Right of first refusal (ROFR)
Right to match a third-party offer before a shareholder can sell to that party. Usually granted to the corporation and/or preferred holders.
| First in line | Corporation |
|---|---|
| Second in line | Major preferred holders, pro rata to their holdings |
| Notice period | 20–30 days to elect |
| Carve-outs | Permitted transfers to family, estate, affiliates |
The mechanics
When a shareholder subject to a ROFR wants to sell shares, the process typically runs:
- The shareholder receives a written offer from a third party.
- The shareholder delivers notice of the proposed transfer to the ROFR holders, attaching the third-party offer.
- The ROFR holders have a defined notice period (commonly 20–30 days) to elect to match the offer.
- If a ROFR holder matches, they purchase the shares at the offer price and on the offer terms. The shareholder cannot then complete the sale to the third party.
- If no ROFR holder matches, the shareholder is free to complete the sale to the third party on the disclosed terms within a defined window (commonly 60–90 days).
If the shareholder doesn't close with the third party within the window, or if the terms change materially, the ROFR resets and the shareholder must give notice again.
What it controls
ROFRs serve two main purposes:
- Controlling the cap table. Without a ROFR, a shareholder can sell to anyone, including competitors, hostile parties, or buyers the existing investors don't want on the cap table. A ROFR gives existing holders the ability to block unwanted parties from joining.
- Concentration opportunities. When a holder sells, the ROFR lets existing investors increase their ownership without going through a primary financing round. This is particularly valuable in late-stage private corporations where secondary opportunities are rare.
Standard carve-outs
Most ROFRs include exceptions for transfers that are not arm's-length and not threatening to the cap-table structure:
- Transfers to family members or trusts for the benefit of family
- Transfers on death or by will
- Transfers to affiliated entities (a holder's investment vehicle, parent fund, etc.)
- Transfers approved in writing by the corporation or the ROFR holders
These carve-outs are negotiated case by case and typically appear in the shareholder agreement or the corporation's bylaws.
Octelligence captures ROFR terms per share class or per shareholder, generates the notice on a proposed transfer, tracks the response window, and updates the share register when a ROFR holder elects to purchase. The transfer doesn't close until the workflow does.
See share transfer workflowNotice generation, response tracking, and an updated share register when the workflow completes.