Question

Betty owns 100 shares of MegaCorp, Inc., which she bought in MegaCorp’s initial public offering of 10,000 shares. MegaCorp makes a new issuance of 10,000 shares. According to her stock certificate, and as noted in the articles of incorporation and bylaws of MegaCorp, Inc., Betty is entitled, but not required, to buy another 100 shares at the time of the new issue. This is an example of _____________________________, which are intended to allow shareholders to maintain their proportionate ownership interest in the corporation

Answer 1

Answer:

Preemptive rights

Explanation:

Preemptive rights are a way of preventing the dilution of a shareholder's ownership in a corporation.  Preemptive rights are set by a contract clause that establishes that in case the corporation issues new stock, then a current shareholder must be given the right to buy additional shares before the stocks are sold to other investors.

The preemptive right usually gives the stockholder the right to buy new stock in the same proportion as his/her current stock ownership. For example, if an investor currently owns 2% of the company's stock, he/she will be able to buy 2% of every new set of stocks issued.