What is a right of first refusal?

A right of first refusal is a clause frequently included in shareholder agreements containing buy-sell clauses. It generally grants other shareholders priority in purchasing shares that a shareholder wishes to sell before they can be sold to someone outside the company.

In practical terms, a right of first refusal means that when a shareholder wishes to sell their shares, they must first offer them to those who hold this right, in accordance with the terms stipulated in the agreement. Only if these individuals do not exercise their right can the shareholder, subject to other applicable conditions, sell their shares to a third party.

The right of first refusal may have the following objectives, in particular:

• to allow existing shareholders to retain the control they already had over the company's decisions and affairs;
• to oversee the arrival of a new shareholder;
• to promote the stability of the shareholding;
• to limit the risks of conflicts between shareholders.

The procedures for exercising a right of first refusal vary according to the provisions of the agreement. They may include, in particular:

• the time allowed for beneficiaries to exercise their right;
• the method of determining the price of shares;
• the conditions under which the shares must first be offered;
• the conditions under which the sale to a third party can then be carried out;
• the consequences of failing to exercise the right within the prescribed period.

The right of first refusal does not necessarily prevent a shareholder from selling their shares. Rather, it regulates their sale by granting the beneficiaries of the right the possibility of acquiring them first, in accordance with the conditions stipulated in the agreement.

In summary , a right of first refusal generally grants other shareholders priority in acquiring shares that a shareholder wishes to sell before they can be sold to a third party. This is a clause commonly used in shareholder agreements containing buy-sell clauses to govern the transfer of shares.