What Is a Right of First Refusal?
A right of first refusal (ROFR) is a contractual provision that gives a designated party the right to match any bona fide third-party offer before the owner can accept that offer and sell the asset. If the ROFR holder matches the terms, it acquires the asset; if it declines, the owner is free to proceed with the third-party sale on the same or better terms.
In M&A, ROFRs appear in shareholder agreements, joint venture contracts, commercial leases, and licensing arrangements. They protect the ROFR holder’s strategic interest in the asset — ensuring that a competitor or undesirable third party cannot acquire it without the ROFR holder having the opportunity to step in.
How ROFR Works
Process
- Owner receives a third-party offer — a bona fide, arm’s-length offer from a willing buyer
- Notice to ROFR holder — the owner must notify the ROFR holder of the offer terms (price, conditions, timing)
- Matching period — the ROFR holder has a specified period (typically 15-60 days) to decide whether to match
- Match or decline — if the ROFR holder matches, it buys on the same terms; if it declines, the owner sells to the third party
- Sale proceeds — if the owner does not sell to the third party on the noticed terms, the ROFR resets for any new offer
ROFR vs. Right of First Offer (ROFO)
| Feature | ROFR | ROFO |
|---|---|---|
| Sequence | Third-party offer first, then matching right | ROFO holder bids first, then owner can seek third-party offers |
| Information | ROFR holder sees the actual third-party offer | ROFO holder bids “blind” |
| Advantage | ROFR holder — knows the market price | Owner — not locked into ROFO holder’s terms |
| Market chilling | Higher — third parties may not bid knowing ROFR exists | Lower — third parties bid after ROFO fails |
Uses in M&A
Shareholder Agreements
ROFRs are standard in private company shareholder agreements:
- If a shareholder wants to sell, the other shareholders have the first right to purchase at the same price
- Prevents unwanted third parties from entering the shareholder group
- Commonly paired with tag-along and drag-along rights
Joint Ventures
JV partners often include ROFRs to ensure continuity of the JV relationship:
- If one partner wants to exit, the other partner matches the third-party offer
- Prevents a competitor from acquiring one side of the JV
- May be combined with call options for additional exit flexibility
Commercial Leases
Tenants may hold ROFRs over the leased property, giving them the right to purchase before the landlord sells to a third party. In M&A involving property-intensive businesses, these ROFRs can significantly affect deal structuring and timeline.
The “Chilling Effect”
ROFRs are controversial in M&A because they can discourage potential third-party buyers from making offers:
- Why bid if the ROFR holder can match? — third parties may decline to invest time and money in due diligence and negotiations knowing that the ROFR holder can swoop in and match
- Information leakage — the ROFR holder learns the market price without bidding, gaining a free option on the asset
- Reduced competition — fewer bidders mean lower prices for the seller
According to academic research published in the Journal of Financial Economics, assets subject to ROFRs sell at an average discount of 10-15% compared to unencumbered assets, reflecting the chilling effect on competitive bidding.
Drafting Considerations
- “Bona fide offer” definition — what constitutes a qualifying third-party offer?
- Matching period — how long does the ROFR holder have to match? (15-60 days is standard)
- Partial matching — can the ROFR holder match for a portion of the shares?
- Non-cash consideration — how is a third-party stock offer valued for matching purposes?
- Subsequent sale restrictions — if the ROFR holder declines, must the sale close within a specified period at the noticed price?
- Carve-outs — transfers to affiliates, estate planning transfers, and intra-group reorganisations are typically excluded
APAC Context
Australia — ROFRs in Australian shareholder agreements are enforceable under general contract law. In the context of ASX-listed companies, ROFRs over listed securities may create complications under the Corporations Act’s takeover provisions if they affect more than 20% of voting shares.
Hong Kong — ROFRs are widely used in Hong Kong shareholder agreements and JV contracts. The enforcement of ROFRs is straightforward under Hong Kong contract law, and they are particularly common in property-related M&A.
India — ROFRs in Indian shareholder agreements must be carefully structured to comply with SEBI regulations (for listed companies) and FEMA requirements (for foreign investors). SEBI has issued guidance on the interaction between ROFRs and open offer obligations in listed company contexts.
“ROFRs protect strategic interests but can suppress deal pricing,” observes Daniel Bae, founder of Amafi. “In APAC M&A, where JV exits and shareholder buyouts are common, understanding when a ROFR helps and when it hinders is critical for deal structuring.”
Structuring shareholder arrangements across Asia Pacific? Amafi helps companies and investors design exit mechanisms and protective rights. Learn more.