When you launch a company, every share matters. The people who hold those shares have a say in how your business grows, who comes on board, and what direction it takes. That’s why many founders include a right of first refusal clause in their shareholders’ agreement or Articles of Association. It’s a practical way to keep control of your ownership structure as the company develops and attracts new investors.
This article explains what the right of first refusal clause means, why it matters for startups, how it works in practice, and what to look out for when drafting one under the law of England and Wales.
What Is the Right of First Refusal?
The right of first refusal (often shortened to “ROFR”) gives existing shareholders the opportunity to buy shares before they are offered to an external buyer. In simple terms, if a shareholder wishes to sell their shares, they must first offer them to the other shareholders (usually in proportion to their current holdings) on the same terms as the proposed sale to a third party.
If none of the existing shareholders wish to buy, the seller is then free to sell their shares to an outsider, typically on the same terms that were offered internally. For early-stage businesses, this type of clause can help keep the group of shareholders stable and committed.
Why Is Right of First Refusal So Important for Startups?
The right of first refusal is important for startups because it helps founders and early investors stay in control of the company’s direction. It’s an important safeguard that helps you:
Maintain control over ownership
Without this clause, any shareholder could sell their shares to a third party, potentially bringing in someone who doesn’t share your company’s goals or values. A right of first refusal lets you decide who joins the ownership structure and who does not.
Protect investor confidence
Investors usually want to preserve their level of influence and voting power. A right of first refusal allows them to maintain their percentage shareholding, protecting their position as the business grows.
Reduce disputes
A clear clause makes it much easier to manage share sales and avoid confusion. It sets out who has the right to buy, how long they have to decide, and what happens if no one accepts the offer.
Support long-term stability
A predictable ownership structure gives confidence to employees, partners, and future investors. It shows that your company takes governance seriously and has considered how to manage changes in ownership fairly.
How the Right of First Refusal Works
A right of first refusal clause usually follows a clear and defined process. When a shareholder decides to sell their shares, they must first notify the company and other shareholders of the offer, including the number of shares, the proposed buyer, and the price.
The other shareholders then have a specific period (commonly between 14 and 30 days) to decide whether they wish to buy the shares. If several shareholders are interested, the shares are usually divided between them in proportion to their current holdings.
If none of the existing shareholders accept the offer within the set period, the selling shareholder is free to sell their shares to the external buyer, but only on the same terms as those originally offered. This keeps the process transparent and prevents shareholders from sidestepping the agreement by selling to outsiders on more favourable terms.
How It Differs from a Pre-emption Right
The right of first refusal is not the same as a pre-emption right, although both are common in shareholder agreements.
A pre-emption right applies when new shares are issued by the company. It gives existing shareholders the first opportunity to buy new shares in proportion to their current holdings, protecting them from dilution.
The right of first refusal, on the other hand, applies to existing shares being sold or transferred by current shareholders. It prevents new investors from entering the business without giving current shareholders the chance to buy those shares first.
Startups usually benefit from having both clauses in place: pre-emption rights to protect against dilution, and a right of first refusal to control ownership transfers.
How to Draft an Effective ROFR Clause
Not every right of first refusal clause is written in the same way. You should think about how your company operates and what kind of flexibility you might need. Here are some things to consider:
Scope and Coverage
You should decide whether the clause applies only to direct share sales or also to transfers, such as when a shareholder wants to move shares to a family member or holding company.
Time Limits and Procedures
You should set clear deadlines for each stage of the process so that share sales don’t drag on. Your clause should specify exactly when notice must be given, how long shareholders have to respond, and how completion should take place.
Price and Valuation
If there’s no external offer to base the price on, you should include a method for valuing the shares. Many companies specify a fair market value agreed between the parties or determined by an independent valuer.
Notice Requirements
Your clause should say how and when notices must be served, and what information must be included. This avoids arguments about whether a valid offer has been made.
Waivers and Flexibility
There may be situations where the shareholders agree to waive their right of first refusal, such as when bringing in a strategic investor. The clause should allow this by written agreement to avoid unnecessary barriers to future investment.
Balancing Flexibility and Control
As your business grows, you may want to adjust your right of first refusal clause to make it more flexible. For example, you might allow certain share transfers between founders or within a corporate group without triggering the clause.
You should also review the clause before each funding round. Venture capital and angel investors sometimes ask for exemptions so that they can sell their shares more freely in the future. Balancing founder control with investor expectations is an important part of long-term growth planning.
Why You Should Use a Solicitor
You should not rely on a generic template or copy clauses from another company’s documents. A solicitor who specialises in startup and shareholder law can modify the right of first refusal clause to your specific circumstances. They can make sure it fits correctly with your Articles of Association, shareholders’ agreement, and any investor documentation.
Legal advice at this stage saves time and money later, particularly if your company grows quickly or attracts investment. It gives you a clear, workable process for share transfers and protects both the founders and the investors.
Speak to JPP Law
At JPP Law, our commercial solicitors help startups and growing companies across England and Wales with shareholder agreements, investment documentation, and company governance. We can draft or review your right of first refusal clause to make sure it reflects your business goals and offers the right balance between control and flexibility.
If you are setting up a company or reviewing your shareholder arrangements, contact JPP Law today to speak with an experienced solicitor about your options.
