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. Distinguishable from Right of First Offer (ROFO), ROFO requires seller to offer to holder first; ROFR requires holder to match 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; Tenneco v. Enterprise Products (Tex. 1996) addressed mergers as triggering events. 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.
For Texas commercial parties, ROFR drafting and enforcement requires careful attention. Best practice: (1) draft triggering events broadly to capture indirect transfers, mergers, restructurings; (2) specify "same terms" precisely, including non-cash consideration; (3) set reasonable response period (30-45 days typical); (4) include specific performance remedy; (5) provide adequate notice content requirements; (6) for ROFR holders, monitor seller activities for triggering events; (7) document compliance carefully. For sellers: (1) document third-party offers carefully; (2) provide proper notice with all required information; (3) preserve evidence of bona fide third-party negotiations; (4) consider ROFO vs. ROFR trade-offs at agreement formation. Common pitfall: ROFR provisions that fail to address mergers or change-of-control transactions, allowing sophisticated parties to circumvent.
Practice guide: Buy-Sell Agreements in Texas