Monday, September 19, 2011

Right of First Refusal: A Practical Pointer

A right of first refusal is an important provision that should be included in a variety of transactions/contracts -- for example, in By Laws/Operating Agreement, giving the corporation the right to buy the shares of a selling shareholder or giving a shareholder the right to buy shares offered by the corporation; or giving partners in a joint venture the right to buy assets the JV wants to sell.  An expereienced business lawyer will help you understand the importance of a properly drafted right of first refusal and the risks of failing to include well defined terms relating to the rights. See

The key to a properly drafted right of first refusal is detailing the process for exercising the right.  Make sure the right of first refusal addresses the following:

   1.  The party who has the right must be given written notice of the bona fide third party offer;
   2.  If you are the party that has the right, you want a reasonable time period to exercise the right;
   3.  If you are the selling party you want to limit the time frame for the party holding the right of first refusal to respond because if it is too long it could scare off potential third parties;
   4.  The mechanism for exercising the right should include a written exercise within a defined period following notice of the 3rd part offer, the exercise should be accompanied by a deposit amount, and there needs to be a time frame for the closing; and
   5.  If the 3rd party offer fails to close, you want the right to of first refusal to apply to any future offers.

Again, make sure the terms of any right of first refusal includes clear parameters for notice and exercise of the right.

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