The right of first offer and the right of first refusal

by Roberta Incorvaia, Filippo Grigolon

The right of first offer/first refusal consists in the opportunity granted to one or more shareholders, usually by means of a shareholders' agreement, to purchase the equity of another shareholder before the latter is offered for sale to third parties. Specifically, the party of the shareholders’ agreement, before soliciting and/or taking into account any offer from third parties:

  • according to a “right of first offer (ROFO) clause”, shall (i) notify to the other party of the shareholders’ agreement its intention to sell and (ii) invite them to make an offer for purchasing its equity - within a given period of time - at a certain price;
  • according to a “right of first refusal (ROFR) clause”, shall (i) notify to the other party of the shareholders’ agreement its intention to sell and (ii) formulate a proposal for sale indicating the price at which it intends to sell  its equity.

The proposals, advanced by the buyer in the case of ROFO or by the seller in the case of ROFR, must be irrevocable pursuant to Art. 1329 of the Italian Civil Code. 

The functioning of the ROFO clause
According to a ROFO clause, the party who intends to sell its equity to a third party, before starting any negotiation, shall send a notice to the other party soliciting such party to make an offer for purchasing its equity, within a given period of time, at a certain price. The seller’s notice can also indicate the minimum price and/or further conditions under which it is willing to sell its equity. Following the notice:

(i) if none of the invited parties submits any offer, the seller is free to transfer its equity to third parties without any limitation; 

(ii) if the offer differs from the conditions provided for by the seller in the notice, it could be considered as non-submission of the offer;

(iii) if the seller receives an offer that complies with the conditions set forth in the notice or in the clause of the shareholders’ agreement, it may either decide not to sell or accept the purchase offer. If the seller intends to sell its equity later on, he will be obliged to reiterate the procedure of the first offer;

(iv) if the seller receives more than one offer: 

  • according to some doctrice, the ROFO clause shall provide for the execution of the sale of the equity with (i) the party who submitted the best offer or (ii) each of the parties who submitted the offer for the same price, proportionally;
  • according to other doctrine, however, when each of the parties submitted an offer for the purchase of the equity at the same price, the seller is free to choose between a proportional co-sale of the equity or to make single sales with of one or more of the parties .

According to a part of doctrine, the seller may accept a purchase proposal from a third party for a better price than the one offered by the parties of the shareholders' agreement; according to another author, another doctrine opinion suggests that “the improvement” of the purchase proposal received from a third party must be evaluated in its entirety, not only considering the price.

For this reason, the ROFO clause should define the evaluation elements as detailed as possible (e.g., extensions in payment terms, representations and warranties).

The functioning of the ROFR clause
According to a ROFR clause, a party who intends to sell its equity to a third party, before starting any negotiation, shall send an irrevocable proposal of sale of its equity to the other party, who is free to accept or refuse such proposal within a given period of time. Following such proposal:

(i)  if the party accepts the proposal, the seller will be free to negotiate with third parties and may sell its equity even at worse conditions than the ones proposed initially to the party;

(ii) if the proposal is accepted by the party, the parties shall conclude the sale and purchase agreement at the conditions under the proposal. In case of multiple acceptance by the parties, the ROFR clause may provide for a pro-rata or an equal portions purchase.