Pre-emption right

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A pre-emption right, right of pre-emption, or first option to buy is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity. [1] It comes from the Latin verb emo, emere, emi, emptum, to buy or purchase, plus the inseparable preposition pre, before. A right to acquire existing property in preference to any other person is usually referred to as a right of first refusal .

Property, in the abstract, is what belongs to or with something, whether as an attribute or as a component of said thing. In the context of this article, it is one or more components, whether physical or incorporeal, of a person's estate; or so belonging to, as in being owned by, a person or jointly a group of people or a legal entity like a corporation or even a society. Depending on the nature of the property, an owner of property has the right to consume, alter, share, redefine, rent, mortgage, pawn, sell, exchange, transfer, give away or destroy it, or to exclude others from doing these things, as well as to perhaps abandon it; whereas regardless of the nature of the property, the owner thereof has the right to properly use it, or at the very least exclusively keep it.

Right of first refusal is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. A first refusal right must have at least three parties: the owner, the third party or buyer and the option holder. In general, the owner must make the same offer to the option holder before making the offer to the buyer. The right of first refusal is similar in concept to a call option.

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Company shares

In practice, the most common form of pre-emption right is the right of existing shareholders to acquire new shares issued by a company in a rights issue, a usually but not always public offering. In this context, the pre-emptive right is also called subscription right or subscription privilege. [2] This is the right, but not the obligation, of existing shareholders to buy the new shares before they are offered to the public. In this way, existing shareholders can maintain their proportional ownership of the company, preventing stock dilution. [3] In many jurisdictions, subscription rights are automatically provided for by statute, for example the UK, but in other jurisdictions it only arises if provided for under the constitutional documents of the relevant company, for example the US. In such countries shareholder rights are often violated leading to proceedings at the Court of Justice of the European Union. [4]

Stock financial instrument

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly known as "stocks". A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

A company, abbreviated as co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. Company members share a common purpose, and unite to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals. Companies take various forms, such as:

Rights issue

A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive(can be dilutive) pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering. Sometimes Right issue can give privileges to people like director, employees those are having some ownership in company to buy the issues.

Other situations in which pre-emption rights are seen to arise are in property developments; parties close to the investors are often given a right of pre-emption in relation to new flats or condominiums within a development.

Overall, pre-emption right is similar to the concept of a call option.

Call option company

A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time for a certain price. The seller is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.

In companies in the United Kingdom

The Companies Act 2006 is the source of shareholder pre-emption rights in British companies. Under section 561(1) of the Companies Act 2006 a company must not issue shares to any person unless:

Companies Act 2006 British statute

The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest Act in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since been surpassed, in that respect, by the Corporation Tax Act 2009.

Share (finance) single unit of ownership in a corporation, mutual fund, or any other organization

In financial markets, a share is a unit used as mutual funds, limited partnerships, and real estate investment trusts. The owner of shares in the corporation/company is a shareholder of the corporation. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.

  1. It has made an offer (on the same or more favourable terms) to each person who already holds shares in the company in the proportion held by them; and
  2. The time limit given to the shareholder to accept the offer has expired.

By virtue of section 562(5), the period given to the shareholders to accept such an offer must not be less than 14 days.

The effect of these provisions is that a company cannot allot shares to new shareholders until it has offered them to their existing shareholders. The company must give the shareholders at least 14 days to decide whether or not they wish to purchase the shares.Private companies and in some cases public companies can choose to disapply or modify the satutory pre-emption rights either generally or in respect of a specific allotment (sections 569 to 573 of the Companies Act 2006)

Historical meanings

In earlier time, "pre-emption right" has had a separate and distinct meaning to that given to it today. [5]

Under international law, the right of preemption formerly referred to the right of a nation to detain merchandise passing through its territories or seas, in order to afford to its subjects the preference of purchase. This form of right was sometimes regulated by treaty. A treaty between the United States and Great Britain in 1794 agreed that:

whereas the difficulty of agreeing on precise cases in which alone provisions and other articles not generally contraband may be regarded as such, renders it expedient to provide against the inconveniences and misunderstandings which might thence arise. It is further agreed that whenever any such articles so being contraband according to the existing laws of nations, shall for that reason be seized, the same shall not be confiscated, but the owners thereof shall be speedily and completely indemnified; and the captors, or in their default-the government under whose authority they act, shall pay to the masters or owners of such vessel the full value of all articles, with a reasonable mercantile profit thereon, together with the freight, and also the damages incident to such detention.

