A right of first refusal ("ROFR") is a contractual entitlement of a party to enter into a business transaction with the counterparty (to a contract) which such counterparty is desirous of executing with a third party. When tested on the principles of contract law in India, such contracts are held to be valid so long as the ROFR is exercised during the original or mutually extended term of the original contract between the parties which contains the ROFR clause. Any term of the contract which contains a negative covenant restricting freedom of trade, such as allowing exercise of the right under a ROFR Clause, beyond the terms of the contract would be in violation of Section 27 of the Indian Contract Act, 1872.1
Joint venture ("JV") agreements, otherwise, also referred to as shareholders agreements, contain terms primarily pertaining to management and governance rights, share transfer restrictions and exit rights.
A ROFR clause in such JV agreements entails that the exiting partner/shareholder must allow the remaining partners/shareholders to match the offer price received by the exiting partner from a third party to buy the offered shares of the exiting partner. The rationale behind the ROFR clause in JV agreements is to control and restrict who may become a shareholder in such JVs. In this piece, we shall take cue from certain cases which have dealt with ROFR clauses and discuss the legality of such clauses, their ingredients and guidelines for drafting of ROFR Clauses
Footnote
1 Percept D Mark (India) Pvt. Ltd. v. Zaheer Khan (2006) 4 SCC 227.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
