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The Right of First Refusal

(Article published in the June 10, 2002 issue of TODAY, Business Section)

It is amazing that Mr. John Gokongwie’s drive to take over PLDT by acquiring control of First Pacific Co. Ltd’s 24.4 percent interest in the company – a deal which his son Lance calls "our single biggest investment ever" and which the pro-Pangilinan group promises to turn into "the biggest legal battle of their lives"—turns on, to a significant extent, the decision of a third (and an uninvolved but may be keenly interested) party, Nippon Telegraph and Telephone Co. (NTT), to exercise its right of first refusal.

Since the right of first refusal, according to the Supreme Court, "evolved in the Philippine juristic [sic, and not "Jurassic" as may have been appropriate] sphere only within the last decade", the lawyers of all the sides of the transaction, in between wiping their copious tears that fail to hide their toothy grins all the way to the bank, would do well to read the judgment in the case of Riviera Filipina, Inc. v. Court of Appeals, et al, G.R. No. 117355, penned by Justice Sabino De Leon, Jr., on 05 April 2002, five days and two months before he retired last Friday, 09 June 2002. Foreign lawyers, particularly, ought not presume that the right of first refusal in the Philippines is exactly how they understand it to be in their own country since Philippine law and practice have a way of modifying foreign devices. Witness, for instance, the way we think of trusts. Despite our adoption of the same terminology, the substance of some forms of trusts as we know them here is totally unrecognizable to English and other equity-law educated lawyers.

The Riviera case involved a lease executed by Juan L. Reyes, as lessor, and Riviera Filipina, Inc., ("Reviera") as lessee, over a 1,018 square meter parcel of land located along EDSA, Quezon City. Paragraph 11 of the contract provided that the "Lessee shall have the right of first refusal should the Lessor decide to sell the property during the term of the lease".

During the term of the lease, Juan L. Reyes was compelled by circumstances – the land which was mortgaged to Prudential Bank had been foreclosed, the redemption period was running out, and he was not in a position to raise enough funds to buy it back on time -- decided to sell the leased property. He initially offered to sell it to Riviera for Php 5,000 per square meter. Riviera wanted to buy it for only Php 4,000 per square meter. Reyes rejected the offered price and instead raised his asking price to Php 6,000. Reyes’ lawyer, in relating the new asking price, made explicit reference, in his letter, to the lessee’s right of first refusal under the contract and warned that, if the lessee did not purchase the land as then offered, within ten days from notice, the lessee would be deemed to have thereby waived the right. Riviera raised his offer to buy to Php 5,000. Reyes again refused.

On 02 December 1988, Riviera wrote to Reyes confirming its intent to buy at "the fixed and final price" of Php 5,000, saying that the "offer is what we feel should be the market price of your property". Riviera, in addition, asked Reyes to respond within fifteen days "since there are also other properties being offered to them at the moment". Reyes wrote back and said that the price was not acceptable, expressing the regret that since Riviera had failed to take advantage of its right to buy the property, the "right of first refusal in sale of said property" had been lost.

Reyes then confided to a close family friend about its predicament, particularly the fast approaching expiry date of the redemption period. The family friend offered Php 5,300 and Reyes accepted. The family friend told Reyes that he needed time to look for a partner since he did not at that moment have the amount with which to pay Reyes.

Concerned that the expiry date of the redemption period was at hand, Reyes sent his nephew, Atty. Estanislao Alinea, to Riviera to find out if it was still interested and to ask Riviera to raise its "offer for the purchase of the said property a little higher". Riviera responded with a letter that not only insisted on the price of Php 5,000 but also changed its prior offer by stretching the period of payment from the previous "complete payment within sixty (60) to ninety (90) days" to 50% down within 30 days upon submission of documents and "the balance in five (5) years in equal monthly installments at 12% interest on diminishing balance.

Reyes naturally refused. Alinea went back to Riviera to ask if it could increase its price. Riviera said "no’. Through all these shuttling back and forth, Reyes did not expressly offer the property to Riviera for Php 5,300 which was the price offered by his family friend.

Just before the redemption period expired, two corporations, presumably assembled by the family friend, raised enough money to redeem. Thereafter, a deed of sale was executed by Reyes to the two corporation for Php 5,300 per square meter.

Riviera went to court to rescind the sale and compel Reyes to sell to him instead at the same price. Riviera contented that the right of first refusal principally amounts to a right to match. Since, it was not informed of the offer to buy at Php 5,300, then the sale to the two companies was in violation of their right of first refusal.

The courts, starting for the trial court to the Court of Appeals and finally the Supreme Court, held that the Riviera’s right of first refusal, as understood by the parties, was not violated.

Justice De Leon traced the development of Philippine jurisprudence on the right of first refusal, starting from Guzman, Bocaling & Co v. Bonnevie, 206 SCRA 668, to Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602, then Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 264 SCRA 483, and finally to Parañaque Kings Enterprises, Inc. v. Court of Appeals, 268 SCRA 727.

If only for that, John Gokongwei and Manny Pangilinan should give a plaque of appreciation to the good justice for reducing the creative billing of their respective lawyers for time to be spent on "research". But the more important part of his ponencia is the reminder that "general propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon the basis of isolated clinical classroom principles. Analysis and construction should not be limited to the words used in the contract, as they may not accurately reflect the parties’ true intent. The court must read a contract as the average person would read it and should not give it a strained or forced construction".

The Riviera decision, after considering the actions of the parties, found that they considered the right of first refusal "to mean simply that should the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee Riviera". Since Riviera took a "take-it-or-leave" stance and even downgraded its last offer, Reyes could not be blamed for not disclosing to Riviera the offer for Php 5,300. The Court held that in the interpretation of the right of first refusal as understood by the parties, the question of what is to be included or what is meant is for the parties to determine and "this question may not be resolved by what the parties might have provided had they thought about it… or by what the court might conclude regarding abstract fairness".

We do not know how NTT or any of the parties to the PLDT shareholders agreement understood the "right of first refusal". Disclosures to the public made so far on the transaction and the relevant determinants of its legality and fairness have left much to be desired. All we know for certain is that the lawyers involved, for such a high profile case as this, will certainly desire much.