Also known as:rights of preemption · preemption right · preemptive right · preemptive purchase right
Written by attorneys — see sources below.
2 senses
1
in corporate law
An option granted to existing shareholders to purchase newly issued shares in proportion to their current holdings. The option arises only when the articles of incorporation expressly provide for it under the default rule that shareholders otherwise hold no such right.
2
in property law
A right allowing a designated person to purchase property on specified terms before it may be sold to a third party. The right is enforceable when its price and timing terms are reasonable at the time of the donative transfer.
Each sense below has its own examples, sources, and questions.
Sense 1
1
in corporate law
An option granted to existing shareholders to purchase newly issued shares in proportion to their current holdings. The option arises only when the articles of incorporation expressly provide for it under the default rule that shareholders otherwise hold no such right.
See Our Sources· 2 primary sources
Model Codes
Examples1
Shareholder Demand for Pro Rata Shares
Valley Craft's articles contained a clause protecting existing shareholders from dilution. The board authorized a new class of patron shares and sold the entire class to First Studio for a non-cash endowment. Jason, a twenty percent common shareholder, demanded the opportunity to purchase a proportional portion on identical terms before the issuance closed. The corporation refused, citing the absence of an express election of preemptive rights in the articles.
3 common questions
Students Frequently Ask...
When do shareholders possess preemptive rights under the Model Business Corporation Act?
Shareholders possess preemptive rights only to the extent the articles of incorporation expressly provide for them. The statute establishes a default rule of no preemptive rights. Language electing such rights triggers proportional purchase opportunities on uniform terms set by the board.
Supporting sources
Does a general anti-dilution clause in the articles create preemptive rights?
Sense 2
2
in property law
A right allowing a designated person to purchase property on specified terms before it may be sold to a third party. The right is enforceable when its price and timing terms are reasonable at the time of the donative transfer.
See Our Sources· 2 sources
Restatements
Cases
Examples1
Testamentary Right of First Refusal
Michael's will devised a law office suite to his son Daniel but granted Harper & Cole LLP a right of first refusal exercisable at a fixed formula price if Daniel ever sold. Years later a large firm offered more than triple the formula amount. Harper & Cole attempted to exercise within the stated period. Daniel sought a declaratory judgment that the clause unreasonably restrained alienation.
The Symphony Space, Inc. v. Pergola Properties, Inc.669 N.E.2d 799 (1996)
In 1978 Broadwest Realty Corporation owned a two-story building on Broadway between 94th and 95th Streets in Manhattan that contained a theater occupying approximately 58 percent of the floor space and separate commercial space. Broadwest had been unable to secure a permanent tenant for the theater and was operating its properties, including adjacent Pomander Walk and the Healy Building, at a net loss.
Symphony Space, Inc., a not-for-profit arts organization that had previously rented the theater for one-night engagements, entered into negotiations with Broadwest. On December 1, 1978, Broadwest and Symphony executed a contract for the sale of the building to Symphony for a purchase price of $10,010, with $10 paid at closing and the balance secured by a purchase-money mortgage. On December 31, 1978, the parties executed four separate documents: a deed conveying the building to Symphony, a lease from Symphony to Broadwest of the commercial space for $1 per year running from January 1, 1979 to May 31, 2003, a $10,000 mortgage note from Symphony due December 31, 2003, and an option agreement granting Broadwest the exclusive right to repurchase the entire building during specified exercise periods.
The option agreement set four exercise periods: after July 1, 1979 with closing in 1987, 1993, 1998 or 2003; following maturity of the mortgage note; during the ninety days after termination of the lease other than for nonpayment of rent; and during the ninety days after notice of Symphony’s default under the mortgage. Purchase prices ranged from $15,000 to $28,000 depending on the closing year. The option was stated to be unconditional and to run with the land. The transaction was structured so that Symphony could obtain a property-tax exemption for the theater parcel while Broadwest retained approximately $140,000 in annual rental income and reduced its own taxes by $30,000 per year.
In the summer of 1981 Broadwest sold and assigned its interests in the lease, option, mortgage, and the adjacent properties to defendants Pergola Properties, Inc., Bradford N. Swett, Casandium Limited, and Darenth Consultants for $4.8 million. In January 1985 defendant Swett served notice exercising the option on the ground of alleged default and set a May 6, 1985 closing. Symphony disputed the default and, in March 1985, commenced this declaratory-judgment action. Defendants served additional exercise notices in April 1985 and March 1987. After the trial court granted Symphony summary judgment and the Appellate Division affirmed, the Appellate Division certified the question whether the order was properly made, and the Court of Appeals granted review.
2 common questions
Students Frequently Ask...
When is a right of first refusal in a will an invalid restraint on alienation?
A right of first refusal in a will is invalid when its price or timing terms are unreasonable at the time of the donative transfer. A fixed price that has become far below market or an excessively long exercise period renders the provision unenforceable.
Supporting sources
What factors determine whether a preemptive provision in a donative transfer is reasonable?
A general anti-dilution clause does not create preemptive rights. The statute requires language that elects preemptive rights or achieves a comparable protective effect. A broad policy statement fails to satisfy this threshold.
Supporting sources
Are preemptive rights available for shares issued for non-cash consideration?
Preemptive rights do not apply to shares sold otherwise than for cash. The statute expressly excludes such issuances even when preemptive rights otherwise exist.
Reasonableness turns on whether the designated holder must pay a price reflecting fair market value and whether the holder receives a commercially sensible period to decide. A matching right tied to a bona fide third-party offer satisfies the price requirement.
Supporting sources
— and, second, if it is a
preemptive right
, whether the rule applies to it. Preliminarily, it is clear that before enactment of EPTL 9-1.1 in 1965 Bruken’s
right
to acquire the lots,…
, requires Hal or Martha Wallis to give Wildenstein at least 30 days prior notice of the terms of any proposed sale of a painting covered by the settlement agreement, and provides that…
the property on the same terms and conditions contained in any bona fide offer received by, and acceptable to, the grantee, his heirs, executors, administrators, and assigns.…
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