Right of First Refusal

A Right of First Refusal gives the entitled party the opportunity to acquire shares first before they are sold to third parties. If a shareholder wants to sell, they must first offer the shares to the entitled party. This allows existing owners to retain control over who enters the shareholder base.

It is usually structured so that the selling shareholder first obtains a binding third-party offer and then offers the shares to the other shareholders on exactly those terms. Only after an exercise period may the sale to the third party proceed. A related and more seller-friendly variant is the right of first offer, under which shares must first be offered internally and only then placed in the market, without requiring a third-party offer. The advantage is protecting the shareholder group against unwanted co-owners, particularly competitors. The disadvantage is equally clear: a right of first refusal reduces the number of serious interested parties, because a third party would have to incur considerable diligence costs without certainty of winning. Economically this depresses the achievable price.

Under the statutory German pre-emption right, a purchase agreement with a third party has already been concluded. Exercising the right creates a purchase agreement with the beneficiary on the agreed terms. To limit the deterrent effect on third-party buyers, exercise periods are usually kept to a few weeks. In Germany the right is regularly set out in the shareholders' agreement and additionally secured by a transfer restriction in the articles, because only the latter binds third parties.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.