STRUCTURING A "RIGHT OF FIRST REFUSAL" AGREEMENT

STRUCTURING A "RIGHT OF FIRST REFUSAL" AGREEMENT

INTRODUCTION

The agreements are used to define the reason, duties, rights and obligations of the parties to the agreement which protects their rights and interests and decreases the possibility of any conflict between the parties in any future event. The right of first refusal clause in a shareholder agreement defines what should be done when any of the shareholder or investor is willing to sell his/ her stake. When any of the shareholders wants to sell his/ her share, a clause in the shareholder’s agreement stating that the shareholders who wants to sell his/ her shares have to present the right to match an offer received from a third party. This is known as the right of first refusal. Such clause guarantees that, as a shareholder or investor is leaving, the existing stakeholders is provided with the first option to buy the stake of the investor who wants to sell his share. 

The Right of First Refusal clause is generally used in commercial agreements as it provides safety, security and surety in commercial and business perspective. Such agreement is a contractual right given by the owner of the company to the company’s investors and stakeholders which results in a great impact on the business. Small sector companies generally have a very small number of investors and shareholders in such cases this clause plays very important role in situation when any investor wishes to leave. A ROFR agreement provides a right which can also be incorporated in a lease of commercial property agreement. The implication of the right of first refusal clause is fully enforceable on the terms and conditions agreed between the parties to the contract mentioned before in the agreement.

RIGHT TO REFUSAL OR RIGHT OF FIRST REFUSAL (ROFR)

The right of first refusal, also known as ROFR and last look provision, provides a person or company with the opportunity to initiate a business transaction before anyone else can. It provides the first opportunity to buy stocks or real estate at the same price and terms and conditions as another offer. In case when the rightful holder of the right of first refusal declines then the owner of the asset is free to sell it to whomever they wish. Such clauses give businesses more security if a rightful owner goes bankrupt or wants to sell the property concerned in the agreement. Venture capitalists and other companies use the right of first refusal for acquiring the best price on stocks or entire companies. Business partners in a joint venture generally provides each other the right so they can avoid any newcomer from buying any stake in their company if anyone of them wishes to sell their shares. Generally, the right of first refusal (ROFR) is a contractual right between parties to the agreement which are:

  1. the Grantor;
  2. the Holder.

The grantor is a rightful owner of an asset which the holder may purchase in future. The ROFR ensures that in a case when a third party wants to and makes a bid for the asset then the grantor is obligated to first offer it to the holder for the same price and conditions which is offered to the third party. Right of first refusal is generally used in real estate and LLC Operating.

INPORTANT FEATURES OF ROFR AGREEMENT

The ROFR is presented in various forms, general guidelines which are to be considered while negotiating for a ROFR includes: -

  1. Nature of the rights granted by the agreement:

The Grantor is contractually obliged to make an offer to sell on basic terms and conditions to the Grantee, and should notify the Grantee of his wish to sell, making the Grantee make an offer to purchase which then is at the discretion of the Grantor to accept or decline;

  1.  Duration of the right provided by the agreement:

The ROFR clause must mention the duration for which such agreement which grants the respective rights and obligations is valid.

  1. The triggering event during enforceability of agreement:

The ROFR should be drafted in a way that it is limited to the situations when the Grantor wants to sell the property, or if any other dispositions of the property are intended to fall within the scope of the ROFR;

  1. Timeline for the exercise of the right provided by the agreement:

The Grantor is provided with a specific duration to use the ROFR upon the Grantee after being notified of a third party's offer or of the Grantor's desire to sell of the property depending upon the situation.

  1. Non-exercise of the right:

In case when the Grantee chooses not to exercise the ROFR on the first opportunity when it becomes exercisable and if the Grantor's sale to any third party is not successful, then the Grantor is obliged to follow the process of notifying or making a different offer to the Grantee.

  1.  Terms of the sale:

The terms should also include the price to be paid for the property and the subject to which the property will be sold in future, and whether or not the Grantee is obligated to pay a deposit after using the powers of the ROFR

  1. Transferability of the ROFR:

The parties may consider the fact that if the ROFR is intended to be personal to the Grantee only.

SHAREHOLDERS AGREEMENTS: IMPORTANT POINTS YOU MUST CONSIDER | TO KNOW MORE, VISIT -

 

STRUCTURING A RIGHT OF FIRST REFUSAL AGREEMENT

  1. Definitions Clause:

An ROFR agreement must consist of a clear and absolute definitions. An offer made for the property initiates the ROFR, according to which the grantor is required to contact the holder or visa versa. For an ROFR agreement to be successful, such factors must be considered and should be clear and well-defined in the agreement.

  1. Duration clause:

Timing is very important for the right of first refusal agreements. Without specific timings and deadlines, the agreement is not so effective, as it becomes very difficult to determine whether the grantor or the holder have worked according to the contract or not. Deadlines are important for both the parties to the agreement. A holder expects that they will be provided with a reasonable time to consider and accept or reject an offer, and a grantor is ensured that the ROFR is not perpetual.

  1. Transferability clause:

Mentioning terms and conditions of transferability in the agreement ensures that both parties to the agreement are well aware and understands whom they are obligated and allowed to work with, at the starting and in the future.

  1. Exceptions clause:

Grantor and holder are allowed to make exceptions in their contract. Which means in situations which do not trigger the ROFR agreement. In such situations it is clearly indicated that the grantor is not willing to sell the property, and thus an exception should be made.

  1. Extinguishment clause:

Cancellation of the ROFR is called extinguishment. This happens for two reasons:

  1. The right may be declined;
  2. The holder may fail to use the right in the allotted time period

After extinguishment occurs the holder now has no additional rights of the property, and the grantor is free to sell the property to any third party.

CONCLUSION

The ROFR clause provides some specific rights to the shareholder because of which an investor has power to purchase additional shares in a company before the same is offered to any third party or any new purchaser. It restricts the involvement of any third party in the company and grants additional control to the rightful right holders during the sale of the share. For making it effective and to ensure its proper execution there is a requirement of a valid contract between the parties to the contract.

To make the agreement investor-friendly ROFR clause is being incorporated in various contracts and transactional agreements such as shareholders agreement, franchise agreement, property lease etc. The stakeholders in an agreement should understand the importance and setbacks of this clause.

 

BY- GAURAV GUPTA