Finance term
Right of First Refusal (Corporate / Securities)
Also known as: ROFR, corporate ROFR, preemptive purchase right, right of first refusal shareholder
Definition
A corporate Right of First Refusal (ROFR) gives existing shareholders or the company the contractual right to purchase a selling shareholder's equity on the same terms offered by a third-party buyer — before the shareholder can transfer shares to the outsider.
Detailed explanation
In the corporate and securities context, a Right of First Refusal is a transfer restriction mechanism in shareholder agreements, LLC operating agreements, and venture capital term sheets. When a shareholder receives a bona fide third-party offer to buy their shares, the ROFR obligates them to first offer those shares to existing holders (or the company) at the same price and terms. If the ROFR holder declines or fails to exercise within the notice period, the selling shareholder may complete the sale to the third party.
Corporate ROFRs serve different purposes from real estate ROFRs (which grant a right to match offers on property). Corporate ROFRs: (1) preserve existing ownership structure and prevent unwanted outside parties from acquiring equity; (2) allow co-founders or investors to maintain their proportional ownership by buying out departing members; (3) give the company itself a buyback right before shares reach outside hands.
The SEC requires disclosure of material ROFRs in offering documents and ongoing reporting. SEC Rule 144 (17 CFR 230.144) governs resales of restricted securities and operates independently of contractual ROFR provisions — both must be satisfied in a transfer. Form S-1 registration statements and proxy statements (Schedule 14A) routinely describe ROFR provisions in the 'Related Party Transactions' and 'Description of Capital Stock' sections. ROFRs can create complications in IPO processes — ROFR rights typically terminate or convert to market-based resale rights upon a qualified IPO event, a transition often negotiated in the original investor rights agreement.
◈ Worked example
- A co-founder receives a $500,000 offer from an outside investor for her 20% stake. The shareholder agreement triggers ROFR: company and existing investors have 30 days to purchase at the same $500,000 terms. The lead investor exercises the ROFR — the outside investor never enters the cap table.
- VC term sheet: 'Company and Series A holders have a right of first refusal on any proposed transfer of founder shares, exercisable within 30 days of written notice of proposed transfer.' Standard provision to protect investor ownership percentage.
- ROFR vs. Right of First Offer (ROFO): ROFR triggers after a third-party price is established. ROFO triggers before — the seller must offer the shares to ROFO holders first, at a price the holders propose, before soliciting outside buyers. ROFR is more common in VC agreements; ROFO sometimes appears in real estate and commercial contracts.
Common questions
The most-asked questions about Right of First Refusal (Corporate / Securities) — answered straightforwardly.
How is a corporate ROFR different from a real estate ROFR? +
Both give a right to match a third-party offer, but the subject matter differs. Real estate ROFRs attach to property — the holder can match any sale of that parcel. Corporate ROFRs attach to equity interests — they apply when a shareholder wants to sell their shares. The triggering events, notice periods, and legal frameworks are different. Real estate ROFRs are governed by property law; corporate ROFRs are governed by the shareholder agreement and state corporate/LLC statutes.
Does an ROFR affect how a company can IPO? +
Yes. Contractual ROFRs on private shares are typically waived or terminated in connection with a qualified IPO. Most investor rights agreements (IRAs) provide that ROFR rights terminate automatically upon a qualified IPO — because public market shareholders cannot be subject to private transfer restrictions. This termination provision must be explicitly drafted; without it, ROFR clauses could technically apply to post-IPO secondary sales, creating compliance issues under SEC Rule 144.
What happens if a shareholder transfers shares without honoring an ROFR? +
The transfer is typically voidable — the company or ROFR holder can seek to rescind the transfer, obtain a court injunction to block the transaction, or recover damages. Most shareholder agreements specify that any transfer in violation of ROFR is void ab initio (as if it never happened). Courts in Delaware and other states consistently enforce contractual transfer restrictions when properly documented.
Further reading
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https://clearvaluelending.com/glossary/right-of-first-refusal-corporate