Right of first refusal

From Wikipedia, the free encyclopedia - View original article

 
Jump to: navigation, search

Right of first refusal (ROFR or RFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. In brief, the right of first refusal is similar in concept to a call option.

An ROFR can cover almost any sort of asset, including real estate, personal property, a patent license, a screenplay, or an interest in a business. It might also cover business transactions that are not strictly assets, such as the right to enter a joint venture or distribution arrangement. In entertainment, a right of first refusal on a concept or a screenplay would give the holder the right to make that movie first. Only if the holder turns it down may the owner then shop it around to other parties.

Because an ROFR is a contract right, the holder's remedies for breach are typically limited to recovery of damages. In other words, if the owner sells the asset to a third party without offering the holder the opportunity to purchase it first, the holder can then sue the owner for damages but may have a difficult time obtaining a court order to stop or reverse the sale. However, in some cases the option becomes a property right that may be used to invalidate an improper sale.

An ROFR differs from a Right of First Offer (ROFO, also known as a Right of First Negotiation) in that the ROFO merely obliges the owner to undergo exclusive good faith negotiations with the rights holder before negotiating with other parties. A ROFR is an option to enter a transaction on exact or approximate transaction terms. A ROFO is merely an agreement to negotiate.

Examples[edit]

Variations[edit]

The following are all variations on the basic ROFR.

Many other variations are possible. A fully drafted ROFR addresses all of these types of issues and more, and in the case of valuable or complex transactions is subject to negotiation and review by business transaction attorneys. However, many ROFR are not completely specified. Even the best drafted ROFR agreements suffer a high risk of dispute and litigation because they are anticipating future transactions and contingencies that are unknowable at the time the ROFR originates.

In venture capital[edit]

In venture capital deals, the right of first refusal is a term sheet provision permitting existing investors in a company to accept or refuse the purchase of equity shares offered by the company, before third parties have access to the deal. The main goal of the provision is to allow investors to prevent ownership dilution as the company raises additional capital. Typically, the provision will exempt certain types of shares, such as those in an employee pool, or shares issues to equipment loaners or lessors.[1][2] Startup companies are advised to attempt negotiating out this right, because it enables existing investors to send stronger (potentially negative) signals to new investors, and consequently drive down the company's valuation.[3]

See also[edit]

References[edit]

External links[edit]