Right of First Refusal

What is right of first refusal?

The right of first refusal is a promise that gives a person the priority to enter into a purchase or transfer agreement. A shareholder of a company for example will often have the right of first refusal to buy shares from the company’s other shareholders. Naturally only if it is specified in the company’s articles of association or shareholder’s agreement. That way the shareholders of a company can protect themselves against external individuals being written into the shareholders’ registry. Right of first refusal is often connected to a number of conditions that have to be accepted in order to proceed with the purchase.

Since you are not always able to buy the shares immediately sometimes the shareholders will establish a promissory note with an instalment scheme.

Right of first refusal in contracts

There are no laws as such regulating questions regarding right of first refusal. Thus, there is no automatic right of first refusal for the shareholders of an enterprise, it has to be specified in a contract. If there is no agreement regarding right of first refusal, the shareholder can sell to whomever they choose. Right of first refusal is not an obligation and you do not need to make use of it unless you have the chance to. It is a right.

Usually, the share prize is determined in advance. It is usually included in the conditions for the right of first refusal. The prize can rise though, if a shareholder receives an offer from an external buyer. In this case you would typically have to match that prize. That is to say that there are two models of right of first refusal: that it comes into play when an interested third party is found. Their offer determines the conditions for the right of first refusal. Or that the right of first refusal is determined in advance.

Questions about the right of first refusal sometimes arise in connection to deadlock-clauses describing the conditions for a company’s shareholders buying each other’s shares in the event of a tie for a decision. Furthermore, a non-competition-clause should be considered to prevent a shareholder to defect to a competing enterprise and give the competitor access to your own company.

Sections on the right of first refusal can also be included in leases. Here, the tenant can be granted right of first refusal on real estate in case the owner wishes to sell.