Pre-emptive Rights Law and Legal Definition

Pre emptive right is the right of certain stockholders to maintain ownership of a constant percentage of a firm's stock. Such stockholders have the first opportunity to purchase new stock in the firm proportionate to the percentage of shares already held. Its purpose is to protect shareholders from dilution of value and control when new shares are issued. Although almost all states have pre-emptive right statutes, most states either permit corporations to pay stockholders to waive their pre-emptive rights or state in their statutes that the pre-emptive right is valid only if it is mentioned in the corporate charter. As a result, pre-emptive rights are the exception rather than the rule. NY CLS Bus Corp § 622 defines a Pre-emptive right and the exercise of such rights. It reads in relevant part:

As used in section § 622 the term: “Pre-emptive right" means the right to purchase shares or other securities to be issued or subjected to rights or options to purchase, as such right is defined in this section.

1 With respect to any corporation incorporated prior to the effective date of subparagraph (2) of this paragraph, except as otherwise provided in the certificate of incorporation, and except as provided in this section, the holders of equity shares of any class, in case of the proposed issuance by the corporation of, or the proposed granting by the corporation of rights or options to purchase, its equity shares of any class or any shares or other securities convertible into or carrying rights or options to purchase its equity shares of any class, shall, if the issuance of the equity shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the unlimited dividend rights of such holders, have the right during a reasonable time and on reasonable conditions, both to be fixed by the board, to purchase such shares or other securities in such proportions as shall be determined as provided in this section.

2 With respect to any corporation incorporated on or after the effective date of this subparagraph, the holders of such shares shall not have any preemptive right, except as otherwise expressly provided in the certificate of incorporation.

3.Except as otherwise provided in the certificate of incorporation, and except as provided in this section, the holders of voting shares of any class having any preemptive right under this paragraph on the date immediately prior to the effective date of subparagraph (2) of paragraph (b) of this section, in case of the proposed issuance by the corporation of, or the proposed granting by the corporation of rights or options to purchase, its voting shares of any class or any shares or other securities convertible into or carrying rights or options to purchase its voting shares of any class, shall, if the issuance of the voting shares proposed to be issued or issuable upon exercise of such rights or options or upon conversion of such other securities would adversely affect the voting rights of such holders, have the right during a reasonable time and on reasonable conditions, both to be fixed by the board, to purchase such shares or other securities in such proportions as shall be determined as provided in this section.