Right of First Refusal – Definition

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Right of First Refusal Definition

Right of first refusal, or ROFR, grants the rights and terms of a business transaction to its holder, that is, the holder of ROFR has the right to do a business transaction with the owner of a property before any other person or the third party does. In the right of first refusal contractual agreement, three parties must be involved, the parties are; the owner of a property, the holder of ROFR and a third party or buyer. This contractual right stipulates that the owner of a property must first offer transaction rights to ROFR holder before any other buyer.

A Little More on What is the Right of Last Refusal

Rights of First Refusal mostly occur in real estate, asset transactions and Limited Liability Company (LLC) Operating agreements. This transaction right can also be used for non-asset business transactions. This right gives its holder the right to make the first move with a property owner in a business transaction.

Peradventure the holder of ROFR is denied the right to transactions before a third party, recovery of damages can be claimed. This means that if the owner offers or sells assets to a buyer without offering them to ROFR holder first, the owner can be sued for damages.  However, ROFR differs from ROFO (Right of First Offer) since the owner is only obliged to negotiate with a ROFO holder before other buyers.

Examples

The difference between ROFR and ROFO can be better understood with the examples cited below:

Example 1 (ROFR): Gold has a property and he is offered $3million by a third buyer. Before he sells it to the buyer, he must first contact Smith who holds the right of first refusal to purchase the property. If Smith is ready to pay the $3million offered to Gold by the third party, he owns the property, if otherwise, Gold can go back to the third party to sell the property.

Example 2: (ROFO):If Smith holds a ROFO, Gold must first negotiate price with Smith, if Smith is willing to go by Gold’s transaction terms, he claims the property. But if Smith declines, Gold can go to another buyer and start negotiation afresh.

Variations

There are certain differences that are noticeable in a basic Right of first refusal (ROFR). These variations are highlighted below;

  • Duration of ROFR: This right has the time-limit of five years. The owner of a property is only obliged to first offer business transactions to ROFR holder only in the first five years. Afterwards, the ROFR outlives its validity.
  • ROFR elapses on declined offers; If Smith declines to buy a property at the amount offered by Gold, Gold has no obligation to offer the property to smith again.
  • An owner has a period of 60 days to close a business transaction with a ROFR holder after decline.
  • ROFR can be transferred between parties.
  • Gold might decided not to sell his property himself, he can transfer the property to another person who is then subjected to the ROFR being held by Smith.
  • ROFR allows a substitute purchaser but no pending transaction is allowed.

Aside from the variations listed above, ROFR still has some other variations.

In venture capital

ROFR in venture capital deals operates in a peculiar way, in venture capital deals ROFR allows investors in a firm to either accept or decline the purchase of the company’s equity shares. If the investors decline, the company then has the right to offer the shares or external investors or private buyers. ROFR benefits investors such that it prevents stock or equity adulteration as the company develops.  If company owners offer equity shares to third parties before investors, there will be a dilution of the company’s ownership and stocks. However, the provision of ROFR in venture capital deals is limited to certain shares.

References for Right of First Refusal

Academic Research on Right of First Refusal

Contracting, directed parts, and complexity in automotive outsourcing decisions, Klibanoff, P., & Novak, S. (2003). Unpublished working paper, Northwestern University. This paper examines contract practices and trade or product complexities in automobile outsourcing decisions. Contracting automobile products and outsourcing of interior systems for automobile is one that requires a comprehensive examination. This paper conducts a theoretical study on automotive contract practices as well as product complexities of automobiles. It also examines how suppliers of auto firms integrate certain components into its complex systems. With original field interviews and contract agreements between buyers and suppliers of automobiles and their interior systems, this paper evaluates the contract structures and practices as well as product complexity of automobiles.

Docudramas: The Legality of Producing Fact-Based Dramas-What Every Producer’s Attorney Should Know, Grunfeld, J. G. (1991). Hastings Comm. & Ent. LJ, 14, 483. Fact-based dramas or docudramas are dramatized films that are based on real life events. These dramas are non-fictional as they are seen to portray true or real experiences. This paper examines the production of docudramas of fact-based dramas as they enjoy popularity in the entertainment industry. The legality of producing these forms of drama are also established in this paper as every attorney are obliged to know the legal aspects of producing docudramas. The potential liabilities of fact-based drama when its rights not secured and the wrong application of publicity rights of docudramas are also examined in this paper.

