Right of First Refusal

Right of First Refusal (ROFR) is a transfer-restriction right under which, when a shareholder receives a bona fide third-party offer to purchase its shares, it must first offer those shares to the other ROFR holders (typically existing investors / founders) on the same terms as the third-party offer. Only if the ROFR holders decline can the seller proceed with the third-party sale.

Distinguish from ROFO:

• ROFO (Right of First Offer) — seller must offer shares to ROFR holders first, before approaching the market. Holders quote a price; if accepted, sale closes; if not, seller can market to third parties but typically only at a price not lower than the rejected ROFO price.
• ROFR — seller goes to market first, secures an offer, then offers to ROFR holders on the same terms.

ROFO favours the buyer (existing investors); ROFR favours the seller (more price discovery). Indian SHAs often have a hybrid — ROFO at first, falling to ROFR if the ROFO is unmatched.

Typical clause mechanics:

• Transfer notice: seller delivers details of third-party offer (buyer, price, payment terms, closing date) to the company / ROFR holders.
• Acceptance window: 15–30 days.
• Pro-rata allocation: if multiple holders elect, shares allocated pro-rata to their existing holdings.
• Closing: matched holders close on the same economic terms as the third party.

Indian-context notes:

• Section 58 of the Companies Act 2013 permits private companies to restrict transfer via their AoA — the ROFR clause must be mirrored in the AoA to be enforceable against the company and registrar of transfers.
• The Supreme Court (in cases like *Bajaj Auto Ltd. v. WCB Engineering*, *Vodafone International*) has upheld the enforceability of pre-emption rights in shareholders' agreements when reflected in the AoA.
• For public listed companies, ROFR rights face limitations — SEBI's listing framework generally requires that transfers be permitted without restrictions; pre-emption rights are limited to specific contexts.

Common companion clauses:

• Tag-along — minority follows majority on sale.
• Drag-along — majority forces minority into sale (see Drag-Along Rights).
• Lock-in — founders cannot transfer for a specified period.

Pitfall: Excluding promoter/affiliate transfers from ROFR (which is standard) creates loopholes — founders may transfer to a related party who then sells. Investors typically demand affiliate-transfer carve-outs with continuing ROFR on subsequent transfers.