What is a right of first refusal

The right of first refusal applies in many situations. In fact, it is often included in the articles of association governing the operation of public and private limited companies, as well as in housing rental contracts and leases in general. Here we are going to explain in depth the meaning of pre-emptive acquisition and everything it entails.

What is the right of first refusal?

The right of pre-emptive acquisition refers to the right of a certain person to purchase a property, a package of shares or any other property under certain circumstances. It usually occurs in these circumstances:

• Public and private limited companies: these types of companies are usually divided into shareholdings or packages of shares among their different partners. It may be the case that one of them wants to sell his shares to a third party. In this case, the clause limiting the transferability of these shares or holdings will come into play, giving preference to the purchase option held by the other shareholders. They will be able to acquire them as long as they match the price offered by the third party interested in the purchase.
• In residential rental contracts: the meaning of preferential in the real estate sector is not very different. For example, imagine the case in which your landlord informs you of the termination of the rental contract that he has with you as tenant because he wants to buy the property. In this case, he will have to inform you of the offer he has made and give you the right to match it and keep the property.

It should be noted that under no circumstances can the owner of a shareholding in a company, or the owner of a rented property, sell his property to a third party without giving the shareholders or the tenant the right to match the offer, i.e. the purchase price, and keep it for himself.

So what is preferential?

We assume that the answer to the question of what is preferential is already emerging. Specifically, it refers to the situation whereby the person selling his shares or property has to 'prefer' his fellow shareholders or his tenant to a third party in the event that the purchase price is equal. It can also be made to the company on an ancillary basis.

Subsidiary character definition

To find the definition of subsidiary nature, the definition relating to the right to acquire property on a pre-emptive basis, we must go a little further. In particular, this is a term that can only be found in the articles of association of a company.

As mentioned above, a shareholder who wants to sell his shareholding to a third party must grant the right of first refusal to his fellow shareholders. If any of them matches the offer, he can keep the shares. But it may also be the case that the shareholder sells his shares to the company itself. This is what would give the subsidiary character to the other partners.

The pros and cons of pre-emptive acquisition rights

This right creates an interesting paradox. On the one hand, it gives owners the certainty that if they wish to sell their property, whether in the form of real estate or a share package, they can do so whenever they wish, since the only way for any of the other partners or the tenant to avoid doing so is to make the acquisition themselves. On the other hand, it reduces the value of such property. The reason? Few real buyers are interested in this option as they know that it is unlikely that the other partners or the tenant will pass up the opportunity to match their offer unless it is exorbitant or out of market.

The result is that, generally, both the shares and the rented properties subject to the preferential right of acquisition have a lower value than those not subject to the preferential right of acquisition.

In the case of companies, the reason why this right is still included in the articles of association is quite simple. It is to maintain the governance structure of the company and to prevent the entry of external partners when this is not desired. This usually means that the buyer interested in the shareholding package has to negotiate with all the shareholders even though he is only going to buy the share of one of them.

This is different in the case of rented properties, as this right is inherent in the tenant's relationship with the landlord for as long as the rental contract is in force.

The need for a pre-emptive right of acquisition in commercial companies

There are companies that do not have any clauses in their articles of association that regulate this type of right. This is not very common, as companies even try to regulate sales prices through these clauses. However, they do exist. But how do shareholders sell their shares in such cases?

In order to do so, it is necessary to obtain authorisation from the other shareholders. They must give their consent so that the person interested in selling can carry out the operation. And, if this is not given, a serious problem can arise. Our experience tells us that this is a much more costly and complex process and that, for this reason, the formula of the preferential right of acquisition is more interesting.

Moreover, it should be remembered that the right of first refusal is considered as a subjective right. This means that, in order to be modified or removed from a company's articles of association, it is necessary for each and every partner to agree to it.

In short, we hope that we have helped you to clarify your perspective on the right of first refusal, to find out whether it is really in the best interest of your company and to learn about the process you should follow if you want to sell your shareholding in a company.