What is a 'right of first refusal' and how does it work?
This question was asked in response to yesterday’s story about the possible existence of a “right of first refusal” (ROFR) clause in the shareholders’ agreement (SHA) for investors in the Light Rail Manila Corp. (LRMC). The LRMC is a closely-held private company, meaning that it has a small number of shareholders, and since there is no public market for the sale of those shares, the shareholders in such a company almost always sign a SHA to govern important aspects of ownership like how decisions will be made, how disputes will be resolved, and how shares can be sold or transferred. In reality, these agreements are massive, and since they’re just negotiated contracts, the parties are free to make up whatever weird and wild clauses they like or to modify existing templates to suit whatever special situations are in play. > What is a ROFR clause? In this case, a ROFR clause is used to control how shares are sold and transferred, and it gives the other parties to the agreement the right (but not the obligation) to buy any shares that are being sold before they are sold to parties outside of the agreement.
