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The Right of First Refusal (ROFR) is a contractual right given to an individual or company. This right gives the holder an "upfront ticket" in a potential sale transaction of an asset, often property or shares in a business. When the owner decides to sell, they must first offer it to the individual or company holding the ROFR. This holder then has the choice to purchase under the terms offered by a third-party prospective buyer, or decline and allow the sale to proceed with the third-party.
While the Rights of First Refusal and First Offer might seem similar, they serve distinct roles. Right of First Offer (ROFO) stipulates that the asset owner must offer it to the rights holder before they market it to third parties. Right of First Refusal is active later, when the owner has an offer from an interested third party. So, ROFO is exercised before marketing the asset, and ROFR when an outside offer is on the table.
ROFR offers several benefits:
Control for Holder: It provides control over changes in business ownership or property.
Preferred Buying Position: The holder gets a preferred position to buy an asset that they deem valuable.
Protection against Undesirable Owners: It serves as protection against unwanted new business partners.
Negotiation Power: In some instances, it can offer the holder the power to negotiate a lower price.
While there aren't specific benchmarks for ROFR, some general aspects shape its use and effectiveness:
Just like your best friend calling 'shotgun' for the front seat in a car, Right of First Refusal is a kind of 'shotgun' in the business world. Before selling an asset to someone else, the owner must first offer it to the person holding this 'ticket'. The holder can then decide to buy it or pass. It's a valuable tool; however, it must be used wisely and clearly defined to avoid any potential hiccups.