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5 Case studies of successful and unsuccessful rights of first refusal

Introduction

The right of first refusal is a legal contract clause that allows a person or corporation to purchase property before it is offered to others. An individual or organisation has the right to first refusal and is usually granted a certain amount of time to make a buying decision.

The right of first refusal may be useful for protecting property interests, but it is not without hazards. In rare situations, a person or corporation with first refusal may be unable to raise the required finances to acquire the property, putting them at a disadvantage. Furthermore, the right of first refusal may bind the property, prohibiting the owner from selling it to another party.

Before entering into a contract with a right of first refusal, there are many considerations. The post will examine five case studies of the successful and failed use of first-refusal rights in India.

Let us first study the right of first refusal.

What exactly is the right of the first refusal agreement?

A contract between two parties in which the second party (Holder) has the contractual first right or first chance (Granter) to accept or refuse an offer is known as a right of first refusal. The second party is under no obligation to accept the offer. The right of first refusal is a very wide and frequent contract clause. The clause binds both parties legally.

Every investor and partner has the right to first refusal. Agree on an all-inclusive and comprehensive right of refusal clause, contracts such as Share Purchase Agreements, Franchise Agreements, Lease Agreements, and so on. This clause grants the parties specific authority and rights.

Problems with right of first refusal 

There are various issues with the right of refusal. One of the most prevalent issues is that it might cause a property’s sale to be delayed. It might cause the transaction to be delayed by many weeks or even months. If the owner intends to sell the property, the renter must be notified and given a chance to acquire the property.

Another issue with the right of first refusal is its difficulty to enforce. The owner must locate another buyer if the renter does not want to buy the property. This might be challenging, particularly if the market has shifted since the first offer.

Finally, the owner may be burdened by the right of refusal. If the owner wishes to sell the property, they must first tell the renter and provide them with the opportunity to acquire it. It may be a time-consuming and expensive procedure.

Understanding the simple right of first refusal agreement

The contractual right, but not a responsibility, to engage in a commercial right of first refusal agreement with a person or firm before anybody else.

Grantor and Holder are the parties involved. Grantor owns an asset that Holder may choose to acquire at a later date.

When a third party approaches the Grantor for the Asset, the Grantor must first make an offer to the Holder for the same price and conditions.

  • Characteristics of the right of first refusal:
  • Contractual Authority
  • There is no obligation.
  • Investor / Partner’s Rights
  • Upcoming Transactions
  • Opportunity

5 Case studies of successful and unsuccessful use of rights of first refusal:

1. A successful case study of the right of refusal

The Indian government was trying to sell its ownership in several state-owned enterprises in 2009. Bharat Heavy Electricals Limited (BHEL), a major engineering and manufacturing firm, was one of these firms.

The government solicited offers for its share in BHEL, and many private firms indicated interest. On the other hand, the government was adamant about avoiding selling its interest to a private corporation.

Instead, the government chose to provide BHEL workers with the right of first refusal at stake. Employees will be given the first option to buy the government’s interest in the firm under the terms of the offer.

Employees were pleased with the offer and many filed for the right of first refusal. The government finally sold its interest in BHEL to workers for Rs. 1, demolished the business, and dispersed the assets among the workforce.

2. An example of a failed case study of the right of first refusal

The Indian government chose to sell its interest in Videsh Sanchar Nigam Limited (VSNL), a state-owned telecommunications corporation, in 2006.

The administration extended an invitation. In this instance, the government granted VSNL workers the right of refusal. However, the workers could not raise the sums required to acquire the government’s interest. Consequently, the government was compelled to sell its interest to a private corporation for far less than it had intended.

3. A successful case study of the right to first refusal

The Indian government sold its share in Hindustan Zinc Limited (HZL), a state-owned mining and metals firm, in 2003.

The government requested offers for its holding in HZL, and many private corporations responded. On the other hand, the government was adamant about avoiding selling its interest to a private corporation.

Instead, the government opted to provide HZL workers with a right of first refusal on the stake. Employees will be given the first option to buy the government’s interest in the firm under the terms of the offer.

Employees were pleased with the offer and many filed for the right of first refusal. After selling its interest in HZL to workers for Rs. 1, the government liquidated the enterprise.

4. An example of a failed case study of the right of first refusal

The Indian government chose to sell its parts to Air India, the country’s state-owned airline, in 2001.

The government solicited offers for its holding in Air India, and many private firms indicated interest. On the other hand, the government was adamant about avoiding selling its interest to a private corporation.

Instead, the government opted to provide a right of first refusal to Air India personnel. Employees will be given the first option to buy the government’s interest in the firm under the terms of the offer.

Employees were not pleased with the offer, and just a few sought the right of first refusal. The government subsequently sold its ownership of Air India to a private business for far less than it had intended.

5. A successful case study of the right to first refusal

The Indian government sold its interest in Bharat Earth Movers Limited (BEML), a state-owned engineering and manufacturing firm, in 1997.

The government solicited offers for its holding in BEML, and many private firms indicated interest. On the other hand, the government was adamant about avoiding selling its interest to a private corporation. Instead, the government opted to provide BEML workers with the right of first refusal at stake. Employees will be given the first option to buy the government’s interest in the firm under the terms of the offer.

Employees were pleased with the offer and many filed for the right of first refusal. The government finally sold its interest in BEML to workers for Rs. 1, demolished the firm and dispersed its assets among its employees.

Bottom Line

Any investor who takes the risk of investing will require certain rights in their favour to have a fool-proof guarantee of the protection of their hard-earned money. When negotiating a shareholders’ right of first refusal agreement between an investor and the company’s founders or promoters, the Right of First Refusal is one of the most basic rights. ROFR permits investors to conditionally prevent the firm’s promoters from selling shares to a third party.