Preemptive rights

Preemptive Rights

Preemptive rights are rights of shareholders of a corporation or members of an LLC giving them the power to purchase additional shares in the corporation, or units or membership interests in the LLC, in the event that the company authorizes the issuance of additional shares, units or membership interests. Preemptive rights allow equity holders to maintain their pro rata ownership positions in companies. They are a tool to allow current equity holders in a company to prevent their pro rata ownership positions from being diluted. They offer a protective mechanism for minority percentage equity holders from losing their equity status in future capital raises. In LLCs, preemptive rights are negotiated into an operating agreement between the members. In a corporation, they are negotiated into a shareholders agreement between the founder shareholders, or, in the case of shareholders joining the company as part of a capital raise, such rights also sometimes appear in the corporation’s Articles of Incorporation or the stock purchase agreements by the investors. In Oregon, preemptive rights are not default rights for shareholders of corporations under the Oregon Business Corporation Act, and they are not default rights for members of LLCs under the Oregon Limited Liability Company Act. Therefore, for such rights to exist, the equity holders of Oregon corporations or LLCs must negotiate them into binding agreements with their fellow equity holders.