Right Of First Refusal
Right of first refusal provides the holder the right, not the obligation, to take part in a transaction.
Very similar to option contracts, the right of first refusal provides the holder the right, not the obligation, to take part in a transaction. The holder of the ROFR has the chance of establishing an agreement before anyone else. Companies or individuals commonly use rights of first refusal to view how business opportunities will be. The holder has the right to enter at a later time instead of an immediate commitment.
For example, Sara wants to sell 1,000,000 shares she owns to Sam. Sara is offering the shares for the price of $5 million but with certain terms & conditions. However, Kevin, another investor, has the right of refusal to the purchase of shares. Sara has to offer Kevin the shares with the same terms and conditions that she offered Sam. Kevin can choose to use his ROFR at any moment within the specified time period. If Kevin decides to use his right of first refusal and goes through with the deal, Sam will have no right to strike a deal. Although, if Kevin refuses to the terms and conditions or the time period of the right expires, then Sara can freely approach Sam.
The ROFR is customizable according to the parties’ preferences, enabling them to create different standard agreement variations. The agreement’s involved party can include changes such as the time period that the right will be valid for and permitting a third party that the buyer recommended to secure the purchase. Generally, the ROFR agreements are time-bound. After the time period expires, the owner can freely approach other third-party buyers.
The owner of the asset will be free to entertain others’ offers if the right holder does not want to enter into a deal. Lessees in the real estate industry often use this right as it provides them with a preference in the property that they will hold. The ROFR is beneficial to the holder of the right. But it can also be a limitation to the owner as he would have a limited number of parties interested in competing for the asset.