Confirmation of OGCC Opinion No. 075, s. 2011 on the Share Purchase Agreement between Landbank and Global 5000 Investment, Inc.

DOJ OPINION NO. 086, s. 2012 October 15, 2012 Ms. Gilda E. Pico President and CEO Landbank of the Philippines Landbank Plaza 1598 M.H. del Pilar cor. Dr. J. Quintos Streets Malate, Manila Dear Ms. Pico : This refers to your request for confirmation of the Opinion No. 075, series of 2011 dated 31 March 2011, rendered by the Office of the Government Corporate Counsel (OGCC) on the 2 December 2008 Share Purchase Agreement (SPA) executed by Landbank of the Philippines (LBP) and Global 5000 Investment, Inc. (Global). It appears that the SPA provides for the sale by LBP of its 46.59 million shares of stock in the Manila Electric Company (MERALCO) to Global for a consideration of P4.2 Billion (P90.00 per share) plus fixed interest of P554 Million payable as follows: Amount Due Date Downpayment P838,738,728.00 30 days from execution 1st Installment P838,738,728 + January 31, 2010 fixed interest 2nd Installment P838,738,728 + January 31, 2011 fixed interest 3rd Installment P1,677,477,456 + January 31, 2012 fixed interest The SPA also provides that LBP shall assign its voting rights and its right to receive dividends to Global immediately upon the latter's downpayment to be made within thirty (30) days from the execution of the SPA. TECcHA As it happened, on 10 December 2008, LBP learned that MERALCO unilaterally cancelled the certificates covering LBP's 42,000,750 shares and issued new stock certificates in favor of Ms. Josefina S. Lubrica on 28 November 2008. As a result, the SPA was not implemented. The cancellation of the stock certificates and transfer to Ms. Lubrica were allegedly made in compliance with an Order of Department of Agrarian Reform (DAR) Adjudicator Conchita C. Minas, without notifying LBP or requiring the latter to endorse or surrender its stock certificates which, to date, remain in its possession. These transactions were questioned by LBP in cases still pending before the courts. Of the 42 million MERALCO shares transferred to Ms. Lubrica, approximately 40.6 million were lodged with the Philippine Depository and Trust Corporation (PDTC) and 1.4 million were retained by Ms. Lubrica. The 3.36 million shares lodged with PDTC were traded and settled, while the remaining 37.23 million sharers were quarantined or held in trust by MERALCO's stock and transfer agent pending the final determination of the courts on the matter of ownership. In a letter dated 17 December 2008, Global advised LBP that it was deferring payment of the consideration under the SPA since LBP could not deliver any stock or assign its voting rights or its right to receive dividends to Global. LBP, however, did not reply to this letter. Moreover, the parties neither demanded that each one comply with its contractual obligations nor terminated the SPA. The value of the 42 million shares at the time of the execution of the SPA in December 2008 was at P58.00 per share, much lower than the contract price of P90.00 per share. The value of the MERALCO share has progressively increased since then and is worth P245.00 per share in the market as of 23 August 2012. On 31 March 2011, the OGCC rendered its Opinion No. 075, series of 2011 (supplement to/modification of its earlier Opinion No. 019, series of 2011) and opined that: 1. The Agreement is a contract to sell. Since Global failed to comply with the suspensive condition of full payment of purchase price, LBP is under no obligation to convey title and ownership over the shares. AaSIET 2. The Agreement has been novated from a pure obligation to a conditional obligation. As provided in Article 1189 of the Civil Code, improvements on the thing must inure to LBP's benefit. Hence, it can demand a higher value for the shares or at least renegotiate the purchase price. 3. The Agreement may be renegotiated on the ground of LBP's lost income opportunity, and pursuing the same is grossly disadvantageous to the government. We partially affirm the Opinion rendered by the OGCC. The Share Purchase Agreement is a Contract to Sell As correctly ruled in the OGCC Opinion, a reading of the terms and stipulations of the SPA shows that obviously it is a contract to sell where the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents the obligation to sell from arising and, thus, ownership is retained by the prospective seller without further remedies by the prospective buyer. 1 Section 3 (b) of the SPA provides that: "(b) All rights to, interests and title in and ownership of the Sale Shares shall remain with the Seller. ..." (Emphasis supplied) Corollary thereto, Subsections 4.1 and 4.2 of Section 4 of the SPA also state that: "4.1 Closing Date .The closing shall take place and be effective for all purposes upon full payment of the Consideration on January 31, 2012 or such other time as the Buyer and Seller may mutually agree in writing (the "Closing Date") 4.2 Transfer of Sale Shares .On Closing Date, the Buyer shall deliver to the Seller the payment for the Third Installment, including any interest payments due, when applicable. Simultaneous with such delivery, the Seller shall lodge the Sale Shares with the Philippine Central Depository thru its designated broker for the