The pre-emptive right is the right of existing stockholders to subscribe to new issuances of shares in proportion to their current shareholdings, before the shares are offered to others. Its purpose is to let stockholders protect their proportionate ownership and voting power from being diluted. Under the Revised Corporation Code, the right generally covers all issuances of shares, but it can be denied or limited by a provision in the articles of incorporation, and it does not extend to certain issuances — such as shares issued in compliance with laws requiring a minimum public offering, shares issued in good faith in exchange for property needed for corporate purposes, or shares issued to pay a previously contracted debt. Stockholders who are given the right but do not exercise it within the period lose it for that issuance.
When a corporation issues new shares, existing stockholders can see their ownership diluted. The pre-emptive right is their shield.
What It Is
The pre-emptive right is the right of existing stockholders to subscribe to new issuances of shares in proportion to their current shareholdings, before those shares are offered to outsiders. If you own 20% of the company, you generally get first crack at 20% of a new issuance.
Why It Exists
The purpose is to protect a stockholder's proportionate ownership and voting power. Without it, the majority could issue new shares to friendly parties and dilute a minority stockholder's stake and influence. The pre-emptive right lets each stockholder maintain their percentage by buying their share of the new issue.
The General Rule
Under the Revised Corporation Code, the pre-emptive right generally extends to all issuances of shares — a broad default in favor of stockholders. But it is not absolute.
When It Does Not Apply
The right can be denied or limited, and does not extend to certain issuances:
- Where the articles of incorporation deny or restrict it;
- Shares issued in compliance with a law requiring a minimum stock ownership by the public;
- Shares issued in good faith in exchange for property needed for corporate purposes; and
- Shares issued to pay a previously contracted debt.
In these cases, stockholders cannot insist on subscribing first.
Exercising the Right
When the right applies, stockholders are given a period within which to exercise it. A stockholder who does not subscribe within that period loses the pre-emptive right for that particular issuance, and those shares may then be offered to others.
Practical Takeaways
- The pre-emptive right lets existing stockholders buy new shares first, in proportion to their holdings, to avoid dilution;
- It generally covers all issuances, but the articles can deny it and certain issuances are excluded (public-offering compliance, property exchanges, debt payment);
- Exercise it within the period or it is lost for that issuance.
Frequently Asked Questions
What is the pre-emptive right? It is the right of existing stockholders to subscribe to new share issuances in proportion to their current holdings, before the shares are offered to others, so they can protect their proportionate ownership.
Why does the pre-emptive right matter? It prevents dilution of a stockholder's ownership and voting power. Without it, the majority could issue new shares to friendly parties and shrink a minority's stake and influence.
When does the pre-emptive right not apply? When the articles of incorporation deny or restrict it, and for shares issued to comply with a minimum public-ownership law, shares exchanged in good faith for needed property, or shares issued to pay a previously contracted debt.
What if a stockholder does not exercise the right? A stockholder who does not subscribe within the period given loses the pre-emptive right for that issuance, and those shares may then be offered to others.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.