Cites management abuses SEC pushes for shareholder arbitration

The Securities and Exchange Commission (SEC) is pushing for the inclusion of provisions on shareholder arbitration among the proposed amendments to the Corporation Code of the Philippines.

Speaking before the Shareholders’ Association of the Philippines (SharePhil), SEC chairperson Teresita Herbosa said arbitration will help address conflicts between shareholders and the corporation or between minority and majority shareholders.

She noted that shareholder arbitration in other markets such as Brazil is deemed to be “the best antidote to the slow and ill-equipped courts.”

“We need not stress the obvious that the same situation of ‘slow and ill-equipped courts’ is present here,” Herbosa said.

Shareholder arbitration has yet to be adopted in the United States where a report of the US SEC concluded that it should permit shareholders to adopt alternative procedures for resolving disputes such as through arbitration because of high litigation costs.

In contrast, Brazil has incentivized shareholder arbitration. Brazil law provides that companies can adopt an arbitration agreement in their charters in exchange for a higher grade for its corporate governance practices.

Meanwhile, Herbosa said more amendments to the law are needed to protect minority shareholders and their rights.

“During my previous life as a private litigation lawyer, I have come across, either in theory or practice, acts or ommissions attributable to management that tend to impede, obstruct and hinder the exercise of shareholders’ rights,” said Herbosa.

She noted that, in some stockholders’ meetings, some shareholders are unable to cut into the scripted proceedings. “Worse, was the dilatory ways including securing a TRO by which management would thwart the right of inspection by a shareholder,” Herbosa added.

Sometimes, the abuse of shareholders’ rights is obscured by accountants, auditors and lawyers hired by management “whose glossy annual reports and voluminous opinions may be long in form but poor in substance, leaving shareholders at a loss on how the company is really doing or how they are being treated badly,” said Herbosa.

“The lack of transparency not only violates shareholders rights but transforms them into passive and submissive shareholders unable to make informed decision and to voice any dissent,” stressed Herbosa.

She also pointed out cases when minority shareholders are prejudiced when companies are mismanaged by board members and principal officers who are highly compensated with big expense accounts.

“Moreover, due to questionable related party transactions…majority stockholders, their directors and officers, had hugely benefited therefrom. So this gives rise to a doubt on whether all shareholders are created equal,” Herbosa added.