Rights

When new shares of common stock are sold to the general public, the proportional ownership of existing shareholders is likely to be reduced. However, if a preemptive right is contained in the firm's articles of incorporation, then the firm must first offer any new issue of common stock to existing shareholders. If the articles of incorporation do not include a preemptive right, the firm has a choice of offering the issue of common stock directly to existing shareholders or to the public.

An issue of common stock offered to existing stockholders is called a rights offering (or offer, for short) or a privileged subscription. In a rights offering, each shareholder is issued rights to buy a specified number of new shares from the firm at a specified price within a specified time, after which time the rights are said to expire. The terms of the rights offering are evidenced by certificates known as share warrants or rights. Such rights are often traded on securities exchanges or over the counter.

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