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Benyamin S. Ross, Mark H. Mixon Jr. and Reginald J. Glosson (l-r) Benyamin S. Ross, Mark H. Mixon Jr. and Reginald J. Glosson of Gibson, Dunn & Crutcher.

In the context of limited liability companies, a right of first refusal (ROFR) limits the ability of an equityholder to transfer equity to a third party without first offering other existing equityholders a right to match the third party’s offer. Occasionally, equityholders choose to bundle equity they propose to transfer to a third party with a number of other assets. Such bundling can impair rights of first refusal in at least two manners. First, bundling requires an allocation of value as between the equity subject to the ROFR and the other assets. If no allocation methodology is specified in the contract, then the transferring party could attempt to overallocate value to the equity subject to the ROFR. Although courts have historically been willing to reevaluate overallocation in light of the transferor’s ulterior incentives, see, e.g., Gleason v. Norwest Mortgage, 243 F.3d 130 (3d Cir. 2001) (remanding to district court for hearing and fact finding on the price of a bundle subject to a ROFR), uncertainty regarding a court’s re-allocation weighs heavily on a ROFR holder contemplating exercising such right. Second, by introducing both a potentially divisible bundle of assets and a delay mechanism through the allocation, bundling provides the transferring party with additional time to evaluate whether the ROFR holder will exercise its right or challenge the allocation; the transferring party may then choose to cancel the proposed sale in its entirety, or partially cancel the sale by coaxing the proposed third-party purchaser to exclude from their offer the assets not subject to the ROFR.

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