What is a right of first refusal?

A shareholder's right of first refusal becomes relevant when another owner / shareholder wants to sell his shares to another party. A 'first right of refusal' is also called a 'pre-emptive right' or 'right of pre-emption'.

It is very important to have a really kick ass (good) ‘first right of refusal’ clause in your Shareholder Agreement. We have a very clear and obvious first right of refusal in our Simple Shareholder Agreement at Clause 14.

Why (I can hear you ask)? Because the first right of refusal means that any owner that wants to leave the business or shareholder that wants to sell its shares has to first offer those shares to the other existing owners / shareholders (usually this will be at the same price offered to the proposd buyer of shares). The existing owners then usually have a period of time (say 30 days) to accept or reject the offer to buy the shares. If they accept - then the sale of the shares to the existing shareholders go ahead. If they refuse - then the exiting owner is free to sell his shares to another party.

Think of it this way - if there was no right of first refusal, then any shareholder could sell its shares to absolutely anyone (pretty much without warning), and suddenly the other owners are stuck with a strange co-owner that they know nothing about. This is especially important if a majority shareholder sells its shares.

What do you think? Is it fair to have first rights of refusal in Shareholder Agreements? I'm keen to hear your thoughts in the comments.