外文翻译
RETHINKING RIGHTS OF FIRST REFUSAL
David I. Walker*
Among the many provisions of the incorporating documents of a close corporation, an item will often appear (usually well towards the back) labeled \of First Refusal.\ By adopting this provision, the shareholders of the corporation promise that they only will sell their shares after negotiating a price with a third party and offering the shares at that price to their fellow shareholders.
Although the details will vary, such rights of first refusal are ubiquitous in commercial contracts and encumber assets ranging from gas stations to oil pipelines, from shares
of stock to livestock; and they are not limited to constraining sales or even to restricting the disposition of property.
In the typical right of first refusal arrangement, at least three parties are implicated -- the owner and rightholder who have contracted for the grant of the right and one or more potential third-party buyers. This Article investigates the economic impact of the grant on each of these parties, and seeks to determine why the contracting parties make such commitments and why they adopt this particular instrument. This Article has three primary goals:
1. Demonstrate that rights of first refusal are costly for the contracting parties.
The few commentators who have considered the matter have suggested that rights of
first or, beyond transaction costs, simply transfer value from the refusal are economically innocuous grantor to the rightholder.
If, at worst, a right of first refusal simply transferred value between the contracting
parties, little justification would be needed for its adoption.
The transfer could be compensated for ex ante, if necessary, and the benefit beyond
transaction costs arising from the instrument would represent added value to be divided by the contracting parties.
My first goal, however, is to demonstrate that parties adopting rights of first refusal
incur more than dispute and negotiation costs. Rights of first refusal discourage potentially high-valuing third-party bidders from entering a contest to purchase, and thus the instrument reduces a seller!s expected realization. For this reason the right of first refusal proves to be costly for the contracting parties, in aggregate.
2. Rebut the idea that rights of first refusal provide efficient insurance against bargaining breakdown.
Although the right of first refusal is demonstrated to create a net cost for the contracting parties, the right does provide benefits. Several books and articles dealing with rights of first refusal in the close corporation context suggest that the device is used to assure compatible management, maintain family control, or otherwise protect the remaining shareholders from an interloper. The existence of such goals, however, explains only why an insider might value property, in this case shares, more highly than an outsider would; it does not explain why the encumbrance is necessary. Presumably, if the insider places the highest value on shares or other property, he will buy them when they are offered for sale. Underlying this rationale, then, must be a further argument about bargaining breakdown. Fully spelled out, the argument is that an insider may place a high idiosyncratic value on a property and that, absent the insurance provided by a right of first refusal, such value could be lost in a failed negotiation.
Although helpful, the bargaining-breakdown explanation is not fully persuasive. The second aim of this Article is to rebut this justification by demonstrating that equally effective insurance against bargaining breakdown can be provided at lower cost through an instrument that I call a commitment to auction.
3. Suggest that rights of first refusal are primarily motivated by a desire to inhibit exit.
Having rejected the bargaining-breakdown-insurance hypothesis as inadequate, my third goal is to develop alternative explanations for the persistence of rights of first refusal. I argue that most rights of first refusal spring from a desire not just to ensure that, if A sells, B gets an opportunity to purchase the property, but from a desire to inhibit A from selling in the first place. In other words, the selection of the right of first refusal over the commitment to auction must be explained by a desire to restrain alienability and preserve the status quo. Although credible in the context of close corporations and other co-venturing relationships, this justification does not make sense in all circumstances in which the right of first refusal is adopted. In contexts in
which inhibiting exit is an unpersuasive justification, however, the right of first refusal generally carries a lower incremental cost, and the instrument!s persistence may be partially explained by network externalities.
Part I describes the uses of rights of first refusal, their variations, and alternatives, as well as the assets typically encumbered and the participants usually involved. Because the terminology associated with these restrictive devices is not used consistently, one of the purposes of this Part is to closely identify the \right of first refusal that will be the focus of this Article.
Part II analyses the cost of the right of first refusal grant. In this Part, I argue that contracting parties who encumber assets with rights of first refusal reduce the expected gains of third parties considering bidding on the assets. This phenomenon, I argue, deters bidders and reduces the expected realization on the sale of such property.
Part III develops the bargaining-breakdown justification. I argue that the potential for high insider idiosyncratic value in relationships in which rights of first refusal are typically found make these relationships particularly susceptible to bargaining breakdown. This finding, however, only justifies the provision of some insurance; it does not necessarily support the creation of a right of first refusal. Accordingly, Part IV undercuts this justification as it demonstrates that the adoption of a commitment to auction the encumbered property provides the same insurance at a lower cost. Like a right of first refusal, a commitment to auction avoids the possibility of lost insider idiosyncratic value through failed negotiations, but third-party bidders and, thus, the expected realization on the sale of the property are not as adversely affected by the use of the auction device.
