A right of first refusal (“ROFR”) is a pre-emptive right that entitles the holder to purchase shares before they are offered to a third party. The ROFR is a common feature of shareholders’ agreements and articles of association in private companies, and it is designed to preserve the existing balance of control and to prevent the entry of unwanted shareholders.
The Structure of the Right
The ROFR operates through a prescribed procedure. The selling shareholder must notify the ROFR holder of the proposed transfer, the identity of the third-party buyer, the price, and the terms. The ROFR holder then has a specified period—typically thirty to sixty days—to accept the offer and purchase the shares on the same terms. If the ROFR holder does not accept, the selling shareholder may transfer the shares to the third party within a specified period, subject to the third party’s compliance with the transfer restrictions.
The ROFR may be proportionate (the holder can buy its pro-rata share of the offered shares) or “all or nothing” (the holder must buy all the offered shares or none). The choice depends on the commercial objective and the number of ROFR holders.
The Enforceability
The enforceability of the ROFR depends on whether it is contained in the articles or in a shareholders’ agreement. Where the ROFR is in the articles, it binds the company and all the shareholders. Where it is in an SHA, it binds the signatories as a contract, and a breach gives rise to a claim for damages or specific performance. The V.B. Rangaraj principle limits the enforceability of an SHA-based ROFR against the company or against non-signatory shareholders.
The courts have enforced ROFR clauses through injunctions and specific performance where the breach is clear and the remedy of damages is inadequate. The NCLT has also recognised the ROFR as a relevant factor in oppression proceedings where the breach is part of a pattern of conduct that is oppressive to the minority.
The Procedural Pitfalls
The most common pitfall is a defective notice. The notice must specify the price, the terms, and the identity of the third-party buyer, and it must give the ROFR holder a reasonable opportunity to exercise the right. A notice that omits a material term, or that gives an unreasonably short acceptance period, is vulnerable to challenge.
The second pitfall is the failure to obtain the board’s approval where the articles require it. The ROFR does not dispense with the board’s power to refuse registration under Section 58, and the two requirements are cumulative.
A technically sound ROFR is precise, procedurally clear, and consistent with the articles. The right is only as effective as the procedure that implements it.
Call to Action
Anuj Desai & Associates advises companies and shareholders on the right of first refusal—from the drafting of the ROFR clause and the procedure to the enforcement of the right and the defence of a breach claim. If your ROFR is being circumvented, we can help you protect your position.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
Article 245