Right of First Refusal (ROFR)
A contractual right giving the holder the option to purchase property or interests at the same terms offered by a third party, before the seller can complete the third-party transaction. Standard in stockholder agreements, real estate, and partnership contexts to control who can become an owner. It differs from a right of first offer (ROFO), under which the seller must offer to the holder first. A ROFR lets the holder match a third-party offer.
A Right of First Refusal (ROFR) is a contractual right giving the holder the option to purchase property or interests at the same terms offered by a third party, before the seller can complete the third-party transaction. ROFRs are standard in stockholder agreements, real estate contracts, and partnership arrangements to control who can become an owner. The economic structure: seller obtains bona fide third-party offer, presents it to ROFR holder, holder elects to match (and purchase) or decline (allowing third-party transaction). ROFRs are distinguishable from Rights of First Offer (ROFO), ROFO requires seller to offer to holder first.
Standard ROFR mechanics
Typical ROFR provision flow: (1) seller solicits or receives offer from third party; (2) seller obtains bona fide offer with specified terms; (3) seller delivers notice to ROFR holder including offer terms; (4) response period, typically 15-60 days for holder to elect; (5) match, holder agrees to purchase at same terms; (6) decline, holder declines; seller may complete third-party transaction on same or substantially same terms; (7) re-offer if material terms change. The mechanics ensure ROFR holder receives genuine opportunity to purchase.
ROFR vs. ROFO
Distinct rights with different economic implications: (1) ROFR (Right of First Refusal), seller must obtain third-party offer first, then offer to holder at those terms; (2) ROFO (Right of First Offer), seller must offer to holder first at specified or negotiated price, before approaching third parties. ROFO is generally more seller-friendly (no need to involve third parties in price discovery if holder is interested). ROFR is more buyer-friendly (objective market price discovery; holder doesn't need to commit before knowing market value).
Common ROFR contexts
ROFRs appear in: (1) stockholder agreements, restricting transfers of stock; (2) LLC operating agreements, limiting member transfers; (3) real estate, rights to purchase real property; (4) commercial leases, tenant rights to purchase landlord's property; (5) partnership agreements, controlling partner exit; (6) investor side letters, VC ROFR on subsequent sales; (7) licensing agreements, IP licensee rights to acquire IP if licensor sells. Each context has distinct considerations.
Triggering events
ROFR triggering events typically include: (1) proposed sale to third party; (2) change of control of seller in some structures; (3) transfer to specified parties (sometimes excluded, family transfers, trust transfers); (4) merger or restructuring, case-specific; in Tenneco v. Enterprise Products (Tex. 1996), the court held that a sale of a corporate partner's stock did not trigger a partnership agreement's preferential purchase right. Drafting precision is critical, courts construe triggers narrowly. Common gaps: change-of-control of upstream entities, transfers to affiliates.
Drafting issues
Recurring ROFR drafting issues: (1) "same terms" requirement, strict matching vs. economic equivalent; (2) specific performance availability, typically yes for unique property; (3) response period, too short impractical; too long delays seller; (4) notice requirements, what information must be provided; (5) excluded transfers, family, estate planning, affiliate transfers commonly excluded; (6) deemed offer requirements, parties' obligations to seek genuine third-party offers; (7) survival, duration of ROFR; (8) damages, typically specific performance plus possible damages.
Common pitfalls
Frequent ROFR enforcement issues: (1) structured transactions, sales structured as mergers, recapitalizations, or asset transfers to avoid ROFR; (2) collusive offers, third party offer manipulated to deter ROFR exercise; (3) change-of-control workarounds, selling parent of seller rather than selling property directly; (4) multiple-asset bundling, third party offer includes assets ROFR doesn't cover, complicating "same terms" analysis; (5) side payments and structures outside the formal transaction.
A threshold question in a ROFR dispute is whether the transaction triggered the right at all. In Tenneco, the Texas Supreme Court construed the right narrowly and would not treat a stock sale as a transfer of the underlying interest, because the agreement did not address changes in ownership of the partner. A provision that is silent on mergers or changes of control may leave indirect transfers outside the right.
Practice guide: Buy-Sell Agreements in Texas