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 shipyard is 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 repair industry. It can either spell the industrys demise or breathe new life to the struggling but potentially healthy partner in the countrys bid for economic growth. It can either kill an initiative yet in its infancy, or harness creativity in the productive disposition of government assets. ISSUE: Whether PHILSECO is a Public Utility. Whether under the 1977 Joint Venture Agreement, KAWASAKI can purchase only a maximum of 40% of PHILSECOs total capitalization. HELD: By nature, a shipyard is not 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. 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. 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. Public use means the same as use by the public. The essential feature of the public use is that it is not confined to privileged individuals, but is open to the indefinite public. It is this indefinite or unrestricted quality that gives it its public character. In determining whether a use is public, we must look not only to the character of the business to be done, but also to the proposed mode of doing it. If the use is merely optional with the owners, or the public benefit is merely incidental, it is not a public use,

authorizing the exercise of jurisdiction of the public utility commission. There must be, in general, a right which the law compels the owner to give to the general public. It is not enough that the general prosperity of the public is promoted. Public use is not synonymous with public interest. The true criterion by which to judge the character of 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 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. Furthermore, the phrase under the same terms in section 1.4 cannot be given an interpretation that would limit the right of KAWASAKI to purchase PHILSECO shares only to the extent of its original proportionate contribution of 40% to the total capitalization of the PHILSECO. Taken together with the whole of section 1.4, the phrase under the same terms means that a partner to the joint venture that decides to sell its shares to a third party shall make a similar offer to the nonselling partner. The selling partner cannot make a different or a more onerous offer to the 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 the right of first refusal protects the non-selling partner from the entry of third persons, it cannot also deprive the other partner the right to sell its shares to third persons if, under the same offer, it does not buy the shares. Apart from the right of first refusal, the parties also have preemptive rights under section 1.5 in the unissued shares of Philseco. Unlike the former, this situation does not contemplate transfer of a partners shares to third parties but the issuance of new Philseco shares. The grant of preemptive rights preserves the proportionate shares of the original partners so as not to dilute their respective interests with the issuance of the new 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 its original proportionate share in the joint venture. The case at bar does not concern the issuance of new shares but the transfer of a partners share in the joint venture. Verily, the operative protective mechanism is the right of first refusal which does not impose any limitation in the maximum shares that the non-selling partner may acquire.