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J.G. SUMMIT HOLDINGS v. CA

FACTS:

The case involves two motions filed by the petitioner, J.G. Summit Holdings, Inc., seeking reconsideration of a resolution and to elevate the case to the Court En Banc. The undisputed facts of the case state that on January 27, 1997, the National Investment and Development Corporation (NIDC) entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. (KAWASAKI) for the construction, operation, and management of the Subic National Shipyard, Inc. (SNS) which later became the Philippine Shipyard and Engineering Corporation (PHILSECO). The JVA granted the parties the right of first refusal should either of them decide to sell, assign, or transfer their interest in the joint venture. In 1986, NIDC transferred all its rights, title, and interest in PHILSECO to the Philippine National Bank (PNB), which were subsequently transferred to the National Government. The National Government's shareholdings in PHILSECO increased to 97.41% as a result of a quasi-reorganization in 1989. The Committee on Privatization (COP) and the Asset Privatization Trust (APT) decided to sell the National Government's share in PHILSECO, and KAWASAKI's right of first refusal was "exchanged" for the right to top the highest bid by 5%. KAWASAKI notified APT that Philyards Holdings, Inc. (PHI) would exercise its right to top at the pre-bidding conference. Bidding was held on December 2, 1993, with the highest qualified bid subject to the final approval of the APT Board of Trustees and COP. Kawasaki and/or PHI had 30 days to exercise their option to top the highest bid by offering a bid 5% higher. If they failed to exercise this option, APT would declare the highest bidder the preferred bidder.

In this case, petitioner J.G. Summit Holdings, Inc. participated in the public bidding for the sale of the 87.67% equity of the National Government in PHILSECO. The bidding rules provided that if the highest bid is approved by the Committee on Privatization (COP), Kawasaki Heavy Industries, Inc. and/or its nominee Philyard Holdings, Inc. shall have 30 days to exercise their "Option to Top the Highest Bid" by offering a bid equivalent to the highest bid plus 5% thereof. Petitioner was declared the highest bidder, and the COP approved the sale subject to the right of Kawasaki/Philyards to top petitioner's bid by 5% as specified in the bidding rules. Petitioner protested the offer made by Philyard Holdings, Inc. to top its bid, alleging violations of the Asset Specific Bidding Rules (ASBR) and other legal grounds. Nonetheless, Philyard Holdings, Inc. paid the balance of the purchase price and executed a Stock Purchase Agreement with the Asset Privatization Trust (APT). Petitioner filed a Petition for Mandamus with the Supreme Court, but it was referred to the Court of Appeals, which denied the petition for lack of merit. Petitioner then filed a Petition for Certiorari with the Supreme Court, alleging grave abuse of discretion on the part of the appellate court. The Supreme Court ruled in favor of petitioner, declaring the right to top granted to Kawasaki/Philyards as illegal and void. The transfer of the government's shares to Philyard Holdings, Inc. was also voided, and petitioner, as the highest bidder, was ordered to pay the bid price to APT, who was then ordered to execute a Stock Purchase Agreement with petitioner and issue the corresponding certificates of stocks.

The case involves the issuance of certificates of stock to the petitioner representing 87.6% of PHILSECO's total capitalization. The court ruled in favor of the respondents, stating that PHILSECO is not a public utility and that there is no provision in the 1977 Joint Venture Agreement that prevents Kawasaki from acquiring more than 40% of PHILSECO's total capitalization. The court also held that the right to top granted to Kawasaki did not violate the principles of competitive bidding. The petitioner filed a Motion for Reconsideration and a Motion to Elevate the Case to the Court En Banc. The relevant issues to be resolved are whether the case should be elevated to the Court en banc and whether there are cogent reasons to reconsider the court's previous resolution. The petitioner argues for elevation to the Court en banc on grounds of confusion between the bidding process and the fate of the shipping industry, the presence of a novel question of law, and alleged executive interference. The private respondent opposes the motion, arguing that the Supreme Court en banc is not an appellate court and that there is no novel question of law involved.

The petitioner in this case argues that PHILSECO, as a shipyard, should maintain a 60%-40% Filipino-foreign equity ratio because it is considered a public utility. The Court acknowledges the significant impact of its ruling on the shipbuilding industry. The petitioner also contends that this case should be considered under a Supreme Court Resolution dating back to February 23, 1984, which covers cases involving novel questions of law or the modification/reversal of a doctrine or principle laid down by the court. However, the Court rejects this argument, stating that the present case is based on basic principles of the right of first refusal and estoppel in commercial and civil law. It emphasizes that contractual obligations arising from rights of first refusal have long been recognized in the jurisdiction, and estoppel is a well-known concept in civil law. The Court also mentions that it used fundamental principles on public bidding to resolve the issues raised by the petitioner. Lastly, the petitioner relies on the right to top in a public bidding as a basis for considering the case as involving a novel issue. However, the Court dismisses this claim, stating that the right to top was merely a condition disclosed to all bidding parties and not a novel issue.

ISSUES:

  1. Whether the right to top granted to Kawasaki in exchange for its right of first refusal violates the principles of competitive bidding.

  2. Whether the shipyard, Philseco, as a public utility, should maintain a 60%-40% Filipino-foreign equity ratio.

  3. Whether the petitioner is entitled to a fair resolution of the case based on contract law.

  4. Whether the consortium has the legal authority to exercise the right of first refusal or the right to top.

  5. Whether the 60%-40% relationship between NIDC and KAWASAKI is constitutionally required.

  6. Whether the award of shares to PHILYARDS through the exercise of the right to top is valid.

  7. Whether the landholding issue is relevant to the case.

    • Whether the right of first refusal granted in the Joint Venture Agreement between Kawasaki and National Investment and Development Corporation is valid.
    • Whether the right of first refusal can be converted into the right to top.
    • Whether the consortium formed by Philyard Holdings to raise funds for exercising the right to top is valid.
    • Whether the landholding issue affects the validity of the right of first refusal.

