Right of first refusal, co-sale and tag-along rights

By Simon Walker

These are contractual terms between shareholders that are usually included in the articles of association. If one shareholder wishes to dispose of shares that are subject to a right of first refusal (ROFR), it must first offer them to those other shareholders who have the benefit of the ROFR. There are usually certain exceptions to the ROFR, such as the right of individuals to transfer shares to close relatives and trusts and investors to transfer shares freely to third parties, each other or within an investor’s group. The requirement to go through an ROFR process may add several weeks to the timescale for selling shares.

If a shareholder wishes to dispose of shares that are the subject of a co-sale or tag-along right, the other shareholders who benefit from the right can insist that the potential purchaser agrees to purchase an equivalent percentage of their shares, at the same price and under the same terms and conditions. This may have the effect of making the shares more difficult to sell.

A venture capital investor’s decision to invest in a company is often based largely on the strength of the technical and management experience of the founders and management. It does not want these individuals to dispose of their shares in the company while it remains an investor. Consequently, investors frequently require an ROFR as well as co-sale/tag-along rights on any sale of shares by a founder or key managers. Indeed, they may sometimes require a prohibition on founders and key managers selling shares for a stated period…

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