What is a right of first refusal?
A right of first refusal, or ROFR, is a contractual right that forces a selling shareholder to offer its shares to a designated party — usually the company, the founders, or existing investors — on the same terms a third party has already offered, before the sale to that outsider can close. The holder of the ROFR gets to step into the buyer's shoes and take the shares itself.
The mechanic is reactive, not proactive. A ROFR does not let the holder force a sale or set a price; it only activates once a selling shareholder has a genuine, fully-formed offer in hand. The price and terms are set by the outside market — the ROFR holder simply chooses to match them or pass.
ROFRs are standard in venture financings, joint ventures, and closely held companies. They exist to keep ownership inside a known group and to stop a stake from drifting to a competitor, an activist, or anyone the existing holders did not vet.
How a right of first refusal actually works
The sequence is tightly choreographed and almost always spelled out in the shareholders agreement or charter.
- A bona fide offer arrives. The selling shareholder receives a genuine, arm's-length offer from a third party — typically required to be in writing, for cash, and on defined terms.
- Notice to the ROFR holder. The seller must give written notice disclosing the buyer's identity, the price, and all material terms. The clock starts.
- Election window. The holder has a fixed period — often 15 to 30 days — to elect to buy the shares on identical terms.
- Match or release. If the holder matches, it buys the shares. If it declines or lets the window lapse, the seller is free to sell to the original third party — but usually only on the disclosed terms, and only within a set window before the ROFR re-attaches.
If the deal with the outsider changes materially — a lower price, different consideration — the ROFR typically resets and must be re-offered.
ROFR versus right of first offer
The two are routinely confused. A right of first refusal is reactive: the seller must already have a third-party offer, and the holder matches it. A right of first offer (ROFO) is proactive: the seller must come to the holder first, before shopping the shares, and the holder names a price. Only if the holder passes can the seller go to market.
Sellers generally prefer a ROFO because it preserves their ability to test the market freely. ROFR holders prefer the ROFR because it lets them see a real, market-tested price before committing — though that same feature can chill outside bids, since a third party knows its offer may simply be used to set the holder's purchase price.