Question

If a company raises money by issuing new stocks, a current shareholder has the right to purchase new shares on a pro rata basis (can keep the same percentage interest in the company). This provision in a companyâs bylaws is called the:
a. Proxy fight
b· IPO Provision
c. percentage right
d. preemptive right

Answer 1

Answer:

The correct answer is letter "D": preemptive right.

Explanation:

A Preemptive Right allows select shareholders to purchase newly issued shares in their corporation before the general public. The situation arises when the company issues more shares on top of the issued at the Initial Public Offering (IPO). Therefore, as there will be more outstanding shares the ownership percentage of the stakeholder would be decreased.

The preemptive right allows those shareholders to purchase the recently issued shares before the public in an attempt of keeping their same ownership percentage.

Answer 2

Answer:

d. preemptive right

Explanation:

Preemptive rights refers to the clause that is included in a merger agreement or security that allows an investor to buy a proportionate number of shares to be issued in the future in order to protects him from losing his percentage ownership of a company.

The aim a preemptive right is to avoid a situation whereby the management of the company take over the control of the company by issuing and buying extra shares of the corporation to themselves. It basically aims to prevent the dilution of the value of stockholders.