The Right of First Refusal

The Right of First Refusal

The number of Yahoo bidders continues to grow every day, but the number of options Yahoo can realistically choose from has become limited. The most important case has come with Alibaba, the Chinese internet-based series of businesses. Yahoo faces the challenge of maintaining its 43% stake in the Internet giant while still being acquired- if it accepts any bid, it may lose the stake entirely. The multi-billion dollar stake is considered highly valuable, especially for Yahoo, as it provides a gateway into China’s growing Internet market.

When Yahoo bought its stake in Alibaba, there was an agreed contract with the “right of first refusal” attached. Alibaba, protecting itself, had injected the clause in order to guarantee it controlled its own shares if Yahoo decided to sell them or the company was bought over entirely. Specifically, the right of first refusal has permitted Alibaba to repurchase the shares should Yahoo “transfer” them to another party. With an acquisition of Yahoo, the stockholder’s agreement states Alibaba can buy the stake no matter the offers Yahoo may receive for it.

The right of first refusal is specifically created for shareholder’s to have control over the company. It is actually Alibaba’s shareholders who will exercise this right, and will likely remain unchallenged. A bidder for the stake would have to willingly pay an extremely high price for Alibaba shareholders not to exercise their right of refusal. There is a drawback for these shareholders, however- they may only exercise their right if a third party steps forward first with an offer.

If Alibaba does decide to step in and exercise its right of first refusal, there is no doubt Yahoo’s bids will be put on the back-burner. Alibaba is waiting for the chance to purchase the minority stake, and may even force a third party bidder into the sale. In truth, Alibaba has more control over Yahoo’s future than Yahoo does itself.

~Zeena Advani

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