JG SUMMIT HOLDINGS vs. CA (G.R. No.

124293, September 24, 2003)

Doctrine: The right of first refusal in the JVA under which the corporation is organized
constitutes a legal means by which the corporate venture would include the delectus
personae characteristic within the JV arrangement, allowing stockholders the ability to
prevent equity interests from being transferred to third parties. The JVA’s right of first
refusal must be made to apply and be binding to the Government and the bidder at a
public bidding held on the shares of the JV corporation.

Facts:

National Investment and Development Corporation (NIDC) and Kawasaki Heavy Industries
entered into a Joint Venture Agreement (JVA) in a shipyard business named PHILSECO,
with a shareholding of 60-40% respectively. This agreement provided for a right of first
refusalshould either of them decide to sell, assign or transfer its interest in the joint venture.

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 it 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 of KAWASAKI’s
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. Hence, KAWASAKI was
declared the highest bidder. However, JG summit posits the argument that the right of
first refusal contained in the JVA is unconstitutional because it allowed KAWASAKI, a
foreign corporation, to own more than 40% of a public utility.

Issue: Is the right of first refusal under the JVA unconstitutional? NO

Ruling:

1. First, the court ruled that a shipyard is not a public utility, hence not subject to the 60-40%
ownership requirement

2. . The joint venture between the Philippine Government and KAWASAKI is in the nature of
a partnership which, unlike an ordinary corporation, is based on delectus personae. No one
can become a member of the partnership association without the consent of all the other
associates. The right of first refusal thus ensures that the parties are given control over
who may become a new partner in substitution of or in addition to the original partners.
Should the selling partner decide to dispose all its shares, the non-selling partner may
acquire all these shares and terminate the partnership. No person or corporation can be
compelled to remain or to continue the partnership. 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 PHILSECO's 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 Government's share to
40% of Philseco's total capitalization.