What Is the Right of First Refusal?

The right of first refusal is an essential legal safeguard that enables business owners to safeguard their financial and ownership interests. Before the stock is sold to an outside buyer or party, the right of first refusal allows a business to buy it from an employee or owner. As a result, an outside buyer can be prevented from gaining voting rights or an ownership share in the company, allowing the business owners to maintain control over it.

In contracts between the company and its shareholders, workers, or founders, the particular terms and conditions of a company’s right of first refusal should be expressly mentioned in writing. The right of first refusal comes in after the seller has received an offer from an outside buyer. It can also be used as a “right of first offer,” which gives the business the opportunity to submit a purchase offer prior to the seller receiving offers from potential outside buyers.

LLC and Operating Agreements

The necessary organization documents must be filed with the Secretary of State in order to establish a limited liability company. The Operating Agreement is a formal contract that specifies the organization and management of the company. It may also contain clauses that grant the company and members the right of first refusal to protect the LLC’s membership interests. Within the Operating Agreement, you may find the kinds of sales that are covered by the company’s right of first refusal, the timing of such offers, and which owners or corporate officers are permitted to exercise a right of first refusal.

Corporations and Stock Purchase Agreements

By establishing and using a right of first refusal, corporations can safeguard their ownership interests. This right should also be expressly described in the company’s share or stock purchase contracts, charter, or other important corporate documents like a shareholder’s agreement. Compared to LLCs, corporations typically have more complicated ownership and management structures. This makes the right of first refusal potentially more complex. In the appropriate company corporate documents, the right of first refusal should be as specific as possible. It should detail the duties and rights of everyone involved in the business with regard to the right of first refusal as well as the valuation and appraisal of the stocks and shares.

Additionally, companies may be subject to compliance requirements caused by the right of first refusal. Since stock is a security, the Securities and Exchange Commission has regulatory authority over it. A lawyer can help you understand more about your SEC or state securities (blue sky) obligations. These can be far more difficult than merely submitting the necessary paperwork to the SEC once a deal has been completed. The timing and quantity of a transaction could also be controlled by federal restrictions. Civil liability or administrative penalties may result from failure to comply with these responsibilities. Owners who commit fraud or conceal information may potentially be held criminally liable. By creating corporate agreements that properly identify your company’s rights, a business attorney can avert a variety of legal issues.