Pre-emption right
Encyclopedia
A pre-emption right is a right
to acquire certain property
in preference to any other person. It comes from the Latin verb emo, emere, emi, emptum, to buy or purchase, plus the inseparable preposition pre, before. It usually refers to property newly coming into existence. A right to acquire existing property in preference to any other person is usually referred to as a right of first refusal
.
issued by a company
in a rights issue
, a usually but not always public offering. In this context, the pre-emptive right is also called subscription right or subscription privilege. This is the right, but not the obligation, of existing shareholders to buy the new shares before they are offered to the public. In this way, existing shareholders can maintain their proportional ownership of the company, preventing stock dilution
. In many jurisdictions, subscription rights are automatically provided for by statute
, for example the UK, but in other jurisdictions it only arises if provided for under the constitutional documents
of the relevant company, for example the US.
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
.
Under international law, the right of preemption formerly referred to the right of a nation
to detain merchandise passing through its territories or seas, in order to afford to its subjects the preference of purchase. This form of right was sometimes regulated by treaty
. A treaty between the United States
and Great Britain
in 1794 agreed that "whereas the difficulty of agreeing on precise cases in which alone provisions and other articles not generally contraband may be regarded as such, renders it expedient to provide against the inconveniences and misunderstandings which might thence arise. It is further agreed that whenever any such articles so being contraband according to the existing laws of nations, shall for that reason be seized, the same shall not be confiscated, but the owners thereof shall be speedily and completely indemnified; and the captors, or in their default-the government under whose authority they act, shall pay to the masters or owners of such vessel the full value of all articles, with a reasonable mercantile profit thereon, together with the freight, and also the damages incident to such detention."
In the United States in the eighteenth century, the right given to settler
s of public lands, to purchase them in preference to others, was called the preemption right.
Right
Rights are legal, social, or ethical principles of 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 convention, or ethical theory...
to acquire certain property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
in preference to any other person. It comes from the Latin verb emo, emere, emi, emptum, to buy or purchase, plus the inseparable preposition pre, before. It usually refers to property newly coming into existence. 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
Right of first refusal 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 transaction with a third party...
.
Company shares
In practice, the most common form of pre-emption right is the right of existing shareholders to acquire new sharesStock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
issued by a company
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
in a rights issue
Rights issue
A rights issue is an issue of additional shares by a company to raise capital under a seasoned equity offering. The rights issue is a special form of shelf offering or shelf registration. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from...
, a usually but not always public offering. In this context, the pre-emptive right is also called subscription right or subscription privilege. This is the right, but not the obligation, of existing shareholders to buy the new shares before they are offered to the public. In this way, existing shareholders can maintain their proportional ownership of the company, preventing stock dilution
Stock dilution
Stock dilution is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into...
. In many jurisdictions, subscription rights are automatically provided for by statute
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
, for example the UK, but in other jurisdictions it only arises if provided for under the constitutional documents
Constitutional documents
In relation to artificial persons, the constitutional documents of the entity are the documents which define the existence of the entity and regulate the structure and control of the entity and its members...
of the relevant company, for example the US.
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
Call option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
.
Historical meanings
In earlier time, "pre-emption right" has had a separate and distinct meaning to that given to it today.Under international law, the right of preemption formerly referred to the right of a nation
Nation
A nation may refer to a community of people who share a common language, culture, ethnicity, descent, and/or history. In this definition, a nation has no physical borders. However, it can also refer to people who share a common territory and government irrespective of their ethnic make-up...
to detain merchandise passing through its territories or seas, in order to afford to its subjects the preference of purchase. This form of right was sometimes regulated by treaty
Treaty
A treaty is an express agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as an agreement, protocol, covenant, convention or exchange of letters, among other terms...
. A treaty between the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and Great Britain
Great Britain
Great Britain or Britain is an island situated to the northwest of Continental Europe. It is the ninth largest island in the world, and the largest European island, as well as the largest of the British Isles...
in 1794 agreed that "whereas the difficulty of agreeing on precise cases in which alone provisions and other articles not generally contraband may be regarded as such, renders it expedient to provide against the inconveniences and misunderstandings which might thence arise. It is further agreed that whenever any such articles so being contraband according to the existing laws of nations, shall for that reason be seized, the same shall not be confiscated, but the owners thereof shall be speedily and completely indemnified; and the captors, or in their default-the government under whose authority they act, shall pay to the masters or owners of such vessel the full value of all articles, with a reasonable mercantile profit thereon, together with the freight, and also the damages incident to such detention."
In the United States in the eighteenth century, the right given to settler
Settler
A settler is a person who has migrated to an area and established permanent residence there, often to colonize the area. Settlers are generally people who take up residence on land and cultivate it, as opposed to nomads...
s of public lands, to purchase them in preference to others, was called the preemption right.
See also
- Preemption Act of 1841Preemption Act of 1841The Preemption Act of 1841, also known as the Distributive Preemption Act , was a federal law approved on September 4, 1841. It was designed to "appropriate the proceeds of the sales of public lands.....
(U.S. land transfers) - Option (finance)Option (finance)In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
- Right of first refusalRight of first refusalRight of first refusal 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 transaction with a third party...
- Drag-Along rightDrag-along rightDrag-Along Right is a legal concept in corporate law. The right assures that if the majority shareholder sells his stake, minority holders are forced to join the deal. This right protects majority shareholders. Drag-along rights are fairly standard terms in a stock purchase agreement...
- Tag-Along rightTag-along rightA tag-along right is a legal concept in corporate law. The right assures that if the majority shareholder sells his stake, minority holders have the right to join the deal and sell their stake at the same terms and conditions as would apply to the majority shareholder. This right protects minority...