The close corporation model is the focus of Part V. There, I argue that co-venturers
often would wish to inhibit the exit of members as well as to veto new additions, and that the relatively harmless-looking right of first refusal has become the legally acceptable tool of choice for achieving this goal. Part VI, however, suggests that inhibition of exit does not adequately explain all rights of first refusal, and this Part develops other explanations, chiefly network externalities, to fill the gap. The implications of the analysis are briefly reviewed in Part VII. Given the presumption of efficient contracting in the private sector, the focus of this Part is on statutory grants of rights of first refusal.
1. A Typical Right of First Refusal.
The following arrangement is typical of the classic right of first refusal: The owner and
lessor of a property grants to the lessee a right to match the terms of and preempt any sale of the property negotiated between the owner and a potential third-party buyer during the term of the lease. This preemption right essentially allows the lessee to step into the shoes of the potential buyer and make the purchase. If, after receipt of notice and within a specified time, the lessee elects not to exercise the right, the owner and third-party buyer have a fixed term in which to execute the transaction. If the lessee elects not to exercise and, for some reason, the sale is not consummated with the third party or is not completed within the specified period, the right of first refusal is reactivated and the lessee must again be given notice and the right to preempt before the property may be sold. Because the right of first refusal could be circumvented by the owner!s negotiation of a swap of the property for a unique property owned by the third-party buyer, the contract providing the right of first refusal grant often will confine the owner to negotiating a sale for cash.
The right of first refusal device apparently serves two purposes. First, it provides
some security to the lessee. Although the sale of the property would not disrupt the lease, the lessee may care about the identity of his lessor. Under this arrangement, if the owner decides to sell, the lessee will at least be given the opportunity to purchase. Second, although the right of first refusal may restrict the owner, she is not locked in to ownership of the asset for the full term of the lease.
2. Diversity in Right of First Refusal Terms.
A“right of first refusal” is simply a fancy name for a small bundle of contract terms.
As such, the applications and variations of the right are seemingly infinite. In contrast to the grant of a right to purchase, the right of first refusal may be used to grant a preemptive right to sell, a right to lease, a right to employ, or a right to be employed. The right of first refusal may be granted for a limited duration, as in the right to preemptively purchase during the term of a lease, or, subject only to certain rules barring perpetuities, the right may be perpetual, as in the case of a shareholders' agreement that grants aclose corporation a right of first refusal on any sale of shares by the shareholders. Generally, the right of first refusal is granted as one element of a
larger transaction -- in my first example the right of first refusal was incidental to the lease of property. It is conceivable, however, that parties might contract solely for the grant of the right of first refusal.
3. Fixed Price Rights of First Refusal.
In my example involving the right of first refusal held by the lessee, the contract
specified that the right to preempt would be at the price negotiated between the owner and the third-party buyer. This, indeed, is the standard approach adopted by contracting parties, and it is an intuitively appealing arrangement, as the owner is required to develop an executable deal and the price is assumed to be at or near market. An alternative to this arrangement is the grant of a right of first refusal at a fixed price. Although rarely seen today, some contracts have specified that if the grantor chose to sell parcel X within a certain period, the grantee would have the right to purchase the parcel for $ Y.Because a parcel would undoubtedly be worth something other than $Y at the time a right is triggered, such a grant generally would either be worthless to the grantee (when the market price is below $ Y) or would prevent the grantor from selling or cause her considerable loss if forced to sell (when the market price is above $ Y). Thus, the rarity of this variation is not surprising.
4. Distinguishing Rights of First Refusal from Options
Although often associated with options, the right of first refusal is not a true option.
The holder of an option to purchase, for instance, has a unilateral right to trigger the purchase at the option price during the term of the option. The holder of the right of first refusal, by contrast, has only a contingent option. Contingent upon the grantor!s decision to sell, the right of first refusal grantee has an option to purchase.
5. Alternatives to the Right of First Refusal.
The right of first refusal is a means of dealing with foreseeable, but unpredictable,
changes in business relationships. The option, discussed above, is an alternative mechanism for managing a changeable environment, and the right of first offer is another. The right of first offer is essentially a right of first refusal in reverse. Its use can be demonstrated by substituting a right
优先购买权的再思考【外文翻译】
