Rights of First Refusal

Right of First Refusal in Family Businesses, Small Business and Florida Companies

In a small or family business, the owners, members or partners often have a written agreement in place that restricts the transfer of the owners’ interests to outsiders. This makes sense: nobody wants to be forced to be partners in a small business with a perfect stranger. It can lead to disputes and litigation.

One way to restrict the transfer of shares is to provide for the automatic repurchase of the shares from a departing owner. The owners or the business itself may repurchase the shares. The repurchase agreement may provide for a set price or a method for calculating a price.

Another way to protect the business is to permanently restrict their transfer. For example, it may be permissible only to transfer shares to a surviving spouse or to the remaining owners of the business.

A third way to protect the business is to require an owner who wishes to sell his shares on the open market to first offer to sell them to the existing owners of the business. This is called the owners’ “right of first refusal.” A right of first refusal may include a pre-agreed sale price. Alternatively, it may merely give the co-owners a chance to match the best offer made by an outside bidder.

Rights of first refusal have real consequences. The existence of a right of first refusal may discourage any potential

buyers from bidding on the shares in the first place, because of the very real chance that the bid will simply be matched and dishonored. No serious, arms-length buyer of the shares would want to be used in this way. This means that a right of first refusal can seriously impair the value of the shares. Ultimately, that means that a right of first refusal generally discourages a co-owner of a small business from leaving in the first place.

One final note about rights of first refusal under Florida law. Rights of first refusal are not just for a business owner, or employee, or highly compensated executive. Rights of first refusal are common in Florida real estate contracts and real estate litigation in Florida. If you have a right of first refusal, what other terms are present which trigger that right? How long do you have to exercise, or not exercise, that right of first refusal. When a right of first refusal is offered in a Florida real estate contract or deal, that right becomes an option to buy. Will you be ready with a Florida business lawyer or a Florida real estate litigator?