What You Always Wanted to Know About ROFRs But Were Afraid to Ask

The term ROFR (pronounced “ROH-fur”), or R-O-F-R, is often bandied about by legal professionals, business parties, and courts in connection with business and real estate matters without any additional context or explanation of exactly what it is they are referring to. Before you do an internet search and end up listening to this guy, let me explain what a ROFR is. It’s an acronym for a legal entitlement called a right of first refusal.  While the name itself sounds, and admittedly somewhat is, self-explanatory, a ROFR is much more than merely a right to “refuse” something.

At its most basic level, a ROFR involves one party (the “ROFR Grantor”) granting to another party (the “ROFR Holder”) a first right to purchase or otherwise acquire something of value owned by the ROFR Grantor (the “ROFR Subject”) in lieu of the ROFR Grantor selling or otherwise disposing of the ROFR Subject to a typically unaffiliated or unrelated third party (an “Offeror”).

The ROFR Subject itself could consist of any number of things, including the following:

equity in an entity (e.g., shares of stock in a corporation, membership interests or units in a limited liability company, partnership interests in a partnership, etc.);

• additional leased space in a building under a lease;
• a building or real estate parcel;
• service for additional territory under a supply agreement; or
• provision of additional or expanded services under a services, procurement, or outsourcing agreement.

Other than where the ROFR Subject is equity in an entity, the vast majority of ROFRs are unilateral, meaning that it is only a single RORF Holder’s right and the ROFR Grantor’s obligation.  In the entity/equity ownership context, a ROFR can often be granted to multiple parties (the entity, all the entity’s owners, or mutually to both the entity and its owners. If the ROFR is granted to both the entity and its owners, the parties will need to agree at the outset on an order of priority among the ROFR Holders (i.e., whether the entity or the owners have the first opportunity to exercise the ROFR).

As an initial step for any ROFR, the ROFR Grantor and the ROFR Holder first need to agree on the universe of potential transactions that will trigger the ROFR as well as their respective rights and obligations once the ROFR has been triggered. Generally, the triggering event for a ROFR is the ROFR Grantor’s receipt of an offer an Offeror to acquire some or all of the ROFR Subject (a “Covered Transaction”).

After the ROFR Grantor receives an offer, the ROFR Grantor is obligated to notify the ROFR Holder of the offer and its terms. Once the ROFR Holder receives notice of the Third-Party Offer, the ROFR Holder has a number of days in which to respond to the ROFR Grantor. The ROFR Holder’s response must indicate whether it desires to exercise the ROFR or not.  Usually, failure to respond is considered a declination of the ROFR. If the ROFR Holder accepts the ROFR Grantor’s offer, the parties will thereafter proceed with consummating the Covered Transaction on the terms set forth in the Third-Party Offer (or sometimes on terms which are stated in the ROFR itself). If, on the other hand, the ROFR Holder declines to exercise its ROFR, the ROFR Grantor is free to pursue its sale or other disposition of the ROFR Subject in the Covered Transaction pursuant to the terms of the offer.

The consummation of the Covered Transaction is normally still subject to certain limitations and conditions. For example, (1) the Covered Transaction must be completed within a specified number of days and (2) if any material terms change, the change deemed to create a new offer to which the conditions of the ROFR apply anew.

The primary purposes of a ROFR are to ensure that: 

(1) the sale or other disposition of the ROFR Subject occurs on terms and conditions that approximate those obtainable in an arm’s-length transaction on the open market (although there is no way of guaranteeing that it will reflect full market value for the ROFR Subject, especially where an offeror is cognizant of the existence of a ROFR or other restrictions on the ROFR Subject’s sale or other disposition that could result in the acquisition attempt being preempted after investing significant time and resources);

(2) the ROFR Holder doesn’t miss out on the opportunity to obtain additional rights that may subsequently become available under an existing arrangement; and

(3) the ROFR Holder doesn’t end up being business partners with an unrelated or unwelcome third party, which is of particular importance where the ROFR Subject is a controlling equity interest in an entity in which the ROFR Holder owns only a minority equity interest.