What is Right of First Refusal?
The
right of first refusal (ROFR) is a contractual right that gives its holder the opportunity to enter a business transaction with the owner of something on a priority basis, before the owner is entitled to enter that transaction with a third party. It is a common provision in
business agreements, especially in real estate, joint ventures, and equity deals.
How Does it Work?
When an owner decides to sell or lease their asset, and there's a ROFR in place, they must first offer the opportunity to the holder of the ROFR. If the holder declines, only then can the owner proceed with third parties. This mechanism protects the interests of the holder and ensures they are not sidelined in any future deals.
Why Include a Right of First Refusal?
Incorporating a ROFR in a business agreement can be strategic. It provides security for the holder, ensuring that they have the first opportunity to acquire or lease an asset. For the owner, offering a ROFR can attract partners or investors by providing them with a sense of priority and security in future transactions.
Common Applications in Business
The ROFR is widely used across various sectors: Real Estate: Tenants often obtain a ROFR to buy the property they are leasing if the owner decides to sell.
Equity Deals: Investors may secure a ROFR to purchase additional shares if the company decides to issue new stock.
Partnership Agreements: Partners may have a ROFR to buy out the interests of a departing partner.
Advantages and Disadvantages
The ROFR comes with its set of benefits and challenges:
Advantages: Provides security and priority to the holder in acquiring assets.
Can be a valuable negotiation tool in attracting investors or partners.
Disadvantages:
May complicate the sale process for the owner as third parties might be deterred by the existing ROFR.
The holder must be ready and have the resources to act on the ROFR when the opportunity arises.
How is Right of First Refusal Different from Right of First Offer?
While both ROFR and
right of first offer (ROFO) provide priority, they differ significantly. With a ROFO, the holder gets the chance to make the first offer on the asset before the owner negotiates with third parties. In contrast, the ROFR allows the holder to match an offer the owner has already received from a third party.
Key Considerations in Drafting ROFR Clauses
When drafting a ROFR clause, several factors should be considered: Duration: Clearly define the period during which the ROFR is effective.
Terms: Specify the terms under which the ROFR can be exercised, including any pricing mechanisms.
Notification: Outline the process for notifying the holder of the ROFR when the asset is available.
Conditions: Include any conditions that must be met for the ROFR to be valid.
Conclusion
The
right of first refusal is a powerful tool in business transactions that can benefit both the holder and the owner. However, its effectiveness depends on how well it is drafted and implemented within the context of the broader
business strategy. Both parties should consider the implications carefully and consult with legal professionals to ensure the ROFR aligns with their
business goals.