Frontier Issues: Pitfalls in Developing and Marketing Multimedia Products, Scott, M. D. (1994). Cardozo Arts & Ent. LJ, 13, 413. There are certain drawbacks or pitfalls that are associated with the development and marketing of Multimedia products. This paper examines these frontier issues as the plague the multimedia industry and how these issues affect how products are developed and marketed. Issues discussed in this paper include dealing with multimedia content providers and how they locate or obtain contents. Another frontier issue discusses in this paper is the incense practices that are involved in how content providers secure their contents. Marketing is crucial to multimedia products, without a good marketing strategy, the products are irrelevant. This paper also studies the marketing rights and obligations of the multimedia industry.

It Seemed like a Good Idea at the Time: Rights of First Offer and First Refusal, Stein, J. (2014). Prac. Real Est. Law., 30, 43. This paper elaborately discusses the Right of first refusal (ROFR) and Right of first offer (ROFO) and their benefits. When these contractual rights were first initiated, they sounded like great ideas for real estate owners, and LLC transaction agreements and most importantly, the holders of ROFR and ROFO. This paper examines the provisions of these two contractual rights and their effects on business transactions across diverse sectors. Despite that both rofr and ROFO seemed like good ideas when they were first initiated, this paper studies the downsides of these rights.

Interpreting Stale Preferential Rights to Acquire Real Estate: Beyond the Restatement of Property, Circo, C. J. (2017). Vill. L. Rev., 62, 603. This paper studies the negative effects of stale preferential rights to acquire real estate. Stale preferential rights are also long-term preferential purchase rights and this pose lots of problems in business transaction. Ordinarily, a rights of first refusal fives right or purchase to its holder, meaning that the owner of a property must first offer the sales of property to a ROFR holder before a third party. This paper however identifies that a stale preferential rights often backfire given that diverse circumstances can cause disagreement over the application of the right. Some properties might not be sold in perpetuity, and this can cause problems to arise over preferential rights.

The economics of bidder collusion, Marshall, R. C., Marx, L. M., & Meurer, M. J. (2014). In Game Theory and Business Applications (pp. 367-397). Springer, Boston, MA. Collusion at auctions may involve many parties which includes the bidders or buyers and the sellers and auctioneers. This paper examines the features of collusion at auctions as this is different from collusion in posted market prices. The sole aim of collusion is to deceive other parties involved in the auction process. Hence, collusion can be between bidders or auctioneers. This paper studies the different roles played by bidders and auctioneers in collusion at auction. Also, how different parties involved in tha auctions are susceptible to the illegal conspiracy of another party is discussed in this paper.

Purchase Options, ROFRs, and ROFOs: Theory and Practice, Circo, C. J. (2016). This paper presents a review of the theories and practises of Right of first refusal (ROFR) and Right of first offer (ROFO). Both ROFR and ROFO are purchase options that are used in real estate transaction and other asset transactions, this study examines the methodologies and principles guiding their practise. This paper highlights the issues that lawyers face with the practices of ROFR and ROFO and how contract and property law principles can address these issues. This paper gives empirical suggestions of theories that can resole practical legal problems that lawyers face.

Course File: An Integrated Approach to Teaching Production and Entertainment Law, Timmer, J. (2006). Journal of Film and Video, 58(4), 29-42. There are diverse approaches of teaching production and entertainment laws in the entertainment industry. This paper discusses an integrated approach that will enhance the teaching of quality production and entertainment laws. This integrated approach will help students prepare for a successive career in media firms as well as entertainment industries.  The approaches integrated into this teaching are video and audio techniques, television and motion picture production among others. The approach also include technical practice aspect, production planning, directing, editing and visualization. This paper however finds out that this integrated teaching approach provided a better and realistic experience for students.

Defending against potential collusion by your suppliers—26th Colin Clark Memorial Lecture, Marx, L. M. (2017). Economic Analysis and Policy, 53(C), 123-128. This article reflects some cogent comments that were made at the 26th Colin Clark Memorial lecture as defence against potential collusion by suppliers. Procurement of inputs that are used for manufacturing process are discussed in this paper. There are certain situations where inputs are provided by more one suppliers, in this case, manufacturers have the tendency of using the rivalry amongst suppliers to curtail prices that they pay for inputs. This paper examines different processes used by suppliers for procurement of inputs and how these processes affect prices.

Monopoly practises and competitive behaviour in the French satellite pay-TV market, Cincera, M., & Noury, A. (2004). Discussed in this paper are issues surrounding monopoly practises and competitive behaviours in the French satellite pay-TV market. Monthly data of markets where duopoly operates are used in the analysis. This paper also studies the interactions that ensue between competing firms. The french satellite pay-TV market was monopolized until 1997 when competitor firms began to emerge. This paper also examines the impacts collusive behaviours between competitive firms. It also studies how entry and tests for collusive behaviour by means of non-nested methods in this duopoly with competitive firms and their impacts.

