Preemptive Rights

Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts

McCarter & English LLP

2002-08-02

Preemptive rights as such are designated by statute as proper charter provisions since they are part of the "rights and privileges" of a given class of stock. Such rights mean what the name implies: that the existing shareholders of the company have a right to subscribe to any new issuance of shares in such proportions as will maintain their equity position in the company before shares may be offered outside of the existing shareholder group. Again, rights in the nature of preemptive rights are often bargained for by investors but usually not as a charter provision. Once inserted in the charter, they can only be eliminated, as they must when an initial public offering occurs, by a vote of the shareholders, indeed, by a vote of each class of shareholders affected. The investors bargaining for preemptive rights usually want to be able to trigger or waive those rights on their own, so that the Stock Purchase Agreement is the more likely home for provisions of this nature. Planners should be careful to inspect the corporation law of the domicile to ascertain whether the statute is of the "opt in" or "opt out" variety; whether, if the charter is silent (i.e., the organizers do not make a conscious election), cumulative voting or preemptive rights are or are not in effect. Silence is a choice; the trick is to make sure it is a conscious choice.