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Memo 1. Background & Aim of This Memo: For Discussion Purposes Only Suri & Company

The memo analyzes the right of first refusal (ROFR) which gives the holder the option to enter a business transaction with an asset owner according to specified terms before the owner can transact with a third party. While ROFR is a contract right, the holder's remedy for breach is typically limited to damages recovery. Further, ROFR with respect to company shares gives a non-selling shareholder preemptive rights to purchase shares a selling shareholder proposes to sell. However, ROFR has been viewed as hindering the principle of free share transferability in public companies laid out in Section 111-A of the Companies Act of 1956. Given this, the memo aims to analyze the enforceability of ROF

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Anshul Yadav
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60 views1 page

Memo 1. Background & Aim of This Memo: For Discussion Purposes Only Suri & Company

The memo analyzes the right of first refusal (ROFR) which gives the holder the option to enter a business transaction with an asset owner according to specified terms before the owner can transact with a third party. While ROFR is a contract right, the holder's remedy for breach is typically limited to damages recovery. Further, ROFR with respect to company shares gives a non-selling shareholder preemptive rights to purchase shares a selling shareholder proposes to sell. However, ROFR has been viewed as hindering the principle of free share transferability in public companies laid out in Section 111-A of the Companies Act of 1956. Given this, the memo aims to analyze the enforceability of ROF

Uploaded by

Anshul Yadav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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For discussion purposes only

Suri & Company


MEMO

1.

Background & Aim of this Memo


The aim of this memo is to analyze the current position of the clause Right of
First Refusal (ROFR) i.e. a contractual right that gives its holder the option to
enter a business transaction with the owner of something, according to specified
terms, before the owner is entitled to enter into that transaction with a third party.
As ROFR is a contract right, the holder's remedies for breach are typically limited
to recovery of damages. In other words, if the owner sells the asset to a third party
without offering the holder the opportunity to purchase it first, the holder can then
sue the owner for damages but may have a difficult time obtaining a court order to
stop or reverse the sale. However, in some cases the option becomes a property
right that may be used to invalidate an improper sale. Further, ROFR with respect
to shares of a company is a pre-emptive option of a non-selling shareholder to
purchase shares of a company that a selling shareholder proposes to sell. If the
non-selling shareholder refuses to purchase such shares, the selling shareholder
can sell the shares to a third party usually with a stipulation that the terms of such
sale and more importantly the sale price should not be more favorable than those
offered to the non-selling shareholder.
ROFR (among other shareholders rights such as right to first offer, tag along,
drag along), has however been viewed as a hindrance to the principle of free
transferability of shares of a public limited company laid down in Section 111-A
of the Companies Act, 1956 (Companies Act). Such pre-emptive rights, though
legally recognized in case of private limited companies, are highly debatable in
case of listed and unlisted public limited companies. Considering this, it becomes
imperative to analyze enforceability of ROFR in case of public limited companies
vis-a-vis Section 111-A.

2.

Legislative History
The original text of Section 111-A and the principle of free transferability was
imported in the Companies Act in September 1995 from Section 22-A of
Securities Contract Regulation Act, 1956 which now stands deleted. It has been

Private & Confidential

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