The importance of the “first right of refusal”

11 January 2024

A right of first refusal (ROFR) may be an important contractual tool that parties should consider before embarking upon a project to research or commercialise intellectual property (IP).

This is because it is difficult, at the start of such a project, to know exactly the outcome of that research, so the parties cannot price its value and agree any subsequent assignment or licence terms.

A first right of refusal provides the party who doesn’t own the IP (‘commercialisation partner‘) the first opportunity to negotiate the purchase or licence, and any terms, with the owner of that IP (‘IP owner‘).

Mahoneys has recently assisted several clients draft and enforce ROFR over important intellectual property, including:

  • a large industrial chemical supplier undertaking research to identify new methods of material re-purposing;
  • a specialist mining equipment design firm in its demerger and subsequent proposed sale to a large international mining firm.

Some of our tips for ensuring you get your ROFR right include:

  • obligate the IP owner not to offer the IP to a third party on better terms than was offered to the commercialisation partner;
  • place clear time limits on responses from the commercialization partner to exercise the ROFR;
  • make clear when the commercialisation partner has refused the ROFR, e.g. on elapsing of time;
  • protect against the commercialisation partner frustrating the arrangement between the third party offeree and the IP owner. For example an IP owner might require:

(a) payments up front instead of on deferred payment basis (especially if there is a level of distrust between the parties, or the IP owner has concerns about the commercialisation partner’s solvency);

(b) require the commercialisation partner to pay a non-refundable deposit to exercise the ROFR to discourage the commercialisation partner from using the due diligence process to draw out or interfere with the deal with the third party offeree. Ideally, any due diligence would be conducted under a separate agreement (e.g. a non-disclosure and due diligence deed), which would not need to be offered to the commercialisation partner;

  • consider whether security should be provided if the ROFR is exercised especially where the commercialisation partner is a corporate subsidiary of a larger corporate structure, which has no or little unencumbered value;
  • address how terms which clearly apply to the third party offeree, but would not apply to the commercialisation partner are to be dealt with;
  • be alive to how the IP owner could structure its deal with a third party in the future – for example, if a single corporate entity only holds the IP assets, the IP owner could seek to sell shares in that corporate entity, effectively giving control of the IP assets to the third party, without triggering the terms of the ROFR;
  • consider the extent to which variations to the terms agreed between the IP owner and third party require the IP owner to go through the ROFR process again (e.g. variation on price or royalty amount only etc.); and
  • consider whether key terms (such as royalty or purchase price) should be referred to an expert for determination if the parties can’t reach agreement (and then ensure those matters the expert must take into account are described).

Of course, generally, care should be taken to ensure the ROFR isn’t invalid under the doctrine of restraints, or a breach of Australia’s competition laws.

Feel free to contact Rhys Williamson or Antony Harrison if you need assistance with a ROFR.