First-Purchase Rights: Rights of First Refusal and Rights of First Offer

American Law and Economics Review 12(2), pp. 331-337 (2012)

NYU Law and Economics Research Paper No. 07-42

35 Pages Posted: 13 Nov 2007 Last revised: 15 Jul 2013

See all articles by Marcel Kahan

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Shmuel Leshem

Independent

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Date Written: August 1, 2012

Abstract

This paper analyzes rights of first refusal and rights of first offer in a multiple-buyer, sequential bargaining setting. A right of first refusal entitles the right-holder to purchase a subject asset on the same terms as those accepted by a third party. A right of first offer requires a seller to first offer the right-holder to buy a subject asset and prohibits the seller from subsequently selling the asset to a third party on better terms than those offered to the right-holder.

We examine when and how such rights yield benefits to, or impose costs, on the right-holder and the seller. We show that a right of first refusal transfers value from other buyers to the right-holder, but may also force the seller to make suboptimal offers. A right of first offer induces the seller to lower his first-period offer, which will tend to increase the net surplus to the seller and right-holder, but also forces the seller to make suboptimal subsequent offers. We find conditions under which it is in the ex ante interest of the seller and the right-holder to contract for a right of first refusal or a right of first offer, respectively.

Suggested Citation

Kahan, Marcel and Leshem, Shmuel and Sundaram, Rangarajan K., First-Purchase Rights: Rights of First Refusal and Rights of First Offer (August 1, 2012). American Law and Economics Review 12(2), pp. 331-337 (2012); NYU Law and Economics Research Paper No. 07-42 . Available at SSRN: https://ssrn.com/abstract=1029313 or http://dx.doi.org/10.2139/ssrn.1029313

Marcel Kahan (Contact Author)

New York University School of Law ( email )

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European Corporate Governance Institute ( email )

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Shmuel Leshem

Independent ( email )

Los Angeles, CA

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

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