A right of first refusal (ROFR) is one of the most common transfer restrictions in US shareholder agreements. It gives the company (or other shareholders) the right to buy any shares being sold by a shareholder before they are sold to a third party — at the same price and on the same terms offered by the third party. The mechanic is straightforward in concept; the drafting is where the disputes happen. The value of an ROFR depends entirely on what 'same price and terms' means. If the third party is paying $50/share in cash, the ROFR holder buying at the same price is straightforward. But if the third party is paying with stock of an unrelated entity, deferred consideration, or providing services in addition to cash, the equivalence question becomes complex. ROFRs that fail to address these scenarios — or that do so vaguely — invite litigation when the transfer event finally occurs.
What is a Right of First Refusal?
A right of first refusal in a US shareholder agreement is a contractual restriction on share transfer requiring a shareholder offering shares for sale to first offer them to the company and/or other shareholders on the same terms as a bona fide third-party offer. It is governed by state corporate law (typically the state of incorporation — e.g., Delaware General Corporation Law; California Corporations Code; New York Business Corporation Law); state contract law; and the specific shareholder agreement and corporate charter terms. ROFRs survive corporate reorganisations only to the extent specified in the contract.
Red flags to watch for
If a shareholder holds their shares through an LLC or family trust, an ROFR triggered only by 'transfer of shares' may not apply when the underlying ownership of the LLC or trust changes hands. A well-drafted ROFR captures both direct and indirect transfers (through holdco changes of control).
If the third-party offer is mixed cash and equity, services, earn-out, or non-monetary consideration, valuing it at 'cash equivalent' is contestable. The ROFR clause should specify the valuation methodology — e.g., independent appraiser, agreed indices, or specific formulae.
An ROFR with a 10-day exercise period may be impossible to fund — the company would need board approval, financing, and tax structuring within ten days. A 30–60 day window is more realistic, with an optional extension on showing good-faith financing efforts.
If a third party offers to buy common and preferred shares on different terms, the ROFR holder may want to buy only one class. A ROFR that requires all-or-nothing exercise can leave the holder unable to participate efficiently — the agreement should permit partial exercise.
If multiple shareholders share the ROFR but allocation is per capita (equal split) rather than pro rata (by shareholding), the result can over- or under-allocate to particular holders. Pro rata allocation by shareholding is typically more equitable for corporate ROFRs.
Most ROFRs exclude permitted transfers (to family members, trusts, affiliates). If the definition is broad and there is no procedure for the company to confirm a transfer is genuinely 'permitted,' the exclusion can be exploited. A confirmation procedure prevents abuse.
Your legal rights
US shareholders are protected by: state corporate law (Delaware General Corporation Law §§ 202 and 218 on transfer restrictions; California Corporations Code § 204; New York Business Corporation Law § 620); state contract law principles requiring ROFRs to be expressed in writing on the share certificate or, in book-entry shares, with adequate notice (Uniform Commercial Code Article 8); state common-law fiduciary duty principles for officers and directors managing ROFR exercise; and federal securities laws (specifically Section 4(a)(7) and Rule 144 under the Securities Act of 1933) governing resale of restricted securities. Disputes are heard in state corporate courts (e.g., Delaware Court of Chancery for Delaware corporations).
Questions to ask before you sign
- 1What triggers the ROFR — direct share transfer only, or indirect transfers through holding entities?
- 2How is third-party consideration valued when it includes non-cash elements (stock, earn-out, services)?
- 3What is the exercise period, and is it long enough to mobilise capital and obtain board approval?
- 4Is partial exercise permitted, and how is allocation handled when multiple shareholders participate?
- 5What permitted transfer exclusions apply, and what is the procedure to confirm a transfer qualifies?
- 6How does the ROFR survive in the event of a merger, reorganisation, or other corporate transaction?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.