Full Definition
Right of First Refusal (ROFR) grants the holder the contractual right to purchase shares on the same terms as an offer received from a third-party buyer, before the selling stockholder can sell to that third party. When a stockholder receives a bona fide third-party offer to purchase their shares, they must first offer those shares to the ROFR holder on identical terms (price, form of consideration, closing conditions). If the ROFR holder declines to exercise within a defined period (typically 10-30 days), the seller can proceed to sell to the third party on the terms that were offered. ROFR protects the company and its existing investors from having unknown third parties acquire significant ownership positions without the company's consent. ROFR provisions in private company stockholders' agreements typically give the company the first right of refusal, with participating investors holding a secondary right if the company declines to exercise. This two-tier structure allows the company to repurchase shares (for stock buybacks, employee benefit purposes, or to prevent dilutive secondary sales), and if the company passes, allows investors to maintain the shareholder composition they are comfortable with by purchasing the offered shares. ROFR provisions define what constitutes a "permitted transfer" excluded from ROFR requirements—typically transfers to family members, trusts, or affiliated entities for estate planning purposes are permitted without triggering ROFR. ROFR provisions are particularly important in employee stock transactions in private companies. When early employees or executives want to sell shares in secondary market transactions (before an IPO provides natural liquidity), ROFR ensures the company and its investors have the opportunity to control who becomes a shareholder. Some companies have exercised ROFR to prevent secondary sales by departed employees to venture secondary funds, preferring to keep the shareholder base limited to those with ongoing relationships with the company. However, ROFR over employee shares can also impede employees' ability to achieve liquidity, which may affect the company's ability to attract and retain talent—a tension that companies manage through structured liquidity programs (tender offers) that provide employee liquidity in a controlled way.
FAQs
What happens if the ROFR holder wants to match a third-party offer but needs more time than the required exercise period?
Most ROFR agreements allow the holder to extend the exercise period by providing notice of intent to exercise, with the actual closing within a commercially reasonable period (typically 30-60 days from exercise). This permits the holder to conduct necessary financial or legal review before committing, without forfeiting the right by missing the initial exercise deadline. If the ROFR holder fails to exercise within the prescribed period (including any extensions), the seller can proceed with the third-party transaction on the originally offered terms.
Can a company's ROFR survive a merger or acquisition?
ROFR provisions typically terminate at a merger or acquisition where all shareholders are selling to the same acquirer—the ROFR exists to control who buys individual shareholders' stakes, not to apply when the entire company is being sold. Most stockholder agreements specify that ROFR rights terminate upon a change of control transaction. However, ROFR provisions survive a change of control where only certain shareholders are selling (a secondary sale of some shareholders' stake alongside an acquisition) if not specifically terminated by the transaction documents.
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