Right of First Refusal
AdvancedA right of first refusal is a contractual right that requires an owner wishing to sell an asset, such as shares in a private company, to offer it first to a specified party, who can buy it on the same terms as an offer received from an outsider.
Rights of first refusal are common in shareholder agreements, joint ventures, property and partnerships. They let existing shareholders or the company control who becomes an owner.
For example, a shareholder in a private company receives an offer of 30 per share from an outside investor. Under a right of first refusal held by the company or other shareholders, they must first offer the shares to those holders at 30 per share. Only if they decline can the shareholder sell to the outsider, on the same terms.
Rights of first refusal protect existing owners against unwanted new shareholders, such as competitors, and help preserve control.
For sellers, they can make it harder to find buyers, since outsiders may be reluctant to negotiate a deal that someone else can match. A related but different right is the right of first offer, which requires the seller to offer the asset to the rights holder before seeking outside offers.
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