About three weeks ago, I asked: Who will take up the cudgels for the minority shareholders who stand to suffer from higher taxes and administrative burdens imposed by Revenue Regulation No. 16-2012 (“RR 16-12”)?
Minority shareholders holding at least P72 billion worth of shares are affected by the issuance of RR 16-12. Two weeks ago, my question (and perhaps, the investing public’s prayers) had been answered.
In a letter addressed to the Commissioner of Internal Revenue, Secretary of Finance and the Securities and Exchange Commission, the Shareholders’ Association of the Philippines (SharePHIL) raised its concerns on the deleterious effects of RR 16-12 on the rights of minority shareholders.
SharePHIL is a group that protects shareholders’ rights. Its vision is to be the leading institution and catalyst in the protection and promotion of shareholder rights, duties and responsibilities. Its mission is to be a major player in promoting domestic capital market development through advocacy, education and enlightenment of shareholders.
In 2011, the SEC directed the Philippine Stock Exchange to amend its MPO rule by shortening the deadline for all listed companies to comply with the MPO requirement by 31 Dec. 2012. Companies that fail to meet the deadline would automatically be subjected to a six-month trading suspension, and delisting if they are still noncompliant after six months.
The Amended MPO Rule empowers the SEC to grant, upon the recommendation of the PSE, extensions in justifiable causes where the listed company has a concrete program to restore its public ownership level to the required percentage.
Accordingly, several listed companies applied for extension to comply with the Amended MPO Rule.
The extension would have enabled investors to continue enjoying the preferential tax rate of ½ of 1 percent of the transaction value and the simplified procedure under the law when they sell their shares through the PSE.
Last December, however, the Finance secretary and the Revenue commissioner released RR 16-12 imposing (net) capital gains tax (5 percent/10 percent) and documentary stamp taxes (DST) on the trading of shares of stock of noncompliant companies after the 2012 deadline, regardless of any extension given by the SEC.
As a consequence, the SEC denied all requests for extension of the grace period (Blanket Denial) to comply with the MPO requirement, regardless of their individual merit. Furthermore, the SEC directed the PSE to suspend all noncompliant companies starting 1 Jan. 2013, and automatically delist noncompliant companies after the suspension period.
SharePHIL requested the Finance chief and Revenue commissioner to reconsider RR 16-12, and suspend its implementation. SharePHIL also requested the SEC to reconsider the Blanket Denial based on the individual merit of the applications of noncompliant firms.
Basically, SharePHIL is saying that RR 16-12 is a squeeze-out mechanism that will work against minority shareholders in utter disregard of their rights under the law.
First, the implementation of RR 16-12 vis-à-vis the SEC Blanket Denial will reduce liquidity in the secondary market because of the higher transaction costs and greater administrative burden on minority shareholders who wish to sell their stakes in affected firms. Minority shareholders will now have to pay the (net) capital gains tax (5 percent/10 percent) and DST instead of the ½ of 1 percent stock transaction tax mandated by law. They will now also have to file several returns and additional documentary requirements with the Bureau of Internal Revenue for each transaction.
SharePHIL notes that minority shareholders do not have the same economies of scale as do larger shareholders, to reduce the costs associated with a transaction on a per share or peso basis. The additional costs and burdens imposed on the transfer of shares, as well as the automatic suspension or delisting of publicly listed companies, will further reduce liquidity in the secondary market.
SharePHIL further explained that delisting companies from the PSE will result in a lower disclosure regime that will adversely affect good corporate governance because of the lack of market check and reduced price transparency and accuracy.
Second, SharePHIL argued that the tender offer (which is a PSE requirement for delisting a noncompliant company) will not necessarily serve the best interest of minority shareholders. Unlike the mandatory tender offer required by the Securities Regulation Code, where a significant block of shares (35 percent or more) is being acquired, or where the resulting interest of the acquiring shareholder is majority ownership of the target company, there is no control or significant shareholding premium involved when the person(s) required to make the tender offer are already the controlling shareholders of the company.
What this all means is that minority shareholders will not be able to obtain the true value of their shareholdings as they are made to choose between (1) an offer that does not offer any premium and may be well below the true worth of the listed company, and (2) higher tax and administrative burdens and increased transaction costs. Either way, the minority shareholders hold the proverbial “empty bag.”
Third, SharePHIL asserts that the Tax Code only requires that shares of stock be listed and traded in the local stock exchange subject to the stock transaction tax of ½ of 1 percent in lieu of (net) capital gains tax and regular corporate or individual income tax, and exempt from DST.
RR 16-12 constitutes an illegal change of rules in the middle of the game that would erode the confidence of the investing public in our market.
Based on PSE’s final report, there are 10 noncompliant companies that account for about P722.3 billion in market capitalization, or 7.67 percent of the total domestic market capitalization of our stock market. If delisted from the PSE, the market capitalization of our stock market will be greatly reduced, which will make it less attractive to investors and adversely impact on local share prices to the detriment of the innocent small Juans and Marias.
With SharePhil leading the way, minority shareholders may just have found a voice to champion their cause.
(The author is co-managing partner and head of the corporate and special projects department of ACCRALAW, and a law professor at the Ateneo Law School. He may be contacted at felim@accralaw.com.)