This contract tip explains the right of first refusal, also known as a ROFR.
In most ROFRs, one party agrees to offer something to the other party before offering it to a third party. That offering party can only do that thing with someone else after the contract party declines.
If contracts are like getting married, ROFRs are like having to get your spouse's approval to park in the garage.
They can be great tools for creating more connections between the contract parties or onerous restrictions that limit the party's options.
In commercial deals, the most common ROFRs are rights to (1) purchase, sell, or license something, (2) act as distributor or reseller, or (3) obtain an exclusive territory or field of use.
There are lots of ROFR variations. You may see rights of first offer (ROFOs), rights of first negotiation (ROFNs), and others.
Every ROFR provision must answer these seven questions:
1. Who is granting and receiving the right?
2. What is the subject of the right? Be clear and precise on the scope.
3. What is the grantor required to offer under the ROFR? Check if it restricts just signing deals. It may prohibit negotiations too.
4. How long is the negotiation period? Make sure it is enough time considering the complexity.
5. What limits apply to the grantor during the negotiation period? It should be long enough to evaluate but not so long that it kills the proposed transaction.
6. What happens if they disagree on terms?
7. Are there any ongoing restrictions? Watch out for any lingering rules that apply even after the contract counterparty turns down the offer.
What's been your experience with ROFRs?
