Corporate Securities Info
Sidestepping the 60-40 rule
By Raul J. Palabrica Jr.Philippine Daily Inquirer
One year ago on Thursday, the Supreme Court ruled in a case involving PLDT that, for purposes of determining compliance with the 60 percent-40 percent nationality requirement (in favor of Filipinos) in the operation of public utilities, “capital” refers only to shares of stocks entitled to vote in the election of directors.
Citing its adverse effects on the economy, PLDT and several business groups have asked the tribunal to reconsider its decision.
This week, the tribunal heard oral arguments on that request.
Until the tribunal ruled differently, capital has been interpreted as “the sum total of the outstanding capital stock, irrespective of their nomenclature or classification as common, preferred, voting or non-voting.”
Thus, as long as 60 percent of the capital stock of a company engaged in a partly nationalized business is owned by Filipinos, regardless of who among the stockholders have the right to elect its directors, the company can lawfully engage in that business.
Considering the gravity of the issue, not to mention the tribunal’s workload, it will take some time before the last word on this case is heard.
Voting rights
Not wanting to hold their breath while waiting for that day to happen, some of the companies that would be adversely affected by a revised rendition of the nationality rule have decided to prepare for a worst-case scenario.
PLDT, Globe Telecom and Ayala Land, among others, have taken steps to amend their Articles of Incorporation to meet the requirements of the decision.
Basically, the amendment consists of giving preferred shareholders (with Filipino citizens in mind) the right to vote in the election of directors which, by tradition, is reserved to holders of common stocks.
The old practice of restricting voting rights to common stockholders to the exclusion of preferred shareholders will be done away with. The two sets of stocks will enjoy equal voting privileges, although their dividend rates may vary depending on their by-laws.
With the parity in voting rights, the sum total of common and preferred shares shall be used in determining compliance with the minimum Filipino capital ownership requirement.
By making the price of preferred shares less expensive, Filipinos or Philippine companies would be encouraged to buy them, thus making it easier for the affected companies to meet the 60-40 benchmark.
Adjustments
The move of some companies to change their voting rules ahead of the final decision on the issue has raised some eyebrows. Why the rush? Why not wait for the tribunal’s ruling? Who knows, the justices may reconsider their stand.
And even if the tribunal decides to stand pat, the companies would, in the spirit of fairness, be given sufficient time to make the proper adjustments in their corporate structure.
After all, in the absence of malice or bad faith by the contending parties, court rulings are prospectively applied.
From the legal standpoint, awaiting the tribunal’s final ruling is a wise course of action. The justices may, after hearing the legal and economic consequences of its decision, find no compelling reasons to alter the two-decade-old interpretation of capital.
Although that possibility exists, there are realities on the ground that make preparations for a worst-case scenario a sound preemptive move.
Most partly nationalized businesses, such as operation of public utilities and exploitation of natural resources, are capital-intensive, i.e., they require substantial funds to be able to operate efficiently and profitably.
Unless their stockholders have deep pockets, these companies have to either invite foreign investors, borrow from banks or issue corporate bonds to meet their financing requirements.
Contracts
In these transactions, it is a standard practice that the covering contracts contain (aside from the obligatory financial terms) representations, covenants and warranties that the company must abide with to be able to avail itself of the credit facilities.
Thus, for example, the company has to state that it is lawfully organized in accordance with Philippine regulations, that it undertakes to maintain that standing during the life of the agreement, and that it ensures that it will take the proper measures to live up to that commitment.
Before any funds are released, the creditor or investor will demand that the company affirm in writing the accuracy of those statements. The affirmation is often signed by the company president or CEO, and confirmed by an opinion of counsel issued by a lawyer designated by the parties for that purpose.
If, say, at the time the funds are due for release the tribunal decides to retain the existing nationality rule and the company has not made any changes in its stockholding structure, fine. The company will have no problem affirming the validity of those statements.
But if the tribunal instead upholds its revised interpretation on ownership, the company could find itself in serious trouble. Since its corporate structure no longer complies with Philippine regulations, it cannot give the required affirmation.
That failure may result in the suspension of the release of the funds or, worse, put the company in default, meaning, it will be obliged to immediately pay whatever amounts that have been released earlier plus interest and penalties.
So why take the risk? By making the needed amendments ahead of the tribunal’s final ruling, the companies are assured that, regardless of how the wind blows later, they can meet their contractual commitments and receive the promised money.
It has been said that a good executive is not measured on how well he can solve problems, but on how he can prevent them from happening.
(For feedback, write to <rpalabrica@inquirer.com.ph>.)
Follow Us
Recent Stories:
Short URL: http://business.inquirer.net/?p=68031
Tags: Business , capital , foreign ownership , Philippines , shares , stocks , supreme court
