When it comes to shareholder agreements, one provision that often crops up is the „right of first refusal“ clause. This clause is designed to protect existing shareholders from dilution and to give them the opportunity to maintain their percentage ownership in the company in case of new share issuances or transfers.
The right of first refusal clause is essentially a contractual agreement that grants existing shareholders the right to purchase any shares that a shareholder wishes to sell. This means that if a shareholder wants to sell their shares to a third party, they must first offer them to the other shareholders at a price and on terms no less favorable than what the third party is offering to pay.
This provision is particularly important for startups and small businesses, where every share counts and a dilution could potentially harm the existing shareholders` interests. The right of first refusal clause ensures that shareholders have a say in any major changes to the company`s ownership structure and can maintain their control over the company.
The right of first refusal clause is typically included in shareholder agreements at the time of incorporation or during a subsequent equity financing round. It is important to note that this clause can be a double-edged sword – while it protects existing shareholders, it can also be a barrier to attracting new investors who may not want to be subject to these restrictions.
Therefore, it is essential that companies carefully consider the impact of the right of first refusal clause on their future financing and investment goals before including it in their shareholder agreement. For instance, a company that plans to raise capital through subsequent equity offerings must ensure that potential investors are comfortable with the restrictions created by the right of first refusal clause.
In conclusion, the right of first refusal clause is an important provision in shareholder agreements that protects existing shareholders from dilution and promotes stability and control in the company`s ownership structure. However, it should be used judiciously and with an eye towards the company`s future financing and investment needs.