Shmuel Leshem

First-Purchase Rights: Rights of First Refusal and Rights of First Offer

This paper analyses rights of first refusal. The holder of a right of first refusal has the option to purchase a subject asset on the same terms as those accepted by a third-party buyer. A variant of a right of first refusal is a right of first offer. A right of first offer requires a seller who wishes to sell a subject asset to offer the right-holder to buy that asset before it is offered to other potential buyers. If the right-holder declined the seller’s offer, the seller may sell the asset to a third party but only on terms no better (for the third party) than those offered to the right-holder. The main proposition of the paper is that in a multiple-buyer, sequential bargaining setting, rights of first refusal increase the joint profits of the seller and right-holder by increasing the probability that the right-holder is offered to purchase the seller’s asset and/or by providing the right-holder an opportunity to purchase the asset at a lower price than that he would be offered otherwise. The value of rights of first refusal derives from the facts that an unencumbered seller (i) is indifferent to buyers’ sampling order if the right-holder is identical to other buyers’; and (ii) exploits his monopoly position to make the right-holder an offer which is higher than that which maximizes the joint profits of the seller and right-holder. * New York University School of Law. ** University of Southern California Law School. *** New York University Stern School of Business. Hosted by The Berkeley Electronic Press 1This paper analyzes rights of first refusal and rights of first offer in a multiple-buyer, sequential bargaining setting. A right of first refusal entitles the right-holder to purchase a subject asset on the same terms as those accepted by a third party. A right of first offer requires a seller to first offer the right-holder to buy a subject asset and prohibits the seller from subsequently selling the asset to a third party on better terms than those offered to the right-holder. We examine when and how such rights yield benefits to, or impose costs, on the right-holder and the seller. We show that a right of first refusal transfers value from other buyers to the right-holder, but may also force the seller to make suboptimal offers. A right of first offer induces the seller to lower his first-period offer, which will tend to increase the net surplus to the seller and right-holder, but also forces the seller to make suboptimal subsequent offers. We find conditions under which it is in the ex ante interest of the seller and the right-holder to contract for a right of first refusal or a right of first offer, respectively.

The Uneasy Case of Multiple Injurers’ Liability

Abstract When harm is caused by multiple injurers, damages are allocated among the responsible injurers in proportion to their relative responsibility for harm. This Article shows that a proportional allocation of liability between strictly-liable injurers distorts incentives to take precautions. The effects of this distortion depend on the nature of the injurers’ precautions. If precautions are complements, injurers compete for lower liability shares, which results in excessive care-taking. If precautions are substitutes, injurers are afflicted by moral hazard, which gives rise to insufficient care-taking. By illuminating injurers’ strategic incentives, this Article highlights a tension between equity and efficiency under a proportional allocation of liability