Right Of First Refusal

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What is a 'Right Of First Refusal'

A right of first refusal is a contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can. Since an entity with the right of first refusal has the right, but not the obligation, to enter into a transaction that generally involves an asset, it is akin to a having a call option on the asset. If the entity with the right of first refusal declines to enter into a transaction, the owner of the asset is free to open the bidding up to other interested parties.

BREAKING DOWN 'Right Of First Refusal'

A right of first refusal is usually negotiated by a party when it wants to see how a business will turn out. The party may therefore prefer to hold the option to get involved at a later point, rather than make the outlay and commitment upfront.

In the business world, rights of first refusal are commonly seen in joint venture situations. The partners in a joint venture generally possess the right of first refusal on buying out the stakes held by other partners, should the latter wish to leave the joint venture.

Rights of first refusal are a common feature in many other areas, from real estate to sports and entertainment. For example, a publishing house may ask for the right of first refusal on future books by a relatively new author.

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