Right of First Refusal

A right of first refusal is an investor protection that restricts the transferability of securities. If a right of first refusal 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 offer the securities to the right holder on the same terms and conditions and at the same price as any potential third party. Refusal rights protect investors by allowing the investor to purchase the shares in a company before they are transferred to a third party. Unlike a right of first offer, the right of first refusal permits a potential seller to negotiate with third parties before providing notice to the right holder. Rights of first refusal are very common in standard investment documents. A first refusal right may also be granted in favor of the company, allowing the company to repurchase the shares before they are transferred to a third party.  Procedurally, rights of first refusal require the seller and the right holder to meet deadlines and reply within prescribed notice periods. Careful attention should be paid to a first refusal provision if an equity holder intends to sell securities, as failure to comply with the terms can void any later transfer.