Strengthening securities, corporate governance in PH

AFTER a lot of brainstorming and private sector consultation, the Securities and Exchange Commission (SEC) has taken the big step of rewriting the implementing framework for domestic securities regulation to give corporations more leeway in raising funds while plugging regulatory loopholes and incorporating global best practices.

The implementing rules and regulations (IRR) of the 2015 Securities Regulation Code (SRC)–as approved by the SEC en banc– expands the shelf registration program and streamlines certain requirements on the public offering of debt or equity securities. This new rulebook also refines the tender offer requirements, which are sometimes contentious during corporate takeovers.

The 2015 SEC rulebook also sought to address regulatory gaps and boost market and regulatory structures. The adoption of global best practices was also meant to ensure that the players would be able to meet the challenges posed by increasing market sophistication and regional integration.

“I am pleased that the SEC has completed this very challenging project,” SEC Chair Teresita Herbosa said. “We received significant inputs on this rule-making, and in response we incorporated many changes from the proposals that are designed to address varying concerns. I believe the final version faithfully implements the statutory requirements as mandated by SRC.”

In a nutshell, corporate lawyer Francis Lim, former president of the Philippine Stock Exchange and now head of investor protection group Shareholders Association of the Philippines (SharePHIL), described the new rules as providing “easier access to capital.”

The mandatory tender offer rules have been revised to provide two levels of action, depending on the threshold triggered: A disclosure action and mandatory tender offer action. The rules also provide a set of guidelines in the conduct of valuation and issuance of fairness opinion.

Mandatory

Tender offer refers to a publicly announced intention to acquire the outstanding shares of a public company or outstanding shares of a related company that controls such public company. Such offer is mandatory when there are changes in controlling interest so that minority investors will have a chance to exit at the same price as the controlling stockholders.

Any group intending to buy 15 percent of stocks of a public company in one or more transactions over a period of 12 months is required to file such declaration with the SEC. But if this group intends to acquire 35 percent of the shares of such a public company in one or more transactions over a period of 12 months, the group must disclose this and make a tender offer to all shareholders.

For issuers and their technical advisers, another welcome revision is the expansion of the shelf registration program. Under a shelf registration program, securities to be issued in tranches may be registered for an offering to be made on a continuous or delayed basis for a period not exceeding three years. A longer shelf registration gives corporate issuers more leeway in pursuing their corporate financing exercise.

Commercial paper is now simply defined as evidence of indebtedness of any person with a maturity of 365 days or less. The new rules ceased using the terms long-term commercial paper (LTCP) and short-term commercial paper (STCP). Selling commercial papers is also made easier with the requirement of an issuer rating instead of a separate rating for each issuance.

A new category of exempt security is likewise introduced. This involves securities issued or guaranteed by multilateral financial entities (MFEs) established through a treaty or binding agreement to which the Philippines is a party.

Public offerings with a limited character are also exempt from registration. Such offerings will be exempt as long as the covered securities are available only to the parties or persons named in the application for exemption for a specified period. For example, the employee stock option plans (Esop) issued by a corporation to its eligible employees are exempt securities.

Underwriters are no longer required to underwrite securities solely on a firm commitment basis. They can agree on a different plan of distribution with the issuing company subject to the approval by the SEC. However, as a general rule, issuers of registered securities, except issuers of proprietary/non-proprietary membership certificates or shares, are still required to enter into an underwriting agreement with an investment bank or investment house.

The period to sell securities, which are subject of registration statement, is extended from two days to 10 business days from the date of the effectivity of the registration statement.

Financial capability

Requirements for “qualified” buyers or those allowed to participate in private and typically more sophisticatedly structured offering of securities are relaxed. The financial capacity of individuals to qualify had been reduced to P10 million in annual gross income from P25 million previously. Any verifiable document may now be submitted to prove financial capacity. Income tax return is optional.

The SEC also adopted a new policy to extend the effectivity of financial statements to 180 days from 135 days to align with the Association of Southeast Asian Nation (Asean) standard as part of regional market integration this year. This policy will be formalized as part of the amended SRC Rule 68 (Special Accounting Rules), which the SEC will release separately at a later date. In the meantime, issuers can avail of this extension by filing a request for exemptive relief with the SEC.

A copy of the 2015 SRC rules may be downloaded from the SEC website at www.sec.gov.ph.

