LIN Broadcasting Corp. v. Metromedia, Inc., 73 N.Y.2d 54 (1988)
A right of first refusal offer, triggered by a contract to sell to a third party, is revocable by the seller during the specified duration of the right if the third-party transaction is abandoned, unless the contract explicitly states otherwise.
Summary
LIN Broadcasting and Metromedia had agreements giving each other first refusal rights regarding the sale of their interests in cellular telephone ventures. When Metromedia contracted to sell assets, including these interests, to Southwestern Bell, it notified LIN of its first refusal rights. After negotiations, Metromedia and Bell amended their agreement, excluding the cellular interests. Metromedia then notified LIN that the first refusal offers were no longer valid. LIN attempted to exercise its first refusal rights. The court held that the offers were revocable because a right of first refusal does not create a binding option and the underlying third-party transaction had been abandoned. This case clarifies the distinction between a right of first refusal and an option, emphasizing that a first refusal offer is not irrevocable unless explicitly stated in the agreement.
Facts
LIN and Metromedia formed partnerships and corporations to provide cellular telephone service in New York City and Philadelphia. The New York agreement provided LIN a 45-day right of first refusal, and the Philadelphia agreement had a 10-day right to request appraisal of shares with 30 days to purchase at appraised value. In June 1986, Metromedia agreed to sell various assets, including its cellular interests, to Southwestern Bell for $1.65 billion, conditioned on waivers of first refusal rights. Metromedia notified LIN of the proposed sale and its first refusal rights. After some discussion and extensions, Metromedia and Bell amended their agreement in September 1986, with Metromedia retaining the cellular interests and reducing the purchase price by $453 million. Metromedia then notified LIN that the first refusal offers were no longer valid.
Procedural History
LIN sued Metromedia for specific performance to compel the sale of the New York interests and initiated a proceeding to expedite the appraisal of the Philadelphia interests. The trial court denied Metromedia’s motions to dismiss and granted LIN’s petition for appraisal. The Appellate Division reversed, concluding that neither agreement conferred an irrevocable right to compel a sale, and that Metromedia could change its mind about selling before the right of first refusal was invoked.
Issue(s)
Whether a contractual right of first refusal, triggered by a contract to sell to a third party, may be exercised during the specified duration of the right but after the third-party transaction has been abandoned?
Holding
No, because a right of first refusal does not create a binding option requiring the offer to remain open after the third-party transaction is abandoned, unless the contract explicitly states otherwise.
Court’s Reasoning
The court emphasized the distinction between a right of first refusal and an option. A right of first refusal requires the owner, when and if they decide to sell, to offer the property first to the holder of the right, allowing them to match a third-party offer. An option, on the other hand, is an offer that is contractually kept open. The court stated that “[t]he effect of a right of first refusal…is to bind the party who desires to sell not to sell without first giving the other party the opportunity to purchase the property at the price specified.” Since neither the New York nor Philadelphia agreement bestowed an irrevocable right to compel a sale, LIN only had a standard right of first refusal. The court reasoned that requiring the selling party to keep the offer open after the third-party sale was abandoned would give the first refusal offer all the attributes of an option, which was not the intent of the agreement. The court noted the clause itself operates as a restriction by preventing a party from making a sale without first making the first refusal offer. The court stated, “When, as here, the selling party has fully complied with its obligations under the first refusal clause by not selling without first making the required offer, the nonselling party has received the bargained-for performance.” The court further reasoned that imposing an irrevocable option on the seller carries substantial risks, as the buyer could wait until the end of the option period to buy only if the price is advantageous. The court concluded that unless the parties explicitly agree to such an allocation of risks and benefits, the law should not impose it. The court found that other jurisdictions supported this conclusion.