FINRA Series 7Investment Information and Suitable RecommendationsEasy
A shareholder receives a subscription rights offering from a company in which she owns common stock. What is the primary purpose of preemptive rights granted to existing shareholders?
- ATo allow shareholders to purchase additional shares at a premium to market price
- BTo allow shareholders to maintain their proportionate ownership percentage in the company
- CTo give shareholders voting control over the company's board of directors
- DTo guarantee shareholders a fixed dividend rate on newly issued shares
Show answer & explanationAnswer & explanation
Correct answer: B. To allow shareholders to maintain their proportionate ownership percentage in the company
Preemptive rights allow existing common shareholders to purchase newly issued shares (usually at a discount to market price) in proportion to their current holdings, protecting them from dilution of ownership and voting power.
Why the other options are wrong
- A. Incorrect — rights are typically offered at a discount, not a premium.
- C. Incorrect — rights protect ownership percentage, not board control specifically.
- D. Incorrect — rights do not guarantee any dividend rate.
Preemptive Rights
The right of existing common shareholders to purchase newly issued shares before they are offered to the public, preserving their proportionate ownership.
- Protects against dilution of ownership
- Rights are typically short-term and offered below market price
- Rights can be exercised, sold, or allowed to expire
Memory trick: Preemptive = 'pre-empt' dilution of your slice of the pie.