for their faith.
Preemptive rights are important legal considerations for business professionals to be aware of, as they can often be game-changers in a company’s ability to raise capital and grow. As the term continues to become increasingly popular, understanding the nuances of this legal concept will become even more important for savvy business professionals.