Sponsorship Agreements: Rights of First Negotiation (ROFNs) and Rights of Last Refusal (ROLR)

In a previous article, I discussed Rights of First Offer (ROFOs) and Why You Need Them in your sponsorship agreement if you are a sponsor.  But if you are not the sponsor and instead you are the event or other sponsorship rights-holder, the ROFO will limit competitive bidding for your valuable sponsorship rights and may therefore decrease your sponsorship revenue.

For this reason, if a sponsor seeks to include a ROFO in a sponsorship agreement, the event or other rights-holder should usually either (i) reject the ROFO or (ii) change it to a Right of First Negotiation (ROFN) or Right of Negotiation (RON).  The ROFN is the common middle road approach used in sponsorship agreements.

Below I discuss both the ROFN and the RON, as well as the Right of Last Refusal (ROLR), which is sometimes used in conjunction with the ROFN/RON.

  • Right of First Negotiation (ROFN).  The ROFN requires the grantor to first and exclusively negotiate with the sponsor for a thing (e.g., renewal of the sponsorship or new rights) for a defined time period before negotiating for the thing with any third party. The ROFN is only triggered if the grantor makes the thing available.  For example, if there is no event or no new sponsorship rights are made available during the ROFN period, then the ROFN does not come into effect and expires. The only obligation the ROFN typically imposes on the parties is to negotiate in good faith.  If the sponsor and the grantor fail to reach an agreement for the thing within the defined period, then the grantor is free to negotiate and enter into an agreement for the thing with any third party, assuming the sponsor does not have a Right of Last Refusal (ROLR) (described below).  Here is a sample sponsor-friendly ROFN clause that is derived from a deal I worked on:

“If the Company or any of its affiliates organizes an Event at any time in any part of the world during the 2-year period following the 2017 Event (the “Future Event“), Sponsor shall have the exclusive right of first negotiation to purchase the same rights granted under this Agreement for the Future Event. On the date that the Company makes the final decision to hold the Future Event, the Company shall give written notice to Sponsor that it will hold the Future Event. Beginning on the date that Sponsor receives such notice and ending sixty (60) days thereafter, the parties shall negotiate in good faith to enter into a definitive agreement for the Future Event.  If the negotiations do not result in an agreement during the negotiation period for Sponsor to sponsor the Future Event, the Company may enter into negotiations with third parties with respect to the purchase of such sponsorship rights, or any other rights, and may proceed, in its sole discretion and without further obligation to Sponsor, with the sale of such sponsorship rights, or any other rights, to any third party.”

  •  Right of Negotiation (RON).  The RON is the same as the ROFN except the RON is not exclusive and does not give the sponsor a first priority in negotiation. Since the RON is nearly the functional equivalent of negotiating for the thing on the open market, it has little economic value and is not customarily used.
  • Right of Last Refusal (ROLR).  The ROLR is sometimes implemented in connection with a ROFN or RON.  If the sponsor and the grantor do not reach a deal for the thing during the ROFN/RON period and the grantor subsequently receives an offer from a third party for the thing, the ROLR gives the sponsor the right to match the third party offer during a defined time period.  A potential drawback of the ROLR for the grantor is that may discourage third parties from negotiating with the grantor for the thing since they know they may be outbid.  On the other hand, if there is significant interest among third parties and the ROLR holder, the grantor may be able to use the third party bids as a stalking horse to increase the price payable by the ROLR holder.  That said, ROLRs are not customarily found in sponsorship agreements, and in most cases the sponsorship recipients should avoid them because (i) they are more likely reduce third party interest in sponsorship assets than to increase the price of those assets and, (ii) perhaps more important, they complicate sponsorship negotiations for management.

Portions of this article were inspired by the article, Rights of First Negotiation, Offer and Refusal by PracticalLaw, a tool I use in my law practice.

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