JG SUMMIT HOLDINGS v CA

FACTS: A joint venture (JVA) was entered by a government corporation, National Investment and
Development Corporation (NIDC) with a Japanese corporation, Kawasaki Heavy Industries, Ltd. for a shipyard
business, Philippine Shipyard and Engineering Corporation (PHILSECO), with an agreement of a shareholding
proportion of 60%-40 respectively and a right of first refusal to Kawasaki. Thereafter, NIDC transferred all its
rights, title and interest to the Philippine National Bank (PNB).

After several months, by virtue of Administrative Order 14, PNB's interest in PHILSECO was transferred to the
National Government. Then President Aquino’s Proclamation No. 50 was issued 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 by virtue of which the latter was named the trustee of the
National Government's share in PHILSECO. As a result of a quasi-reorganization of PHILSECO to settle its huge
obligations to PNB, the National Government's shareholdings in PHILSECO increased to97.41% thereby
reducing Kawasaki's shareholdings to 2.59%.After negotiations, it was agreed that Kawasaki’s right of first
refusal under the JVA be “exchanged” for the right to top by 5% the highest bid for said shares. Kawasaki
informed that Philyards Holdings, Inc. (PHI), in which it was a stockholder, would exercise this right in its stead.

Petitioner JG Summit Holdings was declared highest bidder. Even so, because of the right to top by 5%
percent the highest bid, Kawasaki/PHI’s was able to top the winning bid. JG Summit protested, contending
that PHILSECO, as a shipyard is a public utility and, hence, must observe the 60%-40%Filipino-foreign
capitalization. By buying 87.67% of PHILSECO’s capital stock at bidding, Kawasaki/PHI in effect now owns more
than 40% of the stock, thus violative of the laws.

ISSUE:

RULING: A careful reading of the 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 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. But as afore-discussed, 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 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.