Pre-emption: Definition, Example and Related Terms
What is Pre-emption ?
Pre-emption is a special right given by an agreement. Think of it this way: you're at a garage sale, and you spot a cool pair of roller-skates. You're not sure if you want to buy them or not. The seller then offers you first dibs on the skates. If anyone else shows interest, the seller will ask you first if you still want them. If you say yes, they're yours; if not, the seller will offer them to the other person. This right to have the first opportunity to buy something before anyone else can, is pre-emption.
In the business world, pre-emption often comes into play when company shares are being sold. Existing shareholders might have a right of pre-emption that allows them to buy additional shares before the company offers them to someone else. This can be a very useful advantage!
Example(s)
Key Element Description A new investor wants to buy shares from a company. But the company’s current shareholders have a pre-emption right. This means the shareholders get the opportunity to buy the shares first, before the new investor can buy them. Investor A wants to sell their shares in a start-up. However, the pre-emption clause in their agreement states that other existing investors get the first shot at buying Investor A’s shares. A family business is selling additional shares to finance a new project Existing family members have pre-emption rights and are first offered the possibility to buy the new shares. Only if they decline, the shares can be offered to external investors. A band member is leaving a successful band and wants to sell their rights to the band’s songs. The other band members have pre-emption rights and get first dibs on purchasing before it’s offered to an outside buyer. A company’s major shareholder dies and the shares come up for sale. The pre-emption clause in the shareholder agreement allows existing shareholders the first chance to buy these shares.