Pre-emption rights
Capital MarketsThe right of an existing shareholder to be offered new shares first, in proportion to what they already hold.
Also written: pre emption rights, preemption rights, pre-emption right
Pre-emption gives existing shareholders first refusal on new shares. In the UK the right is statutory rather than contractual, and equivalents exist across most of continental Europe, which is the single biggest structural difference between how European and US companies raise follow on equity.
The purpose is to stop two transfers happening without the consent of the people who lose out. Issuing a share to a new investor moves a slice of ownership away from every existing holder, and if that share is priced below what it is worth it moves value as well. Pre-emption puts the decision with the holders who bear the consequence.
It is not absolute. Shareholders can disapply it by special resolution, for a limited period and a limited amount, which is what a listed board asks for each year at its annual general meeting. That is what makes a placing possible at all, and what makes it small.
There is no general equivalent for a US listed company. That is why a US board can place stock with new institutions overnight off a shelf registration while a European board can only do so within the authority its shareholders have already granted, and why the rights issue remains the European default for anything large.
Worked example
A holder owns 5% of a company that wants to issue new shares equal to 20% of its existing capital.
Under pre-emption that holder is offered 5% of the new shares. Taking them up leaves the stake at 5%, so ownership is untouched.
Without pre-emption the same issue placed entirely with new investors cuts the holding to roughly 4.2%, and the holder had no say in it.