1. It is frequently stated that the primary purpose of the preemptive right is to allow individuals to maintain their proportionate share of the ownership and control of a corporation.
a. How important do you suppose this consideration is for the average stockholder of a firm whose shares are traded on the New York or American Stock Exchanges?
b. Is the preemptive right likely to be of more importance to stockholders of publicly owned or closely held firms? Explain.
c. Is a firm likely to get a wider distribution of shares of it sells new stock through a preemptive rights offering to existing stockholders or directly to underwriters?
d. Why would management be interested in getting a wider distribution of its shares?
Here is some background info regarding pre-emptive rights:
The preemptive right is the right belonging to existing shareholders of a corporation to avoid involuntary dilution of their ownership stake by giving them the chance to buy a proportional interest of any future issuance of common stock. The anti-dilutive preemptive right has also been called the subscription right or subscription privilege.
For example: The Terra Firma Coffee Company has 100 shares of stock outstanding. You own 10 of these shares, or 10% of the entire company. To raise capital to expand, the Board of Directors decides to sell another 100 shares in the company for $50 each. If the preemptive right did not exist, this would dilute ...