When Rights of First Refusal Are a Bad Deal — HBS Working Knowledge

June 30th, 2008

HBS Working Knowledge newsletter has a Q&A with a Harvard professor who examined a specific kind of right of first refusal, where one party has the right to buy an asset at a fixed price, but can also swoop in if the asset is offered to a third party at a lower price.

The article explains that this works against the right holder, because it lets the seller tell the third party “buy at this (high) price or not at all.”

When Rights of First Refusal Are a Bad Deal — HBS Working Knowledge

The best part of the whole article is the answer to the question “why do people use these types of rights if they work out so badly for the right holder?”  The answer:

Contracts are big, complicated things with lots of clauses, some of which get exercised rarely if at all.

Words to live by for sure.

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