THE RIGHT OF FIRST REFUSAL (“ROFR”) AND THE RIGHT OF FIRST OFFER (“ROFO”)

( by Andrew Baek / August 6, 2024 )

Contract provisions granting the ROFR, or alternatively, the ROFO, are often found in shareholders’ agreements, but their application is not limited to such context. These provisions may also appear in publishing agreements, real estate contracts, or any other contracts involving the potential transfer of rights, titles, or interests in an asset (collectively, “Ownership”) by a party to the contract (the “Transferor”).

The ROFR grants its holder the following rights regarding any Ownership that is subject to the ROFR: when a third party makes an offer to the Transferor to acquire the Ownership, and the Transferor wishes to accept the offer, the Transferor must first present the offer to the ROFR holder. The ROFR holder then has the option to either match the third party’s offer and acquire the Ownership itself, or refuse to match the offer. If the ROFR holder refuses to match the offer, then the Transferor can accept the third party’s offer and proceed with the transfer of Ownership, provided that the terms of the offer are not subsequently altered to be more favorable to the transferee compared to the original offer.

While the concept is straight forward, the actual contract language can be carefully crafted to be neutral or to favor either the Holder or the Transferor. Key factors include, without limitation, defining what constitutes an offer that triggers the ROFR, the extent of the disclosure required regarding the third party’s offer, the timeline for exercising the ROFR, and the repercussions for breaching ROFR obligations.

For instance, when the ROFR is triggered and the terms of the offer have been shared, the ROFR holder then generally must notify the Transferor of its decision to match or refuse to match the offer within a specified time period. However, there can be challenges, such as incomplete disclosure of the third party’s offer terms or changes to the offer while the ROFR holder is still deciding. Additionally, the ROFR holder might prefer negotiating the terms with the Transferor rather than matching the third party’s offer exactly as it is. The contract might require a written notice from the ROFR holder to confirm whether the ROFR holder will match the offer, or it may stipulate that failure to validly notify the Transferor of the ROFR holder’s intent within the specified time period constitutes a waiver of the ROFR. In some cases, depending on the nature of the Ownership, the ROFR holder might even be required to provide a deposit in order to exercise its ROFR.

The ROFO, while similar to the ROFR, is more advantageous to the Transferor. In the case of the ROFR, the Transferor must first negotiate with a third party and obtain an actual offer. In contrast, with the ROFO, this step is unnecessary. The Transferor can unilaterally determine the terms of the transfer (e.g., price), and then offer those terms to the holder of the ROFO. The terminology might sound counterintuitive since it is the Transferor, not the ROFO holder, who appears to be making the “first offer”. It may well be interpreted to mean that the ROFO holder is entitled to receive the first offer; however, in some cases, the contract would actually stipulate that the Transferor may solicit ROFO holders to make offers to the Transferor. Anyhow, once the Transferor notifies the ROFO holder of the offer, then the ROFO holder may either accept the offer and acquire the Ownership, or refuse to accept the offer. If the ROFO holder refuses acceptance, then the Transferor may take the offer to a third party and proceed with the transfer of Ownership, provided that the terms of the offer are not subsequently altered to be more favorable to the transferee compared to the original offer.

The main difference between the ROFR and the ROFO is that the ROFO imposes less restrictions on the liquidity of the Ownership transfer compared to the ROFR. Therefore, the inclusion of the ROFR or the ROFO in a contract, as well as the specific language of the contract provisions, depends significantly on the interests and leverage of the contracting parties.

If you are considering the inclusion of the ROFR or the ROFO in your contract or need advice on how to modify the terms to your advantage or to check for any poison pills included therein, feel free to contact us via email at inpyeong@inpyeonglaw.com or by phone at +82 2038 2339.

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