A Right of First Refusal (ROFR) is a contractual provision that grants a party the priority to purchase an asset before the owner can sell it to third parties. This legal right ensures existing stakeholders—like partners, investors, or tenants—maintain control over ownership transitions and prevents unwanted third parties from acquiring equity stakes or property interests.
What is ROFR
ROFR clauses create a mandatory negotiation pathway where holders receive priority consideration. When an owner receives a bona fide third-party offer, they must present it to the ROFR holder first. The holder then decides whether to purchase the asset under those same terms or allow the sale to proceed.
This mechanism differs from outright purchase rights or options. ROFR holders don't obligate themselves to buy—they simply secure the first opportunity to match external offers without upfront capital commitment or predetermined purchase prices.
Common ROFR Applications:
- Shareholder agreements in private companies
- Stock purchase agreements for employee and investor transfers
- Commercial leases between landlords and tenants
- Operating agreements between business partners
- Franchise agreements between franchisors and franchisees
How ROFR Triggers
The ROFR process begins when an asset owner receives a bona fide third-party offer—a legitimate, written offer with specific price and binding terms. This prevents owners from manufacturing artificial offers to pressure ROFR holders.
Once triggered, owners must provide written notice containing:
- Purchase price and payment structure
- Payment terms (cash, financing, or earnouts)
- Closing timeline and contingencies
- Complete asset description
- Third-party buyer identification
The ROFR holder then has a contractually specified response period (typically 15-90 days) to decide whether to match the offer. Non-response or silence constitutes decline, allowing owners to proceed with the third-party sale.
ROFR in Startup Context
In startup ecosystems, ROFR provisions appear prominently in shareholder agreements and stock purchase agreements. When a founder, employee, or early investor wants to sell shares, existing investors and the company typically hold ROFR rights.
These rights prevent unwanted third parties from acquiring equity stakes and allow venture capital firms to maintain ownership percentages. In multi-layer ROFR structures, the company often holds first ROFR, followed by other investors and remaining shareholders.
| ROFR Holder Hierarchy | Exercise Priority | Timeline Impact |
|---|---|---|
| Company entity | First right to repurchase | 30-45 days |
| Lead investors | If company declines | Additional 30 days |
| Pro-rata investors | Proportional opportunity | Additional 15-30 days |
| General shareholders | Remaining opportunity | Final 30-day window |
Multi-layer ROFR can extend transaction timelines by 90-120 days as each holder exercises or declines. Many ROFR structures exempt certain transfers—gifts to family members, transfers to trusts, charitable donations—to prevent ROFR from blocking routine estate planning.
ROFR vs Right of First Offer (ROFO)
Right of First Refusal (ROFR) and Right of First Offer (ROFO) are distinct contractual mechanisms with different triggering events and strategic implications.
| Feature | ROFR | ROFO |
|---|---|---|
| Trigger | Third-party offer received | Owner decides to sell |
| Price determination | Match third-party offer | Holder makes initial offer |
| Negotiation scope | Match or decline (minimal) | Full negotiation of all terms |
| Timing | After third-party marketing | Before owner seeks external buyers |
| Price advantage | Owner benefits from market discovery | Holder can negotiate favorable terms |
ROFO advantages for holders: First opportunity to negotiate directly, potential for below-market pricing, and greater certainty before owner markets the asset.
ROFR advantages for owners: Market price discovery before negotiations, leverage from competing offers, and ability to proceed quickly if holders decline.
Hybrid structures combine both sequentially: ROFO first (holder submits initial offer), then if insufficient, owner markets to third parties, then ROFR activates (holder can match best third-party offer).
ROFR Applications Across Industries
Business Partnerships and LLCs
LLC operating agreements and partnership agreements commonly include ROFR when partners want to sell ownership interests. This prevents partners from introducing unwanted co-owners.
Partnership ROFR structures may grant rights to:
- Individual partners (each buys proportional share)
- The company entity (buys and retires the interest)
- Managing partners exclusively (sole right to acquire departing interest)
Professional service firms—law firms, medical practices, consulting firms—rely heavily on ROFR to maintain partner composition and often combine it with non-compete provisions. If departing partners sell to third parties instead of existing partners, non-competes activate.
