A provision (clause) that is set out in an entity’s charter conferring on its existing shareholders the right to purchase additional shares of common stock in case it issues more shares (increasing the base of outstanding shares), with the potential to reduce their percentage of ownership in the entity (had such a provision not been incorporated.)

This provision is usually used in convertible preferred stocks to help protect holders from potential dilution. Dilution is the decrease in the value of owned shares because of an increase in the total number of shares outstanding due to issuance of additional shares. An anti-dilution provision grants a holder of preferred shares the right to convert its preferred shares at the new price at which the new stock has been issued.

The negative effects of dilution can be mitigated by incorporating such a provision into a share purchase agreement, stipulating that that the conversion price at which the holder originally purchased shares will be adjusted downward if the issuer would embark on addition campaigns of capital raising. For example, if an investor initially purchased shares at $20 and consequently, new shares are issued at $15, then the price at which the investor originally purchased its shares will be reduced to $15, with the difference (20- 15 = $5) prompting the entity to issue more shares to that investor in order to maintain its original ownership unchanged.