Harsh delisting penalty

For violation of disclosure rules, high-end property developer Alphaland Corp. was recently removed by the Philippine Stock Exchange (PSE) from the list of companies that can trade their stocks in the exchange.

It has also been barred from applying for relisting within five years from its delisting.

In addition, its top executives—chair and CEO Roberto Ongpin, president Mario Oreta and corporate secretary Rodolfo Ma. Ponferrada—have been disqualified from becoming directors or executive officers in any company that may apply for listing in the future.

By way of background, listed companies are required under existing regulations to promptly disclose to the exchange all material developments in their operations.

In turn, these disclosures have to be disseminated by the exchange to the public, in particular, the stockholders.

Based on the disclosures, the stockholders can make an informed judgment on whether to sell their shares, buy more, or adopt a wait-and-see attitude.

The information also gives PSE and the Securities and Exchange Commission the opportunity to exercise their supervisory or regulatory powers over the reporting companies if the circumstances call for it.

Intentional

Noticeably, PSE failed to give additional details about Alphaland’s defective or noncompliant disclosures that formed the basis of its action.

Did the disclosures contain serious misrepresentations? Were there material omissions? Were the alleged errors in the disclosures intentional or inadvertent?  If the disclosures were not timely made, were any reasons given for the delay? If so, were they meritorious?

The determination of whether a disclosure is compliant with the prescribed rules has been a contentious issue between reporting companies and PSE because it involves financial sanctions. Unless the media get wind of it, disputes over this matter are kept under wraps.

Although PSE has laid down the parameters on the preparation and submission of disclosures, the sufficiency or adequacy of disclosures depends on their assigned reviewer.

If stock trading is smooth and profitable, disclosures are liberally treated and minor lapses ignored.

But if controversy hits the stock market or extraordinary movements in stock prices are noticed, the disclosures are reviewed with fine-toothed combs and, in case violations are found, sanctions are imposed.

Verbiage

For securities lawyers, the preparation of disclosures is an art that calls for facility in language and imaginative interpretation of the rules.

Except for data that are easily verifiable, e.g., percentage of beneficial ownership or capital subscription, information required to be disclosed that is “subjective” in nature or susceptible to varying interpretations is often presented in an exaggerated manner or underplayed.

Let’s say a listed company has been reported to be in talks with a foreign investor for a joint venture that could improve its bottom line.

If the negotiations turned out well, expect the company to disclose the deal in glowing terms that give the impression that it is poised to become the stock market’s next superstar.

In case things bombed out, the disclosure will probably read “… the parties have decided to rethink their positions to enable them to arrive at a mutually acceptable arrangement in the near future.” Stripped of verbiage, it means the proposed joint venture went pfft.

A vaguely worded or inconclusive disclosure is next to useless because it prevents the affected stockholders from making informed judgments on what action to take on their stocks.

Administrative

There is no question that defective or noncompliant disclosures should be penalized to deter their repetition.

But who should be held liable for violation of disclosure rules? The company as a juridical entity, or the corporate officers responsible for the preparation and submission of the disclosures, or both?

If the infraction was committed in the company’s name, or its effects redounded to its benefit, it is fair to impose the penalty on the company.

The argument can be made that the company officials tasked with complying with disclosure rules should, in addition, be similarly penalized because a company can act only through its representatives. Sounds logical.

The flaw in this argument, however, is it “upgrades” the consequences of an infraction which, from a close reading of the Securities Regulation Code, is intended to be dealt with administratively, e.g., through fines and other sanctions, the ultimate of which is delisting from the exchange.

Delisting is not something to be taken lightly. It could stain the company’s reputation in the financial market.

For the next five years, the company is barred from gaining access to public funding through the stock market. Fair enough.

But it is not fair to outrightly hold personally liable the corporate officials involved in the preparation of disclosures.

By extending the prohibition to Alphaland’s key executives ability to become directors or executive officers of any company that may apply for listing in the future, PSE has, in the absence of a showing that they personally benefited from or acted in bad faith in the disclosure violation, changed the character of the otherwise administrative offense.

The company’s offense has become their personal offense, too. And for that, they have to suffer the misfortune of becoming pariahs in companies that want to list on the stock market.

There go the presumptions of innocence and regularity in commercial transactions. The burden of proof is on them to prove they acted in good faith or no malice attended the submission of the disclosures.

Tough luck.

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