What Is A Right Of First Refusal?

A Right of First Refusal (often shortened to ROFR) is a simple but powerful clause that can shape how an opportunity is bought or sold. In plain English, it gives one party the first chance to accept or match an offer before the owner can sell or grant that opportunity to someone else.

In Australia, you’ll see ROFRs come up in a range of deals - from share transfers in private companies to commercial leases and distribution or IP licensing arrangements. If you’re building or buying a business, they can be a smart way to protect your position, manage risk and keep strategic control.

In this guide, we’ll break down how ROFRs work, where they’re used, what to watch out for, and how to put one in place the right way.

How Does A Right Of First Refusal Work In Australia?

A Right of First Refusal is a contractual promise. One party (the grantor) agrees that before they accept a third-party offer for a defined opportunity, they must first offer that opportunity to a specified party (the holder) on the same or pre-agreed terms.

Here’s the typical flow you’ll see in a well-drafted ROFR process:

• Trigger Event: Something happens that activates the ROFR - for example, the grantor receives a bona fide third-party offer to buy shares, purchase a business asset, or lease a premises.
• Notice: The grantor notifies the holder in writing, usually attaching the third-party offer or summarising all material terms (price, scope, conditions, timing).
• Election Period: The holder gets a fixed time (often 5-30 business days) to accept, match or decline the offer.
• Matching Terms: If the holder accepts, the parties proceed on the same terms as the third-party offer (or as otherwise set out in the ROFR clause).
• Free To Proceed: If the holder declines (or does not respond in time), the grantor may proceed with the third-party deal, usually within a set period and on terms no more favourable than those offered to the holder.

Getting the mechanics right matters. The clause should spell out exactly how notice is given, what must be disclosed, how long the holder has to decide, and what happens if the final third-party deal differs from what was offered to the holder.

It’s also common to include carve-outs (for example, transfers to affiliates, restructures or employee share schemes) so day-to-day moves aren’t blocked by the ROFR.

Where Do You Commonly See ROFRs?

Share Transfers In Private Companies

Founders and investors often want control over who can join their cap table. That’s why pre‑emption rights and ROFRs frequently sit in a Shareholders Agreement and sometimes in the company’s Company Constitution.

When a shareholder wants to sell, the ROFR requires them to offer those shares to existing holders first before selling to an outside buyer. If you’re mid-transaction, the sale terms will usually be set out in a Share Sale Agreement, which should align with any existing ROFR or pre‑emption process.

Business And Asset Sales

Businesses sometimes grant a buyer or partner a ROFR over future asset sales or business lines. This can lock in potential growth pathways while giving the owner flexibility to test the market. If you’re selling part or all of a business, make sure your ROFR provisions line up with the Business Sale Agreement you ultimately sign.

Commercial Leasing

Landlords and tenants may agree a ROFR over neighbouring space or future lease terms. For example, a tenant might get first dibs on an adjacent shop before the landlord leases it to someone else. If you’re negotiating a lease with this kind of clause, it’s wise to have the terms reviewed under a Commercial Lease Review so timelines, triggers and notice requirements are clear.

Supply, Distribution And IP Licensing

In commercial contracts, a ROFR can give a distributor first rights to new regions or product lines, or an existing licensee priority on renewed or expanded IP licences. When used this way, it should dovetail with the broader commercial terms in your Distribution Agreement or IP licence so obligations don’t clash.

ROFR Vs ROFO Vs Options: What’s The Difference?

It’s easy to mix these up, but they’re not the same.

• Right of First Refusal (ROFR): The owner can negotiate with third parties, but before accepting a third-party offer, they must first offer the same deal to the holder.
• Right of First Offer (ROFO): The owner must give the holder the opportunity to make an offer first, before negotiating with third parties. If they can’t agree, the owner can go to market (usually subject to parameters like a minimum price or time window).
• Option (Call/Put): An option is stronger - it gives the holder the right (but not the obligation) to buy (call option) or requires the owner to buy (put option) at a pre-agreed price or pricing formula within a set period. If you need that level of certainty, you might use an Option Deed instead of a ROFR.

Which one is “best” depends on your objectives. A ROFR preserves competitive tension (because the owner can still seek third-party offers), while a ROFO can be more collaborative and efficient. An option provides the greatest certainty but also the greatest commitment.

Key Clauses To Include In A ROFR

A clear, practical clause helps avoid disputes. Here are the essentials most Australian ROFRs should cover.

• Scope: Define exactly what the ROFR covers (specific shares, a particular property, identified product lines or territories) and what it does not cover.
• Trigger Events: Set out when the ROFR applies - receipt of a bona fide third‑party offer, an intention to sell, or the owner’s decision to grant a new licence.
• Notice Requirements: Specify what must be included (price, payment terms, conditions, completion timing) and how notice is given.
• Election Period: Provide a realistic window for the holder to respond - long enough to assess the deal, but short enough to keep momentum.
• Matching Mechanics: State whether the holder must “match” all terms or only price and material conditions, and how minor variations are handled.
• Due Diligence / Information Rights: If appropriate, allow reasonable access to information necessary to evaluate the offer, often paired with a Non-Disclosure Agreement.
• Third-Party Deal Window: If the holder declines, give the owner a set period to complete the third‑party transaction on terms no more favourable than those offered to the holder.
• Carve-Outs: Exclude transfers to related bodies corporate, internal restructures, employee equity plans or permitted small sales (if relevant).
• Valuation / Pricing: For complex assets, consider a valuation formula or independent expert determination if price is disputed.
• Remedies: Include consequences for breach (e.g. injunctive relief, specific performance, or a requirement that transfers in breach are void as between the parties).
• Assignment: Clarify whether the ROFR can be assigned to a buyer or a related party, or if it’s personal to the holder.
• Consistency: Ensure the ROFR is consistent with other documents (constitutions, shareholder agreements, leases, finance documents) so you don’t create contradictions.

