SEC unmasks 4-year ‘fraudulent’ buyout of The Medical City
The Securities and Exchange Commission (SEC) voided the takeover of a board faction led by Jose Xavier B. Gonzales in The Medical City, citing “illegality and fraud” in the buyout of one of the country’s largest health care groups with hospitals and clinics in the Philippines and in Guam.
The 2018 boardroom coup led to the ousting of Gonzales’ uncle, the health care group’s longtime CEO and former Health Secretary Alfredo Bengzon, and spawned a slew of criminal complaints between both sides.
But in a decision on Aug. 13 but made public on Thursday, the commission en banc nullified the acquisition of shares by Gonzales’ group in Professional Services Inc. (PSI), the operator of The Medical City.
This involved the acquisition of a majority stake in PSI by Viva Holdings (Philippines) Pre. Ltd., Viva Healthcare Ltd., Fountel Corp. and Felicitas Antoinette Inc. (FAI).
The SEC said Gonzales, whose family owns and operates FAI and Fountel Corp., hid an agreement with Viva to gain control over PSI and The Medical City over several years, defrauding the board, its shareholders and violating the Securities Regulation Code (SRC).
The decision is a vindication for the 84-year-old Bengzon, who has fought back against alleged anomalies in the takeover by Gonzales—once considered a trusted nephew.
“We commend the SEC for this landmark decision that penalizes the fraudulent acts of the Gonzales and Viva group, and upholds the interests of the corporation and its shareholders,” Eric Puno, Bengzon’s lawyer, said in a statement on Thursday.
“This decision rectifies the illegal dilution brought about by the fraud, resulting in substantial financial gain and restoration of control to the legitimate shareholders of The Medical City,” he added.
Gonzales, who sits as chair of the board in The Medical City, called the decision arbitrary and unfounded.
“We will exhaust all legal means possible to ensure that the SEC’s decision will not affect the continuing operations of The Medical City,” he said in a statement.
He added the decision would also force the health care group to reimburse his camp at least P10 billion they have already invested since 2013.
“By forcing The Medical City to give us back the cash we have been investing in its growth since 2013, the SEC risks depriving the hospital network of badly needed resources in its fight against COVID-19,” he said.
A series of capital increases allowed Gonzales’ camp to gain control of the company, according to the SEC. It said these remained valid, but those acquired shares “shall be considered as unsubscribed and allocated for subscription by investors.”
Moreover, the shares his side bought from other shareholders such as Splash Corp., San Miguel Corp. (SMC) and Insular Life Assurance Co. Ltd. would be canceled.
These would be returned to PSI, which could then sell these to other investors. Only when those shares are sold should the company reimburse Viva, Fountel and FAI for their nullified transactions.
The SEC would also be pursuing penalties against Gonzales’ camp for other violations. It said they were liable for violating Section 18 of the SRC and Rules 19.2.A and 19.12 of the SRC’s guidelines.
These refer to required disclosures when buying another company and rules for a tender offer, which requires the buyout of other shareholders should ownership breach 35 percent.
The SEC also outlined how the Gonzales-led faction carried out the takeover scheme over a period of four years before it was revealed to the board in 2017, when he successfully blocked the entry of Ayala Corp.’s health care subsidiary.
From 2013 until August 2017, Fountel, FAI and Viva increased holdings in PSI from under 10 percent to a controlling 54.24 percent through a series of capital increases and the buyout of other minority shareholders such as SMC and Splash.
As early as April 2013, the SEC said Gonzales, a director of PSI, proposed the entry of a “strategic investor or partner” who would help with the company’s expansion.
The board decided on a capital increase, which allowed the entry of Viva.
But unknown to the board was a cooperation and shareholders agreement (CSA) sealed between Viva and Gonzales’ companies on Aug. 1, 2013.
The SEC said the CSA transformed their business relationship into a “beneficial ownership over each other’s shares” in their bid to gain control of PSI.
Section 18 of the SRC requires any person who gains beneficial ownership of over 5 percent of a covered corporation must report this to the SEC.
But for several years, the parties hid their relationship from the board and other shareholders. This made it appear the acquisition of shares were independent of each other and thus “will not be used to wrest control over the management, governance and conduct of business of PSI.”
The SEC said the scheme gave the parties time to gain control of PSI without being questioned.
It said the CSA was only discovered in 2017 when Gonzales sought to block the entry of Ayala. Gonzales had said this would violate his shareholders’ agreement with Viva.
Apart from the violations, the SEC said the CSA was also disadvantageous to the company’s shareholders. It said Ayala was willing to buy shares at P12,621.48 each or “significantly higher than what Viva Holdings and FAI paid for their subscription to PSI shares in 2017.”
“With the said violations, the CSA parties made a mockery of the SRC and rendered the provisions designed to promote the development of the capital market, protect investors, and eliminate fraudulent and manipulative devices that destroy the integrity of the market, inutile,” the SEC said.
For violating the SRC, the special hearing panel imposed the penalty of P1 million plus P2,000 for each day of continuing violation from Aug. 1, 2013 up to the time that SEC form 18-A is filed.
