Also known as: privileged subscriptions · pre-emptive right · preemptive right · rights issue
Written by attorneys · grounded in primary & secondary sources — see below
A rights offering by which a corporation issues stock-purchase rights to existing shareholders. The rights permit the shareholders to buy newly issued shares at a fixed price usually below market value and in proportion to their current holdings.
Patriot Insurance needed fresh capital for expansion. Its board approved a rights offering that gave each common shareholder the chance to buy one new share for every four shares already owned at a discounted price. Pierre Poulin exercised his rights and acquired additional shares without dilution of his ownership percentage.
Paragon Construction issued new shares through a privileged subscription. Pavel Petrov received notice of his proportional rights but signed a written waiver declining to purchase any additional shares. The corporation then sold the unsubscribed shares to outside investors at the same price.
Pacific Bank created a new series of preferred shares and extended a privileged subscription to existing common holders. Piper Patel purchased her pro rata portion on the uniform terms set by the board. The transaction preserved her relative ownership stake in the corporation.
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Prime Logistics sold new shares exclusively to an outside party. Pedro Pacheco, a minority common shareholder, claimed the issuance violated his participation rights under a privileged subscription. The court examined whether the articles had elected such rights before determining the validity of the transaction.
A privileged subscription is the actual rights offering that allows existing shareholders to purchase new shares proportionally at a set price. Preemptive rights are the underlying legal entitlement that may or may not exist depending on the articles of incorporation. The offering implements the right when the articles elect it.
Shareholders receive a privileged subscription only when the articles of incorporation elect preemptive rights or contain language of similar effect. Absent such language the default rule provides no right to acquire unissued shares proportionally.
A shareholder may waive participation in a privileged subscription. A written waiver is irrevocable even without consideration supporting it.
No preemptive right and therefore no privileged subscription attaches to shares sold otherwise than for cash. A board may issue shares for property or services without first offering them to existing holders.
…v. Plywood Corp. , 324 Mass. 171, 176-177 (1949). [^maj-24]: Under the Massachusetts law, “[n]o stockholder shall have any pre-emptive right to acquire stock of the corporation except to the extent provided in the articles of organization or in a by-law adopted by and subject to amendment only by the stockholders.” G. L. c.…