Company’s right of first refusal: Overview, definition, and example
What is the company’s right of first refusal?
The company’s right of first refusal (ROFR) is a contractual right that gives a company the first opportunity to purchase or acquire an asset, share, or interest before the owner can offer it to a third party. In other words, if the owner decides to sell the asset, the company can choose to buy it on the same terms offered by the third party. This right is often used in shareholder agreements, partnership agreements, and real estate transactions to give the company or other stakeholders a chance to retain control or preserve an existing relationship before allowing external parties to step in.
Why is the company’s right of first refusal important?
The right of first refusal is important because it helps protect a company’s interests by allowing it to maintain control over its ownership structure or key assets. For example, if a shareholder wishes to sell their shares, the company can prevent an unwanted third party from gaining influence by exercising its right to purchase the shares first. It also provides the company with an opportunity to retain important resources, such as property or intellectual property, that could be critical to its operations. Additionally, the ROFR offers security and stability by allowing the company to make decisions before external parties have a chance to interfere.
Understanding the company’s right of first refusal through an example
Imagine a tech startup where the company’s founders each hold a 25% share. One of the shareholders decides to sell their 25% interest. The company’s right of first refusal gives the company the option to purchase the shares at the same price and terms offered by an outside buyer. If the company decides to exercise its right, it prevents the outside buyer from becoming a new shareholder, preserving the existing ownership structure. If the company chooses not to exercise the right, the shareholder can proceed with selling to the third party.
In another example, a real estate company owns a building, and a tenant in the building wants to sell their leasehold interest. The company’s right of first refusal allows the real estate company to purchase the tenant’s interest in the lease before the tenant can sell it to another party. This ensures the company has the first opportunity to control who holds the lease.
An example of a company’s right of first refusal clause
Here’s how a clause related to the company’s right of first refusal might look in a contract:
“In the event that the Shareholder desires to sell, transfer, or assign all or any portion of their shares in the Company, the Company shall have the right of first refusal to purchase such shares on the same terms and conditions as offered by a third-party buyer. The Shareholder shall provide written notice to the Company of the proposed sale, and the Company shall have [insert number] days to exercise its right of first refusal.”
Conclusion
The company’s right of first refusal is a valuable tool that allows a business to retain control over its ownership structure, assets, or key interests. By giving the company the opportunity to purchase assets or shares before they are offered to third parties, the right of first refusal helps protect against unwanted changes and preserves internal relationships. Whether applied to share transfers, real estate transactions, or other agreements, this right ensures that the company has the first chance to make decisions that align with its best interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.