JG Summit Holdings v.

CA
G.R. No. 124293 January 31, 2005 J. Puno Cadorna
petitioner JG Summit Holdings, Inc.
respondents Court of Appeals; Committee on Privatization, its Chairman and Members; Asset 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 government’s 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 corporation’s 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 government’s share in
PHILSECO.
Apparently, PHILSECO, at the time, owed PNB huge amounts, so that a quasi-reorganization of PHILSECO occurred that raised
the government’s shareholdings in PHILSECO to 97.41%. Meanwhile, Kawasaki’s shareholdings dropped to 2.59%.

Sale of government equity in PHILSECO to private entities

COP and APT decided to sell the national government’s share in PHILSECO to private entities. APT
entered into an agreement with Kawasaki in which the latter’s right of first refusal under the JVA was
converted into the latter’s 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
Kawasaki’s right to top.
The Asset Specific Bidding Rules (ASBR) contained the mechanics for the bidding process of the government’s 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 Summit’s protest of Kawasaki/PHI’s right to top

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 JG Summit won the public bidding with a bid of P2,030,000,000.00. It acknowledged Kawasaki and/or
PHI’s right to top. COP approved the sale of the shares to JG Summit, subject to Kawasaki and/or PHI’s 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 Summit’s right as the highest bidder.
However, upon separate MR’s, 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 PHILSECO’s 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 Kawasaki’s 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 Court’s 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.

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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 PHI’s 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 Kawasaki’s
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 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 Kawasaki’s 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

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 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 Summit’s 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.

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 APT’s exercise of its discretion in deciding on how best to privatize the government’s 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 wasn’t really discussed in the present case, but I guess because in entering its bid, JG Summit expressed that it acknowledged
Kawasaki/PHI’s right to top.)

1 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.