JG Summit Holdings INC. vs. Court of Appeals | G.R. No.

124293 January 31, 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 NDC and KAWASAKI will contribute P330M 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 pursuant to an Administrative Order.
When the former President Aquino issued Proclamation No. 50 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 wherein the latter was named the trustee of
the National Government’s share in PHILSECO.

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 5%, the highest bid for the said shares. They further agreed that KAWASAKI woul.d
be entitled to name a company in which it was a stockholder, which could exercise the right to
top. KAWASAKI then informed APT that Philyards Holdings, Inc. (PHI) would exercise its right to top.

At the public bidding, petitioner J.G. Summit Holdings Inc. submitted a bid of Two Billion and Thirty Million
Pesos (Php2,030,000,000.00) with an acknowledgement of KAWASAKI/PHILYARDS right to top.
As petitioner was declared the highest bidder, the COP approved the sale “subject to the right of
Kawasaki Heavy Industries, Inc. / PHILYARDS Holdings Inc. to top JG’s bid by 5% as specified in the
bidding rules.”
On the other hand, the respondent by virtue of right to top by 5%, the highest bid for the said shares
timely exercised the same.

Petitioners, in their motion for reconsideration, raised, inter alia, the issue on the maintenance of the 60%-
40% relationship between the NIDC and KAWASAKI arising from the Constitution because PHILSECO is
a landholding corporation and need not be a public utility to be bound by the 60%-40% constitutional
limitation.

ISSUE: Whether under the 1977 Joint Venture Agreement, KAWASAKI can purchase only a
maximum of 40% of PHILSECO’s total capitalization.

The right of first refusal is meant to protect the original or remaining joint venturer(s) or shareholder(s)
from the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). The
joint venture between the Philippine Government and KAWASAKI is in the nature of a
partnership36 which, unlike an ordinary corporation, is based on delectus personae.37 No one can become
a member of the partnership association without the consent of all the other associates. The right of first
refusal thus ensures that the parties are given control over who may become a new partner in substitution
of or in addition to the original partners. Should the selling partner decide to dispose all its shares, the
non-selling partner may acquire all these shares and terminate the partnership. No person or corporation
can be compelled to remain or to continue the partnership. Of course, this presupposes that there are no
other restrictions in the maximum allowable share that the non-selling partner may acquire such as the
constitutional restriction on foreign ownership in public utility. The theory that KAWASAKI can acquire, as
a maximum, only 40% of PHILSECO’s 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 Government’s share to 40%
of Philseco’s total capitalization.
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 non-selling 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 partner’s
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 partner’s 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.

RULING: The court upheld the validity of the mutual rights of first refusal under the JVA between
KAWASAKI and NIDC.

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 the land, the
right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40%
ration. 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, in can even be said that if the foreign
shareholdings of a landholding corporation exeeds 40%, it is not the foreign stockholders’ ownership of
the shares which is adversely affected but the capacity of the corporation to won 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 judicial 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.
Bourns vs D.M. Carman (GR 2800 1906.12.04)

FACTS:
An action to recover the sum of $437.50 balance due on a contract for the sawing of lumber yard of Lo-
Chim-Lim was filed by Bourns (Plaintiff). Thecontract was entered into by Lo-Chim-Lim, acting as in his
own name with the plaintiff, and it appears that Lo-Chim-Lim personally agreed to pay for the
work himself. The plaintiff brought the action against Lo-Chim-Lim and his co-defendants jointly, alleging
that at the time the contract was made, they were the joint proprietors and operators of the said lumber
yard engaged in the purchase and sale of lumber under the name and style of Lo-Chim-Lim, hence were
partners. The lower court dismissed the action on the ground that defendants D.M. Carman, Fulgencio
and Tan-Tongco, except Vicente Palance and Go-Tauco were not the partners of Lo-Chim-Lim.