In the United States in the eighteenth century, when an individual bought the preemption right to land, he did not buy the land. He was only buying the right to buy the land. [6] In the case of the Phelps and Gorham Purchase, the syndicate paid Massachusetts USD$1,000,000 for the pre-emptive rights, and then paid the Indians, who thought they owned the land, $5,000 cash and an annual $500 annuity forever for their title to the land. [7]

See also

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Phelps and Gorham Purchase

The Phelps and Gorham Purchase was the purchase in 1788 of 6,000,000 acres (24,000 km2) of land in what is now western New York State from the Commonwealth of Massachusetts for $1,000,000 (£300,000), to be paid in three annual installments, and the pre-emptive right to the title on the land from the Six Nations of the Iroquois Confederacy for $5000 (£12,500). A syndicate formed by Oliver Phelps and Nathaniel Gorham bought preemptive rights to 6,000,000-acre (24,000 km2) in New York, west of Seneca Lake between Lake Ontario and the Pennsylvania border, from the Commonwealth of Massachusetts.

Preemption or pre-emption may refer to:

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Preemption Line

The Preemption Line divided the aboriginal lands of western New York State awarded to New York from those awarded to Commonwealth of Massachusetts by the Treaty of Hartford of 1786. It was defined as the meridian (north–south) line from the eighty-second milestone of the Pennsylvania–New York survey line at 76° 57' 58" W northward to Lake Ontario.

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Seneca Nation of Indians v. Christy, 162 U.S. 283 (1896), was the first litigation of aboriginal title in the United States by a tribal plaintiff in the Supreme Court of the United States since Cherokee Nation v. Georgia (1831). It was the first such litigation by an indigenous plaintiff since Fellows v. Blacksmith (1857) and its companion case of New York ex rel. Cutler v. Dibble (1858). The New York courts held that the 1788 Phelps and Gorham Purchase did not violate the Nonintercourse Act, one of the provisions of which prohibits purchases of Indian lands without the approval of the federal government, and that the Seneca Nation of New York was barred by the state statute of limitations from challenging the transfer of title. The U.S. Supreme Court declined to review the merits of lower court ruling because of the adequate and independent state grounds doctrine.

Preemption was a term used in the nineteenth century to refer to a settler's right to purchase public land at a federally set minimum price; it was a right of first refusal. Usually this was conferred to male heads of households who developed the property into a farm. If he was a citizen or was taking steps to become one and he and his family developed the land he had the right to then buy that land for the minimum price. Land was otherwise sold through auction, typically at a price too high for these settlers. Preemption is similar to squatter's rights and mining claims.

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Russian businesses may have one of several types of legal status. A business may operate as a limited liability company, or as a public or private joint-stock company, or may be run by a sole proprietor. Other types of commercial and non-commercial organizations are also recognized.

<i>R v Symonds</i>

R v Symonds(The Queen v Symonds) incorporated the concept of Aboriginal title into New Zealand law and upheld the Government's pre-emptive right of purchase to Maori land deriving from the common law and expressed in the Treaty of Waitangi. Although the Native Lands Act 1862 waived Crown pre-emption, the notion of Aboriginal title has been revived in the 20th century to deal with Maori property rights.

References

  1. Garner, Bryan A., Editor-in-Chief (2009). Black's Law Dictionary. St. Paul, Minnesota, USA: Thomson Reuters. ISBN   978-0-314-19949-2. Right of pre-emption. A potential buyer's contractual right to have the first opportunity to buy, at a specified price, if the seller chooses to sell within the contractual period. Also termed 'first option to buy'.CS1 maint: Multiple names: authors list (link)
  2. Preemptive right definition on InvestorWords.com
  3. Subscription rights explained on thismatter.com
  4. K. Grechenig, Discriminating Shareholders through the Exclusion of Pre-emption Rights? - The European Infringement Proceeding against Spain (C-338/06), European Company and Financial Law Review (ECFR) 2007, p. 517-592.
  5. www.lectlaw.com
  6. Henry, Marian S. (February 25, 2000). "The Phelps-Gorham Purchase". Archived from the original on 27 February 2014. Retrieved 31 December 2012.
  7. Milliken, Charles F. (1911). A History of Ontario County, New York and Its People Vol. 1. Lewis Historical Publishing Co. p. 15. Retrieved 2008-01-25.