Circumventing the law

Minority shareholders of a public company who may not agree to the entry of new investors into the company are given a chance to exit the firm via what is known as the mandatory tender offer.

A tender offer refers to a publicly announced intention by a person acting alone or in concert with other persons to acquire outstanding equity securities of a public company. And this includes an associate or related company of such public company which controls the said public company.

The Securities Regulation Code (SRC), meanwhile, defines a public company as any corporation with a class of equity securities listed with an exchange, or with assets in excess of P50 million and has two hundred or more holders, at least 200 of which hold at least 100 shares of a class of its equity securities.

Under the 2015 SRC implementing rules, tender offer becomes mandatory, first, when any person or group of persons acting in concert intend to acquire 15 percent of equity securities in a public company in one or more transactions within a 12-month period in which case they shall file a declaration to that effect with the SEC; second, intending to acquire 35 percent of the outstanding voting shares or such outstanding voting shares sufficient to gain control of the board in a public company in one or more transactions within a 12-month period in which case it shall make a tender offer for the percentage sought to all holders of such securities within the period; third, intending to acquire 35 percent of the outstanding voting shares or such outstanding voting shares sufficient to gain control in a public company directly from one or more stockholders in which case they shall make a tender offer for all the outstanding voting shares; and fourth, if any acquisition would result in ownership of over 50 percent of the total outstanding equity securities of a public company so that the acquirer shall be required to make a tender offer for all the outstanding equity securities to all remaining stockholders and the acquirer shall be required to accept all securities tendered.

This rule gives the minority shareholders the opportunity to sell their shares to the acquirer at the same price as those offered to the majority shareholders, although they are not required to sell.

In one case, the Supreme Court explained that the purpose of the tender offer rule is to protect minority shareholders in public companies against any scheme that dilutes the share value of their investments and to give the shareholder the opportunity to decide whether or not to sell in connection with a transfer of control.

Just recently, the SEC had the occasion to put its foot down once again against attempts to circumvent this mandatory tender offer requirement.

In a ruling released last January, the SEC en banc ruled against Alliance Select Foods International and for the appellants which include Harvest All Investment Ltd., Victory Fund Ltd. and Bondeast Private Ltd. represented by Hedy Yap-Chua when it held, citing the Supreme Court ruling in the case of Cemco vs National Life Insurance, that the legislative intent of Section 19 of the SRC on tender offers is to regulate activities relating to acquisition of control and for the purpose of protecting the minority shareholders.

ASFII is engaged in the business of manufacturing canned tuna and other processed seafoods and exports canned tuna products while the appellants are shareholders in the company.

If the intended acquisition of shares will result in a change of control of a public company, a tender offer is mandatory and whether the means by which control is acquired (direct purchase of shares or indirect means) will not matter.

The SEC said that considering that the 2015 stock rights offering would result in the ownership by Strongoak of 55.32 percent of ASFII’s issued and outstanding capital stock, then Section 19 of the SRC should be applied and ASFII’s failure to conduct a mandatory tender offer constituted a violation thereof.

The commission referred to ASFII’s admission that it accepted Strongoak’s offer to subscribe to 430.28 million shares equivalent to 28. 69 percent of its outstanding shares in relation to the 2014 private placement, and to subscribe to an additional 952.48 million common shares from the one billion common shares of ASFII which resulted in its ownership of 55.32 percent of the issued and outstanding capital stock, all in response to its need to raise capital.

It noted that the 2014 private placement and 2015 SRO which facilitated the acquisition by Strongoak of 55.32 percent of ASFII’s outstanding capital stock appeared to be a product of a scheme that will enable Strongoak to take control of publicly listed ASFII and were carefully designed to work around the mandatory tender offer rule.

In its earlier answer to the complaint filed with the SEC, ASFII maintained that the 2014 private placement is not covered by the tender offer rule because the ownership of Strongoak as a consequence thereof, which is 28.69 percent, did not breach the 35 percent threshold and even if the threshold was met, the transaction is exempt as what was purchased came from the unissued capital stock.

Meanwhile, as for the 2015 SRO, it said that the same is still not covered by the tender offer rule since notwithstanding that it resulted in Strongoak owning 55.32 percent of ASFII’s issued and outstanding capital stock, the shares came from the increase in the authorized capital stock of the company.

Under Sec. 19.3A of the SRC implementing rules, the mandatory tender offer rule shall not apply to any purchase of shares from the unissued capital stock provided that the acquisition will not result to a 50 percent or more ownership of shares by the purchaser as well as any purchase of shares from an increase in the authorized capital stock.

However, the SEC stressed that the acquisition of control shall not be confused with the means of achieving the same so that if the purchase will result in a change of control, then the manner of acquisition, whether direct or indirect acquisition of shares, will be subject to the tender offer rule.

It emphasized that while the shares acquired by Strongoak came from exempt securities, Rule 19.3.1 of the SRC IRR expressly qualifies the enumeration of the exceptions by the phrase “unless the acquisition of equity securities is intended to circumvent or defeat the objectives of the tender offer rules.”

The SEC ruled that in the context of the purpose of the mandatory tender offer rule which is to protect minority shareholders, the aggregate acquisitions by Strongoak of ASFII shares equivalent to 55.32 percent of the outstanding capital stock are outside the ambit of the exceptions notwithstanding that they came from the increase in authorized capital stock and unissued capital.

It stressed that any person who circumvents the law, direct or otherwise, shall not be allowed to benefit from the same.

The commission nullified the acquisition by Strongoak of shares of ASFII which it said was done in contravention of the mandatory tender offer rule as it ruled that any contract made in violation of any provision of the SRC shall be void.

But recently, ASFII told the stock exchange that it will exhaust all legal remedies, including filing a petition for review with the Court of Appeals.

In the meantime however, the SEC declared that the ASFII shares acquired by Strongoak are void subscriptions so that these shares are now considered unsubscribed and available for subscription by any person who intends to buy provided they comply with all the legal requirements. Once subscribed, ASFII can pay back Strongoak for the price it paid for the subscriptions that were nullified.