Question

What does a &#x27;Right of First Refusal&#x27; (ROFR) agreement allow existing stakeholders to do when a shareholder attempts to sell their equity to an outside party?

Accepted Answer

A Right of First Refusal is a contractual provision that grants existing stakeholders the legal right to purchase shares before a current shareholder is permitted to sell them to an outside party. When a shareholder receives a legitimate, third-party offer to purchase their equity, the ROFR requires them to formally present the terms of that offer to the other existing stakeholders. The stakeholders then have a specific window of time, known as an option period, to decide whether they wish to purchase the shares themselves under the exact same price and terms proposed by the outsider. If the stakeholders choose to exercise their right, they become the buyers of the equity, effectively blocking the outside party from entering the cap table. If the stakeholders decline the offer or let the option period expire, the selling shareholder is then free to complete the sale to the outside party on those same terms. This mechanism ensures that current stakeholders have control over who becomes a new partner or investor in the company by allowing them to maintain their existing ownership proportions or exclude unwanted outsiders.

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What does a 'Right of First Refusal' (ROFR) agreement allow existing stakeholders to do when a shareholder attempts to sell their equity to an outside party?