JG Summit Holdings v.

CA
G.R. No. 124293
January 31, 2005
J. Puno
Cadorna
JG
Summit
Holdings,
Inc.
petitioner
responden Court of Appeals; Committee on Privatization, its Chairman and Members; Asset
ts Privatization Trust; and Philyards Holdings, Inc.

summary

JG Summit is questioning the right of first refusal of a Japanese corporation, which owns shares in
a Philippine Corporation. It submits that such right, which was eventually converted into a right
to top the bid in the bidding process that occurred to sell the governments shares in the said
Philippine corporation, would allow the Japanese corporation to acquire more than the allowable
40% equity allowed by law for corporations that own land. Court ruled, among other things, that
the right itself does not violate the constitutional limit and that in any case, if the Japanese
corporations shareholdings increase beyond 40%, it would only disqualify the corporation from
owning land. This is because the shareholders and the corporation have separate entities, and
the right of first refusal refers to the shareholder independently of the capacity (or lack thereof)
to own land pertaining to the corporation

facts of the case

(sorry mahaba, pero lam niyo naman madetalye si sir :p)

Original JVA between NIDC and Kawasaki

The National Investment and Development Corporation (NIDC), a government corporation,
entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan
(Kawasaki) for the construction, operation and management of the Subic National Shipyard, Inc.
(SNS) which subsequently became the Philippine Shipyard and Engineering Corporation
(PHILSECO). Under the JVA, NIDC and Kawasaki will contribute P330 million for the capitalization
of PHILSECO in the proportion of 60%-40%, respectively.
One of the salient features in the JVA grants to NIDC and Kawasaki the right of first
refusal should either of them decide to sell, assign or transfer its interest in the JVA,
unless the transferee is a GOCC or a Kawasaki affiliate.
Transfer of NIDC shares in PHILSECO to the government
NIDC transferred all its interests in PHILSECO to the Philippine National Bank (PNB), and the latter
transferred the same to the national government, pursuant to AO No. 14.
PCory issued Proclamation No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization
Trust (APT) to take over the non-performing assets of the national government for purposes of conservation,
managements and disposal. Pursuant to this, the government and APT entered into a trust agreement where APT was
named the trustee of the governments share in PHILSECO.
Apparently, PHILSECO, at the time, owed PNB huge amounts, so that a quasi-reorganization of PHILSECO occurred
that raised the governments shareholdings in PHILSECO to 97.41%. Meanwhile, Kawasakis shareholdings
dropped to 2.59%.

Sale of government equity in PHILSECO to private entities

COP and APT decided to sell the national governments share in PHILSECO to
private entities. APT entered into an agreement with Kawasaki in which the latters
right of first refusal under the JVA was converted into the latters right to top by 5%,
whatever would be the highest bid for the said shares. In addition, Kawasaki was
entitled to name a company in which it was a stockholder, which could exercise the
right to top. Kawasaki informed APT that Philyards Holdings, Inc. (PHI) would be the
one exercising Kawasakis right to top.
The Asset Specific Bidding Rules (ASBR) contained the mechanics for the bidding process of the governments
87.6% equity share in PHILSECO. Under the rules, the highest bid, as well as the buyer, shall be subject to the final
approval of both the APT Board of Trustees and the COP. The APT shall also advise Kawasaki and/or its nominee, PHI,
that the highest bid is acceptable to the government, and thereafter, give Kawasaki and/or PHI a period of 30 calendar
days from the date of receipt of such advice within which to exercise their right to top. Should Kawasaki and/or PHI
exercise this right, they shall so notify the APT and make their deposit within the same 30-day period. Should they fail
to exercise this right within the period, APT will declare the highest bidder as the winning bidder.

The conflict: JG Summits protest of Kawasaki/PHIs right to top

JG Summit won the public bidding with a bid of P2,030,000,000.00. It acknowledged
Kawasaki and/or PHIs right to top. COP approved the sale of the shares to JG Summit, subject to
Kawasaki and/or PHIs right to top.
Subsequently, JG Summit informed APT that it was protesting the offer of PHI to
top its bid on the grounds that:
a) Kawasaki/PHI consortium (composed of Kawasaki, PHI, Mitsui, Keppel, SM Group, ICTSI and Insular Life)
violated the bidding process because the last four companies were the losing bidders;
b) Only Kawasaki could exercise the right to top since giving the same option to top to PHI constituted
unwarranted benefit to a third party;
c) No right of first refusal can be exercised in a public bidding or auction sale;
d) JG Summit was not estopped from questioning the proceedings.

