In the realm of corporate transaction documents — especially shareholder agreements, joint ventures, and private equity agreements — two important pre-emptive rights frequently arise: the Right of First Refusal (ROFR) and the Right of First Offer (ROFO). Each mechanism allows a party to have some manner of control over ownership and to shield itself from the implied vested rights of a third party/shareholder/partner. However, they do differ in terms of their language, legal application, and strategic approach.
This article examines the definitions under the law, the business implications and limitations of ROFR and ROFO, and the relative strengths of ROFR and ROFO in pursuing preferred transactional outcomes — and to what extent the two alternatives serve the better interests of its three primary participants — the promoters and their shareholders.
Right of First Refusal (ROFR)
A Right of First Refusal (ROFR) is a contractual right that permits the rights holder, usually a current shareholder or investor, to match the offer of a third party before the seller can enter into an agreement with a third-party to convey shares or assets. It serves the purpose of protecting the interest of the existing investor and shareholder and restrict third-party interest. It is commonly found in shareholders’ agreements and joint ventures.
Under a ROFR, if the seller receives a bona fide offer from an outsider, the seller is required to notify the ROFR rights holder with the same notice of the terms of the offer. If the ROFR rights holder accepts the offer, they can purchase the asset or shares on those terms. If the ROFR rights holder declines to accept the offer, the seller is free to sell to the third party on the agreed terms.
Judicial Validation
In Messer Holdings Ltd. v. Shyam Madanmohan Ruia & Ors. (Bombay High Court, 2010), the court ruled that a Right of First Refusal clause in a shareholder agreement was enforceable. The court was called upon to determine whether such contractual clauses violated the principle of free transferability of shares as enshrined in Section 111A of the Companies Act, 1956.
The court stated that ROFR clauses contained in private shareholders’ agreements were enforceable even if the clauses were not inserted in the Articles of Association. The ruling in this case demonstrates a very radical movement in the legal position held by the law, and that what were previously seen as mere rights of shareholders during a statutory corporate framework may be preserved within the contract law realm.
Right of First Offer (ROFO)
A Right of First Offer (ROFO) provides a contractual counterparty the first opportunity to make an offer for an asset or shares before the seller can negotiate with external buyers. If the seller intends to sell, they must first notify the ROFO holder, who will then have an exclusive right to negotiate and submit an offer within a specified time period.
If a deal is not completed within the period by the ROFO holder, the seller is free to sell the asset on the same or similar terms as provided to the ROFO holder, but to third parties. The ROFO benefits a counterparty for negotiations by allowing earlier access while also providing an opportunity for conversation with regard to the potential deal.
It gives the buyer a stronger negotiating position while ensuring the seller is not exposed to third-party offers during the negotiation period. Compared to a ROFR, a ROFO is less disruptive to sellers; sellers can start a selling process rather than reacting to third-party offers. ROFOs have been used in joint ventures, early-stage investments (also known as convertible promissory notes), and relationships where the seller wants to maintain some flexibility but also control of the sale process.
Judicial Clarification
In MSK Projects v. State of Rajasthan & Ors. (Supreme Court, 2011), a dispute arose over a concession agreement where the petitioner alleged the state breached a right of first offer (ROFO). The Supreme Court held that a ROFO clause imposes on the seller an obligation to offer the first refusal within a time period.
If the offeree fails to respond or negotiate in that time period, the seller can sell to other third parties. Thus, the case reiterated that ROFO rights are time-sensitive and not exclusive once the time elapses.
ROFR vs ROFO: Comparative Analysis
ROFR and ROFO differ in several key respects:
- A ROFR is triggered when the seller receives a third-party offer, allowing the right holder to match its terms.
- A ROFO is activated when the seller merely indicates an intent to sell, giving the holder the opportunity to make the first offer before the seller approaches any third parties.
- This makes ROFR a reactive right and ROFO a proactive one.
- With ROFR, the buyer must respond to existing terms; ROFO allows setting terms at the outset.
- ROFR comes into play after a market valuation is known; ROFO is exercised before the asset is put on the market.
As a result:
- ROFR tends to benefit promoters and majority shareholders by giving them greater control over ownership changes.
- ROFO is more favourable for investors and minority shareholders who want early access to acquisitions.
- ROFR can be complex, requiring exact matching of a third-party offer.
- ROFO involves simpler negotiation dynamics.
- Strategically, ROFR blocks external parties; ROFO offers a preferred chance to invest before wider opportunities arise.
ROFR vs ROFO: Which Is Better for Promoters?
For promoters aiming to preserve control and avoid dilution or hostile takeovers, ROFR is often the better choice. It allows promoters the final say by giving them the chance to match external offers. ROFR is especially useful in closely held or family-run businesses, providing a shield to retain ownership within a trusted group.
In contrast, ROFO merely prohibits the selling shareholder from negotiating third-party deals before offering to the ROFO holder. It offers less certainty for promoters looking to block new shareholders, making ROFR the stronger option when control is a priority.
ROFR vs ROFO: Which Is Better for Shareholders/Investors?
For minority shareholders or external investors focused on ownership growth and transactional clarity, ROFO is more attractive. It allows them to initiate negotiations before third parties are involved, often resulting in simpler, more predictable deals.
ROFO gives investors more time to assess and allocate capital. In contrast, ROFR may introduce uncertainty, especially if investors are unsure about third-party pricing or delay decisions. While ROFR offers protection, ROFO is a better fit for investors with long-term growth plans.
Conclusion
Both ROFR and ROFO are critical tools in structuring investments, exits, and governance arrangements. Choosing between them depends on the parties’ roles and strategic goals.
ROFR empowers promoters with a final say on new entrants, while ROFO empowers shareholders and investors with first access to opportunities. The key lies in aligning the clause with the desired control, flexibility, and market exposure in the deal. Legal drafting must be precise to reflect these rights, covering timelines, valuation mechanisms, and exceptions to ensure enforceability and commercial clarity.
Written By: Mr.Ashutosh Tripathi, 4th year B.A LL.B.(Hons.) – Chaudhary Mahadev Prasad Degree college, Prayagraj
