The legal concept grants existing shareholders of a corporation the privilege to purchase newly issued shares of stock before they are offered to the public. This right safeguards their proportional ownership in the company, preventing dilution of their equity or voting power. For example, if an investor owns 10% of a company and the company decides to issue more shares, this entitlement allows that investor to buy 10% of the new issue, thereby maintaining their existing percentage ownership.
This mechanism serves a vital function in protecting shareholder interests. It ensures fairness in corporate governance and promotes stability by preventing management from unfairly altering the distribution of control. Historically, it arose as a check against insider manipulation and remains a cornerstone of shareholder protection, particularly in closely held corporations where maintaining proportional ownership is critical.
