J.G. SUMMIT HOLDINGS, INC., vs.

COURT OF APPEALS; COMMITTEE ON

PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST; and
PHILYARDS HOLDINGS, INC.,

G.R. No. 124293             2000, 2003, 2005

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 NIDC and KAWASAKI will contribute P330 million 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. On
December 8, 1986, President Corazon C. Aquino established 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.
Sunsequently, 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 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge
obligations to PNB, the National Government's shareholdings in PHILSECO increased to
97.41% thereby reducing KAWASAKI's shareholdings to 2.59%.
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 five percent (5%) the highest
bid for the said shares
As petitioner was declared the highest bidder, the COP approved the sale on December 3,
1993 "subject to the right of Kawasaki Heavy Industries, Inc./Philyards Holdings, Inc. to top
JGSMI's bid by 5% as specified in the bidding rules."
KAWASAKI/PHI together with PHILYARDS, Mitsui, Keppel, SM Group, ICTSI and
Insular Life gathered their funds together to top petitioner’s bid.
Petiioner now objects that the “right to top the bid by 5%” of KAWASAKI would
constitute a violation of the 60%-40% capitalization requirement since a shipyard is a public
utility which is governed by Article XII, Section 11 of the Constitution.
ISSUES:
1. Is a shipyard a public utility as provided by law and which Article XII of Constitution
applies?
2. How does BOI classify Shipyard?
3. What is the capitalization requirement in such activity under the law?
4. Is purchasing shares in a landing corporation covered by the same disqualification from
owning land?

RULINGS:
First Issue:
2000 Ruling:
Shipyard is a public utility.
Although, P.D. No. 666 dated March 5, 1975 explicitly stated that a "shipyard"
was not a "public utility” such law was expressly repealed by Section 20 of Batas
Pambansa Blg. 391, the Investment Incentive Policy Act of 1983. Subsequently,
Executive Order No. 226, the Omnibus Investments Code of 1987, was issued and
Section 85 thereof expressly repealed B.P. Blg. 391.
The express repeal of B.P. Blg. 391 by E.O. No. 226 did not revive Section 1 of
P.D. No. 666, declassifying the shipbuilding and ship repair industry as a public utility, as
said executive order did not provide otherwise. When a law which expressly repeals a
prior law is itself repealed, the law first repealed shall not be thereby revived unless
expressly so provided.[23] Consequently, when the APT drafted the ASBR sometime in
1993, P.D. No. 666 no longer existed in our statute books. While it is true that the repeal
of a statute does not operate to impair rights that have become vested or accrued while
the statute was in force, there are no vested rights of the parties that should be protected
in the case at bar. The reason is simple: said decree was already inexistent when the
ASBR was issued.
A shipyard such as PHILSECO being a public utility as provided by law, the
following provision of the Article XII of the Constitution applies:

2003 Ruling:

Shipyard is not a public utility by nature and there is no law declaring a shipyard
as 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.18 To constitute a public utility, the facility
 must be necessary for the maintenance of life and occupation of the residents. However,
the fact that a business offers services or goods that promote public good and serve the
interest of the public does not automatically make it a public utility. Public use is not
synonymous with public interest. As its name indicates, the 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.19 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.

A shipyard is a place or enclosure where ships are built or repaired. Its nature

dictates that it serves but a limited clientele whom it may choose to serve at
its discretion. While it offers its facilities to whoever may wish to avail of its services, a
shipyard is not legally obliged to render its services indiscriminately to the public. It
has no legal obligation to render the services sought by each and every client. The fact
that it publicly offers its services does not give the public a legal right to demand that
such services be rendered.

2005 Ruling:
Adopted 2003 Ruling.This Court categorically ruled on the petitioner’s argument
that PHILSECO, as a shipyard, is a public utility which should maintain a 60%-40%
Filipino-foreign equity ratio, as it was a pivotal issue. In doing so, we recognized the
impact of our ruling on the shipbuilding industry which was beyond avoidance.

Second Issue:
2000, 2003, 2005

The BOI classified shipoyard as a non- public utility.

