The Right of First Refusal (ROFR) is a contractual agreement between two parties where one party (the holder of the right) has the opportunity to engage in a transaction before the other party can enter into that transaction with a third party. This agreement is frequently used in business transactions, particularly in venture capital.
For instance, suppose there are three parties involved: the owner of the asset (Party A), the holder of the right of first refusal (Party B), and a potential third-party buyer (Party C). If Party A decides to sell the asset and receives an offer from Party C, Party A must first offer to sell the asset to Party B on the same terms. Only if Party B refuses to buy under these terms can Party A then sell to Party C.
This right is beneficial to the holder (Party B in the example) as it provides them with the opportunity to control their investment or business environment. In the context of venture capital or private equity, ROFR is commonly found in shareholder agreements, where it gives existing investors the chance to maintain their ownership percentage in future fundraising rounds.