Real Estate Transactions
Commercial leases frequently include ROFR for tenants if landlords sell the property. This protects tenant investments in improvements and provides location continuity.
Real estate ROFR addresses:
- Purchase price matching against third-party offers
- Lease credit application (applying rent toward purchase)
- Tenant improvement cost offsets against price
- Financing contingencies for tenant purchase loans
Condominium associations often grant ROFR to existing owners when units are sold, maintaining community character and giving current residents expansion opportunities.
Shareholder Control in Private Companies
Private company shareholders use ROFR to control equity composition. In acquisition scenarios, drag-along rights work alongside ROFR: ROFR typically applies to individual share sales, while drag-along rights activate when majority shareholders sell the entire company.
Transfer restrictions limit shareholder liquidity but provide company ownership stability. Venture-backed startups particularly rely on ROFR to prevent secondary market investors from acquiring board representation through share purchases.
Advantages and Disadvantages
For ROFR Holders
Ownership control prevents unwanted third parties from acquiring interests—critical in close-knit partnerships where partner identity matters.
Price discovery provides market-validated pricing from third-party offers before committing capital.
Strategic time to arrange financing, conduct due diligence, and evaluate fit before purchase decisions.
For Asset Owners
Reduced liquidity from ROFR compliance requirements. Additional steps extend transaction timelines by 30-90 days and may reduce buyer pool by 15-30%.
Buyer deterrence occurs when third parties hesitate to invest resources in offers that ROFR holders might match.
Relationship preservation allows owners to offer purchase opportunities to valued partners before external sales.
Legal Considerations
Effective ROFR provisions require careful drafting to avoid ambiguity and enforceability challenges.
Essential contract elements:
- Triggering language: Specify exactly which events activate ROFR rights
- Holder identification: Clearly identify who holds rights and in what order
- Definition of "sale" or "transfer": Does it include gifts, inheritances, pledges as collateral?
- Exercise procedures: Detail notification mechanics, response requirements, and acceptance formalities
- Duration: Specify indefinite, time-limited, or event-based termination
Enforcement mechanisms:
- Specific performance: Courts compel asset owners to sell to ROFR holders at matched terms
- Monetary damages: Compensation for lost opportunity when specific performance is impractical
- Injunctive relief: Prevents threatened third-party sale completion
Jurisdictional variations affect ROFR enforceability. Delaware strongly enforces ROFR for corporate interests, while California requires strict notice compliance and construes vague provisions against drafting parties.
Frequently Asked Questions
What happens if a ROFR holder misses the response deadline?
Non-response constitutes decline in virtually all ROFR agreements. The owner can proceed with the third-party sale without further holder obligations. Courts consistently enforce strict deadline compliance, even for delays of single days. Holders should maintain internal tracking systems for ROFR notices to avoid forfeiture.
Can owners negotiate different terms with third parties after ROFR holders decline?
Material changes require re-triggering ROFR in most agreements. Substantially different terms—lower price, better payment structure, reduced contingencies—must be presented to ROFR holders again. This prevents owners from circumventing ROFR through post-decline modifications. Minor changes like adjusted closing dates typically don't require re-notice.
How is "matching" determined for complex offer structures?
An exact replication standard applies in most jurisdictions. ROFR holders must accept all material terms including price, payment structure, contingencies, and timelines. When third-party offers include non-monetary consideration, holders must provide economically equivalent value. Disputes over matching frequently lead to litigation.
What's the difference between ROFR and co-sale rights?
ROFR gives purchase priority; co-sale rights grant selling participation. ROFR allows holders to buy before third-party sales, while co-sale (tag-along) rights let holders sell alongside the owner to the same buyer. Many shareholder agreements include both operating sequentially.
Key Takeaway
Right of First Refusal protects existing stakeholders in partnerships, real estate, and startup equity transactions by granting free optionality to match third-party offers. While ROFR benefits holders strategically, it reduces owner liquidity and complicates transaction processes. Successful ROFR implementation requires precise contract drafting, clear procedural requirements, and explicit handling of exempted transfers.