In a recent decision, the Israeli District Court ("Court") has clarified that the holder of a right of first refusal ("ROFR") is entitled, prior to exercising its right, to explore sale options for the shares it may acquire pursuant to exercise of a ROFR. The holder of a ROFR is even permitted, prior to exercise, to commit to sell shares that are the subject of the ROFR to a third party.
In the present case, each of Company A and Company B held fifty percent of the share capital of Company C. Company C's Articles of Association provided that each of Company A and Company B had a ROFR with respect to the other party's shares of Company C.
Company A and Company D entered into an agreement, pursuant to which Company A agreed to sell its shares to Company D, subject to Company B not exercising its ROFR.
Representatives of Company B and Company D met in order to explore the possibility of mutual cooperation. These meetings were unsuccessful.
Company B ultimately exercised its ROFR and purchased Company A's shares. Company B subsequently sold these shares to Company E, pursuant to an option to sell into which the parties had entered prior to Company B's exercise of its ROFR.
The plaintiff, Company D, did not dispute that in general, the holder of a ROFR has the right to sell shares that are the subject of the right. Rather, Company D objected to the timing of the sale, alleging that Company B had decided to sell, or had actually sold, the shares prior to the exercise of its ROFR.
The Court held against Company D, clarifying that preliminary contact with third parties prior to the exercise of a ROFR does not invalidate the exercise of the right. In the present case, Company B had acted in good faith during its exploratory meetings with Company D, and subsequently had entered into an agreement ensuring the economic viability of the exercise of its ROFR. The Court held that the actual sale of the shares had occurred following Company B's exercise of its ROFR and did not constitute a transfer of the ROFR.
In obiter, the Court stated that its decision would not have changed even had there been an agreement with Company E prior to the exercise of the ROFR obligating Company B to sell the shares. The ROFR was designed to protect shareholders by enabling them to block a sale to an undesirable third party; the intention was not to grant protections to third-party potential buyers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
