Right of First Offer

A right of first offer is an investor protection that restricts the transferability of securities. If a right of first offer is in place in the governing documents of a company or in an investors rights agreement, then any potential seller of their equity securities in the company is obligated to enter into negotiations with the right holder prior to attempting to sell their securities to a third party. The right of first offer will provide for a notice period in which the right holder must respond to the seller’s notice of intent to sell or otherwise waive the right. A controversial element of such a right is the requirement for the parties to attempt to negotiate a sale. Contractual provisions requiring the parties to negotiate “in good faith” using “reasonable best efforts” are common, but a difference in opinion on the correct price for securities can be difficult to surmount. A seller may be stuck between either accepting a low price for the securities or facing accusations of breach of the efforts clause in the right of first offer. For this reason, rights of first offer must be carefully drafted to ensure the parties understand what types of situations would permit the potential seller to sell to a third party.