In view of the foregoing, there can be no other conclusion than to hold that a
shipyard is not a pubic utility. A shipyard has been considered a public utility merely by
legislative declaration. Absent this declaration, there is no more reason why it should
continuously be regarded as such. The fact that the legislature did not clearly and
unambiguously express its intention to include shipyards in the list of public utilities
indicates that that it did not intend to do so. Thus, a shipyard reverts back to its status as
non-public utility prior to the enactment of the Public Service Law.
 This interpretation is in accord with the uniform interpretation placed upon it by
the Board of Investments (BOI), which was entrusted by the legislature with the
preparation of annual Investment Priorities Plan (IPPs). The BOI has consistently
classified shipyards as part of the manufacturing sector and not of the public utilities
sector. The enactment of Batas Pambansa Blg. 391 did not alter the treatment of the BOI
on shipyards. It has been, as at present, classified as part of the manufacturing and not of
the public utilities sector.

Third Issue:
2000 Ruling:
The capitalization requirement in such activity under the law is 60%-40%
capitalization wherein 60% must be held by Filipinos.
The progenitor of this constitutional provision, Article XIV, Section 5 of the 1973
Constitution, required the same proportion of 60%-40% capitalization. The JVA between
NIDC and Kawasaki entered into on January 27, 1977 manifests the intention of the
parties to abide by the constitutional mandate on capitalization of public utilities.
The joint venture created between NIDC and Kawasaki falls within the purview
of an "association" pursuant to Section 5 of Article XIV of the 1973 Constitution and
Section 11 of Article XII of the 1987 Constitution. Consequently, a joint venture that
would engage in the business of operating a public utility, such as a shipyard, must
observe the proportion of 60%-40% Filipino-foreign capitalization.

2003-2005 Ruling:
There is no capitalization requirement in such activity and does not 60%-40%
capitalization wherein 60% must be held by Filipinos.
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.

Fourth Issue:
 2000 Ruling:
Purchasing of shares in a landing corporation is covered by the same
disqualification from owning land.
Notably, paragraph 1.4 of the JVA accorded the parties the right of first refusal
"under the same terms." This phrase implies that when either party exercises the right of
first refusal under paragraph 1.4, they can only do so to the extent allowed them by
paragraphs 1.2 and 1.3 of the JVA or under the proportion of 60%-40% of the shares of
stock. Thus, should the NIDC opt to sell its shares of stock to a third party, Kawasaki
could only exercise its right of first refusal to the extent that its total shares of stock
would not exceed 40% of the entire shares of stock of SNS or PHILSECO. The NIDC, on
the other hand, may purchase even beyond 60% of the total shares. As a government
corporation and necessarily a 100% Filipino-owned corporation, there is nothing to
prevent its purchase of stocks even beyond 60% of the capitalization as the Constitution
clearly limits only foreign capitalization.
The constitutionality of said MARINA guideline, however, is not in issue here.
Kawasaki was bound by its contractual obligation under the JVA that limits its right of
first refusal to 40% of the total capitalization of PHILSECO. Thus, Kawasaki cannot
purchase beyond 40% of the capitalization of the joint venture on account of both
constitutional and contractual proscriptions.

2003 Ruling:
Purchasing of shares in a landing corporation is not covered by the same
disqualification from owning land.
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.

2005 Ruling:
 Same with 2003. Purchasing of shares in a landing corporation is not covered by
the same disqualification from owning land.
We uphold the validity of the mutual rights of first refusal under the JVA between
KAWASAKI and NIDC. First of all, the right of first refusal is a property right of
PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their JVA. This
right allows them to purchase the shares of their co-shareholder before they are offered to
a third party. The agreement of co-shareholders to mutually grant this right to each
other, by itself, does not constitute a violation of the provisions of the Constitution
limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS
correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly
assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This
transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof
of any fraudulent intent. The transfer could be made either to a nominee or such other
party which the holder of the right of first refusal feels it can comfortably do business
with. Alternatively, PHILSECO may divest of its landholdings, in which case
KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECO’s
equity. In fact, it can even be said that if the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign stockholders’ ownership of the shares
which is adversely affected but the capacity of the corporation to own land – that is,
the corporation becomes disqualified to own 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.