The Right of First Refusal in Shareholders’ Agreements: One Clause That Determines Whether You Keep Control
I. A Real Case
In 2023, the three founders of a Shanghai technology company ended up in litigation over an equity dispute. At the company’s founding, each held one-third of the equity. Two years later, one of the shareholders transferred all of his equity to an outside investor without the other two’s consent. After joining, this investor quickly allied with that shareholder to form a majority view at the shareholders’ meeting; the company’s business direction was completely changed, the other two founders were marginalized, and ultimately they were forced to leave the company they had built with their own hands.
The crux of this case lies in the shareholders’ agreement, where the provisions on the right of first refusal were vague. Although the old Company Law provided for the right of first refusal, its exercise procedure was complex and its conditions unclear, leaving an opening for those with ulterior motives.
On July 1, 2024, the newly revised Company Law came into effect. Article 84 makes a subversive revision to the right of first refusal. As a corporate lawyer, I believe every entrepreneur and investor must deeply understand this change, because it directly bears on whether you can hold on to your control of the company.
II. Article 84 of the New Company Law: From “Three Steps” to “One Step”
Article 84 of the newly revised Company Law provides:
Where a shareholder transfers equity to a person other than a shareholder, it shall give written notice to the other shareholders of matters such as the number, price, method and time limit of payment of the equity transfer, and the other shareholders shall have the right of first refusal under equivalent conditions. If a shareholder fails to reply within thirty days from the date it receives the written notice, it shall be deemed to have waived the right of first refusal.
Compared with Article 71 of the old Company Law, this revision is nothing short of revolutionary:
| Comparison Dimension | Article 71 of the Old Company Law | Article 84 of the New Company Law |
|---|---|---|
| Precondition for Exercise | Required three conditions: more-than-half consent + right of first refusal + separate articles-of-association provision | Only one condition required: exercise under equivalent conditions upon receipt of written notice |
| Consent Procedure | Required consent of more than half of the other shareholders | No consent of more than half of the other shareholders needed; direct notice suffices |
| Notice Content | Relatively general provisions | Expressly required to state the number, price, method of payment and time limit |
| Consequence of Silence | Deemed “consent to the transfer” (not clear whether the right of first refusal is waived) | Expressly deemed a waiver of the right of first refusal |
Simply put, the new law simplifies the exercise logic of the right of first refusal from “three steps” to “one step,” greatly improving the efficiency of equity transfers, while also raising higher demands on shareholders’ duty of care.
III. The Fatal Loophole of the Old Law: Why Revision Was Inevitable?
Article 71 of the old Company Law contained a serious logical contradiction:
Paragraph 2 provides: if more than half of the other shareholders disapprove of the transfer, the disapproving shareholders shall purchase the equity being transferred; if they do not purchase, it is deemed consent to the transfer.
Paragraph 3 further provides: for equity whose transfer has been approved by the shareholders, the other shareholders have the right of first refusal under equivalent conditions.
The problem is: under Paragraph 2, if the other shareholders neither consent nor purchase, it is “deemed consent to the transfer.” But once there is “consent to the transfer,” under Paragraph 3 they can jump out and exercise the right of first refusal — that is, they can pretend to consent first, then “intercept” the deal after you have lined up a buyer and terms.
This institutional design seriously violates the principle of good faith and leaves equity transfer transactions in a prolonged state of uncertainty. Buyers dare not proceed readily, sellers fear being intercepted, and the vitality of the entire secondary market is suppressed.
The revision of the new law is precisely to close this loophole.
IV. The Exercise Procedure Under the New Law: A Practical Guide
Under the framework of the new law, the exercise procedure for the right of first refusal becomes clear and concise:
Step 1: The Seller Determines the Transfer Terms
Clarify the core terms such as the number of equity transferred, the transfer price, the method of payment (lump sum / installment), and the payment period.
Step 2: Written Notice to the Other Shareholders
The notice must be in writing (including traceable forms such as email and WeChat) and state all of the above transfer terms.