ISSUE:
Whether appellants are deemed partners of Lo-Chim-Lim and hence are
liable to Bourns

HELD:
No. The alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal agreement
only. There is no evidence tending to show that the said agreement was reduced to writing, or that it was
ever recorded in a public instrument. Moreover, the partnership had no corporate name. The partnership
was engaged in business under the name and style of Lo-Chim- Lim only. Moreover, it does not appear
that there was any mutual agreement between the parties and if there were any, it has not been shown
what the agreement was. The contracts made with the plaintiff were made by Lo-Chim-
Lim individually in his own name, and there is no evidence that the partnership over contracted in any
form. Hence, the partnership is one of cuentasen participacion. It is but a simple business conducted by
Lo-Chim- Lim exclusively in his own name. A partnership constituted in such a manner, the existence of
which was only known to those who had an interest in the same, being no mutual agreements between
the partners and without a corporate name indicating to the public in some way that there were other
people besides the one who ostensibly managed and conducted the business, is exactly the accidental
partnership of cuentas en participacion defined in Art. 239 of the Code of Commerce. Those who contract
with the person under whose name the business of such partnership of cuentas en participacion is
conducted, shall have only a right of action against such person and not against the other persons
interested, and the latter, on the other hand, shall have no right of action against the third person who
contracted with the manager unless such manager formally transfers his right to them.

. PARTNERSHIP OF "CUENTAS EN PARTICIPACION." — A partnership constituted in such a

manner that its existence was only known to those who had an interest in the same, there being no
mutual agreement between the partners, and without a corporate name indicating to the public in
some way that there were other people besides the one who ostensibly managed and conducted the
business, is exactly the accidental partnership of cuentas en participacion defined in article 239 of the
Code of
Commerce.

2. ID. — Those who contracted with the person in whose name the business of a partnership of cuentas
en participacion is conducted, shall have only the right of action against such person and not against the
other persons interested, and the latter, on the other hand, shall have no right of action against the third
person who contracted with the manager unless such manager formally transferred his right to
them. (Art. 242, Code of Commerce.
LBC Express, Inc. vs. Court of Appeals (GR 108679, 1994.09.21)

