In South African private joint venture transactions, it is common to incorporate clauses in the Memorandum of Incorporation (MOI) or Shareholders Agreement (SHA) that restrict a shareholder's ability to sell its shares and loan accounts to a third party (the Selling Shareholder). One key concern for shareholders is controlling the transfer of shares to unknown or undesirable persons, while still maintaining liquidity in their shares.
Typically, these agreements include a pre-emptive rights clause encompassing a Right of First Refusal (ROFR) and/or a Right of First Offer (ROFO).
A ROFR allows non-selling shareholders to either accept or refuse an offer from the Selling Shareholder on the same terms as presented to the Selling Shareholder by a third party.
Conversely, a ROFO grants the non-selling shareholders the right to be offered the shares before any external solicitation takes place, with any third-party offers thereafter being solicited on terms similar to those presented to the non-selling shareholders.
ROFR and ROFOs serve various purposes for shareholders, such as preserving control, safeguarding investment value, aligning interests, fostering partnerships, and enhancing exit strategies.
There are pros and cons to both ROFR and ROFO clauses; however, the utilization of ROFOs has gained popularity in M&A in that it gives the non-selling shareholders “first-mover advantage”.
It is therefore important that pre-emptive rights clauses are tailored to the specific needs of the Company and all its shareholders.