Suppose Company ABC has 100 shares in progress and you own 10 of those shares. That gives you 10% possession. The Board of Directors decided to sell an additional 100 shares of the company for $50 each to raise capital for the expansion. This would reduce your property to 5% – 10 shares divided by the 200 shares outstanding – if the pre-emption right does not exist. Other situations where pre-emption rights are observed are those of real estate developments. Parties close to investors often have a right of pre-emption with respect to new housing or condominiums within the same development. Along the way, the company makes a secondary offer of 500 additional shares. The shareholder holding a pre-emption right must have the opportunity to acquire up to 50 shares or 10% of the new offer. The investor can exercise this right and hold a 10% stake in the company. For example, when a company issues new shares at prices below the shares currently traded, knowing that minority shareholders cannot acquire the new shares as part of their pre-emption rights.
Pre-emption rights give existing shareholders (or shareholders granted the right in the agreement) to purchase additional shares issued by the company and to ensure that their percentage of ownership in the company is not diluted. In the absence of a pre-emption right, the company could issue shares to third parties or other shareholders, without initially giving existing shareholders the right to participate in the issue. In addition, the right of pre-emption may protect the investor from a loss if the new set of common shares is issued at a lower price than the investor`s preferred share. In this case, the owner of the preferred shares has the right to convert the shares into a larger number of common shares, which eliminates the loss of value of the stock. In the 18th century United States, when a person bought the right of pre-emption on the land, he did not buy the land, but only the right to buy the land.  In the case of the purchase of Phelps and Gorham, Massachusetts paid $1,000,000 for the pre-emption fees, then paid $5,000 in cash and an annual annuity of $500 forever for their title to the campaign.  Pre-emption rights protect shareholders from dilution of voting rights and dividends. In theory, shareholders are not harmed when an entity gets fair value for new shares because the value of existing shares increases in proportion to the value received. For example, the value of a 10% interest in a $1,000,000 business is $100,000. If the company finds $1,000,000 in exchange for newly issued shares representing 10% of the company, the current percentage of shareholders in the company will fall to 5%, but is still worth $100,000 (i.e., 5% of $2,000,000). Pre-emption rights are a contractual clause that gives a shareholder the right to acquire additional shares in any future issuance of the company`s common shares before the shares are available to the public.
Shareholders who have such a clause are generally early investors or majority shareholders who wish to maintain the size of their stake in the company when additional shares are offered. This right is not granted regularly to all shareholders. Several states grant preventive rights as a matter of law, but even these laws give the company the opportunity to deny that right in its statutes. The effect of these provisions is that a company does not transfer shares to new shareholders until it has offered them to its existing shareholders.