What are ROFR and ROFO?
Right of First Refusal (ROFR) and Right of First Offer (ROFO) are provisions that give existing shareholders or the company the opportunity to purchase shares before they are sold to a third party. These provisions help maintain control within the existing shareholder group and prevent unwanted outsiders from becoming shareholders.
ROFR (Right of First Refusal)
Seller must offer shares to ROFR holders on same terms as third-party offer. ROFR holders can match the offer.
ROFO (Right of First Offer)
Seller must first offer shares to ROFO holders at price/terms they specify. If declined, seller can seek outside offers.
Right of First Refusal (ROFR)
ROFR is the more protective provision for existing shareholders. It ensures that existing shareholders can match any third-party offer.
ROFR Process
Step 1: Seller Receives Third-Party Offer
Shareholder receives a bona fide offer from an outside buyer to purchase their shares.
Step 2: Notice to ROFR Holders
Seller must notify ROFR holders of the offer terms, price, and buyer identity.
Step 3: ROFR Exercise Period
ROFR holders have a specified period (typically 15-30 days) to elect to purchase shares on identical terms.
Step 4: Purchase or Waiver
If ROFR exercised, shares sold to ROFR holders. If waived, seller can proceed with third-party buyer on same terms.
Key ROFR Terms
- Exercise Period: Time to respond (typically 15-30 days)
- Same Terms: Must match price and all material terms
- Pro-Rata Rights: If multiple ROFR holders, typically purchase pro-rata
- Pass-Through Period: Time to close after ROFR exercise
Right of First Offer (ROFO)
ROFO is more seller-friendly than ROFR. The seller offers to existing shareholders first before seeking outside buyers.
ROFO Process
Step 1: Seller Determines Price
Shareholder determines price and terms at which they are willing to sell.
Step 2: Offer to ROFO Holders
Seller offers shares to ROFO holders at the determined price.
Step 3: ROFO Decision
ROFO holders have specified period to accept or decline the offer.
Step 4: Outside Sale
If ROFO declined, seller can seek outside buyers, sometimes with a floor price requirement.
How They Work
Who Holds the Right?
- Company ROFR: Company has first right to repurchase shares
- Investor ROFR: Investors have right to purchase shares
- Founder ROFR: Founders have right to purchase shares
- Combined: Company first, then investors pro-rata (most common)
ROFR "Deadlock"
When multiple shareholders have ROFR, deadlock can occur:
- • If multiple pass, seller can go to third party
- • If some exercise and some don't, allocation gets complex
- • If nobody exercises, seller proceeds with third party
- • Best practice: Pro-rata allocation among exercising holders
Types of ROFR
Hard ROFR
ROFR holder must accept or reject the exact third-party offer. Most common and protective.
Soft ROFR
ROFR holder can make a counter-offer rather than matching exactly. Less common.
Last Right of Refusal
ROFR holder gets last look after other rights are exercised. Less protective.
Common Exceptions
Most ROFR/ROFO provisions have exceptions for certain types of transfers.
- Affiliate Transfers: Transfers to entities under common control
- Family Transfers: Estate planning transfers to family members
- Trust Transfers: Transfers to trusts for estate planning
- Permitted Transferees: Pre-approved categories of buyers
- Public Sale: Sales in open market after IPO
- Drag-Along Sales: Sales pursuant to drag-along rights
Negotiation Considerations
For Founders
- • Want ROFR on investor sales (protect against unwanted new investors)
- • Want exceptions for personal estate planning
- • Reasonable exercise periods (not too long)
- • Clear allocation if multiple ROFR holders
For Investors
- • Want ROFR on founder sales (prevent founders from cashing out early)
- • Want company ROFR to enable buybacks
- • Longer exercise periods for due diligence
- • Information rights to evaluate offers