implementation of the transfer of the Sale Shares to the Buyer. On the same trading day that the funds are immediately made available to the Seller, the Sale Shares shall be transferred by the Seller to the Buyer via a regular or special block sale. For this purpose, the Buyer and the Seller shall designate their respective brokers to execute the block sale and the parties undertake to execute the documents and perform acts necessary to effect such block sale ." (Emphasis supplied) It is not the title of the contract, but its express terms or stipulations that determine the kind of contract entered into by the parties. As correctly observed by the OGCC, the SPA's stipulations categorically show that LBP retained or reserved title to the shares until the purchase price is fully paid, and only upon full payment of the purchase price by Global that the former shall " execute the documents and perform acts necessary to effect such block sale ." Since there is non-payment of the full purchase price by Global, LBP retained ownership of the shares and has no obligation to convey title thereto to Global. The foregoing factual backdrop likewise clearly indicates that the performance of the obligations under the SPA is subject to a suspensive condition, i.e. ,favorable decision of the Supreme Court as to the ownership of the MERALCO shares of stock. When a contract is subject to a suspensive condition, its effectivity takes place when the event which constitutes the condition happens or is fulfilled. 2 Hence, only when the Supreme Court issues a decision favorable to LBP can the parties demand performance of their mutual obligations under the SPA. Indeed, under the state of things, neither party could deliver its respective contractual obligations in view of the suspensive condition. Be that as it may, the SPA remains valid. Modificatory Novation of the Agreement The facts also show that there was a modificatory novation of the Agreement from a pure obligation to a new conditional obligation, which is dependent upon the happening of a suspensive condition the Supreme Court's decision on the ownership of the shares. The peculiar circumstances of the case, however, confine the modification on the period within which to comply in a proper manner on what is incumbent upon both parties upon the happening of the suspensive condition for LBP to transfer the ownership of the subject shares and Global to pay the purchase price. We take it that the acquiescence of LBP on the Global's letter dated December 17, 2008 to the former operates to limit the modification of the Agreement on the deferment of payment only. It has a limited effect of determining the time of closing the Agreement and delivering the shares to Global. It does not have any effect on the purchase price of P90.00 per share. The deferment does not affect the perfection and validity of the Agreement, as the modification merely involves its consummation. Had LBP contested Global's deferment of the payment and indicated its intention of not pursuing the contract would have been a different story. AEIDTc The novation was merely modificatory and did not extinguish the original agreement. For novation as a mode of extinguishing an obligation, the OGCC Opinion states the following requisites to concur: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. 3 The facts obviously negate the requisites cited in the Opinion, i.e. ,(1) agreement to a new contract; (2) extinguishment of the old obligation; and (3) birth of a valid new obligation. Realizing the weakness of the argument, the Opinion under review goes on to suggest that LBP immediately send Global a letter stating that it accepts the latter's deferment of payment and it takes it as having modified the original Agreement (see page 8 of OGCC Opinion No. 075, series of 2011, dated 31 March 2011). It should likewise be important to point out that after Global sent a letter to LBP on December 18, 2008 stating, among others, that because of the cancellation of LBP's stock certificates and transfer of the MERALCO shares to Ms. Lubrica, Global "shall be constrained to defer payment until this legal matter is resolved in favor of LBP", the latter did not respond to said letter. Thereafter, Global sent another letter to LBP on August 6, 2009 stating that "the transaction covered by the Agreement can be pursued without any further delay or impediment". LBP, however, responded through a letter dated August 27, 2009 stating that "it would be to the mutual interest of the parties if we could sit down together to discuss the implementation of the Agreement ...subject to legal, accounting and auditing rules relevant to the Agreement". Global did not reply to LBP's letter. The letter, therefore, obviously did not tantamount to an agreement to a new contract or give birth to a valid new obligation. ATICcS Lost income opportunity inapplicable While it is true that it is not the parties' fault why the execution of the SPA was delayed, to our mind, LBP cannot be deemed to assert the recovery of interest it could have earned or demand an additional amount by way of interest as lost income opportunity if the transaction was consummated as scheduled in 2008. The Civil Code is explicit on the recovery of the fruits and interest before the happening of the condition, thus: "Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation .Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. ..." (Emphasis supplied) While LBP may have earned interest income from the proceeds of the sale, conversely, Global could have invested the income it is supposed to receive from the dividends of the shares and generated more profits had the transaction pushed through in 2008. Thus, the fruits and the interests are considered as equivalent to and are made to offset each other. Article 1174 of the Civil Code is likewise explicit that no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. Thus: "Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable." Not an Impossible Performance We agree with OGCC that LBP cannot invoke impossibility of performance as an infirmity to invalidate the Agreement. The finding of the OGCC that no valid transfer of the MERALCO stock certificates had taken place in Lubrica's name as the procedure as prescribed in Section 63 of the Corporation Code was disregarded is correct. Said section clearly requires the endorsement of the certificate of stock by the owner or duly authorized persons in transferring ownership of the shares of stock. Thus: aSTAcH "Sec. 63. Certificate of stock and transfer of shares . ...Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer ...." (Emphasis supplied) In Bitong vs. Court of Appeals , 4 the Supreme Court held that the rule is that the endorsement of the certificate of stock by the owner, his attorney-in-fact, or any other person legally authorized to make the transfer, shall be sufficient to effect the transfer of shares only if the same is coupled with delivery; and that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee. Accordingly, as opined by OGCC, the MERALCO shares should still be deemed in the name and possession of LBP since the same were not endorsed nor surrendered for cancellation. Also, the legal loss of the specific thing cannot be invoked by LBP in extinguishing the bank's obligation to deliver the shares under the Agreement. Article 1263 of the Civil Code provides that the obligation is not extinguished if the object is indeterminate or generic. As observed by OGCC, the Agreement sets no description of the shares nor was there even no stipulation that the shares were of particular kind. Thus, as opined by OGCC, it seems that the MERALCO shares of stock as contemplated in the Agreement are generic and the fact that the MERALCO shares are under litigation cannot be considered as basis to invoke impossibility of performance since in the event that the case should finally be decided and that LBP will be declared as the legal owner of the shares, LBP will be ready to comply in a proper manner with what is incumbent upon it. Rebus sic stantibus inapplicable We likewise agree with OGCC that LBP cannot invoke the principle of rebus sic stantibus under Article 1267 of the Civil Code which provides: "Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part." IcCDAS As OGCC discussed in its Opinion, an invocation of the principle of rebus sic stantibus has to be coupled with impossibility of performance, which as stated earlier, is unwarranted in this case. R.A. No. 3019, Section 3 (e) and (g) inapplicable While it is true that the substantial difference on the SPA's consideration of P90.00 per share as against the current value of P245.00 per share in the market as of 23 August 2012 will translate in a huge loss for the government if ever the SPA is pursued, nonetheless, it cannot be considered to be a violation of Section 3 (e) and (g) of R.A. No. 3019. It must be remembered that the contract was entered into in December 2008 where the prevailing market price of the shares of stocks is valued at P58.00 per share. The SPA provided for a purchase price of P90.00 per share which is considerably much higher than the prevailing market price of P58.00 per share. Had the transaction been pursued as scheduled, it cannot be denied that the government would certainly be earning P32.00 per share from the proceeds of the sale. Also, it must be borne in mind that the implementation of the SPA was deferred due to acts and incidents not attributable to the contracting parties. The foregoing clearly shows that, when the contract was perfected, the cause or consideration of the SPA provides benefits to the government in terms of income, thus, it cannot be said that the terms of the agreement is manifestly and grossly disadvantageous to the government. Based on the foregoing, we conclude that: 1. The Agreement is a contract to sell. Since there is non-payment of the full purchase price by Global, LBP retained ownership of the shares and has no obligation to convey title thereto to Global; and TcSCEa 2. The Agreement has been partially novated. Its modification is only limited to its consummation and on the period within which to comply in a proper manner on what is incumbent upon both parties. Very truly yours (SGD.) LEILA M. DE LIMA Secretary Footnotes 1. Nabus v. Joaquin & Julia Pacso , G.R. No. 161318, November 25, 2009. 2. Javier vs. Court of Appeals , G.R. No. 48194,15 March 1990. 3. Fabrigas v. San Francisco del Monte, Inc., G.R. No. 152346, 25 November 2005, 476 SCRA 253. 4. 292 SCRA 503, 96 SCAD 205 (1998).