Facts:
Private respondent Adolfo
Carloto, incumbent
President-Manager of private
respondent Rural Bank of
Labason, alleged that he
was in Cebu City
transacting
business with the Central Bank
Regional Office. He was
instructed to proceed to Manila
on or before November 21,
1984 to follow-up the Rural
Bank's plan of payment of
rediscounting obligations with
Central Bank's main office in
Manila. Respondent Carloto
asked his sister to send him
P1000.00. Mrs. Concha thru
her clerk, Adelina Antigo
consigned thru LBC Dipolog
Branch the pertinent
documents and the sum of
ONE
THOUSAND PESOS
(P1,000.00) to respondent
Carloto. However, the
documents
arrived without the cashpack.
The cashpack was delivered
months thereafter. Which
triggered the filing of the case
by herein respondent carloto.
The trial court rendered its
decision in favor of Carloto.
The Petitioner appealed and the
respondent court modified
the judgment deleting only the
award of attorney’s fees. The
petitioner in this petition
raises the issue on the award of
Moral damages.
Issue:
Whether or not the court
erred in awarding Moral
Damages to the respondent
corporation?
Held:
Yes. The respondent court have
indeed erred in awarding moral
damages to the
Rural Bank of Labason
Inc. being an artificial
person. The court held that
Moral
damages are granted in
recompense for physical
suffering, mental anguish,
fright,
serious anxiety, besmirched
reputation, wounded feelings,
moral shock, social
humiliation, and similar injury.
7 A corporation, being an
artificial person and having
existence only in legal
contemplation, has no
feelings, no emotions, no
senses;
therefore, it cannot experience
physical suffering and mental
anguish. 8 Mental suffering
can be experienced only by one
having a nervous system and it
flows from real ills,
sorrows, and griefs of life all of
which cannot be suffered by
respondent bank as an
artificial person
Facts:
Private respondent Adolfo
Carloto, incumbent
President-Manager of private
respondent Rural Bank of
Labason, alleged that he
was in Cebu City
transacting
business with the Central Bank
Regional Office. He was
instructed to proceed to Manila
on or before November 21,
1984 to follow-up the Rural
Bank's plan of payment of
rediscounting obligations with
Central Bank's main office in
Manila. Respondent Carloto
asked his sister to send him
P1000.00. Mrs. Concha thru
her clerk, Adelina Antigo
consigned thru LBC Dipolog
Branch the pertinent
documents and the sum of
ONE
THOUSAND PESOS
(P1,000.00) to respondent
Carloto. However, the
documents
arrived without the cashpack.
The cashpack was delivered
months thereafter. Which
triggered the filing of the case
by herein respondent carloto.
The trial court rendered its
decision in favor of Carloto.
The Petitioner appealed and the
respondent court modified
the judgment deleting only the
award of attorney’s fees. The
petitioner in this petition
raises the issue on the award of
Moral damages.
Issue:
Whether or not the court
erred in awarding Moral
Damages to the respondent
corporation?
Held:
Yes. The respondent court have
indeed erred in awarding moral
damages to the
Rural Bank of Labason
Inc. being an artificial
person. The court held that
Moral
damages are granted in
recompense for physical
suffering, mental anguish,
fright,
serious anxiety, besmirched
reputation, wounded feelings,
moral shock, social
humiliation, and similar injury.
7 A corporation, being an
artificial person and having
existence only in legal
contemplation, has no
feelings, no emotions, no
senses;
therefore, it cannot experience
physical suffering and mental
anguish. 8 Mental suffering
can be experienced only by one
having a nervous system and it
flows from real ills,
sorrows, and griefs of life all of
which cannot be suffered by
respondent bank as an
artificial person
LBC EXPRESS, INC vs. CA
G.R. No. 108670 September 21,
1994
Facts:
Private respondent Adolfo
Carloto, incumbent
President-Manager of private
respondent Rural Bank of
Labason, alleged that he
was in Cebu City
transacting
business with the Central Bank
Regional Office. He was
instructed to proceed to Manila
on or before November 21,
1984 to follow-up the Rural
Bank's plan of payment of
rediscounting obligations with
Central Bank's main office in
Manila. Respondent Carloto
asked his sister to send him
P1000.00. Mrs. Concha thru
her clerk, Adelina Antigo
consigned thru LBC Dipolog
Branch the pertinent
documents and the sum of
ONE
THOUSAND PESOS
(P1,000.00) to respondent
Carloto. However, the
documents
arrived without the cashpack.
The cashpack was delivered
months thereafter. Which
triggered the filing of the case
by herein respondent carloto.
The trial court rendered its
decision in favor of Carloto.
The Petitioner appealed and the
respondent court modified
the judgment deleting only the
award of attorney’s fees. The
petitioner in this petition
raises the issue on the award of
Moral damages.
Issue:
Whether or not the court
erred in awarding Moral
Damages to the respondent
corporation?
Held:
Yes. The respondent court have
indeed erred in awarding moral
damages to the
Rural Bank of Labason
Inc. being an artificial
person. The court held that
Moral
damages are granted in
recompense for physical
suffering, mental anguish,
fright,
serious anxiety, besmirched
reputation, wounded feelings,
moral shock, social
humiliation, and similar injury.
7 A corporation, being an
artificial person and having
existence only in legal
contemplation, has no
feelings, no emotions, no
senses;
therefore, it cannot experience
physical suffering and mental
anguish. 8 Mental suffering
can be experienced only by one
having a nervous system and it
flows from real ills,
sorrows, and griefs of life all of
which cannot be suffered by
respondent bank as an
artificial person
Facts:
Private respondent Adolfo Carloto, incumbent President-Manager of private respondent
Rural Bank of Labason, alleged that he was in Cebu City transacting business with the
Central Bank Regional Office. He was instructed to proceed to Manilaon or before November 21, 1984
to follow-up the Rural Bank's plan of payment of rediscounting obligations with Central Bank's main
office in Manila. Respondent Carlotoasked his sister to send him P1000.00. Mrs. Concha thru her clerk,
Adelina Antigo consigned thru LBC Dipolog Branch the pertinent documents and the sum of
ONETHOUSAND PESOS (P1,000.00) to respondent Carloto. However, the documents arrived
without the cash pack. The cash pack was delivered months thereafter. Which triggered the filing of the
case by herein respondent Carlotto. The trial court rendered its decision in favor of Carloto. The Petitioner
appealed and the respondent court modified the judgment deleting only the award of attorney’s fees. The
petitioner in this petition raises the issue on the award of Moral damages.

