Filings of public companies
Many people engaged in business have the mistaken notion that after a corporation has registered with the Securities and Exchange Commission, nothing else needs to be done to maintain its juridical personality.
Thus, it is not uncommon for corporations to forget to file their General Information Sheet and their audited financial statements within the prescribed periods.
The price for such omission (whether deliberate or due to plain neglect) is cancellation of registration.
The sanction is necessary because it is principally through these reports that the public or any party that wants to do business with them can get reliable information about their stockholders, operations and financial standing.
The reportorial requirement is stricter for companies that sell securities to the public, are listed in the stock exchange, or are classified as public companies, i.e., they have assets worth at least P50 million and have 200 or more stockholders who each hold a minimum of 100 shares of a class of their equity securities.
The filings of these companies include an annual report which should contain, among others, a balance sheet, profit and loss statement, statement of cash flows, and management’s discussion of results of operations.
Considering the extent of financial involvement of the public in these companies, it is imperative that their filings can be reliably trusted upon to guide investors in their investment plans.
Stockholders
The criteria to be applied in defining the coverage of “public companies” under the Securities Regulation Code (SRC) was recently passed upon by the Supreme Court in the case of “Philippine Veterans Bank vs. Justina Callangan and SEC, G.R. No. 191995,” dated Aug. 3, 2011.
In 2004, the SEC wrote Veterans Bank informing it that, since it has assets in excess of P50 million and 200 or more stockholders who own each at least 100 shares, it is considered a public company that should file the reports applicable to companies of that nature.
The bank, however, countered that it should not be considered a public company “because it is a private company whose shares of stocks are available only to a limited class or sector, i.e., to World War II veterans, and not to the general public.”
The SEC rejected this argument and assessed the bank a monetary penalty for failure to comply with the reportorial requirements from 2001 to 2003.
After the SEC denied the bank’s motion to withdraw the assessment, the bank elevated the matter to the Court of Appeals, then to the Supreme Court, which both upheld the SEC’s action.
Unfazed by the double whammy, the bank filed a motion for reconsideration with the tribunal contesting the dismissal of its earlier petition to set aside the SEC’s resolution.
Veterans’ cause
The bank reiterated its earlier position that it was not a public company because its “shares can be owned only by a specific group of people, namely, World War II veterans and their widows, orphans and compulsory heirs, and is not open to the investing public in general.”
It further pleaded with the tribunal “to take into consideration the financial impact to the cause of ‘veteranism’; compliance with the reportorial requirements under the SRC … would compel the Bank to spend approximately P40 million just to reproduce and mail the “Information Statement” to its 400,000 shareholders nationwide.”
In resolving the issue, the tribunal pointed out that the bank does not dispute the SEC’s finding that it has assets in excess of P50 million and has 395,998 stockholders, which clearly shows that it meets the criteria to be classified as a public company.
Thus, the justices ruled that “it is clear that a ‘public company,’ as contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed; even companies like the bank, whose shares are offered only to a specific group of people, are considered a public company, provided they meet the requirements enumerated above.”
Interpretation
The tribunal noted that the bank’s argument that financial prejudice would be suffered by thousands of veteran-stockholders, and for which it was seeking exemption from compliance, stems from the provision of the law requiring public companies to give its stockholders an annual report in such form as may be prescribed by the SEC.
By raising the money issue, the tribunal said the bank forgot that “the first and fundamental duty of the Court is to apply the law.
“Construction and interpretation come only after a demonstration that the application of the law is impossible or inadequate unless interpretation is resorted to. In this case, we see the law to be very clear and free from any doubt or ambiguity; thus, no room exists for construction or interpretation.”
The justices conceded that the distribution of annual reports will involve some costs for the bank, but said it will be worth the expense.
They pointed out that “for many stockholders, these annual reports are the only means of keeping in touch with the state of health of their investments; to them, these are invaluable and continuing links with the bank that immeasurably contribute to the transparency in public companies that the law envisions.”
One final word on annual reports. To avoid the high cost of preparing and distributing printed copies of the annual report to the stockholders, the companies concerned may instead send compact discs (CDs) containing the required contents of such reports. This format meets the requirements of the law.
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