What is a right of first refusal for shares and how does it protect me?
A right of first refusal (ROFR) is a contractual provision that requires a shareholder who wants to sell their shares to first offer them to the existing shareholders (or the company itself) before selling to an outside buyer. The offer is usually made at the same price and on the same terms that the third-party buyer has proposed.
The protection this provides is meaningful: without a ROFR, a co-owner could sell their stake to a competitor, a stranger, or someone you strongly disagree with, and there would be nothing in the corporation's structure to prevent it. With a ROFR in place, you have the opportunity to maintain control over who becomes your business partner.
The precise mechanics — how long existing shareholders have to exercise their right, whether the company also has a right to purchase, and what happens if only some shareholders exercise their right — vary from agreement to agreement. These details matter and can significantly affect how useful the clause is in practice. A lawyer can help you draft a ROFR that reflects how you actually want it to function.
Key takeaways
- A ROFR gives existing shareholders the chance to buy shares before an outsider can.
- It prevents unwanted third parties from entering the shareholder group.
- The exercise period and mechanics vary and should be carefully drafted.
- Both the shareholders and the company itself can hold a ROFR, depending on the agreement.