SEC says takeover bid at The Medical City wrought with ‘illegality, fraud’

MANILA, Philippines—The Securities and Exchange Commission (SEC) voided the takeover by a faction, led by Jose Xavier B. Gonzales, of The Medical City, citing “illegality and fraud” in the buyout of one of the country’s largest health care providers with hospitals and clinics in the Philippines and Guam.

The 2018 boardroom coup led to the ouster of Gonzales’ uncle, Dr. Alfredo Bengzon, and spawned a slew of criminal complaints between both sides. Bengzon is Medical City’s longtime CEO and former health secretary.

But in a decision on Aug. 13 made public on Thursday (Aug. 20), the SEC en banc nullified the acquisition of shares by Gonzales’ group in The Medical City operator Professional Services Inc. (PSI).

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 of PSI and The Medical City over several years, defrauding the board, its shareholders and violating the Securities Regulation Code.

The decision is a vindication for the 84-year-old Bengzon, who has fought back alleged anomalies in the takeover bid of Gonzales, who was once a trusted nephew of The Medical City CEO.

“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 will also force the health care group to reimburse his camp at least P10 billion which it has invested since 2013.

“By forcing The Medical City to give us back the cash we have been investing its growth since 2013, the SEC risks depriving the hospital network of badly-needed resources in its fight against COVID,” he said.

A series of capital increases allowed Gonzales’ camp to gain control of the company, according to the SEC.

It said those remain valid, however. The acquired shares “shall be considered as unsubscribed and allocated for subscription by investors.”

Moreover, the shares bought from other shareholders such as Splash Corp.,San Miguel Corp., Insular Life Assurance Co. Ltd. will be canceled.

These will be returned to PSI, which can then sell these to other investors. Only when those shares are sold will the company reimburse Viva, Fountel and FAI for the nullified transactions.

The SEC will also pursue penalties against Gonzales’ camp for violations. It said they were liable for violating Section 18 of the SRC and Rules 19.2A and 19.12 of the SRC’s guidelines.

These refer to required disclosures when buying another company and rules for a tender offer, which require 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 Aug. 2017, Fountel, FAI and Viva increased holdings in PSI from under 10 percent to a controlling 54.24 percent.

As early as April 2013, the SEC said Gonzales, director of PSI, proposed the entry of a strategic investor or partner who would help expand the company. The board approved 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 corporation, to report this to the SEC. But for several years, the parties hid their relationship from the board and other shareholders, the SEC said.

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, saying this would violate his shareholders’ agreement with Viva.

Apart from violations, the SEC said the CSA was also to the disadvantage of 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 August 1, 2013 up to the time that SEC form 18-A is filed.

Each respondent was also ordered to pay P1 million plus P2,000 for each continuing violation, from July 31, 2013 to May 15, 2018 for violating SRC Rule 19.2.A, in relation to Rules 19.3.A and 19.3.B. It imposed the same penalty for the respondents’ violation of SRC Rule 19.12.

TSB