Pros And Cons For Grantors And Holders

If You’re Granting A ROFR (The Owner)

• Pros: Keeps existing partners or tenants happy, maintains a relationship, and can still test the market to find true value before a deal is locked in.
• Cons: Can deter third parties (no one likes being a stalking horse), adds process time, and may constrain your deal-making flexibility.
• Tip: Use clear timelines and carve‑outs so you’re not unduly delayed when a genuine sale opportunity arises.

If You’re Receiving A ROFR (The Holder)

• Pros: Protects your strategic position, reduces competitive risk and gives you a fair chance to secure valuable opportunities on market‑tested terms.
• Cons: You may have to decide quickly and fund rapidly, and there’s no guarantee an opportunity will actually come up.
• Tip: Ask for reasonable disclosure and an election period that reflects the size and complexity of the deal you may have to match.

How To Put A ROFR In Place (Step-By-Step)

1) Decide Where The ROFR Belongs

Choose the right home for the clause based on the relationship:

• For founders and investors, use a Shareholders Agreement and align it with your Company Constitution.
• For early-stage negotiations, record the intention in a Heads Of Agreement and finalise it in the definitive contract.
• For commercial property, include it in the lease or as a side deed that is consistent with leasing terms.
• For supply or distribution, integrate it into the core commercial agreement so the scope is crystal clear.

2) Define The Scope And Triggers

Be specific about what the ROFR covers and when it activates. The more clarity you provide up front, the less chance of friction later.

3) Set Practical Timelines And Process

Balance speed and fairness. Short timelines can kill deals; long ones can stall them. Aim for a realistic window to review, decide and (if needed) complete due diligence.

4) Align With The Sale Document

If a sale is likely, ensure your ROFR aligns with the transaction contract - for example, a share transfer under a Share Sale Agreement or a whole‑business deal under a Business Sale Agreement.

5) Address Confidentiality And Information Sharing

If the holder needs information to make an informed choice, give reasonable access subject to confidentiality. A robust Non-Disclosure Agreement allows disclosure without jeopardising your competitive position.

6) Execute Properly And Keep Records

Once agreed, sign the clause as part of the relevant contract and keep your records organised. When the ROFR is triggered, follow the agreed notice process to the letter - dates, content and method all matter.

Common Pitfalls And How To Avoid Them

• Vague Scope: A ROFR that says “if we sell” without clear definitions creates room for dispute. Define the assets, shares or rights covered.
• Missing Notice Details: If the clause doesn’t say what must be disclosed, the holder may claim they weren’t given enough information. List the material terms that must be provided.
• Unrealistic Timings: Deadlines that are too short or too long can derail deals. Tailor timeframes to the likely size and complexity of your transaction.
• Price Gaps: If the final third‑party deal changes meaningfully from the terms offered to the holder, state what happens - a fresh ROFR, a price‑match mechanism, or a cap on favourable changes.
• No Carve‑Outs: Without exceptions, routine moves (like transfers to a wholly owned subsidiary or employee share plan) can require unnecessary process. Add sensible carve‑outs.
• Document Mismatch: Inconsistencies between your ROFR and other documents (constitution, finance covenants, leases) are common. Ensure your Company Constitution and Shareholders Agreement point in the same direction.
• Confidentiality Risks: Sharing deal terms widely can spook the market. Keep disclosure tight and protected by a Non-Disclosure Agreement.

FAQs: Practical Questions We’re Asked

Do I Need A ROFR Or Is A ROFO Enough?

If you want competitive tension and real market testing, a ROFR usually makes sense. If you prefer a quicker, collaborative process (with less risk of being a “stalking horse”), a ROFO may be better. For maximum certainty, consider an Option Deed.

Can A ROFR Scare Off Third-Party Buyers?

It can. Buyers may hesitate if they think their offer will just be matched. You can soften this by limiting the ROFR’s scope, setting short response timelines, and using carve‑outs where sensible.

Where Should We Put A ROFR In A Startup?

Most startups place pre‑emption and ROFR rights in a Shareholders Agreement and align them with the Company Constitution. If you’re mapping out deal basics first, a concise Heads Of Agreement can capture intent while you finalise the long-form contracts.

Key Takeaways

• A Right of First Refusal gives a party the first chance to match a deal before the owner proceeds with a third party - it’s a control and risk‑management tool used across shares, leases and commercial contracts.
• Clarity is everything: define scope, triggers, disclosure, timelines, matching mechanics, carve‑outs and remedies to avoid disputes.
• Choose the right structure: ROFR, ROFO or an option all serve different purposes - pick the one that fits your strategy and risk tolerance.
• Make sure your ROFR is consistent with related documents like your Shareholders Agreement, Company Constitution, leases and sale agreements.
• Handle information carefully: give the holder enough to decide, but protect confidentiality with a Non‑Disclosure Agreement.
• Getting the drafting right up front saves time, preserves relationships and reduces deal risk when an opportunity arises.

If you’d like help drafting or reviewing a Right of First Refusal for your Australian business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.