Step 3: The Other Shareholders Make a Choice Within 30 Days
- Exercise the right of first refusal → purchase the equity on the notice terms (deemed acceptance of the offer)
- No reply / express refusal → deemed waiver of the right of first refusal
Step 4: The Seller Transfers to an Outsider
If the other shareholders waive or fail to exercise the right of first refusal, the seller may transfer the equity to a third party who is not a shareholder.
V. How to Provide for the Right of First Refusal in a Shareholders’ Agreement?
Although the newly revised Company Law expressly provides for the right of first refusal, this does not mean the shareholders’ agreement can simply copy the statute verbatim. On the contrary, precisely because the statute only sets a floor, smart entrepreneurs and investors should spell out the following matters in greater detail in the shareholders’ agreement:
1. Definition of “Equivalent Conditions”
The statute says “exercise the right of first refusal under equivalent conditions,” but what are “equivalent conditions”? Do they include non-price factors the buyer offers, such as performance-based VAM, technical support, and business resources? It is advisable to state expressly in the shareholders’ agreement that equivalent conditions mean not only the same price, but all transaction terms including the method of payment, payment period, and ancillary obligations.
2. Form and Service of Notice
The statute requires “written notice” but does not specify a particular form. It is advisable to state expressly in the shareholders’ agreement: by what means the notice is sent (email, WeChat, courier, etc.), to which address it is sent, and at what time the “date of receipt of notice” begins to run.
3. Multiple Shareholders Exercising the Right of First Refusal Simultaneously
If multiple shareholders claim the right of first refusal at the same time, how is the equity allocated? By shareholding ratio, or by negotiation? This must be agreed in advance in the shareholders’ agreement, otherwise it easily triggers a second dispute.
4. Partial Exercise of the Right of First Refusal
May a shareholder purchase only part of the transferred equity? The statute is silent on this. It is advisable to agree in the shareholders’ agreement that the right of first refusal must be exercised as to the entirety of the transferred equity and may not be partially exercised; otherwise it is deemed waived.
VI. Risk Warning: The Legal Consequences of Collusion
In practice there is a common improper tactic: the buyer colludes in bad faith with some shareholders, agreeing that the other shareholders waive the right of first refusal, and the buyer pays compensation to suppress the acquisition price. This harms the lawful rights and interests of the selling shareholder.
Pursuant to Article 154 of the PRC Civil Code: “A civil juristic act by which the actor and the counterparty collude in bad faith to harm the lawful rights and interests of another person is void.”
Therefore, if anyone attempts to circumvent the right of first refusal through collusion, not only is the act void, but they may also bear corresponding liability for damages.
VII. Our Recommendations for You
If You Are an Entrepreneur:
- Specify the conditions and procedure for exercising the right of first refusal in the shareholders’ agreement; do not let the statute’s general provisions become a hidden risk.
- Upon receiving a notice of equity transfer, be sure to give a clear reply within 30 days; silence is deemed a waiver.
- Pay attention to the full content of “equivalent conditions,” not just the price.
If You Are an Investor:
- Before investing, review the target company’s shareholders’ agreement to see whether the right-of-first-refusal clause poses an obstacle to you.
- If the original shareholders waive the right of first refusal, it is advisable to require them to issue a written waiver statement to avoid later disputes.
- Do not attempt to collude with some shareholders to circumvent the right of first refusal; the legal risk is extremely high.
VIII. Conclusion
The right of first refusal may look like a mere technical clause, but it actually concerns the company’s control and the trust relationship among shareholders. The revision of the newly revised Company Law makes the rules clearer, but the clearer the rules, the more you need to plan ahead in your shareholders’ agreement.
Remember: a good shareholders’ agreement is not for litigation after a dispute arises, but for preventing disputes before they arise.
If you are drafting or reviewing a shareholders’ agreement, feel free to contact a professional lawyer to ensure that every clause truly protects your interests.
Disclaimer: This article is for general legal-awareness reference only and does not constitute specific legal advice. For specific legal issues, please consult a professional lawyer.
Lawyer Kevin Jun Lin
Senior Corporate Lawyer · Industry Legal Practice Expert
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