Question

I just need help with a reply to this post. Thank you!

Chapter 9 question 9-1 It is frequently stated that the one purpose of the preemptive right is to allow individuals to maintain their proportionate share of the ownership and control of a corporation. a. How important do you suppose control is for the average stockholder of a firm whose shares are traded on the New York Stock Exchange? b. Is the control issue likely to be of more importance to stockholders of publicly owned or closely held (private) firms? Explain. (1) It is very important because it will prevent the management from issuing the large shares amount then purchasing the same shares. It will also protect the price of stock against dilution value. I think both the firm will experience the same issues. When management issued more shares then purchasing the same shares would allow them more control on the company. Also, dilution of value would be experiences by both types of firms. 2) Yes. The price of a common share of stock is the Present Value of its estimated future dividends (2) The preemptive right is clearly important to the stockholders of closely held (private) firms whose owners are interested in maintaining their relative control positions

Answer 1

I couldn't understand your request the first time here explaining the answer at length :

1) What is being explained in the answer is the concept of issuing excess shares as mode to gain greater control over the company. The management can issue shares for themselves by which they will dilute the control of average stockholder over the decision making of the company. Suppose a org has 10000 shares being traded in market, a shareholder X has 1000 shares out of it making him 10% owner of the company. Management issue shares 10000 more shares; here the control of X will get diluted to 5% from 10%.

One another point not mentioned in the answer is that when the stockholder is devoid of any control and say over company's decision making the cost of bad decisions is burdened on all shareholder and not on selected ones. So even when one share-holder didn't have anything to do with the decision he is paying by way of dimunition of his investment.

2) The control issue is more strategic for closely held companies as share holders are countable and they all are interested in having their respective control stake intact. The company works directly through its owners or shareholders which makes control all more important Whereas in public companies thousands of small shareholders are there not having significant shares to command sufficient control stake in company and company also works through directors and other agents.