JG Summit Holdings, Inc.

vs Court of Appeals
412 SCRA 10
September 24, 2003
PUNO, J.:

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 to
97.41% 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:
Whether or not PHILSECO, a shipyard, is a public utility and hence Kawasaki, a foreign
corporation, can acquire only a maximum of 40% of its capital.

HELD:

No, a shipyard such as PHILSECO is not considered a public utility.

First, because a shipyard which is a place or enclosure where ships are built or repaired is
in its nature serves a limited clientele and not legally obliged to render its services
indiscriminately to the public. While the business may be regulated for public good, it does not
justify the qualifications for public utility which implies public use and service to the public hence
it must be engaged in regularly supplying the public with some commodity or service of public
consequence.

Second, it is not declared as public utility by law. Based on its legislative history, since the
enactment of Act No. 2307 which created the Public Utility Commision (PUC) until repealed by
Commonwealth Act No. 146 establishing Public Service Commission, a shipyard was a public
utility and should abide by the Filipino citizenship requirement of 60-40 capital of a corporation.
Thereafter, Pres. Marcos issued PD No. 666 which removed the shipbuilding and ship repair
industry from the list of public utilities thereby freeing it from the 60-40 citizenship requirement.
Batas Pambansa Blg. 391 repealed the PD No. 666 and reverted shipyards as public utilities. Then
Pres. Aquino’s Executive Order No. 226 repealed the previous laws with no revival of the principle
that shipyards are public utilities. Thus absent of such legislation declaring the same, a shipyard
reverts back to its status as a non-public utility.

With this, there was nothing preventing Kawasaki from acquiring more than 40% of
PHILSECO’s total capitalization. The JVA should also be interpreted as 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.

Dispositive Portion: IN VIEW OF THE FOREGOING, the Motion for Reconsideration is hereby
GRANTED. The impugned Decision and Resolution of the Court of Appeals are AFFIRMED.

(NOTE: Two motions were filed for resolution of this decision. The decision appealed from was
affirmed upholding the status of non-public utility of shipyards. It held that the prohibition in the
Constitution applies to the ownership of land; the fact that PHILSECO owns land cannot deprive
Kawasaki of its right of first refusal reiterating 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, 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. (J.G. Summit Holdings, Inc. vs CA; 450 SCRA 169; January
31, 2005))