Rights of First Refusal (ROFR) in Merchant Portfolio Transfers

Merchant portfolios are often the most valuable asset of an Independent Sales Organization (ISO).

Over time, ISOs develop relationships with merchants that generate recurring revenue through residual payments tied to credit and debit card processing.

Because of the economic value of these portfolios, ISO agreements frequently include Rights of First Refusal (ROFR) that govern how and when a portfolio may be transferred.

Dilendorf Law Firm helps Independent Sales Organizations on negotiating ISO agreements, including provisions governing portfolio transfers and Rights of First Refusal. Careful negotiation of these clauses at the contract stage can significantly affect an ISO’s ability to sell or monetize its merchant portfolio in the future.

Federal and state courts have repeatedly addressed the enforcement of ROFR provisions in commercial contracts and merchant services agreements.

These decisions provide important guidance regarding notice requirements, matching obligations, and the consequences of failing to comply with contractual transfer restrictions.

The Role of ROFR Clauses in ISO Agreements

A Right of First Refusal gives a designated party the opportunity to purchase an asset before it can be sold to a third party. In the merchant services industry, the holder of the right is often the processor or acquiring bank.

Unlike an option contract, a ROFR does not require the owner to sell the asset. Instead, it regulates the circumstances under which a sale may occur.

Courts have described this distinction clearly. In Seessel Holdings v. Fleming Companies, the court explained:

“[…] the right of first refusal, although closely akin to an option, differs in that it does not give the holder the power to compel an unwilling owner to sell, but merely requires that when and if the owner decides to sell, he offers the property first to the holder of the right.”

In the context of ISO agreements, this means that if an ISO receives an offer to sell its merchant portfolio, the processor with ROFR rights must be given the opportunity to match that offer before the portfolio can be transferred.

Enforcement of ROFR Provisions in Merchant Portfolio Transfers

Federal and state cases addressing the enforcement of ROFR clauses in merchant services agreements provide significant guidance on how courts interpret these provisions.

A leading decision is Process America, Inc. v. Cynergy Holdings, LLC, which involved a dispute between an ISO and a processor regarding merchant portfolio transfers. The court described the fundamental structure of the merchant services industry and the role of ISOs:

“Process America is an Independent Sales Organization (“ISO”) that, prior to the termination of their relationship, solicited and referred merchants to Cynergy, a bankcard processor.”

The ISO agreement in that case required compliance with specific contractual conditions before any transfer of merchant accounts could occur. These conditions included providing notice, allowing the processor to exercise a right of first refusal, paying certain fees, and executing a new processing agreement.

When the ISO transferred a portion of the merchant portfolio to a third party without complying with those contractual provisions, the court concluded that the transfer violated the agreement.

The decision underscores a key principle: courts will enforce ROFR provisions in ISO agreements according to their precise contractual language.

When a ROFR Becomes Enforceable

ROFR provisions generally become enforceable when the asset owner receives a legitimate third-party offer.

In Kunelius v. Town of Stow, the First Circuit explained the legal effect of such an offer:

“Once a seller receives a bona fide offer, a right of first refusal (ROFR) ripens into an option to purchase the property at the price and otherwise on the terms stated in the offer.”

The court further emphasized that the holder must have access to the terms of the proposed transaction in order to decide whether to exercise the right.

This principle is particularly important in merchant portfolio transfers because the value of the portfolio may depend on multiple economic terms, including pricing structures, servicing arrangements, and residual payment streams.

The Requirement to Match the Third-Party Offer

Courts consistently require strict adherence to the terms of the third-party offer when exercising a ROFR.

In Seessel Holdings v. Fleming Companies, the court addressed whether the holder had properly exercised its first refusal right and concluded that the holder must accept the same terms offered to the third-party purchaser.

The court explained:

“[…] the right holder who agrees to meet the same terms and conditions as contained in a third-party offer must meet all of those terms.”

The decision further clarified that a party cannot exercise a ROFR while attempting to modify the underlying transaction. If the holder proposes alternative terms or refuses to finalize a contract matching the third-party offer, the attempted exercise of the right may be ineffective.

These principles frequently arise in disputes involving portfolio sales where the processor attempts to match a transaction but proposes different financing structures or contractual conditions.

The Exercise Period and Procedural Requirements

One of the most critical aspects of a ROFR clause is the exercise period and the procedures required to trigger and exercise the right.

There is no statutory default exercise period governing ROFR clauses. The enforceability of the right depends entirely on the contractual language negotiated by the parties.

A properly drafted ISO agreement should clearly define:

• The duration of the exercise period (typically measured in calendar days)
• The triggering event (such as receipt of a bona fide written offer)
• Notice requirements and delivery methods
• Whether failure to respond within the stated period constitutes waiver of the right

If these procedures are not clearly defined, disputes can arise during portfolio sales.

Delayed or Unreasonable Responses by Banks

Problems frequently arise when the processor or acquiring bank fails to respond within the required exercise period or attempts to delay the transaction.

For example, disputes may arise where the bank:

• Responds after the contractual deadline
• Requests additional information not required by the agreement
• Attempts to extend the exercise period unilaterally
• Attempts to renegotiate the transaction instead of matching the offer

Where the agreement clearly defines the exercise period, courts typically enforce the deadline strictly. Failure to exercise the right within that period may result in waiver of the ROFR, allowing the ISO to proceed with the third-party sale.

When the Agreement Does Not Specify an Exercise Period

Additional complications arise when an ISO agreement does not specify the time period for exercising a ROFR.

In such circumstances, courts may determine that the right must be exercised within a reasonable time, based on the surrounding circumstances and commercial expectations of the parties.

However, the absence of a defined deadline creates uncertainty and may delay transactions or discourage potential buyers. For this reason, carefully drafted ISO agreements typically include clear timelines and procedural rules governing ROFR rights.

At Dilendorf Law Firm, we assist ISOs in negotiating and structuring contractual provisions related to Rights of First Refusal in merchant services agreements.

Why ROFR Clauses Matter in Merchant Portfolio Transactions

ROFR provisions are common in ISO agreements because processors and acquiring banks seek to maintain control over the merchant relationships they service.

From a commercial perspective, these provisions help processors:

• Maintain continuity of merchant processing relationships
• Prevent portfolios from being transferred to competing processors
• Protect underwriting and risk management structures
• Preserve long-term merchant revenue streams

For ISOs, however, these provisions may significantly affect exit strategies and portfolio valuation. A buyer negotiating the acquisition of a merchant portfolio must recognize that the transaction could ultimately be acquired by the ROFR holder instead.

Conclusion

Rights of First Refusal play a central role in merchant portfolio transfers within the payment processing industry. Although these provisions do not prohibit portfolio sales, they can significantly influence the outcome of a transaction by determining who ultimately acquires the portfolio and under what conditions.

Courts consistently require strict compliance with ROFR provisions and enforce them according to the language of the governing agreement. For ISOs and processors alike, careful drafting and negotiation of these provisions is essential.

Contact Us

If you are negotiating an ISO agreement or planning to sell a merchant portfolio, strategic legal guidance can help protect your rights and maximize the value of your business.

Contact us at info@dilendorf.com to discuss your matter.