Right of First Offer Clause
(Operating Agreement) (LLC)

Summary

This Right of First Offer Clause (Operating Agreement) (LLC) in an LLC operating agreement gives the holder of the right a first priority option to purchase the divesting member's membership interest when notified of his or her intention to sell. This clause includes practical guidance and drafting notes. The divesting member is free to accept or reject the first offer made by fellow members. If the divesting member rejects the offer from fellow members, the divesting member is then free to sell the membership interest to third parties. However, the divesting member is always free to later reoffer the membership interest to fellow members if no (or no better) third party offer is forthcoming. This contrasts with a right of first refusal (ROFR) which requires a member who intends on divesting some or all of his or her membership interest to have first received a bona fide offer from a third party and then present that offer to fellow members to match or refuse. Rights of first offer (ROFO) are to be contrasted with preemptive rights. Preemptive rights provide current members the opportunity to maintain their relative equity capital positions with respect to each other in any funding round in which the LLC seeks to raise additional equity capital. In this sense, a preemptive right is essentially ROFO, but with respect to new (not existing) equity capital. Without the preemptive right for current members, the LLC would be able to raise the new equity capital from third parties (who might, depending upon the terms of the operating agreement, also be admitted as new members). This would dilute the relative capital positions of the current members. Preemptive rights, therefore, provide anti-dilution protection for existing members. ROFO (i.e., in contrast with preemptive rights) focus on the potential sale of existing equity capital (not new equity capital) to current LLC members. Accordingly, ROFO do not have a dilutive effect. ROFO must be coordinated with any drag-along rights – generally, a sale of the equity of the majority membership interest holder(s) predicated on a planned change of control of the LLC. Pursuant to a drag-along right, the majority interest holder(s) can force the sale of the membership interests of all other members. A ROFO must also be coordinated with tag-along rights—generally, the right of the minority membership interest holder(s) to include themselves in the sale of the membership interest of the majority (as is typically the case) holder(s) and on identical terms. For a full listing of key content for in-house counsel and corporate secretaries when performing corporate functions, see In-House Corporate Secretary Resource Kit. For more resources on these various clauses, see Right of First Refusal Clause (Operating Agreement) (LLC), Drag-along Rights Clause (Operating Agreement) (LLC), and Preemptive Rights Clause (Operating Agreement) (LLC).