Which right allows shareholders to maintain their proportional ownership when new stock is issued?

Which right allows shareholders to maintain their proportional ownership when new stock is issued?

• A. Preemptive rights
• B. Right of first refusal
• C. Cumulative voting rights
• D. Transfer on death rights

Answer: (A)

The key idea is protecting existing ownership from being diluted when a company issues more stock. Preemptive rights give current shareholders the first chance to purchase a proportional share of any new issuance, so they can maintain their percentage of ownership and voting power. For example, if you own 10% of the company and 1,000 new shares are issued, you’d have the option to buy enough of those new shares to keep your 10% stake, rather than seeing your ownership drop. The other options don’t address maintaining proportionate ownership in the face of new stock: the right of first refusal deals with precedence to buy assets (not new equity), cumulative voting rights affect how votes for directors are counted, and transfer on death rights govern posthumous transfer of shares. Therefore, preemptive rights best fit the concept of preserving proportional ownership during new stock issuance.

The key idea is protecting existing ownership from being diluted when a company issues more stock. Preemptive rights give current shareholders the first chance to purchase a proportional share of any new issuance, so they can maintain their percentage of ownership and voting power. For example, if you own 10% of the company and 1,000 new shares are issued, you’d have the option to buy enough of those new shares to keep your 10% stake, rather than seeing your ownership drop. The other options don’t address maintaining proportionate ownership in the face of new stock: the right of first refusal deals with precedence to buy assets (not new equity), cumulative voting rights affect how votes for directors are counted, and transfer on death rights govern posthumous transfer of shares. Therefore, preemptive rights best fit the concept of preserving proportional ownership during new stock issuance.