SEC pushes for arbitration to resolve shareholder discords

THE SECURITIES and Exchange Commission (SEC) seeks to introduce a mandatory “shareholder arbitration” to resolve intra-corporate disputes, which otherwise usually take long to resolve in courts.

In a keynote speech before the Shareholders Association of the Philippines (SharePhil) last Friday, SEC chair Teresita Herbosa said the concept of shareholder arbitration was included in the proposed amendments to the antiquated Corporate Code of the Philippines.

Shareholder arbitration, typically shunned in advanced markets like the US but popular in some emerging markets but with slow wheels of justice like in Brazil, requires squabbling shareholders to submit their claims for arbitration.

“We need not stress the obvious that the same situation of ‘slow and ill-equipped courts’ is present here,” Herbosa said.

She also underscored the importance of good corporate governance, which she said would benefit both majority and minority shareholders. “The big challenge for us, therefore, is to strike a balance between imposing the best corporate governance practices and what companies deem as overregulation. These are issues which hopefully could be addressed by the SEC in the proposed amendments to the Corporate Code of the Philippines.”

Herbosa said there were calls by the US SEC as early as 2006 to permit shareholders to adopt alternative procedures for resolving disputes, such as arbitration. Fresh attempts emerged in 2012, with supporters citing findings that ligitation costs have become a burden to shareholders.

But some US lawmakers urged the SEC to “maintain its long-standing policy of opposing inclusion of provisions requiring mandatory arbitration of shareholders disputes in the corporate documents of public companies.” The proposal was later junked.

In sharp contrast to the US, Herbosa said Brazil even provided incentives to promote shareholder arbitration. For example, to receive a higher grade for its corporate governance practices, a listed company in Brazil needed to establish arbitration as the primary dispute resolution system.

Herbosa said that while there were concerns regarding the issue of confidentiality in arbitration proceedings vis-a-vis the need for transparency in corporate transactions, shareholder arbitration succeeded in Brazil.

SharePhil, a group advocating investor protection, is likewise pushing for a number of amendments to the Corporate Code.

In a letter to Sen. Paolo Benigno Aquino IV dated Sept. 8, Lim and SharePhil chair Evelyn Singson proposed that independent directors must be voted by a “double majority,” which means the inclusion of a majority of the minority shareholders or those who are not among the top 20 stockholders of covered companies.

SharePhil said this change would ensure that “independent directors are truly independent as they will be elected not only by the controlling shareholders, but also the minority shareholders.”

The group also proposed that the term of independent directors, a contentious issue among businessmen these days, must be limited to no more than nine years.