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Rights of First Refusal

Updated: Nov 11, 2023

A right of first refusal (sometimes a first right of refusal) is the right of someone to purchase something before anyone else. It is an opportunity or option to buy some property that someone else might want to buy.


In my practice, rights of first refusal generally arise in the corporate context. For example, shareholders of a close corporation might agree to a buy-sell or shareholder agreement. These routinely include a right of first refusal for either the business or the other owners when one owner decides to leave the business. You might also find a right of first refusal in the bylaws or company agreement.


They also arise in the context of real estate. Buyers might purchase a right of first refusal for property that is not on the market in the event the owner decides to sell. But they can arise in the context of the sale and purchase of just about any asset.


Rights of first refusal are usually limited in time. For businesses, this might be 60 to 90 days. They might also be limited in amount. For example, a retiring business owner might be required to sell the interest back to the business for a lesser amount.


These make a lot of sense in the business context. Perhaps an LLC has three members who all engage in management of the business. But one of the members decides to retire and sell her membership interest to his son. What if the remaining members don't like the son? Or what if they do, but they know he has little business experience? What if he would be taking over a majority interest in the LLC? They would essentially end up in a bidding war with the son.

If their LLC has a buy-sell agreement, then there is probably a right of first refusal for the company or the members, or one and then the other. If the LLC or the remaining members want the son involved, then they simply take no action. It's a right, an opportunity, not a requirement.


You can find these in various contexts in every state. And it’s generally a good idea in the context of business ownership.

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