APT notified JG Summit that PHI had exercised its option to top the highest bid and that the
COP had approved the same. Thus, APT and PHI executed a Stock Purchase Agreement.
The ensuing cases
Consequently, JG Summit filed a case for mandamus, but this was denied by the CA for lack of merit. CA also
denied the MR.
JG Summit then elevated the case to the SC, which reversed the CA and ruled that a shipyard like PHILSECO is
a public utility whose capitalization must be 60% Filipino-owned. Consequently, the right to top granted to
Kawasaki for the sale of the 87.67% equity of the government in PHILSECO is illegal both for violating the rules on
competitive bidding and also for allowing foreign corporations to own more than 40% equity in the shipyard. The SC
also found that JG Summit was not estopped from questioning the unconstitutional, illegal and inequitable provisions of
the bidding rules. Thus, it upheld JG Summits right as the highest bidder.
However, upon separate MRs, the SC issued a Resolution reversing its earlier ruling. It held PHILSECO is
not a public utility, as by nature, a shipyard is not a public utility and that no law declares a shipyard to
be a public utility. Also, the SC found nothing in the JVA between NIDC and Kawasaki which prevented the
latter from acquiring more than 40% of PHILSECOs total capitalization. Finally, the right to top in exchange
for the right of first refusal was held to not have violated the principles of competitive bidding.
The above developments led JG Summit to institute the instant MR with motion to elevate the case to the SC en
banc.

issue

1. WON there are sufficient bases to elevate the case at bar to the Court en banc NO.
2. WON the motion for reconsideration should be granted NO. (A/N: See specific issues raised
in each number.)

Ratio

Motion to elevate the case to the SC en banc

1.

JG Summit: The main issue WRT the propriety of the bidding process was confused with the policy issue of the
supposed fate of the shipping industry which has never been an issue that is determinative of this case.
SC: The SC clearly and definitively ruled on the propriety of the bidding process by exhaustively discussing the
rules and principles of public bidding and determining whether Kawasakis right to top granted to it in
exchange for its right of first refusal violates these principles. The shipbuilding industry was merely mentioned
in relation to the impact that it may receive as a result of the Courts ruling that a shipyard is not a public
utility which should maintain a 60%-40% Filipino-foreign equity ratio.

2.

JG Summit: The present case involves a novel question of law.

SC: There is no novel question of law. In fact, the case was resolved based on basic principles of the right of
first refusal in commercial law and estoppel in civil law. Contractual obligations arising from rights of first
refusal are not new in this jurisdiction and have been recognized in numerous cases. Estoppel is too known a
civil law concept to require an elongated discussion. Fundamental principles on public bidding were likewise
used to resolve the issues. There is also nothing new about the right to top, which was merely a condition or a
reservation made in the bidding rules fully disclosed to all bidding parties.

3.

JG Summit: There was clear executive interference in the judicial functions of the SC when the Secretary of
Finance forwarded to CJ Davide a memorandum, attaching a copy of the Foreign Chambers Report, which
matter was placed in the agenda of the Court and noted by it in a formal resolution.
SC: There was no executive interference in the functions of the SC by the mere filing of a memorandum by the
Secretary of Finance. Such memorandum was merely noted to acknowledge its filing. It had no further legal
significance.

The SC emphasized that the SC en banc is not an appellate court to which decisions or resolutions of a division may be
appealed.

Motion for Reconsideration (I think the 3rd item is the one that is most relevant to the
topic of corporate entity)
1.

JG Summit: The contracts do not authorize the right to top to be derived from the right of first refusal.
SC: Nothing in the JVA or in the bidding rules bars the conversion of the right of first refusal to the right to top.

2.

JG Summit: Neither the right of first refusal nor the right to top can be legally exercised by the consortium
which is not the proper party granted such right.
SC: The fact that the losing bidder has joined PHI in the latter's effort to raise the P2.131 billion necessary in
exercising the right to top is not contrary to law, public policy or public morals. There is nothing in the
bidding rules that bars the losing bidders from joining either the winning bidder or Kawasaki/PHI
to raise the purchase price. There was also no allegation or proof that the participation of the
losing bidders in the public bidding was done with fraudulent intent. Absent any proof of fraud, the
formation by PHI of a consortium is legitimate in a free enterprise system, unlike in a contract for the operation
of or construction of a government infrastructure where the identity of the buyer/bidder or financier constitutes
an important consideration. In the latter case, the government would have to take utmost precaution to
protect public interest by ensuring that the parties with which it is contracting have the ability to satisfactorily
construct or operate the infrastructure.

