This article speaks on the salient differences between the exercise of a ‘Right of First Refusal’ and a ‘Right of First Offer’.
Conceptual difference between ROF and ROFO
A Right of First Refusal (“ROFR”) and a Right of First Offer (“ROFO”) are both contractual rights linked to specified assets and governing the manner of transfer of such assets inter-se the parties to the ROFR/ROFO and vis-à-vis other third-parties.
Whilst a Right of First Refusal (“ROFR”) provides that a selling party may not undertake transfer of the ROFR assets to a third-party without offering it on such terms to the ROF holding party, a Right of First Offer (“ROFO”) provides that a party seeking to transfer the ROFO assets must first offer it to the ROFO holding party without third-party involvement at such juncture.
It may be noted that a ROFR and ROFO have different implications in respect of the manner in which price discovery is effected and the manner in which they incentivise the parties to the proposed transaction.
Salient features of ROFR
A ROFR mandates that the selling party may not transfer the assets subject to the ROFR to a third-party without offering the same to the concerned party holding the ROF on terms mirroring the proposed third-party sale.
In the event of exercise of the ROFR, the selling party must undertake the sale of the concerned assets to the party holding the ROFR. Further, in the event of waiver of the ROFR, the selling party is permitted to proceed with the thirdparty sale subject to the terms of such sale not being inferior to the terms of the ROFR offer.
Salient features of ROFO
A ROFO mandates that the party desirous of transferring the assets subject to the ROFO must first offer such assets to the party holding the ROFO; in the event that the party holding the ROFO does not elect to purchase the assets, the selling party may then undertake the sale of the concerned assets to a third-party.
In the event that the ROFO holding party elects to purchase the assets, the selling party must undertake the sale of the assets to the party holding the ROFO provided that the selling shareholder is unable to obtain a higher price from a third-party and subject to the manner in which the ROFO provision is drafted.
Comparative analysis of twin concepts of ROFR and ROFO
While both ROF/ROFO are pre-emptive rights in respect of the disposal of the concerned assets, they may be differentiated as below:
- Price Discovery: The price discovery of the concerned assets under a ROFO is determined inter-se the parties to the ROFO as the parties negotiate the price prior to any third-party involvement in the proposed transfer; conversely, the price discovery under a ROFR is determined between the selling party and the third-party, with the holder of the ROFR possessing the right to match/better the price determined externally between the seller and the third-party. Thus, the inclusion of a ROF/ROFO under contract is contingent on the manner on which the parties wish to effect price discovery and the degree of control either party may wish to exercise over such process.
- Chilling Effect: A ROFR may potentially create a ‘chilling effect’ wherein third-parties are apprehensive of conducting the necessary due diligence and negotiations towards effecting price discovery and furthering the proposed transaction, only for the party possessing the ROFR to leverage such right and obtain the benefit of such negotiations. Thus, while a party looking to safeguard exit options in a transaction may agree for the grant of a ROFO to the concerned counter-party, the grant of a ROF may be more contentious on account of such chilling effect.
Whereas a Right of First Refusal (“ROFR”) provides that a selling party may not undertake transfer of the ROFR assets to a third-party without offering it on such terms to the ROFR holding party, a Right of First Offer (“ROFO”) provides that a party seeking to transfer the ROFO assets must first offer it to the ROFO holding party without third-party involvement at such juncture. Further, a ROFR and ROFO have different implications in respect of the manner in which price discovery is effected and the manner in which they incentivise the parties to the proposed transaction.
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