Letter of refusal

Courtesy: Letter of refusal

• Slight variations allowed in exercise: Abe enters an agreement with Bo calling for Bo to put down a 30% down payment, conduct certain inspections, and close the transaction in 20 days. He offers it to Carl at those terms. Carl accepts but is entitled to insist on a 20% down payment and a 30-day closing period.
• Slight variations allowed in sale: Abe offers the house for $1 million to Carl, who declines. Abe then enters a transaction with Bo but during the escrow, Bo discovers a flaw in title and several defects. Abe is entitled to discount the price by $20,000 to close the sale with Bo without having to reoffer the house to Carl at $980,000.
• Continuous: a continuous right of first refusal can be worded to continue to live, even upon infinite opportunities that are declined.

Many other variations are possible. A fully drafted ROFR addresses all of the types of issues and more, and in the case of valuable or complex transactions it is subject to negotiation and review by business transaction attorneys. However, many ROFR are not completely specified. Even the best drafted ROFR agreements suffer a high risk of dispute and litigation because they are anticipating future transactions and contingencies that are unknowable when the ROFR originates.

In venture capital deals, the right of first refusal is a term sheet provision permitting existing investors in a company to accept or refuse the purchase of equity shares offered by the company, before third parties have access to the deal. The main goal of the provision is to allow investors to prevent ownership dilution as the company raises additional capital. Typically, the provision will exempt certain types of shares, such as those in an employee pool, or shares issued to equipment loaners or lessors. Startup companies are advised to attempt negotiating out this right, because it enables existing investors to send stronger (potentially negative) signals to new investors, and consequently drive down the company’s valuation.