DealLawyers.com Blog

OK, all those who’ve faced a sell side ROFR -and like it – raise your hands. My guess is that I won’t see many hands, and you certainly won’t see mine.

All to often, our clients are too willing to give ROFR to buy a business without truly understanding the negative effect it may have on the their ability to maximize value in a sale. I’m really thinking about those “Trojan Horse” ROFRs that innocuously appear in transactions like licensing, supply, outsourcing, or corporate VC-backed deals.

In my experience, ROFRs in the M&A context is a poster child for the Law of Unintended Consequences. Let’s say you want to sell the business that’s subject to a ROFR. So finding a stalking horse isn’t so tough because it’s done all the time in sales under Section 363 of the Bankruptcy Code?

Ive found it’s a little tougher outside of bankruptcy, especially if target’s distressed or not particularly a belle-of-the-ball. To begin with, it just isn’t that easy to find a buyer who’s willing to devote the time, money, and effort to give seller a written binding and unconditional offer – without demanding a huge breakup fee and open-ended expense reimbursement. (Of course, there’s always that famous “hello fee” that buyout funds get for taking a look at a deal).

If you’re under pressure to sell the company and timing’s critical, don’t be surprised if all you can get is an LOI that’s subject to gaping walk rights like due diligence, financing, and even, board and shareholder approval (notwithstanding the fact that buyer may be closely held and you’re dealing with the CEO who controls the vote!).

You next send it off to the holder of that ROFR. Did the lawyer who negotiated the ROFR in the context of that supply agreement bother to add simple things like a short time frame under which the ROFR holder (“ROFR’er”) has to take the deal or that the ROF’er had to match or top all the terms of the offer. Does the match have to be identical or can the ROFR’er play horseshoes? How much of a modification of the stalking horse offer will trigger a new ROFR period? I could go on but it’s only re-living past painful memories.

The worst part is that ROFR’er could “match” the bid but is only interested in driving away the stalking horse so ROFR’er could re-trade the deal as the sole bidder. Is the ROFR’er required by contract or common law to deal in good faith? So many questions, so few answers…

I don’t know about anyone else but if I’m on the potential sell-side, I always resist requests for ROFRs and try to educate the client to watch out for those “Trojan Horses.” If I have to give one, then it’s much better to give a right-of-first-offer. Of course, if I’m on the ROFR’er side, I like the leverage that a ROFR creates so I always think it’s an inifinitely reasonable request that, errrrr, “Ive never seen anyone have a problem with giving.”