Right of first refusal

Right of first refusal

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

*"ROFR:" Abe owns a house that he plans to sell to Bo for $1 million. However, Carl holds a right of first refusal to purchase the house. Therefore, before Abe can sell the house to Bo, he must first offer it to Carl for $1 million. If Carl accepts, he buys the house instead of Bo. If Carl declines, Bo may now buy the house at the proposed $1 million price.

*"ROFO:" Carl holds a ROFO instead of an ROFR. Before Abe may negotiate a deal with Bo, he must first try to sell the house to Carl. Abe and Carl attempt to reach a deal. If they reach an agreement, Abe sells the house to Carl. However, if they fail, then Abe is free to start fresh negotiations with Bo without any restriction as to price or terms.

Variations

The following are all variations on the basic ROFR.

*"Duration." The ROFR is limited in time. E.g. Abe must only make the offer to Carl for any proposed sale in the first five years. After that the right expires and Abe has no further obligation to Carl.

*"Exceptions." Certain transactions are exempt. E.g. Abe may sell or transfer the property to a holding company, a trust, family members, etc., without first offering it to Carl. However, the new owners remain subject to the right.

*"Transferability." Carl may assign her ROFR to Bo. Abe must now offer Bo an option to purchase the property instead of Carl. Not every ROFR is transferable; some are personal to the original holder.

*"Extinguished on first sale." If Abe sells the property to Bo because Carl declines the right, the property is no longer subject to the right. Bo may re-sell it free of the ROFR.

*"Extinguished on declined / failed exercise." If Abe proposes to sell the property to Bo and Carl declines, or if Carl accepts but is unable to complete the transaction, the right is extinguished whether or not Abe ultimately sells the property.

*"Persistent." By contrast to the above two, in this case the right runs with the property and binds the new purchaser. E.g. Abe sells the property to Bo. Now Bo must offer the property to Carl first, just as Abe did, if Bo wishes to re-sell it.

*"Offer and acceptance terms." Specific deadlines, procedures, and forms may be required. For example, Abe must give Carl a "notice of sale." Carl has thirty days to accept or reject, with failure to respond counting as rejection. Carl must then close the transaction within thirty days or else that counts as a failed attempt to exercise.

*"Limited time period to close transaction." Abe offers the property to Carl under the ROFR and Carl declines. Abe now has 60 days to close the transaction with Bo. If it cannot close within 60 days Abe must offer it again to Carl before proceeding further with Bo.

*"Substitute purchaser allowed." Abe offers the property to Carl, who declines. Abe is then free to sell it to Bo but that transaction fails. Abe may sell the property under the same terms to Erin instead without re-offering it to Carl.

*"No pending transaction required." Abe wishes to sell the house for $1 million but has not yet identified a purchaser. She prepares proposed sales terms and offers it to Carl on those terms. If Carl declines, she may then shop around for a purchaser.

*"Slight variations allowed in exercise." Abe enters an agreement with Bo calling for Bo to put down a 30% down payment, conduct certain inspections, and close the transaction in 20 days. She offers it to Carl at those terms. Carl accepts but is entitled to insist on a 20% down payment and a 30 day closing period.

*"Slight variations allowed in sale." Abe offers the house for $1 million to Carl. Carl declines. Abe then enters a transaction with Bo but during the escrow Bo discovers a flaw in title and several defects. Abe is entitled to discount the price by $20,000 to close the sale with Bo without having to re-offer the house to Carl at $980,000.

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.

ee also

*Option (finance)
*Pre-emption right
*Drag-Along right
*Tag-Along right

External links

* [http://w4.stern.nyu.edu/emplibrary/99_009.PDF An Economic Analysis of Rights of First Refusal]
* [http://www.venable.com/docs/pubs/1635.pdf Rights of first refusal: The thorny issues raised by "Bramble"]
* [http://www.stroock.com/SiteFiles/Pub147.pdf The Right of First Refusal: A Modest Proposal]


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Look at other dictionaries:

  • right of first refusal — right of first re·fus·al / ri fyü zəl/: the right to have the first opportunity to purchase property upon the owner s decision to sell at the same terms offered by a third party or at predetermined terms – called also preemptive right; Merriam… …   Law dictionary

  • right of first refusal — The right of a person or company to purchase some thing before the offering is made to others. Bloomberg Financial Dictionary * * * right of first refusal UK US noun [S or U] (also first refusal) LAW ► the right to accept or refuse something… …   Financial and business terms

  • Right Of First Refusal — In general, the right of a person or company to purchase something before the offering is made available to others. For example, a football team may have the right of first refusal on a player s contract. This would mean they can make the first… …   Investment dictionary

  • right of first refusal —  Part of a business contract giving a company the first chance to produce or distribute a new product. In the publishing industry, a publisher frequently asks for the right of first refusal of an author’s next work …   American business jargon

  • right of first refusal — noun A provision in a contract that permits a party to that contract or another named party to have an opportunity to purchase, use, or otherwise obtain a specified object before it is offered to any other party. Well, said the publisher, does… …   Wiktionary

  • have the right of first refusal — have (the right of/to) first refusal give (someone) (the right of/to) first refusal to offer to sell someone something before you offer it to anyone else. Manfield has the right of first refusal on any surplus stock …   New idioms dictionary

  • have the right to first refusal — have (the right of/to) first refusal give (someone) (the right of/to) first refusal to offer to sell someone something before you offer it to anyone else. Manfield has the right of first refusal on any surplus stock …   New idioms dictionary

  • the right of first refusal — (the right of) first refusal : the right to accept or refuse something before it is offered to anyone else If we decide to sell the house, we ll give our tenants first refusal. [=we will offer to sell the house to our tenants before offering to… …   Useful english dictionary

  • first refusal — noun The chance to buy (esp property) before it is offered to others • • • Main Entry: ↑first * * * (the right of) first refusal : the right to accept or refuse something before it is offered to anyone else If we decide to sell the house, we ll… …   Useful english dictionary

  • first refusal — ➔ refusal * * * first refusal UK US noun [U] ► LAW RIGHT OF FIRST REFUSAL(Cf. ↑right of first refusal) …   Financial and business terms

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