Right of first refusal clause: matching an outside offer for shares

Sample clause

a shareholders agreement for Banksia Dental Group Pty Ltd, a fictional company owning three dental practices in Canberra, held by four dentist shareholders

11. Right of First Refusal 11.1 A Shareholder that receives a bona fide offer from a third party to buy any of its Shares, and wishes to accept it, must first give a Transfer Notice to the Company and every other Shareholder, attaching a copy of the offer. 11.2 The Transfer Notice is an offer to sell those Shares to the other Shareholders at the same price per Share and on the same terms as the third party offer. 11.3 The other Shareholders may accept for all, but not some, of the Shares within 20 Business Days after receiving the Transfer Notice, with the Shares allocated among those accepting in proportion to their holdings. 11.4 If the offer is not accepted in full, the Seller may sell all the Shares to the third party within 60 days, at a price not lower than and on terms not more favourable than those in the Transfer Notice. 11.5 A third party buyer must sign a deed agreeing to be bound by this agreement before its transfer is registered. 11.6 Non cash consideration in a third party offer is valued at its cash equivalent by an independent valuer appointed by the Board.

Sample wording, not legal advice.

Variants

What to negotiate

• All or nothing

  Sellers want holders to buy all the offered shares or none, so the outside buyer is not left with a smaller parcel it never wanted. Holders sometimes want to buy only part. Most clauses require the whole parcel to be taken up across the accepting holders, with over allocation between them, before the right counts as exercised.

• Non cash and packaged offers

  A third party may offer shares in its own company, deferred payments or a deal covering other assets. Holders cannot easily match those terms, so clauses convert non cash consideration to a cash equivalent set by a valuer. Sellers ask that the valuer be independent and that the matching period start only once the value is known.

• Permitted transfers

  Shareholders want to move shares to a family trust, a holding company or a superannuation fund without triggering the right. Other holders accept a list of permitted transfers, provided the transferee signs a deed and the shares come back if it stops being controlled by the original shareholder.

• The effect on outside buyers

  Outside buyers dislike spending money on due diligence for a deal that can be matched. Sellers therefore sometimes push for a right of first offer instead, or a short matching period and a break fee for the outsider. Holders resist both where they value control over who joins the register more than the speed of a sale.

The risk of leaving it out

Without a first refusal right, a shareholder in a proprietary company can agree to sell to anyone, subject only to any power in the constitution for directors to refuse to register the transfer. The remaining owners may find a competitor or a stranger on the register, or be left relying on a director discretion that is harder to exercise properly than a clear contractual right.

ROFR and ROFO compared

A right of first refusal is triggered by a real outside offer, while a right of first offer applies before the seller looks for a buyer. Under a refusal right the outsider sets the price, and under a first offer the holders or seller set it. A refusal right can deter outside bidders who fear being matched, while a first offer does not. A refusal right gives the seller a genuine market test but adds delay after a deal is found, whereas a first offer is quicker to run but may leave the seller wondering whether an outsider would have paid more.

The statutory background

Many Australian proprietary companies rely on the replaceable rule that lets directors refuse to register a transfer of shares, and some constitutions add pre emption on transfer. Directors must exercise that power for a proper purpose, which makes it an uncertain protection on its own. UK private companies using the model articles have a similar director discretion to refuse registration. A contractual first refusal right is more predictable because it fixes the process, the price and the timing.

Where it sits in a generated document

A generated shareholders agreement carries the right of first refusal as the first numbered clause in the share transfer section, with tag along and drag along following it, so the transfer notice defined there can be reused. The matching period and the sale window are written in as content. The document does not cite the Corporations Act or the model articles.

Documents that carry this clause

Shareholders agreement templateA veterinary diagnostics company has just taken $1.5 million from one seed fund. The founders keep 80 percent between them, so the whole agreement turns on a single number: the 75 percent consent threshold that puts the investor on one side of every decision that matters.Co-ownership agreement template for shares, costs and exitA co-ownership agreement is what two people write before they buy together, not after something goes wrong. This one covers a $780,000 unit held 60/40 as tenants in common, with tables for who paid what at settlement, who pays what each month, and how either of them gets out.

Questions people ask