Definition: Right of first refusal (ROFR) is a contractual right granted to one party to have the first opportunity to engage in a certain transaction. It allows this party to decide whether to enter the operation or not before it can be offered to a third party.
What Does First Right of Refusal Mean?
These rights are frequently part of real estate, advertising, asset purchases and other business transactions that involve certain process or due diligence to be done before the transaction is completed. By negotiating an exclusive right buyers can secure a given period of time to pilot-test the item being purchased before they fully commit to it and, on the other hand, sellers can test the buyer’s attitude in terms of responsibility, transparency and other ethical elements.
This is particularly important for situations such as business mergers or takeovers, where the party selling the company or being merged prefers to stay still unattached to some extent to guarantee that the buyer complies with certain requirements previously defined for the transaction to be successfully completed. In other instances such as real estate dealings the buyer might be interested in leasing the property for a while to check its actual status and if it is suitable for his purposes. After this period, under a ROFR the buyer is free to decide whether to proceed with the purchase or not.
Example
Mrs. Gladys is a Corporate Buyer working for a big pharmaceutical company. She is in charge of handling large purchases that serve many subsidiaries of the holding company to supply them with equipment, office supplies and other items. She is currently analyzing the possibility of purchasing 350 laptop computers for the company’s middle and top management and she wants to make sure the laptops offered by the supplier are good enough to fit the staff’s requirements.
In order to do so the seller agreed to lease 25 computers for a period of 2 months with an attached ROFR for the company to pilot-test them before they can move forward with the purchase. After the 2 months ended the company exercised its right of first refusal and bought the 25 computers along with the other 325.
