Question: What is a right of first refusal?
Answer:A ‘right of first refusal’ clause is typically found in a Shareholders Agreement. This right entitles a shareholder to the first opportunity to buy any shares for sale by another shareholder or new shares issued by the company.
This right is typically provided on a pro-rata basis. This means that the right prioritises shareholders based on the proportion of the existing shares that they hold. However, shareholders may come to an agreement that entitles a shareholder with a lower proportion of existing shares to exercise their option to purchase the existing or new shares ahead of others.
This right is not an obligation and shareholders with this right are free to refuse to purchase existing or new shares up for offer. The option simply passes onto the next shareholder until:
- all shareholders with the “right of first refusal” receive an offer to partake, or
- someone purchases the existing or new share, whichever happens first.
