What is ROFO (Right of First Offer)?

When a shareholder decides to sell their shares, they can’t always go straight to outside buyers. In many shareholder agreements, a clause called the Right of First Offer (ROFO) gives existing shareholders the first opportunity to purchase those shares before they’re offered externally.

This mechanism helps companies and shareholders maintain control over ownership, prevent unwanted investors from entering the cap table, and preserve stability.

ROFO meaning: Right of First Offer (ROFO) in shareholder agreements

The Right of First Offer (ROFO) is a common clause in shareholder agreements, especially in early-stage and private companies. It gives existing shareholders (or specified investors) the first opportunity to purchase shares whenever another shareholder wishes to sell.

This clause acts as a safeguard, ensuring that before new investors are brought in, current shareholders can negotiate and decide whether to buy the shares. By doing so, ROFO preserves ownership control and prevents unwanted dilution of influence.

How does ROFO work? 

ROFO is designed to give existing investors a priority window before any external buyers are approached.

Here’s how it typically works in practice:

1. Notice: The selling shareholder must first notify the company or ROFO holders of their intent to sell. This notice usually includes the number of shares, the proposed price, and other key terms.
   
2. Offer: The seller formally offers the shares to the ROFO holders. At this stage, no external parties are involved, the deal must be presented internally first.
   
3. Response window: ROFO holders are given a specific timeframe (commonly 15–30 days) to evaluate the offer. During this period, they can decide to buy all, some, or none of the shares.
   
4. Outcome:

• If ROFO holders accept, the transaction is completed internally, allowing existing shareholders to preserve the current ownership circle and increase their individual stake.
• If ROFO holders decline or don’t respond, the seller is free to seek external buyers, but usually only on terms that are the same or more favorable to the seller than those first offered to the ROFO holders.

It’s important to note that a ROFO does not give shareholders the right to match an outsider’s bid, that protection comes under a Right of First Refusal (ROFR). With ROFO, shareholders simply get the first opportunity to make an offer before anyone else enters the picture.

ROFO vs ROFR

Both the Right of First Offer (ROFO) and the Right of First Refusal (ROFR) are preemptive rights designed to give existing shareholders protection, but they operate at very different stages of the sale process.

When are they triggered?

A ROFO is triggered the moment a shareholder decides they want to sell. The seller must first approach existing shareholders before speaking to anyone outside. In contrast, a ROFR only comes into play after a seller has received a concrete offer from an outside buyer.

What is the process?

Under a ROFO, the seller makes an initial offer to existing shareholders and gives them the first opportunity to negotiate. If they decline, the seller can then approach external parties. With a ROFR, the seller is free to shop the market first, but before finalizing a deal, they must give existing shareholders the chance to match the exact terms of the outside offer.

For shareholders, a ROFO provides the first look at new opportunities to increase their stake, while a ROFR provides the last look. 

From the seller’s perspective, ROFO gives more control in setting the price and terms from the start, while a ROFR allows them to test the open market before committing.

ROFO in India vs other markets

The Right of First Offer (ROFO) is widely used across jurisdictions, but its application can vary depending on the legal framework and market practices.

ROFO in India

In India, ROFO and ROFR clauses are very common in shareholder agreements, particularly in venture-funded companies. These rights are recognized under the Companies Act, 2013, but they must be carefully aligned with the company’s Articles of Association to be enforceable. 

Indian courts generally uphold such clauses, provided the process, notice period, and pricing mechanism are clearly drafted.

ROFO in the US and the UK

In the US and UK, ROFO clauses are not only used in private company share transfers but also widely in private equity deals, joint ventures, and real estate transactions. They often appear alongside ROFR clauses, giving investors layered protections. Courts in these jurisdictions tend to enforce ROFOs strictly, but only if the timelines, valuation method, and obligations are clearly defined. Any ambiguity can render the clause unenforceable or lead to disputes.

Frequently Asked Questions (FAQs)

1. What is ROFO in simple terms?

The Right of First Offer (ROFO) is a contractual clause that gives existing shareholders the first opportunity to purchase shares whenever another shareholder decides to sell. This means before approaching outside buyers, the seller must first give current investors a chance to buy at a proposed price and terms.

2. Is ROFO good for shareholders?

Yes. A ROFO can be very beneficial for shareholders because it allows them to increase their stake, avoid dilution, and protect the ownership structure by keeping unwanted third parties out. 

3. What is the difference between ROFO and ROFR?

• ROFO (Right of First Offer): Shareholders get the first opportunity to buy shares before they are offered to outsiders. The seller sets the price and terms, and if shareholders decline, the seller can approach external buyers.
  
• ROFR (Right of First Refusal): Shareholders get the last opportunity to buy shares. The seller can first negotiate with an outside buyer, but before finalizing, must offer the same terms to existing shareholders, who can then choose to match the offer.