Capital ownership issue

When it rains, it pours. This is probably what telecom giant PLDT must be feeling these days.

Hardly has the controversy generated by its acquisition of Digitel settled down, which sparked fears of a monopoly in mobile phone communications, PLDT has to contend with the recent Supreme Court decision that could substantially alter its corporate structure.

The tribunal ruled that capital, for purposes of determining compliance with the 60 percent-40 percent nationality requirement (in favor of Filipinos) in the operation of public utilities, refers only to shares entitled to vote in the election of directors.

This means PLDT has to unload stocks that exceed the Filipino ownership benchmark.

Ahead of the final resolution of the case, some businessmen have pressed the panic button. They have drawn grim scenarios about foreign investors pulling their stakes and moving to countries with more favorable investment policies.

Hold on, guys. The issue is far from settled. The defendants have 15 days from receipt of the decision to file a motion for reconsideration. Knowing the far-reaching effects of the decision, expect them to ask for more time to prepare their best arguments.

Upon receipt of their pleadings, the tribunal will require the petitioner to file its reply to the defendants’ arguments.

Reconsideration

Considering the impact of the decision on our business environment, it is not farfetched that foreign chambers of commerce and other business groups would ask (and be allowed) to intervene and give their two cents’ worth on the issue.

Who knows, the tribunal might, after a careful reading of the pleadings of the parties and serious consideration of the adverse effects of its action on the economy, reconsider its decision.

If the justices decide to deny the motion for reconsideration, a second motion may be filed and, knock on wood, may succeed.

Remember the controversy over the cityhood status of 16 municipalities where the tribunal rendered four different decisions as its composition changed while the motions for reconsideration were pending?

Earlier, in 2004, the tribunal declared as unconstitutional the Mining Act of 1995 but later made a U-turn after the affected business sector strongly pushed for a reconsideration of that decision.

That case is similar to the instant PLDT case because it involves foreign ownership of companies in a regulated industry.

Looking at the time line of precedent setting cases in the past, it may take another 18 months, at the earliest, before we can write finis to this case.

Preparation

Between now and 18 months after, there is enough time for the companies affected by the tribunal’s ruling to take the appropriate measures to make their ownership structure compliant or to mitigate the adverse effects of the reduction of their foreign ownership.

This is not the first time the nationality requirement on certain business activities has been put to a test and successfully hurdled.

As the saying goes, there are several ways of skinning a cat. In this instance, there are various ways of legitimately complying with the intent of the ruling without sacrificing the company’s interests or those of its stockholders, regardless of their nationality.

Let’s be clear on one thing: Foreigners invest in local companies for gain.

They want to earn the most profits as soon as possible with the least hassle. They’d rather leave management to the locals as long as they’re assured of good returns on their investments.

The road to the protection of foreign investments without running afoul with the capital ownership ruling starts with Sec. 16 of the Corporation Code, which states that “the shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which class or series may have such rights, privileges or restrictions as may be stated in the articles of incorporation.”

Simply stated, a company can create different kinds of shares (common, preferred or what have you) and give them all kinds of benefits, rights and privileges as long as they are spelled out in the articles of incorporation or approved by the stockholders in accordance with established procedures.

Adjustments

Thus, common voting shares that exceed the allowable foreign ownership can be converted to another class of shares (perhaps labeled “super common” or “golden common” to distinguish them from traditional common shares) without voting rights.

In exchange for the loss of voting rights, they will be entitled to more benefits, such as higher dividend rates, right to receive dividends after the common shares have gotten their share of dividends or preference in payment upon liquidation.

If the company thinks the new labeling might confuse the investing public, the over-the-allowable-percentage stocks may be re-issued in the form of preferred stocks but, this time, enhanced with the sweeteners mentioned earlier.

Most likely, this preferential treatment will not sit well with existing holders of common and preferred stocks excluded from the carved out excess common stocks.

Their sentiments cannot and should not be ignored because their votes are critical in securing the two-thirds vote needed to amend the Articles of Incorporation to accommodate these adjustments in stock structure.

To minimize, if not avoid, this resentment, the corporation could put a “sunset” provision on the enjoyment of these benefits, meaning, they will be good only for a specific period of time or after the holders of the specially treated shares have received the dividends they would have been entitled to had their shares not been converted to another form.

By thinking out of the box, the legal advisers can find other practical, yet legal, ways to meet the challenges of the tribunal’s ruling on the interpretation of capital in regulated industries.

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