Pre-emptive Rights Are Not Automatic

Rule 3 of 14 in this unit2.1.1

2.1.1 Equity Securities

SIE outline 2.1.1

Pre-emptive Rights Are Not Automatic

DGCL §102(b)(3): "No stockholder shall have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless, and except to the extent that, such right is expressly granted to such stockholder in the certificate of incorporation." NOT "every common shareholder has a pre-emptive right to maintain their percentage." The default is no such right; the charter has to grant it, expressly.

The method for this kind of question

1h45m ÷ 80 items = 78.75 seconds per item. A voting or Rule 144 item should cost about 45.
Three facts decide which formula you are in: does the charter provide cumulative voting? does the issuer report? is the seller an affiliate?
Cumulative voting = shares × seats, and it favours the MINORITY holder. Statutory = your share count per seat.
Rule 144(e) takes the GREATEST of 1% outstanding and the 4-week average weekly volume: never automatically the 1%.
Rule 144(d): 6 months if the issuer reports, 1 year if it does not. The clock runs from acquisition.
Liquidation: sort by claim type, not by how safe the name sounds. A subordinated debenture still outranks preferred stock.
Next: SIE Practice Quiz #5: Equity Securities, every answer explained.

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

A corporation's charter says nothing about pre-emptive rights. May an existing shareholder demand a pro rata right to buy into a new stock issue before it goes to the public?

A. No; pre-emptive rights exist only where expressly granted in the charter B. Yes; pre-emptive rights are presumed unless the charter denies them C. Yes; any shareholder may demand this right under federal securities law D. No; pre-emptive rights were abolished for all U.S. corporations

How sure are you?

Sure Fairly sure Guessing

Correct: A. State corporation law's own text states no shareholder has a pre-emptive right unless it is expressly granted in the charter; silence is a denial, not a gap.

B. Reverses the statute; silence is a denial, not a presumption in the shareholder's favor.

C. Pre-emptive rights are a state corporate-law matter tied to the charter, not a federal securities-law entitlement.

D. Pre-emptive rights are not abolished; they simply require an express charter grant to exist.

Unit: SIE outline 2.1.1

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