A note on the suboptimality of right-of-firstrefusal clauses, Arozamena, L., & Weinschelbaum, F. (2006). Economics Bulletin4(24), 1-5. The main aim of this study is to show that under the dictatorship of the independent private values, no mechanism that has a right-of-first-refusal clause can perfectly increase or influence the sum total of the utilities of the right holder and the seller. This study is primarily a note addressing the sub-optimality of the right-of-first-refusal clause.

If you are offered the Right of First Refusal, should you accept? An investigation of contract design, Grosskopf, B., & Roth, A. E. (2009). This paper explains the meaning of the right-of-first-refusal as contract clause that is intended to provide the holder or seller of a lease or license with some primary protection as soon as the contract is terminated. However, the right holder has the ability/power to act after potential and powerful competitors. Although, another common implementation requires the right holder to reject or accept some offers before the potential competitors are provided with the same offer, note that if the right holder rejects the first offer, the right should be allowed to be exercised affirmatively if only competitors are offered a more appealing deal.

On the Right-of-firstrefusal, Bikhchandani, S., Lippman, S. A., & Ryan, R. (2005). Advances in Theoretical Economics5(1). This paper explains some key concepts to note when considering the right-of-first-refusal. This study indicates how to go about rejecting and accepting offers for right holders.

Vertical integration and right of first refusal, Cabral, L., & Vasconcelos, H. (2011). Economics Letters113(1), 50-53. According to the analyses, drawn from this research, a partially integrated industry was considered and the effects of contracts with a right of first refusal were studied. However, the vertically integrated firms have the power to match a quote ranging from an independent supplier to supply an independent downstream firm. This research paper is comprehensive enough to explain the dos and doesn’t of the right of first refusal and the vertical integration.

Is the newcomer more aggressive when the incumbent is granted a Right-of-FirstRefusal in a procurement auction? Experimental Evidence, Brisset, K., Cochard, F., & Maréchal, F. (2015). Theory and Decision78(4), 639-665. This research explains the concept of right-of-first-refusal by running a laboratory test which compared two mechanisms in a procurement setting. This paper explains the competitions that were organized against a computerized agent which has been programmed to act in a risk-neutral manner. It was observed according to the theory that on the average, bidders are slightly yet insignificantly very aggressive when the cost under the right of first refusal is such in a way that they become predictable (they can behave identically under both auction procedures).

Valuing rights of first refusal for farmland preservation policy, Malcolm, S. A., Duke*, J. M., & Mackenzie, J. (2005). Applied Economics Letters12(5), 285-288. According to this academic paper, a model was used to explain the ex-ante value which is used in the agricultural sector of the economy. This model can be used as a converter which possesses developmental issues in the easement future. The result gotten from this model should assist the government in deciding the prices that should be paid to farmers for ROFR in urban centres. This paper explains that compared to the traditional means of conserving the easement policy, the ROFR should be cost effective because the parcel can only be threatened when the conservations are kept reserved.

Preferred suppliers in auction markets, Burguet, R., & Perry, M. K. (2009). The RAND Journal of Economics40(2), 283-295. The main aim of this research thesis is to explain the mutual agreement between one of the suppliers and the buyers in which the suppliers have to increase their joint surplus. This agreements although depends on the ability of the buyer to design the final rules of the final auction. Note that the moment the buyer has the power, their joint surplus can be increased by a revelation game which explains the cost of the preferred supplier and also helps to reserve a price based on the cost given.

Favouritism in asymmetric procurement auctions, Lee, J. S. (2008). International Journal of Industrial Organization26(6), 1407-1424. This paper examines the main benefits and cost of leasing out a right of first refusal (ROFR) to a bidder in the first-price procurement auction with two available bidders. According to this paper, the analyst observed that the auctioneer prefers to grant the right of first refusal to the ex-ante weaker bidder and that the granting has the authority to increase the auctioneer’s expected payoff. The result gotten from this paper continues to be relevant even when the auctioneer set an optimal reserve price.

Rights Of First Refusal (With Sample Clauses), Houck, R. (2009). Rights Of First Refusal (With Sample Clauses). Prac. Law.55, 45. This paper explains the right to the first refusal with various samples. Different models are used to explain these samples and results gotten helps to explain the relevance of the right to the first refusal to the optimum level.

International M&A and Joint Ventures, Feilbogen, S., Balda, V., Bombau, M., & Den Toom, M. (2011). Int’l Law.45, 63. This academic paper explains the international M and A as well as the joint ventures. The correlation between these two factors as well as the model that explains the difference and similarities were explained.

LLC Operating Agreements-Drafting Tips and Traps for the Unwary, Coppedge, B. R. (2005). Prob. & Prop.19, 44. This academic research paper explains the main aim of the LLC operating agreements as well as the drafting traps and tips for the unwary.

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