Adapted from “Matching Rights: A Boon to Both Sides,” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter.
As dealmakers look for more sophisticated ways to reduce risks and increase returns, a matching right—a contractual guarantee that one side can match any offer that the other side later receives—has become a common and useful tool in negotiations.
As an example, imagine that a procurement officer reaches a five-year, fixed-price agreement with a longtime supplier but is concerned that market fluctuations might make the agreement less attractive to her company in the future. The officer proposes an exit for her company, with appropriate notice, if an alternative supplier can offer a better price. The supplier agrees but demands the right to match any competitor’s offer and keep the business. The parties reach agreement and sign the five-year deal.
As this story shows, matching rights (sometimes known as rights of first refusal or rights of first offer) can create enormous value. While the details vary depending on the negotiation, most matching rights share an underlying structure. Specifically, the grantor gives the right holder the right to buy an asset on the same terms that the grantor would receive from any other bona fide, prospective bidder, otherwise known as the third party.
As a prospective right holder, you should know precisely what a proposed matching right will give you. Many deals that seem to guarantee a matching right are, in fact, murky about the exact consequences that could arise.
For potential right holders, the most common mistake is to fail to specify what will happen if you choose to match a bid. Will your matching bid call off the contest with the third party or launch a bidding war?
Other details are equally important. How long do you have to decide whether to match an offer? If the duration of the matching right is ambiguous, a third party could short-circuit your right by making an exploding offer with a short fuse, forcing the grantor to give you only limited time to match the offer. If you haven’t thought through this possibility in advance, you may fail to match the offer due to time pressure rather than to your unwillingness to pay. The end result is a matching right that is worth significantly less than you thought.
Another important detail is the matching-right “trigger.” Suppose that the contract between the procurement officer and supplier specifies that a “more attractive offer” (from the buyer’s perspective) triggers the supplier’s matching right. If a “more attractive offer” simply concerns the price of a known commodity, this language may be sufficient. But what about a competing offer that provides not only a higher price but also a better-quality product? In this case, a “more attractive offer” trigger doesn’t offer much guidance—and can harm the right holder. The lesson: when considering a matching right, figure out exactly what you’ll receive.