3. JG Summit: The mutual right of first refusal (and the right to top derived from it) between
NIDC and Kawasaki violates their contract and the Constitution, both of which require
them to maintain a 60%-40% capitalization ratio. This is because it would allow Kawasaki
to own more than the allowable 40% of PHILSECO, a landholding corporation, which is
bound by the 60%-40% constitutional limitation. (A/N: Apparently, somewhere along the
way, JG Summit dropped its public utility argument, which the SC already debunked in the
earlier cases and is not mentioned in the present one, and focused on this landholding
argument to insist on the 60%-40% capitalization ratio.)
SC: PHI admitted that PHILSECO owned land until the time of the bidding. However,
PHI asserts that this would not affect the right of first refusal but only the
exercise thereof, meaning: (1) if the land is retained, the right of first refusal, being a
property right, could be assigned to a qualified party; or (2) the land could be divested
before the exercise of the right of first refusal. However here, the right of first refusal
was validly converted into a right to top, which was exercised not by Kawasaki
but by PHI, a Filipino corporation. As such, there is no violation of the
Constitution.
The SC upheld PHIs argument and declared that the mutual right of first refusal of
NIDC and Kawasaki in the JVA was valid. First, it held that said right consisted of NIDC
and Kawasakis property right given to them by their contract. This agreement, by itself,
does not constitute a violation of the provisions of the Constitution limiting land ownership
to Filipinos and Filipino corporations. The SC sustained the abovementioned alternative
options given by PHI to avoid a violation of the constitution. It further held that if
Kawasaki, while PHILSECO still owns land, assigns its right to a qualified Filipino entity in
3

order to maintain the 60%-40% ratio, this transfer would not necessarily amount to a
violation of the Anti-Dummy Laws, absent proof of any fraudulent intent.
Further, the SC said that even if Kawasakis shareholdings in PHILSECO exceed
40%, it would not necessarily affect its standing as a shareholder; it would most
likely affect PHILSECO itself and disqualify it from owning land. This finds support
under the basic corporate law principle that the corporation and its stockholders are
separate juridical entities. In this vein, the right of first refusal over shares
pertains to the shareholders whereas the capacity to own land pertains to the
corporation. Hence, the fact that PHILSECO owns land cannot deprive
stockholders of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed the
allowed foreign equity, what the law disqualifies is the corporation from owning
land. This is the clear import of the relevant provisions under the constitution. 1
Finally, the court debunked JG Summits argument that an option to buy land (by a
foreigner/foreign corporation) being void itself, the right of first refusal granted to
Kawasaki, a Japanese corporation, and the right to top, which is sourced from the right of
first refusal, are also void. In arguing in this manner, JG Summit relied in the case of
Philippine Banking Corporation v. Lui She.
The SC said that nothing in the above decision absolutely barred an alien from ever having
the capacity to acquire land in the Philippines. He can be given an option to buy real
property, which he can exercise on condition that he is granted Philippine citizenship.
What was barred by the above ruling was a situation where an alien is given not only a
lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner
cannot sell or otherwise dispose of his property, this to last for 50 years, because by then
it becomes clear that the arrangement is a virtual transfer of ownership whereby the
owner divests himself in stages not only of the right to enjoy the land, but also of the right
to dispose of it rights the sum total of which make up ownership. Such a situation is not
present in the case at bar.
4.

JG Summit: There is a violation of the rules on competitive bidding.

SC: The discretion to accept or reject a bid and award contracts is vested in the government agencies
entrusted with that function. The discretion given to the authorities on this matter is of such wide latitude that
the courts will not interfere therewith, unless it is apparent that it is used as a shield to a fraudulent award. It is
only upon a clear showing of grave abuse of discretion that the courts will set aside the award of a contract
made by a government entity.

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential
energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the
exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake
such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under
such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or
industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.Section
7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain.

The facts in this case do not indicate any such grave abuse of discretion. The right to top was a condition
imposed by the government in the bidding rules which was made known to all parties. It was a condition
imposed on all bidders equally, based on the APTs exercise of its discretion in deciding on how best to
privatize the governments shares in PHILSECO. It was not a whimsical or arbitrary condition. The right to top
had its history in the mutual right of first refusal in the JVA and was reached by agreement of the government
and KAWASAKI.
5.

JG Summit: We are not estopped from questioning these issues although we participated in the bidding
process.
SC: (A/N: It wasnt really discussed in the present case, but I guess because in entering its bid, JG Summit
expressed that it acknowledged Kawasaki/PHIs right to top.)