Right of First Refusal

Definition

The Right of First Refusal (ROFR) is a contractual term within an agreement that gives a specific party the opportunity to enter into a business transaction with the owner of something, such as a property or business, before the owner negotiates any other offer. In simpler terms, it provides a potential buyer the first chance to buy something before the seller can sell it to someone else. However, if the holder of this right declines the offer, the owner is free to open the transaction to other interested parties.

Phonetic

The phonetics for “Right of First Refusal” would be: Rait ov Furst Ri-fyoo-zuhl

Key Takeaways

Right of First Refusal (ROFR) is a legally binding agreement that provides certain stakeholders, like shareholders or co-owners, the first opportunity to buy a property or asset before the owner can sell to someone else. Here are three important points you need to remember about the Right of First Refusal:

1. Protection of Stakeholder Interest: ROFR is designed to protect entities with vested interests in an asset. It grants the opportunity to buy an asset before it can be sold to a third party, typically to protect the business or stakeholder’s interests.
2. Not an Obligation to Purchase: Remember, ROFR is not an obligation to purchase; it is simply the right to do so before anyone else. The holder is not required to exercise this right if they do not wish or do not have the capacity to make the purchase.
3. Specific Terms and Conditions: The specific terms and conditions of ROFR, such as the price of purchase or terms of the sale, are stated in the agreement. This agreement can be part of the company’s bylaws or a part of the real estate contract, or in other forms.

Importance

The Right of First Refusal (ROFR) is a crucial business/finance term because it provides a potential safety net or opportunity for a party in a business contract. This right allows the holder the option to enter a business transaction with the owner of something, such as a property or an asset, before the owner is entitled to enter into that transaction with a third party. Therefore, this term could be crucial in business partnerships or deals, as it gives the first right to purchase or refusal to the holder. ROFR can prevent unwanted third-party agreements, giving the holder the ability to essentially ‘match’ the offer of an outside party, which can be crucial in maintaining strategic assets or growth opportunities within a company.

Explanation

The Right of First Refusal, also known as ROFR, serves a crucial purpose in diverse business transactions and refers to a contractual right where a party has the privilege to enter into a business deal with an owner, before the owner negotiates with other prospective buyers. The primary purpose of ROFR is to provide an existing investor or owner the opportunity to maintain their hold or stake in an asset, project, or company. When the asset owner receives an external purchase offer, the holder of the ROFR has the right to match that offer before anyone else. This provision offers a measure of security to the holder, protecting their investment or stake.In the context of real estate, for example, a tenant may be granted the right of first refusal in their leasing agreement, providing them the first option to purchase the property if the landlord decides to sell. In corporate finance, shareholders in a company can have the right of first refusal to acquire any new shares the company desires to release, thus avoiding dilution of their ownership stake. Thus, the ROFR principally serves to preserve the business interests of a party and gives them a unique advantage in controlling their future engagement and investment in the given context.

Examples

1. Real Estate Transaction: One of the most common uses of the right of first refusal is seen in the world of real estate. Suppose a tenant in an apartment building has a clause in their lease that grants them the right of first refusal. If the landlord decides to sell the property, the tenant has the option to purchase the property on the terms offered by a prospective third-party buyer before the landlord can sell to that third party. If the tenant refuses or is not able to make the purchase, then the landlord is free to sell to the other buyer.2. Shareholder Agreement: In business finance, right of first refusal often comes into play in shareholders’ agreements, especially in private companies. If a shareholder wants to sell their stake in the company, the other shareholders, under right of first refusal, have the first chance to buy the seller’s stake before it is offered to outside investors. This allows existing shareholders to maintain control over the company.3. Franchise Agreements: Many franchise agreements contain a right of first refusal. For example, suppose a fast food franchise owner decides to sell their restaurant. The parent company may have a right of first refusal, allowing it the first opportunity to purchase the restaurant back before it’s sold to a potential buyer. This allows the parent company to control who operates their franchises and maintain brand consistency.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Pre-emptive Rights
• Option Agreement
• Business Contract
• Shareholders’ Agreement
• Buy-Sell Agreement

Sources for More Information

• Investopedia
• Corporate Finance Institute
• Law Insider
• The Business Professor