Officers of delisted companies beware!

Listing a company with the Philippine Stock Exchange (PSE) is one thing; maintaining the company’s status as a listed one is another.

A new criterion for maintaining the listed status of a company is the continuous compliance with the Minimum Public Ownership Rule (MPO rule) of the PSE.

The MPO rule requires companies listed with the PSE to ensure that at least 10 percent of their outstanding capital stock is owned by the public.

The PSE has strictly implemented the rule since Jan. 1, 2013. There are seven listed companies whose shares have been automatically suspended from trading because of non-compliance with the rule. They have a combined market capitalization of P801.5 billion.

These noncompliant companies have until June 30, 2013, to comply with the MPO Rule. If these companies still fail to comply, then they shall be automatically delisted from the PSE.

Tax consequences

As discussed in my previous columns, shareholders of delisted companies selling their shares will not benefit from the stock transaction tax, which is only one-half of one percent of the transaction value. Instead, they have to pay the capital gains tax, which is a final tax of 5 percent on net capital gains not exceeding P100,000, and 10 percent for net capital gains in excess of  P100,000. So, unless the PSE does something to fend off the potential damage, minority shareholders holding at least P80.1 billion worth of shares of the seven suspended companies stand to be prejudiced by their delisting from the PSE.

Non-tax consequences

While a delisted company may not really care about these tax consequences (considering that the tax burden is on the investors), there are possible non-tax consequences that should be of concern to the company and their directors or officers.

The MPO Rule explicitly provides that “the five-year prohibition on relisting” in the PSE under the Delisting Rules of the PSE shall apply to companies that are subject to automatic delisting for non-compliance with the MPO Rule.

The relisting prohibition is two-pronged:

— The company “cannot apply for relisting within a period of five years from the time it was delisted;” and

— The directors and executive officers of the company are “disqualified from becoming directors or executive officers of any company applying for listing” within the same period.

The first sanction is pretty straightforward. It applies only to the company that has been delisted. It does not apply to any other company, such as related companies of the delisted company.

The second sanction is another story, because the penalty extends beyond the delisted company. Some say that directors and executive officers of the delisted company cannot become directors or officers of “any” company applying for listing within the same five-year period.

Following this view, the following illustrations demonstrate the possible legal consequences:

If Mr. X is a director of the delisted company, he is disqualified from becoming a director or officer of another company (related or unrelated to the delisted company) that applies for listing with the PSE within the same five-year prohibitory period; and

The MPO Rule uses the phrase “applying for listing” without qualification. Those in the industry are aware that there are different kinds of listing such as: IPO listing; follow-on listing; and listing of top-up shares. So, if Mr. X is also a director or executive officer of another listed company (whether or not related to the delisted company) that wants to do a “follow-on” or “top-up” listing of its shares, then Mr. X cannot be a director or officer of that company.

I’m sure that there are several listed companies (especially conglomerates) that have interlocking directors or officers.

Before it is too late, these companies better be aware of the possible non-tax consequences.

The question now is: Is there a way out of this potential legal dilemma? That can be the subject of further discussion.

(The author, former PSE president and CEO, is now the 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 [email protected].)