Issue:

Whether or not the court erred in awarding Moral Damages to the respondent
corporation?

Held:

Yes. The respondent court have indeed erred in awarding moral damages to the Rural
Bank of Labason Inc. being an artificial person. The court held that Moral
damages are granted in recompense for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. 7 A corporation, being an artificial person and having existence
only in legal contemplation, has no feelings, no emotions, no senses ;therefore, it
cannot experience physical suffering and mental anguish. 8 Mental suffering can be experienced
only by one having a nervous system and it flows from real ills, sorrows, and griefs of life all of
which cannot be suffered by respondent bank as an artificial person.
Noell Whessoe, Inc. vs. Independent Testing Consultants

Facts:
Petrotech subcontracted Independent Testing Consultants to conduct non-destructive
testing on Liquigaz's piping systems and storage tanks. Thereafter, Independent Testing Consultants
conducted the tests, but Petrotech refused to pay. Independent Testing Consultants filed a
complaint against Petrotech, Liquigaz, and Noell Whessoe. Noell Whessoe denied being
Liquigaz's contractor and claimed only Petrotech should be liable. Petrotech alleged that Noell
Whessoe approved Independent Testing Consultants but later withdrew their approval. The Court of
Appeals affirmed that Noell Whessoe had knowledge of the engagement and could demand
reimbursement from Petrotech. Petitioner argues that it should not be held liable since it had no
direct contract with Independent Testing Consultants. They also claim to have fulfilled their
contractual obligations to Petrotech and seek moral damages for the negative image caused
by the case.

Issue:
Whether the petitioner is entitled to moral damages.

Ruling:

Petitioner is not entitled to any moral damages. The petitioner asserts that it was
entitled to moral damages of P1,000,000.00 on the basis that respondent Independent Testing
Consultants' collection suit has tarnished its good business name and standing. Moral
damages are awarded when the claimant suffers physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar injury. These damages must be understood to be in the concept of grants,
not punitive or corrective in nature, calculated to compensate the claimant for the injury
suffered. Its award is "aimed at a restoration, within the limits possible, of the spiritual status quo
ante; and therefore, it must be proportionate to the suffering inflicted. A corporation is not a
natural person. It is a creation of legal fiction and has no feelings, no emotions, no senses.

WHEREFORE, the Petition is PARTIALLY GRANTED

Manila Electric Company v. TEAM Electronics Corporation, GR 131723, 2007.12.13

FACTS:
Respondent TEAM Electronics
Corporation or TEC formerly
known as NS
Electronics, is wholly owned by
the Respondent Technology
Assembly and
Management Pacific
Corporation or TPC.
Petitioner MERALCO is a
utility
company supplying electricity
in Metro Manila Area.
Issue started when Meralco
alleged that the two meters
installed in
DCIM Building, owned by TEC
were found to be tampered with
and did not
register the actual power
consumption of the building.
Petitioner informed
TEC of the results of the
inspection and demanded
from the latter the
payment representing its
unregistered consumption, as
a result of the
alleged tampered meters. TEC
referred the letter to Ultra since
the latter was
in possession of the said
building during the covered
period. However, for
failure of TEC to pay the
differential billing, Meralco
disconnected the
electricity supply to the
DCIM Building. Prior to the
reconnection, Meralco
conducted a scheduled
inspection of the questioned
meters and found them
to have been tampered anew.
Meralco sent TEC another letter
demanding
payment, with a warning that
the electric service would be
disconnected in
case of continued refusal to
pay the differential billing.
To avert the
impending disconnection of
electrical service, TEC paid
the amount under
protest.
TEC filed a complaint for
damages against Meralco
before the RTC
Pasig. The court rendered
decision in favor of TEC and
ordered Meralco to
pay actual, exemplary and
moral damages. The trial
court found that
Meralco’s act of disconnecting
the DCIM Building’s electric
supply constituted
bad faith and thus makes it
liable for damages. The CA
affirmed the decision
of RTC, with modification of
the amount of actual damages
and interest.
ISSUE:
Is the award of moral damages
proper?
RULING:
No. TEC’s claim was premised
allegedly on the damage to its
goodwill
and reputation. However, as a
rule, a corporation is not
entitled to moral
damages because, not being a
natural person, it cannot
experience physical
suffering or sentiments like
wounded feelings, serious
anxiety, mental
anguish and moral shock.
The only exception to the
rule is when the
corporation has a reputation that
is debase, resulting in its
humiliation in the
business realm. but in this
exception, it is imperative
for the claimant to
FACTS:

