Home > M&A > shareholder agreements: right of first refusal versus right of first offer Private equity investments generally have a horizon in which project promoters agree to grant investors an exit on predetermined terms. If the promoters have not granted the investor the agreed exit from the company, the “drag” provisions in favor of the investor make sense. In such cases, the investor has the right to force the promoters to sell their shares with him on the same terms and to the same person to whom the investor sells for his exit from the company. A towing makes sense on the principle that there is greater negotiability for a larger stake in the business (since the tug allows the sale of the investor`s and promoter`s shares together) than only for the investor`s shares. Tag rights can be used by an investor if the promoters decide to sell their shares in a good deal; in this case, the investor-company may sell its stake on terms similar to those offered to promoters. In addition, investments in a company can sometimes be made according to the skills of its shareholders/promoters of existing projects. Again, a label right is useful because it offers the investor the opportunity to exit when the real reason for the investment – the existing shareholders/promoters – leaves the company. On the other hand, if a selling shareholder has an overview of the value of the business, they should be in a better position to evaluate their investment. Therefore, the tendering process would not be useful to the selling shareholder in determining value. Instead, a selling shareholder may want to make a sale as quickly and with as little transaction cost as possible. A ROFO offers this possibility. An ROFO allows a selling shareholder to make an offer immediately to non-selling shareholders, rather than spending the time soliciting an offer from a third party first. In addition, if a third-party buyer knows that the shares are subject to ROFR, they may seek reimbursement of due diligence and related costs if the transaction is not completed.

The closing uncertainty in the case of a ROFR can also lead the third party to offer a lower price. For example, if there are two shareholders in a private company, say, A and B, with a Rofo in favor of B granted by A, and A decides to sell his shares, then A must first offer his B shares. Only if B refuses to acquire A`s shares, or if A can obtain from a third party a higher price of its shares than that offered by B, A can sell its share to a third party. If, on the other hand, there is a Rofr in favour of B, then A is first obliged to offer his share to third parties and receive a prize from them for it. A is then obliged to contact B with the price offered by third parties. If B can match or improve the price offered by third parties, A must sell its stake to B. The answer often comes down to the level of knowledge of shareholders about the value of their investment. In the case of a ROFR, since the solicitation process takes place prior to an offer to non-selling shareholders, a selling shareholder may have more certainty that they will receive the best value that exists on the market for their shares. Thus, if a selling shareholder does not have an idea of the value of the company (perhaps because they are a minority shareholder and/or have no right to information), it may be advantageous to negotiate a ROFR to ensure that they get the best value for their investment when it exits. It is customary for the shareholders of a company with a narrow shareholding to determine the rules governing their relations with each other in the form of a shareholders` agreement. A major concern of shareholders when negotiating a shareholders` agreement is to control the transfer of shares to unknown or undesirable persons while maintaining the liquidity of their shares.

A common mechanism to solve this problem is the right of first refusal (ROFR). These are examples of statements that are often used in trading stock market transactions and are then translated into agreements. Typical documents used to capture equity investments, i.e. share purchase agreements or shareholder agreements, are now complex and interspersed with industry terminology such as this. This can be explained by the increase in foreign participation in Indian companies, which has led to the importation of internationally determined negotiating conditions. Although parties represented by industry experts are familiar with these concepts and can therefore use this terminology to their advantage, these terms can still sometimes be misunderstood. Non-selling shareholders should therefore ensure that their offer reflects the fair value of the shares, which could help selling shareholders realize the value of their shares in the event of an exit. The provisions restricting the transfer of shares in the articles of association must be absolutely clear, as ambiguities about the nature and extent of the restriction are likely to be resolved in favour of the holder of the shares.

The same rule could also apply to transfer restrictions in shareholder agreements if the shareholder agreement is concluded between all shareholders. The main points to consider are: An ROFR gives non-selling shareholders the right to accept or reject an offer from a selling shareholder after the selling shareholder has obtained an offer for their shares from a third-party buyer. Non-selling shareholders will receive the offer from the selling shareholder under the same conditions as those submitted by the third-party buyer. This right allows non-selling shareholders to control the process of hiring a new shareholder while maintaining liquidity for the selling shareholder. A shareholders` agreement may be interpreted according to the same rules as the articles of association if the shareholders` agreement was entered into between all the shareholders (and with any subsequent allies or purchasers based on the parties) at the time of incorporation of the company or at the time of the adoption of the articles. however, the court did not need to rule on this point and considered whether previous cases had the authority to do so. .