  12. Whether the right of first refusal granted to Kawasaki is valid under the Anti-Dummy Laws.

  13. Whether the right to top, sourced from the right of first refusal, is also valid.

  14. Whether the alleged ownership of real property by PHILYARDS violates the constitutional requirement on ownership of land.

  15. Whether the prohibition on ownership of land extends to immovable or real property as defined under Article 415 of the Civil Code.

RULING:

  1. The Supreme Court ruled that the right to top does not violate the principles of competitive bidding. The right to top was a condition imposed in the bidding rules, fully disclosed to all parties, and imposed on all bidders equally. The Court held that the discretion to accept or reject a bid and award contracts is vested in the government agencies, and the exercise of this discretion is a policy decision that courts will not interfere with unless there is a clear showing of grave abuse of discretion. In this case, there was no grave abuse of discretion on the part of public respondents in awarding the contract to Respondent SGS.

  2. The Supreme Court rejected the argument that Philseco, as a shipyard, should maintain a 60%-40% Filipino-foreign equity ratio. The Court held that this argument was not a novel question of law and was resolved based on fundamental principles of the right of first refusal in commercial law and estoppel in civil law. The Court recognized the impact of its ruling on the shipbuilding industry and emphasized that contractual obligations arising from rights of first refusal have been recognized in numerous cases.

  3. The Court denied the petitioner's Motion for Reconsideration, stating that the fair resolution of the case is based on principles governing obligations and contracts and corporate law.

  4. The Court upheld the right of PHILYARDS to exercise the right to top as the nominee of KAWASAKI and rejected the petitioner's argument that the consortium was not the proper party granted such right.

  5. The Court ruled that the 60%-40% constitutional requirement does not apply to PHILSECO because it is not a landholding corporation and need not be a public utility to be bound by such limitation.

  6. The Court held that the award of shares to PHILYARDS through the exercise of the right to top is valid and that the formation of a consortium to raise the required amount does not violate the JVA or the ASBR.

  7. The Court found the landholding issue raised by the petitioner to be irrelevant to the case.

    • The right of first refusal under the Joint Venture Agreement is valid and constitutes a property right of the shareholders.
    • The right of first refusal can be converted into the right to top.
    • The consortium formed by Philyard Holdings to raise funds for exercising the right to top is valid.
    • The landholding issue does not affect the validity of the right of first refusal.

  12. The right of first refusal granted to Kawasaki is valid under the Anti-Dummy Laws. The transfer of shares to Kawasaki, a Japanese corporation, does not violate the Anti-Dummy Laws as long as there is no proof of fraudulent intent. The right of first refusal can be exercised by Kawasaki or any other party that PHILSECO feels it can comfortably do business with. The capacity to own land pertains to the corporation, not the shareholders, and therefore, the fact that PHILSECO owns land does not deprive stockholders of their right of first refusal.

  13. The right to top, sourced from the right of first refusal, is also valid. The case of Lui She, cited by the petitioner, does not support the contention that the option to buy land is void in itself. In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of ownership that prohibited the owner from disposing of the property. However, the mutual right of first refusal in this case does not amount to a virtual transfer of land to a non-Filipino. The right of first refusal here pertains to shares of stock, not the land itself.

  14. The Court denied the petitioner's motion for reconsideration and affirmed the decision appealed from. The Court also denied the motion to elevate the case to the Court En Banc for lack of merit.

PRINCIPLES:

  • The discretion to accept or reject a bid and award contracts is vested in the government agencies entrusted with that function, and courts will not interfere unless there is a clear showing of grave abuse of discretion.

  • Contractual obligations arising from rights of first refusal are recognized in commercial law.

  • Estoppel is a known civil law concept.

  • The highest or lowest bidder in a public bidding is not entitled to an award as a matter of right if the bidding rules reserve the right of the government to reject any or all bids or waive defects and accept the most advantageous offer.

  • The exercise of policy decision-making within the constitutional boundaries of a government agency will not be interfered with by courts.

  • Respect for contractual stipulations.

  • Recognition of assignable nature of contract rights.

  • Upholding rights of first refusal.

  • Non-implication of landholding limitations on the exercise of right of first refusal.

  • Principles governing obligations and contracts.

  • Corporate law principles.

  • Substantive due process.

  • Abuse of right provision in the Civil Code.

CASE: J.G. Summit Holdings, Inc. v. Court of Appeals

  • The right of first refusal is a property right of shareholders and can be assigned to a qualified Filipino entity.

  • The conversion of the right of first refusal to the right to top is not prohibited by law or public policy.

  • The formation of a consortium to raise funds for the exercise of the right to top is a legitimate commercial decision.

  • The landholding issue does not affect the validity of the right of first refusal unless there is proof of fraudulent intent.

  • The transfer of shares to a foreign corporation does not violate the Anti-Dummy Laws in the absence of fraudulent intent.

  • The right of first refusal over shares pertains to the shareholders, while the capacity to own land pertains to the corporation.

  • The option to buy land is not void in itself, but it becomes invalid and amounts to a virtual transfer of ownership if it prohibits the owner from disposing of the property.

  • The prohibition on the transfer or conveyance of private lands to individuals, corporations, or associations applies only to ownership of land and does not extend to immovable or real property as defined under Article 415 of the Civil Code.

  • Ownership of immovable property such as trees, plants, and growing fruit attached to the land is not limited to Filipinos and Filipino corporations only.