Avoiding the relisting prohibition

In a recent column, I discussed the tax and non-tax consequences arising from delisting publicly listed companies for non-compliance with the 10 percent minimum public ownership (MPO) rules of the Philippine Stock Exchange (PSE).

As you may remember, a striking non-tax consequence is the five-year prohibition on the company from relisting in the PSE.

To recap, the MPO rules provide that a publicly listed company whose shares are now under trading suspension for non-compliance with the MPO requirement by Dec. 31, 2012,  have six months, or until June 30, 2013, to comply with the 10 percent requirement. If the company does not comply by that time, it will be automatically delisted from the PSE.

While this “automatic delisting” is akin to involuntary delisting under the PSE rules, the MPO rules explicitly provide that for purposes of the automatic delisting of shares of the noncompliant company, the Involuntary Delisting rules of the PSE shall not apply. However, the MPO rules expressly state that the five-year Relisting Prohibition under the Involuntary Delisting rules shall apply.

The Relisting Prohibition under the PSE rules has two parts. The first part provides that a company that is involuntarily delisted from the PSE cannot apply for relisting within a period of five years from the time it was delisted. This consequence is pretty straightforward and does not need further discussion.

What I previously said may be problematic is the second sentence of the Relisting Prohibition, which states that 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 five-year period. Note that the rule uses the term “any listing” without making any distinction; listing, however, can be of many types, such as IPO listing, secondary listing, follow-on listing, top-up listing, etc.

Moreover, the definition of “listing” in the PSE listing rules is broadly stated and refers to “the admission of securities for trading and the inclusion in the official registry in the Exchange.”

Most importantly, the rationale for the disqualification of the directors and executive officers is that they are (and should be) responsible for their company’s failure to comply with a basic requirement of the PSE to remain as a listed company. This, in turn, would cause damage and prejudice to the shareholders who are deprived of the benefits of listing, which include a transparent structure and governance for their company and the tax perks for selling and buying shares of the company.

Considering the rationale for the disqualification and the broad wording of the rule, one can justifiably argue that the directors and executive officers of the delisted cannot sit as such in any other publicly listed company. Verba legis and anima legis, so to speak.

Now, the question is: What can be done?

Delisting, under the PSE rules, is of two types: voluntary and involuntary.

The MPO rules appear to recognize voluntary delisting as an option for companies that fail to comply with the 10 percent MPO requirement rather than be automatically delisted.

In fact, a number of companies availed themselves of this remedy before the automatic trading suspension took effect after Dec. 31, 2012, deadline.

The inclusion of this option appears to be the light at the end of the tunnel for companies that are in danger of being automatically delisted.  Of course, this has to be done before the June 30, 2013, deadline. While voluntary delisting may entail time and cost for the subject company as the PSE requires the conduct of a tender offer, it will help ensure that the Relisting Prohibition shall not apply and the subject company may thereafter apply for a new listing even before the lapse of five years from the time it was delisted.  More importantly, the directors and executive officers of such company may be able to sit as such in other companies applying for any listing (whether in the broad sense or not) within the five-year period.

This is how the PSE currently interprets its rules. Hopefully, the SEC and minority shareholders who feel aggrieved by the delisting of their companies will not question such interpretation.

(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].)