The right of first refusal is an important legal protection that allows business owners to protect their financial and ownership interests in a company. It allows a business to purchase stock from an employee or owner before that stock is sold to an external purchaser or outside party. This, in turn, allows the business owners to retain their control of the company by preventing an outside purchaser from obtaining voting rights or an equity stake in the business.
The right of first refusal can be exercised after the seller has already solicited an offer from an outside purchaser. It can also be exercised as a “right of first offer,” in which the company has the right to make a purchase offer before the seller solicits an offer from an outside purchaser. The specific terms and conditions of a company’s right of first refusal should be clearly stated in writing in official company ownership documents between the company and its shareholders, employees, or founders.
LLC and Operating Agreements
A limited liability company is created by filing the required organization documents with the Secretary of State. The Operating Agreement is a formal document that outlines exactly how the business will be structured and managed. It can also include provisions that protect the LLC’s membership interests by providing the Company and members a right of first refusal. The Operating Agreement can specify what types of sales are subject to the company’s right of first refusal, when such offers will be made, and what owners or corporate officers are authorized to extend a purchase offer on behalf of the company to exercise a right of first refusal.
Corporations and Stock Purchase Agreements
Corporations can also protect their ownership rights by creating and exercising a right of first refusal. Here, too, the company should clearly document the terms and conditions of this right in the company’s share or stock purchase documents, charter, or other key corporate documents such as a Shareholder’s Agreement. Corporations often have a more complex ownership and management structure than LLCs. Because of this, this right of first refusal can also be more complicated. The right of first refusal should be as specific as possible in the appropriate company corporate documents – specifically, it should clearly outline the rights and responsibilities that owners, corporate officers, managers, other shareholders, and the Board of Directors will have with regards to the right of first refusal, including valuation and appraisal of the stock or shares.
The right of first refusal can also trigger compliance obligations for corporations. Stock is a security, and as such, it is regulated by the Securities and Exchange Commission. Be sure to consult with a business attorney about your SEC or state securities (blue sky) obligations. These can be far more complicated than simply filing required documents with the SEC after a sale has been completed. Federal regulations might also restrict the timing and amount of a sale. Failure to meet these obligations could lead to civil liability or administrative sanctions. Individual owners could even face criminal liability in situations of fraud or concealment. A business attorney can prevent all sorts of legal problems by drafting corporate documents that properly establish your company’s right of first refusal.
Call Us Today to Discuss Your Situation with a Silicon Valley Business Attorney
The right of first refusal can protect a company’s financial and ownership rights, but it can also lead to legal liability or internal conflict if it is not established or exercised properly. For this reason, it is important to work with a Silicon Valley business lawyer at all stages of your stock repurchase transactions. The experienced attorneys at Structure Law Group can help your business enact effective policies to structure and protect your right of first refusal. Call (408) 441-7500 or visit our website to schedule a consultation.