When it comes to shareholder agreements, there are two acronyms that often come up: ROFO and ROFR. These two terms refer to different types of clauses that can be included in a shareholder agreement, and understanding the difference between them is important for any business owner.
ROFO stands for “right of first offer.” Essentially, this means that if one shareholder wants to sell their shares in the company, they must first offer them to the other shareholders before seeking outside buyers. The other shareholders then have the opportunity to purchase the shares at the same price and on the same terms that the outside buyer was offering. This can help ensure that existing shareholders maintain control of the company and prevent outside parties from acquiring too much influence.
On the other hand, ROFR stands for “right of first refusal.” This clause means that if a shareholder wants to sell their shares, they must first offer them to the other shareholders at a price and terms determined by the selling shareholder. However, the other shareholders have the right to refuse the offer, in which case the selling shareholder is free to seek outside buyers.
So, what`s the difference between these two clauses? The main distinction lies in the order of events. With an ROFO, the selling shareholder must first offer the shares to the other shareholders before seeking outside buyers. With an ROFR, the selling shareholder can negotiate the terms of the sale with the other shareholders, but ultimately has the option to sell to an outside buyer if the other shareholders decline the offer.
Both ROFO and ROFR clauses can be useful tools for ensuring that shareholders have control over the ownership of the company. However, each has its own advantages and drawbacks. An ROFO can help prevent outside buyers from acquiring too much influence, but it can also limit the selling shareholder`s options. An ROFR allows for more negotiation between the parties, but it also gives the other shareholders the power to veto the sale.
Ultimately, the decision between an ROFO and ROFR clause will depend on the specific needs and goals of the company and its shareholders. It`s important to consult with legal and financial professionals to determine the best course of action for your business.