Relationships between businesses and their shareholders are often mutually beneficial, with accompanying risks and rights documented in contracts. These agreements can establish arrangements with standard and unique features, such as preemptive rights. They work by giving existing shareholders priority on additional company shares before releasing them to the public.
There are no laws requiring companies to have a preemptive rights clause for their shareholders, and this provision does not require shareholders to purchase more shares. Still, businesses may prefer to have preemptive rights in their shareholder arrangements because of the benefits that could come from providing them.
The benefits of preemptive rights
Preemptive rights, also called anti-dilution provisions, often exist to allow shareholders to have opportunities to maintain their stakes in the business before the company issues more shares and makes them accessible in a public venue. Because of this dynamic, the following parties can benefit accordingly:
- Shareholders — They can maintain their authority, rights, and responsibilities by buying additional shares, which could have lower prices than when released publicly. If shareholders conduct purchases strategically, they can maximize profits based on the situation.
- The business — Companies can save more by selling shares to existing shareholders than external parties. Having preemptive rights can maximize savings on transactional costs depending on the circumstances.
Other benefits can apply in different scenarios, usually varying based on the provisions within the agreement.
Knowing what to do about shareholder issues
Despite clear contracts and established setups, shareholder issues can be unavoidable. These concerns can arise for various reasons, such as changes or significant events impacting shareholders and their rights. Fortunately, having experienced legal guidance can help navigate issues or disputes, assisting businesses to maintain thriving relationships with their investors.