Respondent TEAM Electronics Corporation or TEC formerly known as NSEl ectronics,

is wholly owned by the Respondent Technology Assembly and Management Pacific
Corporation or TPC. Petitioner MERALCO is a utility company supplying electricity in
Metro Manila Area. Issue started when Meralco alleged that the two meters installed in DCIM
Building, owned by TEC were found to be tampered with and did not register the actual power
consumption of the building. Petitioner informed TEC of the results of the inspection
and demanded from the latter the payment representing its unregistered consumption,
as a result of the alleged tampered meters. TEC referred the letter to Ultra since the latter
was in possession of the said building during the covered period. However, for failure of TEC
to pay the differential billing, Meralco disconnected the electricity supply to the DCIM
Building. Prior to the reconnection, Meralco conducted a scheduled inspection of the questioned
meters and found them to have been tampered anew. Meralco sent TEC another letter demanding
payment, with a warning that the electric service would be disconnected in case of continued
refusal to pay the differential billing. To avert the impending disconnection of
electrical service, TEC paid the amount under protest. TEC filed a complaint for damages
against Meralco before the RTC Pasig. The court rendered decision in favor of TEC and
ordered Meralco to pay actual, exemplary and moral damages. The trial court found
that Meralco’s act of disconnecting the DCIM Building’s electric supply constituted bad faith
and thus makes it liable for damages. The CA affirmed the decision of RTC, with modification
of the amount of actual damages and interest.

ISSUE:
Is the award of moral damages proper?

RULING:
No. TEC’s claim was premised allegedly on the damage to its goodwill and reputation.
However, as a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only exception to the rule is
when the corporation has a reputation that is debase, resulting in its humiliation in the business
realm. but in this exception, it is imperative for the claimant to present proof to justify
the award. It is essential to prove the existence of the factual basis of the damage and its causal
relation to petitioner’s acts. In this case, the records are bereft of any evidence that the name of
TEC has been debased as a result of the petitioner’s acts. The trial court simply awarded moral
damages without stating the basis thereof.

Ruling: Petitioner is not

entitled to any moral
damages. The petitioner
asserts that it was entitled
to moral damages of
P1,000,000.00 on the basis
that respondent
Independent Testing
Consultants' collection
suit has
tarnished its good business
name and standing.
Moral damages are
awarded when the claimant
suffers physical suffering,
mental anguish, fright,
serious anxiety,
besmirched reputation,
wounded
feelings, moral shock,
social humiliation, and
similar injury. These
damages
must be understood to
be in the concept of
grants, not punitive or
corrective in nature,
calculated to compensate
the claimant for the injury
suffered. Its award is
"aimed at a restoration,
within the limits possible,
of
the spiritual status quo
ante; and therefore, it must
be proportionate to the
suffering inflicted. A
corporation is not a natural
person. It is a creation of
legal fiction and has no
feelings, no emotions, no
senses.
WHEREFORE, the
Petition is PARTIALLY
GRANTED