BUS202: Principles of Finance

Shareholders have the right of preemption, meaning they have the first chance at buying newly issued shares of stock before the general public.

LEARNING OBJECTIVE

• Explain a shareholders' control and preemption rights
  
  

KEY POINTS

• Shareholders gain certain rights with regards to a business entity when purchasing stock. These include being able to sell shares, voting rights and dividends.
• Shareholders have the right of preemption, meaning they have the first chance at buying newly issued shares of stock before the general public.
• Even if shareholders do have the option of using their preemptive right, they do not have to exercise it.
  
  

TERMS

• preemptive right

  a contractual ability to acquire certain property newly coming into existence before it can be offered to any other person or entity

• Preemption

  The right of a shareholder to purchase newly issued shares of a business entity before they are available to the general public so as to protect individual ownership from dilution.

Rights of Stockholders

A shareholder or stockholder is an individual or institution (including a corporation) that legally owns a share of stock in a public or private corporation. Stockholders are granted special privileges depending on the class of stock. These rights may include:

• The right to sell shares
• The right to vote on directors nominated by the board,
• The right to nominate directors (although this is very difficult in practice because of minority protections) and propose shareholder resolutions
• The right to dividends if they are declared
• The right to purchase new shares issued by the company
• The right to what assets remain after a liquidation

Owners of common and preferred stock generally have to wait until debt-holders receive assets after bankruptcy to see any assets after liquidation.

Control and Preemption

Control and preemption are particular stockholder rights.

A preemption right, or right of preemption, is a contractual right to acquire certain property coming into existence before it can be offered to any other person or entity. This right is frequently applied for shareholders of a business entity as they are usually offered the first chance to buy newly issued shares of stock before it becomes available to the general public. While shareholders are offered the option of early purchase, they do not necessarily have to take it. The incentive to exercise this option is based on the desire to protect individual ownership or stake in a company from dilution. The conditions of preemptive rights will vary from company to company and share type to share type.

Shareholder Meeting: This scene from "The Office" humorously illustrates a shareholder meeting, where the shareholder can exercise their right to vote on company issues or question company directors.