Essence of public float rule

The grace period the Bureau of Internal Revenue has given to companies whose stocks are traded in the stock exchange to comply with the minimum public ownership requirement, or public float, will expire at the end of the year.

Public float refers to the company’s stocks that are owned by persons other than its directors, officers and controlling investors. Or people who have little say in the management of the company.

Under existing regulations, listed companies are required to maintain a certain public float (computed on a percentage basis) depending on their market capitalization. The bigger the capital, the more stocks to be put up.

Come Jan. 1, 2013, the stock transactions of companies that fail to meet this requirement will be assessed 5 percent capital gains tax on gains that do not exceed P100,000 and 10 percent if in excess of P100,000.

At present, stock transactions in the exchange are subject  only to a stock transaction tax of 1 percent of the gross selling price or gross value in money of the stocks sold.

This special tax is in lieu of the capital gains tax that is normally imposed on the sale of property based on the difference between its original cost and selling price.

Enforcement

When the BIR announced in November 2010 its intention to impose this year the capital gains tax on listed companies that flaunt the public float requirement, the Philippine Stock Exchange raised a howl.

It said the tax privilege should be enjoyed as long as the stock transaction is done through the exchange, without regard to the number or percentage of the listed company’s stocks that form part of the public float.

Not so, said the BIR. If a listed company’s public float falls short of the public ownership benchmark (which is supposed to be the hallmark of listed companies), it loses its “public ownership” status and, therefore, its transactions are no different from ordinary business deals where the capital gains tax is applicable.

The PSE’s opposition gave, at least initially, the impression that it was prepared to go to court to contest the BIR’s order as it is wont to do whenever regulatory action tended to rock its boat.

Apparently sensing the futility of going the judicial route in the light of earlier Supreme Court decisions that tax breaks are strictly construed against their claimants, the PSE steered away from a confrontation with the BIR and worked out instead a compromise arrangement.

The BIR agreed to hold in abeyance the enforcement of its order until Dec. 31, 2012 to give listed companies enough time to comply with the requirement.

Preferred

According to reports, of the approximately 250 listed companies, only 27 have yet to comply with the public float benchmark.

The PSE said that if these companies would fail to meet the deadline, the trading of their shares in the bourse would be suspended for up to six months. With the suspension, stock transactions during the period will be imposed the standard capital gains tax.

The suspension, however, will not exempt them from paying the listing fees to maintain their inclusion in the trading system. In case compliance cannot be had despite the suspension, the shares will be delisted from the exchange.

This early, anticipating their inability to meet the requirement, some companies have expressed their intention to delist their shares ahead of the cutoff period.

A new tack, however, has been introduced into the scene—there are proposals to allow preferred shares to form part of the public float.  Meaning, if a company does not have sufficient common stocks to make the required public float grade, preferred shares may be substituted or used to fill up any shortfall in common stocks.

This approach comes in the wake of recent efforts of iconic listed companies to sell preferred shares to the public to raise additional capital and meet certain nationality requirements.

Voting rights

In determining whether or not preferred shares can be included in the computation of the minimum public float, due consideration must be given to the purpose for which this requirement has been imposed.

Aside from providing a fair and efficient means of unlocking the true value of stocks, the public float requirement is aimed at widening the base of ownership of listed companies.

Public interest or ownership of stocks in these companies will not be enhanced if those stocks are not readily available, or interested investors are left at the mercy of the companies or broker-dealers in sourcing them.

While it is true that preferred shares represent a share in the ownership of a company, they do not enjoy that most important element of corporate ownership—the right to vote the directors who will run the company.

Unless the company’s Articles of Incorporation provide otherwise, that privilege is reserved to common stocks. The voting rights that preferred shares are entitled to, such as amendment of bylaws and increase of indebtedness, are essentially cosmetic in nature.

To use street language, preferred shareholders are saling pusa or mere bystanders in the corporation.

The stocks that form part of the minimum public float may not be big or enough to vote a seat in the board of directors, but the fact that their owners can participate in the election of the directors is sufficient guarantee that their voice will be heard and taken into consideration by management.

If companies want to include preferred shares in the public float and still remain faithful to their purpose, they should put preferred shareholders on equal voting footing with common stockholders. This way, public ownership in their companies will be truly meaningful.

Any other way will make the preferred shares proposal a mere decorative compliance with the public float requirement.

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