Right of First Refusal (ROFR)

## What it is A Right of First Refusal is a contractual right giving existing shareholders the first opportunity to buy shares that another shareholder wants to sell — on the same terms offered by an outside buyer. The seller must first take the third party's bona fide offer to the ROFR holders; only if they decline to match can the shares go to the outsider. It is a control mechanism to keep ownership within a known group.

## ROFR vs ROFO A close cousin is the Right of First Offer (ROFO), where the selling shareholder must first *offer* the shares to insiders before shopping them externally — the insiders get the first chance to name a price. The practical difference: under ROFR the insider reacts to an external offer; under ROFO the insider acts first. ROFR is generally more seller-restrictive because it can deter outside bidders who fear being used merely to set a price the insiders then match.

## Where it appears in India ROFR clauses are standard in shareholders' agreements (SHAs) of private and startup companies, in joint ventures, and in promoter/PE arrangements. They sit alongside related transfer-control clauses — tag-along (co-sale), drag-along, and lock-in rights — that together govern how and to whom shares can move. They are especially common where founders, VCs and strategic investors want to prevent stakes drifting to unwanted parties or competitors.

For listed companies, ROFRs among promoters must be read against SEBI's Takeover (SAST) Regulations and open-offer triggers, since enforced transfers can have public-market consequences. ROFR clauses are generally enforceable in India provided they don't violate the company's articles or the Companies Act's free-transferability principle for public companies (they apply most cleanly to private companies, where transfer restrictions are permitted).

## Why it matters to investors - For founders and VCs, ROFR preserves cap-table control and prevents surprise entrants. - For a selling shareholder, it can slow down or chill an exit, because outside buyers may hesitate to invest diligence effort knowing insiders can swoop in and match. - In secondary sales of startup shares, ROFR is often the first hurdle — the seller must clear the insiders before completing a transfer.

Bottom line: ROFR is a shareholder-protection and control tool that keeps ownership within a trusted circle, but it can complicate and delay exits — so read the SHA carefully before assuming you can freely sell.