Right of first offer

A right of first offer is a contract that permits the holder to buy the asset from the owner before they try to sell it to a third party. If the holder is not interested in the asset anymore, then the owner can sell it to someone else. The right to first offer is commonly used in the real estate industry. It is written as a contract like a business partnership or a lease and is triggered when the proprietor wants to sell the asset.

For example, Tom is one of the major shareholders in Vista Inc. with 8 million shares. Bella, a shareholder in the company has the right to first offer. Tom decides to sell 2 million shares, so he has to make an offer to Bella before he can offer the shares to a third-party. Tom is obligated to negotiate in good faith and try to reach an agreement with Bella before starting negotiations with a third-party. If Bella does not buy the 2 million equity, then Tom has the right to sell them to a third-party. However, the terms and conditions will be similar to what he offered Bella, it should not be more favourable than them.

The contract terms state that the owner has to give the first offer to the holder of the right of first offer. The holder then has a specific period before which he has to make an offer. If the time limit expires, so does the right, and the owner is free to sell it to a third party. If the owner does not like the offer, he is free to decide if or not to reject it and sell the asset to anyone else without any restraints.

In any case, where the owner is unable to sell the asset to a third party, they can approach the right holder for a new offer. The right holder is not bound by the initial offer anymore and can choose to lower it since he knows that the owner was unsuccessful in selling it. This gives the holder a more powerful position in the negotiations.