8/13/2019 JG Summit Holdings, Inc. vs. Court of Appeals, 412 SCRA 10, September 24, 2003

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JG SUMMIT HOLDINGS, INC.vs. COURT OF APPEALS

G.R. No. 124293. September 24, 2003

FACTS:

The core issue posed by the Motions for Reconsideration is whether a shipyardis a public utility whose capitalization must be sixty percent (60%) owned by Filipinos.Our resolution of this issue will determine the fate of the shipbuilding and ship repairindustry. It can either spell the industrys demise or breathe new life to the struggling butpotentially healthy partner in the countrys bid for economic growth. It can either kill aninitiative yet in its infancy, or harness creativity in the productive disposition ofgovernment assets.

ISSUE:

Whether PHILSECO is a Public Utility.

Whether under the 1977 Joint Venture Agreement, KAWASAKI can purchase only amaximum of 40% of PHILSECOs total capitalization.

HELD:

By nature, a shipyard is not a public utility.A public utility is a business orservice engaged in regularly supplying the public with some commodity or service ofpublic consequence such as electricity, gas, water, transportation, telephone ortelegraph service. To constitute a public utility, the facility must be necessary for themaintenance 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 publicdoes not automatically make it a public utility. Public use is not synonymous with publicinterest. As its name indicates, the term public utility impliespublic useand serviceto the public. The principal determinative characteristic of a public utility is that ofservice to, or readiness to serve, an indefinite public or portion of the public as suchwhich has a legal right to demand and receive its services or commodities. Statedotherwise, the owner or person in control of a public utility must have devoted it to suchuse that the public generally or that part of the public which has been served and hasaccepted the service, has the right to demand that use or service so long as it iscontinued, with reasonable efficiency and under proper charges. Unlike a privateenterprise which independently determines whom it will serve, a public utility holds out

generally and may not refuse legitimate demand for service.

Public use means the same as use by the public. The essential feature of thepublic use is that it is not confined to privileged individuals, but is open to the indefinitepublic. It is this indefinite or unrestricted quality that gives it its public character. Indetermining whether a use is public, we must look not only to the character of thebusiness to be done, but also to the proposed mode of doing it. If the use is merelyoptional with the owners, or the public benefit is merely incidental, it is not a public use,

8/13/2019 JG Summit Holdings, Inc. vs. Court of Appeals, 412 SCRA 10, September 24, 2003

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authorizing the exercise of jurisdiction of the public utility commission. There must be, ingeneral, a right which the law compels the owner to give to the general public. It is notenough that the general prosperity of the public is promoted. Public use is notsynonymous with public interest. The true criterion by which to judge the characterof the use is whether the public may enjoy it by right or only by permission.

A careful reading of the 1977 Joint Venture Agreement reveals that there is nothingthat prevents KAWASAKI from acquiring more than 40% of PHILSECOs totalcapitalization.

Under section 1.3, the parties agreed to the amount of P330 million as the totalcapitalization of their joint venture. There was no mention of the amount of their initialsubscription. What is clear is that they are to infuse the needed capital from time to timeuntil the total subscribed and paid-up capital reaches P312 million. The phrasemaintaining a proportion of 60%-40% refers to their respective share of the burdeneach time the Board of Directors decides to increase the subscription to reach the targetpaid-up capital of P312 million. It does not bind the parties to maintain the sharing

scheme all throughout the existence of their partnership.

Furthermore, the phrase under the same terms in section 1.4 cannot be given aninterpretation that would limit the right of KAWASAKI to purchase PHILSECO sharesonly to the extent of its original proportionate contribution of 40% to the totalcapitalization of the PHILSECO. Taken together with the whole of section 1.4, thephrase under the same terms means that a partner to the joint venture thatdecides to sell its shares to a third party shall make a similar offer to the non-selling partner. The selling partner cannot make a different or a more onerous offer tothe non-selling partner.

The exercise of first refusal presupposes that the non-selling partner is aware of the

terms of the conditions attendant to the sale for it to have a guided choice. While theright of first refusal protects the non-selling partner from the entry of third persons, itcannot also deprive the other partner the right to sell its shares to third persons if, underthe same offer, it does not buy the shares.

Apart from the right of first refusal, the parties also have preemptive rightsundersection 1.5 in the unissued shares of Philseco. Unlike the former, this situation does notcontemplate transfer of a partners shares to third parties but the issuance of newPhilseco shares. The grant of preemptive rights preserves the proportionate shares ofthe original partners so as not to dilute their respective interests with the issuance of thenew shares. Unlike the right of first refusal, a preemptive right gives a partner a

preferential right over the newly issued shares only to the extent that it retains itsoriginal proportionate share in the joint venture.

The case at bar does not concern the issuance of new shares but the transfer of apartners share in the joint venture. Verily, the operative protective mechanism is theright of first refusal which does not impose any limitation in the maximum shares thatthe non-selling partner may acquire.