Corporate Structuring article – Part 1: Rights of First Refusal and Options

June 18, 2020
By Gerry Rogers and Rachel Dixon

This article constitutes the first in a series of articles which are intended to provide practical overviews of certain corporate structuring tools which provide protection and/or flexibility in transactions.  These may be useful to a foreign investor when entering the UAE market or the Middle East region in general.

Rights of First Refusal and Options


As a law firm we frequently advise overseas investors wishing to enter the UAE market (and the broader Middle East region).  Their aims are often achieved through incorporating a new entity in the UAE or establishing a relationship with an existing entity in the UAE.

The establishment of such relationship could be by way of acquisition of an interest in a company already operating in the UAE, or through a joint venture with that company.  The advantages of these strategies are that risks may be mitigated and, particularly for larger players, existing relationships can be leveraged, or new relationships established.

Rights of First Refusal of shares (ROFRs), and options to purchase or sell shares are concepts used by investors to provide flexibility and protection within the context of an acquisition or entry into a joint venture in the UAE, and also any subsequent withdrawal from such relationship.

Difference between a ROFR and an Option

We start with a simple explanation of these concepts and the differences between them.  The simplest way to distinguish a ROFR and an Option is to look at these in the context of a sale of shares:

  1. A ROFR is a right a person gives to another that if they decide to sell shares, then that other party will have the first right to buy them. The discretion to sell the shares vests with the seller – usually the owner.
  2. An Option on the other hand is a right a person gives to another to purchasethe shares within a certain timeframe. On granting the option the seller (usually the owner) loses the discretion of whether to sell or not – it passes to the third party and if the third party exercises the option, the seller is bound to dispose of the item to him.

An Option may also be used as part of an exit strategy whereby the shareholder has the option at a later date to sell its shares to another party.  In this case, on granting the option, if the shareholder exercises its option to sell its shares, then the other party is bound to purchase the shares.

Usefulness in a transaction

Options are of particular use when considering entry into the UAE by means of an acquisition or entry into a joint venture, including for the following reasons:

  1. It enables a foreign investor to “stagger” its investment to provide flexibility, and also to enable an overseas investor who may not be familiar to the jurisdiction to mitigate initial risks of entry;
  2. Such Option may be performance-linked, for example the consideration for an overseas investor’s Option could be based on a formula (often EBIT-based) meaning it will pay more in the context of a joint venture where the joint venture’s performance exceeds expectations. This may be of benefit to the local shareholder in this context;
  3. The right is an entitlement and not an obligation, so this provides flexibility in itself; and
  4. It may be used as a method of deferred payments in an acquisition, particularly effective when linked with a corporate structure where the shares can be pledged.

ROFRs are a useful method to both:

  1. Ensure that existing shareholders are protected from the entry into a company of a new shareholder; and
  2. Give the benefit to the existing shareholders of increasing their shareholdings proportionately on the exit of a shareholder. Please see below for the right under UAE law to a ROFR to shares (which may be disapplied).

How ROFRs and Options work

Options are generally set out in a shareholders’ agreement (or in a joint venture, the joint venture agreement).  These are contractual rights and so can generally be drafted with great flexibility.  If more certainty is desired beyond mere contractual rights, then there are further structuring solutions available within the UAE to ensure this.

Like in many jurisdictions, the entitlements to ROFRs are actually set out in the applicable UAE law.  If these are not required, then such pre-emption rights need to be disapplied.  In the UAE, care must be taken to ensure that such statutory obligations are effectively discharged, and there are structuring solutions to ensure this.