What are preemptive rights?

Preemptive rights refer to the privilege granted to existing shareholders of a corporation, allowing them the opportunity to purchase additional shares of stock before the corporation offers them to new investors. This right is intended to help existing shareholders maintain their proportional ownership in the company and mitigate the risk of dilution that can occur when new shares are issued. By being able to purchase shares in line with their current holdings, shareholders can protect their investment and influence in the company.

This understanding is key to recognizing why this particular right is essential in corporate governance and shareholder rights. Preemptive rights fortify shareholder control and prevent a dilution of influence, ensuring that existing owners can sustain their proportionate stake in the company's ownership structure.