The initial draft of the proposed amendments was issued for public comment in 2011. Subsequently, the SEC conducted a series of consultations with market participants and various stakeholders. The corporate watchdog said the final draft of the rules was adopted after the SEC carefully reviewed and considered the relevant comments from stakeholders.

Overhaul

Overhauling the SRC rulebook is just a step toward upgrading securities and corporate regulation in the country. Recently, the SEC has also mapped out a new corporate governance (CG) framework, which includes reforms such as restricting the tenure of independent directors to nine years, implementing board diversity and adopting a “whistle-blowing” policy.

The draft CG, which seeks to raise the governance bar for local corporations and put them at par with best practices in the region, is targeted for implementation within the next five years as some of the changes are intended to be included as amendments to the Corporate Code of the Philippines.

One contentious proposal in the blueprint is to reduce the term limit for independent directors to nine years. Currently, independent directors (IDs) in the Philippines are allowed to serve for five years, after which a two-year cooling period is required before being allowed to be reelected for no more than five years.

The corporate regulator said that in other jurisdictions within the Asean region, the recommended best practice for the tenure of independent directors was a cumulative term of up to nine years, a term seen adequate for them to understand the business well enough to contribute in boardroom discussions, test strategies of the CEO and management and create long-term shareholder value.

“Long stretches of service may prejudice a director’s ability to act independently and in the best interest of the company. Any term beyond six years for a non-executive director should be subject to particularly rigorous review, and should take into account the need for progressive refreshing of the board and to succession for appointments to the board and to senior management, so as to maintain an appropriate balance of skills and experience within the company and on the board,” the SEC said in the proposed blueprint.

No less than former Supreme Court Chief Justice Artemio Panganiban disagreed with the nine-year term limit. “I believe that the SEC should refrain as much as possible from making minute and detailed ‘impositions’ particularly in limiting shareholders’ rights to vote and be voted. The Corporation Code has granted these rights to vote and be voted, and corporations have been given the right via their articles of incorporation to classify shares. Investors buy and hold more expensive common shares to enjoy these prerogatives to freely elect and be elected directors,” he said.

Panganiban, who also sits as independent director in some publicly listed corporations, said the right to vote and be voted as directors –whether executive, non-executive or independent–could not be arbitrarily restricted or limited by mere administrative regulation.

“Areas for administrative regulations on IDs should be canalized by the standard of delegation given by Congress to the SEC in the Securities Regulation Code, namely, that an ID is without a relationship to the company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Accordingly, SEC may, as it had, require IDs to take periodic seminars on corporate governance, make them compulsory chairs or members of certain board committees, compel stricter disclosures of their private interests, amplify their independence to carry out their responsibilities, etc.,” he said.

Under the corporate governance blueprint, the SEC also seeks to strengthen the role of the compliance officer and the corporate secretary.

Diversity

There is likewise a proposal to encourage board diversity. The SEC believes that having a diversity of perspectives and proven experience in building relevant businesses, as well as deep functional knowledge, was critical. “In this regard, importance must be given to having a diverse board. Board diversity does not merely refer to gender diversity, it could also mean diversity in age, ethnicity, culture, skills, competence and knowledge. However, much attention is given globally to gender diversity as an important component of inclusive growth,” the SEC said.

Meanwhile, the SEC also proposed to put in place a whistle-blowing policy that will allow employees and other stakeholders to freely communicate their concerns without fear of any retribution or repercussion. “Company should refrain from discriminatory or disciplinary actions against employees or other stakeholders. Instead, they should encourage and protect them. Protection of whistle- blowers should be emanating directly from the highest level of the corporation,” it said.

The CG framework also proposes a number of reforms meant to strengthen investor protection, such as the following:

Lengthening the minimum time to release notice of the annual stockholders meeting to 28 days from 14 days to give greater lead time to investors;

Giving stockholders the additional option of participating in the annual meeting by remote communication;

Adopting poll voting as a requirement to decide on substantive matters;

Separation of the roles of the chair and CEO to ensure proper checks and balance and avoid abuse of power and authority and potential conflict of interest, and Strengthening the training requirement for all directors and key officers.

Although the blueprint will be primarily prescribed for public companies through the Revised Code of Corporate Governance and the rules of the Philippines Stock Exchange (PSE), privately held companies are encouraged to consider adopting these practices.