Right Of First Refusal (ROFR)

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.

1. Control for Holder: Control for Holder offers the holder control over changes in business ownership or property. This control allows the holder to influence decisions that affect the business or property, ensuring alignment with their interests and preferences. By having this control, the holder can protect their investment and actively participate in shaping the direction of the business or property.
2. Preferred Buying Position: Preferred Buying Position grants the holder a preferred position to purchase an asset they consider valuable. This advantage gives the holder an opportunity to acquire the asset before others, securing it at a favorable price or terms. Being in a preferred buying position enables the holder to capitalize on valuable opportunities and make strategic investments that align with their goals.
3. Protection against Undesirable Owners: Protection against Undesirable Owners acts as a shield against unwanted new business partners. By having a say in who can join as an owner or partner, the holder can safeguard the business from potential conflicts or disruptions that may arise from incompatible individuals. This protection ensures that the business maintains a stable and harmonious ownership structure.
4. Negotiation Power: Negotiation Power can provide the holder with the leverage to negotiate a lower price in certain situations. Holding a controlling interest or preferred position can strengthen the holder's bargaining position when discussing terms of a transaction. The ability to negotiate from a position of strength can lead to more favorable outcomes and cost savings for the holder.
5. Strategic Business Decisions: By leveraging Control for Holder, Preferred Buying Position, Protection against Undesirable Owners, and Negotiation Power, holders can make strategic business decisions that align with their objectives. These advantages empower holders to protect their interests, seize valuable opportunities, maintain control over ownership dynamics, and negotiate effectively in business transactions. Implementing these strategies can help holders secure their investments and maximize returns in various business scenarios.

While there aren't specific benchmarks for ROFR, some general aspects shape its use and effectiveness:

• Clarity and Detail within Contracts: ROFR clauses need to be clear and comprehensive to avoid potential legal disputes.
• Responsiveness: The time frame for the holder to decide on the offer must be realistic yet decisive.
• Value of Transaction: A ROFR becomes crucial in high-value transactions as stakes are higher.

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.

• Chen, J. (2024, February 18). What is right of first refusal (ROFR), and how does it work? Investopedia.