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.
How it works
A Right of First Refusal, commonly shortened to ROFR, usually becomes relevant after the owner receives or negotiates a qualifying third-party offer. The agreement defines the covered securities, notice process, matching period, price and terms that must be matched, permitted transfers and what happens if the holder declines. The owner may then be allowed to complete the third-party transfer, typically subject to the agreement’s timing and no-more-favorable-terms limitations.
The right generally follows a third-party offer
The owner typically identifies an outside transaction first, then gives the ROFR holder the contractual opportunity to match or accept the covered terms.
Notice terms define the exercise process
Agreements can require disclosure of buyer identity, price, form of consideration, number of shares and other material sale terms.
The holder usually has a limited election period
Failure to exercise within the stated period normally permits the owner to proceed with the qualifying third-party sale.
The outside sale can remain constrained
If the ROFR is declined, the seller may have only a specified period to close and may be barred from giving the third party materially better terms.
Worked example: matching economics
A third party offers $12 million cash for a block of shares. If the ROFR requires matching the same economic terms, the holder must generally offer the required $12 million consideration rather than substitute a lower price.
Why the right affects liquidity
Potential buyers can discount or avoid securities subject to a ROFR because their transaction can be displaced after negotiation.
Common mistakes
Confusing a ROFR with a Right of First Offer; assuming every transfer triggers it; ignoring Permitted Transfers; and treating a right to match price as a right to rewrite all deal terms.
Example
A stockholder receives a bona fide offer to sell 2 million shares for $8.00 per share. The Stockholders Agreement requires the seller to notify the ROFR holder, which can elect to buy those shares on the specified third-party terms before the outside sale closes.
Example
A stockholder receives a bona fide offer to sell 2 million shares for $8.00 per share. The Stockholders Agreement requires the seller to notify the ROFR holder, which can elect to buy those shares on the specified third-party terms before the outside sale closes.
Professional note
A ROFR can protect ownership concentration but can also reduce marketability because a third-party buyer knows its negotiated deal may be matched. The exact trigger and matching standard matter more than the label.
Related terms
- Voting Rights
Voting rights are shareholder rights to vote on specified corporate matters, commonly including director elections and other proposals.
- Lock-Up Agreement
A lock-up agreement restricts specified shareholders from selling shares for a stated period after an IPO or other transaction.
- Transferable Subscription Rights
Transferable Subscription Rights are rights that may be sold, assigned or otherwise transferred before expiration under the terms of the offering, allowing holders to monetize the rights without exercising them.
- 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.
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