As a business owner, you may know the term ‘right of first refusal’. However, you may likely come into contact with the similar term ‘right of last refusal’ when dealing with commercial contracts. Therefore, it is essential to ensure you are well informed about the meaning of such terms to avoid agreeing to a contract you do not fully understand. This article will explain the right of last refusal, how it operates and what you should be aware of before agreeing to such a term.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Right of Last Refusal
A right of last refusal is a preemptive right to receive a particular benefit in preference to any other party. Essentially, this right gives one party the right to match an offer made by a third party when considering future transactions.
Example
For instance, let us consider the following example. Imagine that you are a manufacturer of car parts and have previously entered into an agreement with XYZ Motors. In this agreement, you are to manufacture and supply them with 100 units of exhaust at $1.50 per unit. Your agreement with XYZ Motors also contains a right of last refusal for any future orders relating to that same exhaust.
XYZ Motors is now in the market for another 150 units of the same exhaust, and they receive an offer from ABC Manufacturers to manufacture the exhaust for $1.30 per unit. As you have the right of last refusal as a continuing obligation from your previous contract, XYZ Motors must present the offer from ABC Manufacturers to you. By doing so, XYZ Motors effectively allows you to match that offer. However, if you do, they must refuse the offer from ABC Manufacturers. As a result, XYZ Motors must instead contract with you to supply these additional units.
If you refuse to match the offer from ABC Manufacturers, XYZ Motors can enter into a contract with them.
How Does This Differ From a Right of First Refusal?
A right of first refusal requires the party receiving the benefit to be given the first option to enter a particular transaction. Only if this party chooses not to exercise their right can the other party go to market and seek additional offers.
Following our previous example, imagine that the contract between you and XYZ Motors contained a right of first refusal. In this case, XYZ Motors must allow you to make an offer first before seeking offers from third parties.
You may also see a right of last refusal in shareholders’ agreements. For example, a shareholder wishing to sell their shares must first offer those shares to the other shareholders in the business. If those other shareholders choose not to exercise their option to purchase these shares, only then can the original shareholder look for other offers.
Continue reading this article below the formAdvantages of Last Refusal
There are many advantages to the holder of this right. For instance, you have a right to match an offer made by a third party concerning a business transaction. As a result, this allows you the opportunity to understand the market before making your offer. Additionally, it also gives you time to consider the offer you will make, with a guarantee that you will not lose the contract to someone else if you fail to respond promptly.
Disadvantages of Last Refusal
On the other hand, a third party may become aware that another party has a right of last refusal over a transaction they are currently negotiating. In this case, the third party may decide not to proceed with the negotiations. Again, this is because the risk of the transaction falling through may not be worth investing time into the negotiations and the due diligence process.
Moreover, this may cause issues for the party granting the last refusal right. This is because it could mean fewer parties are interested in the transaction. Additionally, this provides them with less bargaining power.
Key Terms of a Right of Last Refusal
When including a right of last refusal in your contract, it is crucial to consider the practical effects. For instance, some important things to consider include:
- timeframe: does the party receiving the benefit of the right have to exercise their right within a particular time frame? The time frame should be sufficient to give the party time to assess the situation and make an informed decision. However, it should not be too long it results in you potentially missing out on other opportunities.
- commercials: is the right holder allowed to match the offer made by the third party, or do they need to beat the offer somehow?
- restrictions: are there any other restrictions on either party or the future transaction? Consider the example of the shareholder’s agreement above. Suppose the other shareholders chose not to exercise their right of last refusal. In that case, they may still have the opportunity to reject the sale of the shares to another third party if they believe that a third party is unsuitable to hold those shares. Similarly, will the holder of the right of last refusal have any other rights under this provision?
Key Takeaways
A right of last refusal is a preemptive right that allows the holder to make an offer in ongoing negotiations between the other party and a third party. Suppose the party holding the right can match the offer made by the third party. In that case, the other party may be obliged to accept that offer rather than continue negotiations with the third party. Additionally, you should carefully consider a right of last refusal to ensure it provides you with some benefit.
If you need assistance understanding your right of last refusal, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A right of last refusal gives one party the right to match an offer made by a third party when considering future transactions.
You can receive many benefits if you hold the right of last refusal. For instance, you have a right to match an offer made by a third party concerning a business transaction. As a result, you can understand the market before making your offer. Additionally, it gives you time to consider the offer you will make, with a guarantee that you will not lose the contract to someone else if you fail to respond promptly.
We appreciate your feedback – your submission has been successfully received.
