Pre-emption rights, also known as pre-emption rights, anti-dilution rights or subscription rights, give shareholders the right to acquire a proportionate number of shares in each future issue of the company`s shares in order to obtain their percentage ownership of the company. Simply put, pre-emption rights give shareholders the right to buy a certain number of shares when the company issues more shares to prevent their shareholding in the company from diminishing. The right of pre-emption belongs to an existing shareholder; only an existing owner has the right to acquire newly issued shares before the shares are offered and sold to new investors. This mechanism ensures that the shareholder issuing the initial offer cannot propose to acquire the shares of other shareholders at a price significantly lower than he would reasonably be willing to accept. However, the price or method of pricing is not pre-defined in this case. A pellet gun clause is effective if shareholders cannot agree or agree on the management of the business by allowing one to buy the others. It can also help avoid lengthy and costly dispute resolution procedures. However, if a shareholder has limited liquidity or capital, this would be penalized compared to another shareholder with deeper pockets, aware of the other shareholder`s limited resources. The „wealthiest“ shareholder may make an offer to purchase his shares at a highly discounted price to the „poorer“ shareholder, knowing that the weaker shareholder cannot raise that amount to acquire the shares of the offeror, in order to reseal the tender offer under the terms of a standard re-forming clause.
For example, when an investor buys preferred shares in a company for $20 each, converted one by one into common shares, and the company then proceeds with a new set of capital increases that values the common shares at $15 each (a decrease), the investor`s shares will be depreciated (economic dilution). The investor could not convert his preferred shares into common shares without losing $5 per share. An anti-dilution economic provision would protect that investor by stating that if the company issues shares at a lower price than the previous round in which that preferred shareholder invested, it can obtain more common shares if it converts to make a total value. When a shareholder converts his preferred shares into common shares, the conversion price of his preferred shares is reduced by the effect of the complete anti-dilution of the ratchet to reflect the issue price of the new cycle. This means that a preferred shareholder can convert his preferred shares at a lower price. When the shareholder holds common shares, additional shares are often issued after the new cycle to make a whole. In both cases, the investor receives more shares for his initial investment to ensure that his or her interest in the company is not diluted. The founders of a company generally do not contain complex anti-dilution rules in an initial SHA (except pre-emption rights).