JG SUMMIT HOLDINGS, INC., petitioner vs.
COURT OF APPEALS, COMMITTEE ON PRIVATIZATION, its Chairman and
Members; ASSET PRIVATIZATION TRUST and PHILYARDS HOLDINGS, INC., respondents
412 SCRA 10, G.R. No. 124293 September 24, 2003
FACTS: 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, the NDC and KAWASAKI will contribute P330M
for the capitalization of PHILSECO in the proportion of 60%-
40% respectively. One of its salient features is the grant to the
parties of the right of first refusal should either of them decide
to sell, assign or transfer its interest in the joint venture.
NIDC transferred all its rights, title and interest in PHILSECO to
the Philippine National Bank (PNB). Such interests were
subsequently transferred to the National Government
pursuant to an Administrative Order.
When the former President Aquino issued Proclamation No. 50
establishing the Committee on Privatization (COP) and the
Asset Privatization Trust (APT) to take title to, and possession
of, conserve, manage and dispose of non-performing assets of
the National Government, a trust agreement was entered into
between the National Government and the APT wherein the
latter was named the trustee of the National Government’s
share in PHILSECO.
In the interest of the national economy and the government,
the COP and the APT deemed it best to sell the National
Government’s share in PHILSECO to private entities. After a
series of negotiations between the APT and KAWASAKI , they
agreed that the latter’s right of first refusal under the JVA be
“exchanged” for the right to top by 5%, the highest bid for the
said shares. They further agreed that KAWASAKI would be
entitled to name a company in which it was a stockholder,
which could exercise the right to top. KAWASAKI then
informed APT that
Philyards Holdings, Inc. (PHI) would exercise its right to top.
At the public bidding, petitioner J.G. Summit Holdings Inc.
submitted a bid of Two Billion and Thirty Million Pesos
(Php2,030,000,000.00) with an acknowledgement
ofKAWASAKI/PHILYARDS right to top. As petitioner was
declared the highest bidder, the COP approved the sale
“subject to the right of Kawasaki Heavy Industries, Inc. /
PHILYARDS Holdings Inc. to top JG’s bid by 5% as specified in
the bidding rules.”
On the other hand, the respondent by virtue of right to top by
5%, the highest bid for the said shares timely exercised the
same.
Petitioner informed APT that it was protesting the offer of PHI
to top its bid
Petitioner was notified that PHI had fully paid the balance of
the purchase price of the subject bidding. APT notified
petitioner that PHI had exercised its option to top the highest
bid and that the COP had approved the same. Hence, APT and
PHI executed a Stock Purchase Agreement.
Consequently, petitioner filed with this Court a Petition for
Mandamus under G.R. No. 114057. On May 11, 1994, said
petition was referred to the Court of Appeals. On July 18, 1995,
the Court of Appeals denied the same for lack of merit. It
ruled that the petition for mandamus was not the proper
remedy to question the constitutionality or legality of the right
of first refusal and the right to top that was exercised by
KAWASAKI/PHI.
Petitioner filed a Motion for Reconsideration of said Decision
which was denied on March 15, 1996. Petitioners, in their
motion for reconsideration, raised, inter alia, the issue on the
maintenance of the 60%-40% relationship between the NIDC
and KAWASAKI arising from the Constitution because
PHILSECO is a landholding corporation and need not be a
public utility to be bound by the 60%-40% constitutional
limitation.
Petitioner thus filed a Petition for Certiorari with this Court
alleging grave abuse of discretion on the part of the appellate
court.
On November 20, 2000, this Court rendered the now assailed
Decision. Said decision ruled among others that a shipyard like
PHILSECO is a public utility whose capitalization must be sixty
percent (60%) Filipino-owned. Consequently, the right to
top granted to KAWASAKI under the Asset Specific Bidding
Rules (ASBR) drafted for the sale of the 87.67% equity of the
National Government in PHILSECO is illegal---not only because
it violates the rules on competitive bidding--- but more so,
because it allows foreign corporations to own more than 40%
equity in the shipyard. Thus, this Court voided the transfer of
the national governments 87.67% share in PHILSECO to
Philyard Holdings, Inc., and upheld the right of JG Summit, as
the highest bidder, to take title to the said shares.
Now, Respondents filed motion for reconsideration raising the
issues
ISSUES:
1. Whether PHILSECO is a public utility – NO.
2. Whether under the 1977 Joint Venture Agreement, KAWASAKI
can purchase only a maximum of 40% of PHILSECO’s total
capitalization. – NO.
3. Whether the right to top granted to KAWASAKI in exchange for
its right of first refusal violates the principles of competitive
bidding. – NO.
HELD:
Motion for Reconsideration is hereby GRANTED. The
impugned Decision and Resolution of the Court of Appeals are
AFFIRMED.
1. No. PHILSECO is not a public utility
Reasons:
First. By nature, a shipyard is not a public utility. A public
utility is a business or service engaged in regularly supplying
the public with some commodity or service of public
consequence such as electricity, gas, water, transportation,
telephone or telegraph service. To constitute a public utility,
the facility must be necessary for the maintenance of life and
occupation of the residents. term public utility implies public
use and service to the public. The principal determinative
characteristic of a public utility is that of service to, or
readiness to serve, an indefinite public or portion of the
public as such which has a legal right to demand and receive
its services or commodities. Stated otherwise, the owner or
person in control of a public utility must have devoted it to
such use that the public generally or that part of the public
which has been served and has accepted the service, has the
right to demand that use or service so long as it is continued,
with reasonable efficiency and under proper charges. Unlike a
private enterprise which independently determines whom it
will serve, a public utility holds out generally and may not
refuse legitimate demand for service
Second. There is no law declaring a shipyard as a public
utility. A shipyard has been considered a public utility merely
by legislative declaration (sections 13 (b) and 15 of C.A. No. 146
were repealed in so far as the former law included shipyards in
the list of public utilities). Absent this declaration, there is no
more reason why it should continuously be regarded as such.
