What it means
A right of first offer often appears in shareholder agreements, joint venture contracts, property leases and partnership deals. It gives an existing partner or tenant the first opportunity to buy when the owner decides to sell.
The owner must come to them first with the price and main terms they would accept. The sequence is straightforward.
The owner tells the holder, "We want to sell this stake and would sell it at this price." The holder then has a set period, such as 30 days, to accept or decline, and if they decline, the owner can offer it to outsiders. Agreements often limit what happens next.
A common clause says the owner may not sell to a third party at a price lower than the price offered to the holder, or may do so only within a small discount, for example 5% lower, and only within a fixed time such as 6 months. Otherwise, the owner would have to start the process again.
A ROFO is different from a right of first refusal (ROFR). With a ROFR, the owner first finds an outside buyer and agrees terms, then the holder has the option to match that offer.
Holders generally prefer a ROFR because they see real market prices, while owners often prefer a ROFO because outside buyers are less likely to be put off. The nuance is that a ROFO can still limit the owner.
Prospective buyers may hold back if they know the first offer has already been made, and the terms of the clause (timing, price floor and notice) matter a great deal. Legal advice on drafting is essential.
In practice
Real-world examples.
Example
Two founders own a start-up equally. Their shareholder agreement says that any founder wanting to sell must first offer the shares to the other, which keeps unknown investors out of the business.
Example
A shopping centre tenant has a ROFO on adjacent space. When the landlord decides to let the unit, he must first offer it to the tenant at his proposed rent.
Example
A pension fund holds a ROFO on a property partner's share of a joint office tower. When the partner needs cash, the fund gets the first chance to buy before the building share is advertised.
Formula
Calculation
Minimum Third-Party Price = Offer Price to Holder x (1 - Permitted Discount)
This applies only where the agreement includes a price floor.
Worked example: A co-owner wants to sell her 20% stake in a joint venture and offers it to her partner at $2,000,000. The agreement says that, if the partner declines, she may sell to an outsider for no less than 95% of the offered price, within 6 months.
Minimum third-party price = $2,000,000 x (1 - 0.05) = $2,000,000 x 0.95 = $1,900,000
If an outside buyer offers $1,850,000, she cannot accept it without making a fresh offer to her partner at the lower price. If the buyer offers $1,950,000, she can proceed, because $1,950,000 is above the floor of $1,900,000.Case study
Seen in the real world.
Greenwood Hospitality is a fictional hotel owner with a joint venture partner, Alderbank Capital, which holds a ROFO over any sale of Greenwood's 40% stake. In this illustrative case, Greenwood needed to raise cash and offered its stake to Alderbank at $12,000,000.
Alderbank thought the price was too high and declined within the 30-day period. Greenwood then marketed the stake to outside buyers but was bound by a clause that stopped it selling for less than 95% of the offer, which was $11,400,000.
The best outside bid came in at $11,600,000, so Greenwood proceeded. The process was smooth because the terms were clear. It also showed that the ROFO had not stopped Greenwood from selling, but had given Alderbank a fair chance to act first.
Watch out
Common mistakes.
- Confusing a ROFO with a ROFR. In a ROFO, the holder is offered first before any outside buyer is found, and in a ROFR the holder matches an outside offer.
- Ignoring the time limits. If the holder fails to respond in the agreed window, the right may lapse for that sale.
- Assuming the owner must accept the holder's counter-offer. The owner may negotiate, but is usually free to sell elsewhere if no deal is reached.
Questions
People also ask.
Who benefits from a ROFO?
Existing partners or tenants who want to prevent unknown parties from entering gain the most, while owners keep more freedom than under a ROFR.
Does a ROFO guarantee the holder gets the asset?
No. It guarantees an opportunity to buy first, but only if the holder agrees to the price and terms.
Where do I find the details?
In the shareholders' agreement, lease or joint venture contract, which should state the notice period, price rules and time limits.
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