A ROFR gives shareholders who do not sell the right to accept or decline an offer from a selling shareholder after the selling shareholder has solicited an offer for their shares from a third-party buyer. Non-selling shareholders will receive the offer from the selling shareholder under the same conditions as those presented by the third-party buyer. This right allows non-selling shareholders to control the process of welcoming a new shareholder, while preserving liquidity for the selling shareholder. The selling shareholder is then free to accept or refuse the offer. If they refuse, they are free to sell it to third parties at a higher price. Conversely, the right of pre-emption is an obstacle for the owner of the property, as it limits the possibility of negotiating with several buyers who could drive up the price during an auction war. In the example above, the landlord may have a hard time attracting buyers if they know that the current tenant is still the priority to buy. However, if obtaining the right tenant requires a right of pre-emption, the owner of the property can still do so. On the other hand, if a selling shareholder has an overview of the value of the business, they should be in a better position to evaluate their investment. Therefore, the formal notice process would not be useful for the selling shareholder in the value assessment. Instead, a selling shareholder might want to proceed with a sale as quickly and with transaction costs as low as possible. A ROFO offers this possibility. An ROFO allows a selling shareholder to immediately make an offer to non-selling shareholders, rather than spending the time soliciting an offer from a third party first.
In addition, if a third-party buyer knows that the shares are subject to ROFR, the third-party buyer may require that due diligence and related costs be reimbursed if the transaction is not concluded. The uncertainty of conclusion in the case of a ROFR may also lead the third party to offer a lower price. If you are interested in reading other types of clauses and provisions in a shareholders` agreement, we have separate articles that cover deadlock provisions, dilution and pre-emption rights, towing clauses and Tag Along clauses Normally, the share price is fixed in advance. It is usually included in the conditions of the right of pre-emption….