Thus, a shipyard reverts back to its status as non-public utility
prior to the enactment of the Public Service Law.
2. NO. 1977 Joint Venture Agreement reveals that
there is nothing that prevents KAWASAKI from acquiring
more than 40% of PHILSECOs total capitalization.
 Under section 1.3, the parties agreed to the amount
of P330 million as the total capitalization of their joint venture.
There was no mention of the amount of their initial
subscription. What is clear is that they are to infuse the needed
capital from time to time until the total subscribed and paid-
up capital reaches P312 million. The phrase maintaining a
proportion of 60%-40% refers to their respective share of the
burden each time the Board of Directors decides to increase
the subscription to reach the target paid-up capital of P312
million. It does not bind the parties to maintain the sharing
scheme all throughout the existence of their partnership.
 The non-selling party is given the right of first
refusal under section 1.4 to have a preferential right to buy or
to refuse the selling parties shares. The right of first refusal is
meant to protect the original or remaining joint venturer(s) or
shareholder(s) from the entry of third persons who are not
acceptable to it as co-venturer(s) or co-shareholder(s). The
joint venture between the Philippine Government and
KAWASAKI is in the nature of a partnership36 which, unlike an
ordinary corporation, is based on delectus personae.
Of course, this presupposes that there are no other
restrictions in the maximum allowable share that the non-
selling partner may acquire such as the constitutional
restriction on foreign ownership in public utility. The theory
that KAWASAKI can acquire, as a maximum, only 40% of
PHILSECOs shares is correct only if a shipyard is a public
utility. In such instance, the non-selling partner who is an alien
can acquire only a maximum of 40% of the total capitalization
of a public utility despite the grant of first refusal. The partners
cannot, by mere agreement, avoid the constitutional
proscription.
PHILSECO is not a public utility and no other
restriction is present that would limit the right of KAWASAKI
to purchase the Governments share to 40% of Philsecos total
capitalization
 the parties also have preemptive rights under
section 1.5 in the unissued shares of Philseco. Unlike the Rright
of first refusal, this situation does not contemplate transfer of
a partners shares to third parties but the issuance of new
Philseco shares. The grant of preemptive rights preserves the
proportionate shares of the original partners so as not to dilute
their respective interests with the issuance of the new shares.
Unlike the right of first refusal, a preemptive right gives a
partner a preferential right over the newly issued shares only
to the extent that it retains its original proportionate share in
the joint venture.
The case at bar does not concern the issuance of new
shares but the transfer of a partners share in the joint
venture. Verily, the operative protective mechanism is the
right of first refusal which does not impose any limitation in
the maximum shares that the non-selling partner may
acquire.
3. No. the right to top granted to KAWASAKI and
exercised by private respondent did not violate the rules of
competitive bidding.
The word bidding in its comprehensive sense means making an
offer or an invitation to prospective contractors whereby the
government manifests its intention to make proposals for the
purpose of supplies, materials and equipment for official
business or public use, or for public works or repair.
The three principles of public bidding are: (1) the offer to the
public; (2) an opportunity for competition; and (3) a basis for
comparison of bids.39 As long as these three principles are
complied with, the public bidding can be considered valid and
legal.
In the instant case, the sale of the Government shares in
PHILSECO was publicly known. All interested bidders were
welcomed. The basis for comparing the bids were laid down.
All bids were accepted sealed and were opened and read in the
presence of the COAs official representative and before all
interested bidders. The only question that remains is whether
or not the existence of KAWASAKIs right to top destroys the
essence of competitive bidding so as to say that the bidders
did not have an opportunity for competition. We hold that it
does not.
The essence of competition in public bidding is that the bidders
are placed on equal footing. This means that all qualified
bidders have an equal chance of winning the auction through
their bids. In the case at bar, all of the bidders were exposed
to the same risk and were subjected to the same
condition, i.e., the existence of KAWASAKIs right to top. This
reservation or qualification was made known to the bidders in
a pre-bidding conference. They all expressly accepted this
condition in writing without any qualification.
Furthermore, when the Committee on Privatization notified
petitioner of the approval of the sale of the National
Government shares of stock in PHILSECO, it specifically stated
that such approval was subject to the right of KAWASAKI
Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs
bid by 5% as specified in the bidding rules. Clearly, the
approval of the sale was a conditional one. Since Philyards
eventually exercised its right to top petitioners bid by 5%, the
sale was not consummated. Had Philyards Holdings, Inc. failed
or refused to exercise its right to top, the sale between the
petitioner and the National Government would have been
consummated.
In the instant case, the highest bidder was well aware that
the acceptance of its bid was conditioned upon the non-
exercise of the right to top.
If at all, the obvious consideration for the exchange of the right
of first refusal with the right to top is that KAWASAKI can name
a nominee, which it is a shareholder, to exercise the right to
top. This is a valid contractual stipulation; the right to top is an
assignable right and both parties are aware of the full legal
consequences of its exercise. As aforesaid, all bidders were
aware of the existence of the right to top, and its possible
effects on the result of the public bidding was fully disclosed
to them. The petitioner, thus, cannot feign ignorance nor can
it be allowed to repudiate its acts and question the
proceedings it had fully adhered to.