A right of first refusal ("ROFR") is an agreement -- or a clause in an agreement -- that requires the party bound by the right of first refusal to notify you before a sale transaction and give you the option to participate in and/or preempt that transaction. Rather than being informed after the fact of a sale, a right of first refusal ensures that you are not only informed upfront, but also given the chance to preempt any deal yourself -- and therefore protect your interests in whatever way you see fit. A right of first refusal is a type of preemptive or pre-emption right.
Negotiating the right of first refusal can be contentious in many contracts. A strong corporate lawyer from the Priori network can help you negotiate a solid right of first refusal provision.
What Is Right of First Refusal?
The right of first refusal is a common contract provision that gives you the right to enter into a business transaction with a person or company before any other party becomes involved. In a joint venture, for example, you may be given the right of first refusal to buy-out your partner in the joint venture before that partner offers their share to any third party. As a startup investor, a right of first refusal often gives you the option to purchase new share issuances before any third party. This means that your opportunity to have a first look at any potential deal—and possibly take it— is contractually protected.
It’s important to note that this provision is a right only, not an obligation. You are not required to take any deal on the table. It’s also important to note that this is not the same as a veto power. If you opt not to participate, the right of first refusal does not prevent it from going through.
Benefits of Right of First Refusal
The benefits of the right of first refusal run in favor of the potential buyer who is required to be offered the deal. In addition, the right of first refusal ensures that an unknown outsider cannot enter into a business against your wishes. Generally, this is the reason behind such provisions in the first place.
How a Right of First Refusal Is Exercised
If you are contractually guaranteed the right of first refusal, you must be informed at any time of a firm offer to conduct a certain business transaction -- generally promptly once the transaction is on the table. If it involves the sale of a specific asset, you can simply match the best offer in order to buy yourself. In the case of share issuances, you generally will be given the first opportunity to purchase shares at the offered price before the offer is opened to other investors.
Depending on your needs, the cost of negotiating a right of first refusal for your transaction can vary signficantly. Hourly rates for corporate lawyers in the Priori network with experience negotiating ROFRs can vary from $150 per hour to $550 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What’s the difference between a right of first offer and a right of first refusal?
A right of first refusal is designed to let the person with such rights take any deal on the table. A right of first offer, on the other hand, is designed to allow you to set the tone for negotiation. If you have the right of first offer, you are given the opportunity to set the first bid for any sale of an asset. The seller then has the right to accept or reject the offer as they see fit. If the seller rejects the offer, bidding is open for anyone.