Fallout from the PLDT ruling

From bad to worse.

This was the common sentiment of the companies that stand to be affected by the ruling of the Supreme Court on the motions for reconsideration filed on its earlier decision in the case of “Wilson Gamboa vs Finance Secretary Teves, et al.”

By way of background, Gamboa was a minority stockholder of PLDT who questioned the legality of its ownership structure. He argued that since 64.27 percent of PLDT’s common shares are owned by foreigners and only 35.73 percent by Filipinos, it is in violation of the constitutional provision that requires the capital of public  utility companies to be, at least, 60 percent owned by Filipinos.

PLDT countered that these percentages should be viewed in the context of its authorized capital stock where common shares represent only 22.15 percent of that totality and the balance of 77.85 percent is taken up by preferred nonvoting shares, of which 99.4 percent are owned by Filipinos.

Thus, PLDT pointed out, 85.27 percent of its capital stock should be considered Filipino- owned and therefore compliant with the ownership requirement of the Constitution.

The tribunal rejected this argument. It ruled that “full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights is required” to meet the 60-40 capital ownership benchmark.

Interpretation

The motions for reconsideration cited, among others, earlier opinions by the Securities and Exchange Commission interpreting “capital” as referring to the company’s capital stock without distinction on whether its shares of stocks are voting or nonvoting.

Invoking the constitutional mandate that “the State shall develop a self-reliant and independent national economy ‘effectively controlled’ by Filipinos,” the tribunal stressed the importance of putting a vital segment of the economy, operation of a public utility, in the hands of Filipinos, not foreigners.

It also cited the Omnibus Investment Code and Foreign Investments Act, which use ownership by Filipinos of at least “60 percent of the capital stock outstanding and entitled to vote” of a corporation as determinative of its classification as a Philippine national for purposes of capital ownership.

Not content with reiterating its earlier interpretation of “capital” in relation to common or voting shares, the tribunal expanded the scope of the nationality requirement to include all other kinds of shares that a partially nationalized corporation may issue.

Other stocks

It stated that “… if a corporation engaged in a partially nationalized industry issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos.

“In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares.”

The justices reasoned out that this interpretation ensures compliance with the constitutional command that ownership and operation of public utilities should rest in the hands of corporations whose capital is at least 60 percent owned by Filipinos.

From the point of view of the executives of companies engaged in partially nationalized industries, the earlier ruling that common shares should be used as the basis for determining compliance with the 60-40 ownership requirement was painful enough, the inclusion of preferred shares and other forms of stocks in the nationality requirement was a killer.

With this new standard, the affected companies will have to review their stock structure to make sure all the kinds of shares they have issued conform to the 60 percent Filipino ownership requirement.

Trades

If their present stock composition meets the nationality benchmark, fine. All they have to do is make adjustments in the General Information Sheet they are required to submit every year to the SEC to show the nationality of their stockholders.

In case their shares are traded in the local stock exchange, their transfer agents have to be put on strict notice to ring the alarm bells immediately whenever trades on their shares are close to breaching the 60 percent ownership cutoff.

The administrative and civil penalties that attach to any breach of the nationality rules, which apply to both the transfer agent and issuer company, are not something to sneeze at.

The monitoring responsibility becomes problematic if the company’s stocks are traded in the New York Stock Exchange, NASDAQ or other foreign bourses where trades are initiated and completed at the flick of a finder on a computer key.

The shares of Philippine corporations traded in these exchanges may have to be placed in a separate portal or board, with its own unique trading parameters, to ensure compliance with the nationality ownership rules. This arrangement could put a damper on their stocks.

Then there is the issue of “depositary receipts” that some nationalized companies earlier issued to raise funds from foreign investors and are traded in the US stock market.

A depositary receipt is a negotiable financial instrument issued by a bank or investment company that represents ownership in securities of a foreign company.

Designed to go around the constitutional prohibition on ownership by foreigners of stocks of companies engaged in nationalized industries, the stocks are, in theory, owned by the issuing company although beneficial ownership rests with the foreign receipt owners.

Are these receipts covered by the ruling on Filipino ownership? If so, what will happen if these receipts breach the ownership requirement and there are no interested Filipino buyers?

Can the company be compelled to buy back these receipts? What if it does not have the unrestricted retained income that the law requires before any such buyback can be done?

More on the effects of the PLDT ruling in next week’s column.

For comments, send your e-mail to [email protected].