Right of First Offer
A Right of First Offer is a contractual right that generally requires an owner or issuer to give the right holder the first opportunity to make or receive an offer for specified securities, assets or a transaction before dealing freely with third parties.
How it works
A Right of First Offer, or ROFO, operates earlier in the sale process than a Right of First Refusal. Depending on the agreement, the owner may first notify the holder of an intended sale and invite the holder to propose terms, or the issuer may first offer new securities to covered holders on stated terms. If no agreement is reached, the owner can usually approach third parties, sometimes only on terms no more favorable than a negotiated threshold for a defined period.
The right arises before an unrestricted outside sale
The holder receives the first contractual opportunity before the owner completes the broader market process.
Pricing mechanics vary
The owner may state proposed terms, or the right holder may be required to submit the first binding offer.
A rejected offer can constrain later sales
Agreements can require a subsequent third-party transaction to meet a minimum value or prohibit materially more favorable outside terms.
The right can apply to new securities
Some investor-rights agreements use a first-offer structure requiring an issuer to offer new securities to existing investors before selling the balance elsewhere.
Worked example: outside-sale threshold
A holder offers $100 million and the owner rejects it. If the agreement permits an outside sale only above 110% of that offer, a third-party deal may need a value greater than $110 million.
Why ROFO differs economically from ROFR
A ROFO holder may have to price the asset without seeing a third-party bid, while a ROFR holder can often respond to terms already negotiated.
Common mistakes
Using ROFO and ROFR interchangeably; assuming the right always covers share transfers; ignoring the post-rejection sale restrictions; and assuming the holder can wait for a third-party price before bidding.
Example
A shareholder intends to sell a large block. Before soliciting outside buyers, the agreement requires a ROFO notice. The holder has 30 business days to make a binding offer. If the offer is rejected, the seller may seek a third-party deal subject to the agreement’s pricing restrictions.
Example
A shareholder intends to sell a large block. Before soliciting outside buyers, the agreement requires a ROFO notice. The holder has 30 business days to make a binding offer. If the offer is rejected, the seller may seek a third-party deal subject to the agreement’s pricing restrictions.
Professional note
ROFO drafting varies materially. Some provisions are seller-transfer rights; others function as participation rights on new issuances. Always identify what event triggers the right and who sets the initial price.
Related terms
- Investor Rights Agreement
An Investor Rights Agreement is a contract between a company and one or more investors that grants specified governance, information, participation, registration or other rights beyond the ordinary rights attached to the investor’s securities.
- Stockholders Agreement
A Stockholders Agreement is a contract among stockholders, or among stockholders and the company, that governs specified ownership, voting, governance, transfer, consent or exit rights relating to the company’s shares.
- Preemptive Rights
Preemptive Rights are rights allowing an existing stockholder or investor to purchase a proportional share of specified new securities before or alongside other buyers so the holder can reduce dilution of its ownership percentage.
- Right of First Refusal
A Right of First Refusal is a contractual transfer right that generally gives its holder an opportunity to purchase specified securities or property on the terms of a proposed third-party transaction before the owner can complete that sale.
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