Publication -  פרסומים

Unrestricted Right to Exercise Right of First Refusal

November 5, 2014

In Dorlam Investments & Holdings (1999) LTD v Delek Real Estate LTD the Tel Aviv District Court discussed a shareholder exercising his right of first refusal (the “ROFR“) to purchase shares from a fellow shareholder while previously committing to sell those shares to an outside party.

The court analyzed the essence of the ROFR, and stated that the purpose of the ROFR is to safeguard the interests of the existing shareholders. The court added that the ROFR is intended to allow the shareholder holding the ROFR to choose his partners in the company, while the selling shareholder receives the same amount of money for his shares. In other words the right holder is allowed to prevent the sale of shares to a third party that he is not interested in partnering with, and instead find a different party that he is interested in working with.

Therefore, there is no limitation on exercising the ROFR, and agreeing in advance to sell the shares to an outside party. Similarly, it does not matter whether the right holder bought the shares with his own capital or bought them using credit and placing a lien on the purchased shares in favor of the creditor.

The exercise of the ROFR can be made without taking into account the interests of a third party wishing to acquire shares. If such third party wants to prevent exercise of the ROFR, it can simply give a high enough offer that will prevent the right holder from exercising his ROFR.

The court noted that one is prohibited from selling his ROFR without selling his shares (i.e. the ROFR is not a separate tradable right, but rather a right attached to the shares). Otherwise in a situation where a party will want to sell his shares he will be subject to the consent of the ROFR purchaser – who is not a shareholder and has no part in the company.

However this will not be the case with a company with only two shareholders. In that case there will be no prohibition on selling the ROFR without the shares attached to it because there is no fear that a third party would join the company without the consent of the remaining shareholder (who is in the seller of ROFR).

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