Premium distribution rule in corporate acquisitions pushed

One of the country’s leading law firms has asked the Securities and Exchange Commission (SEC) to adopt the premium distribution rule with respect to acquisitions of a listed company.

In a letter to the SEC, the Romulo Mabanta Buenaventura Sayoc & De Los Angeles Law Office said the premium distribution rule, as opposed to a premium protection rule, better serves the Philippine securities markets.

The law office said the premium distribution Rule equalizes the price positions of minority investors and the selling substantial shareholder. The premium commanded by a large block is required to be shared with minority shareholders under such a rule.

"Over the long term, this tends to minimize price distortions in the market.

When premium pricing is required to be shared by tender offer regulations, there is an incentive toward transparency and early disclosure as the controlling shareholders have an incentive to minimize the premiums to minimize any scale downs from minority participation in a tender offer," the law office said.

It further argued that the premium protection Rule rewards minority investors at the cost of the buying investor.

"With such a disincentive, the buying investor may decide to reconsider their acquisition of shares in amounts that would trigger tender offer regulations driven by a premium protection rule. Worse, such a rule may – in effect – actually prevent certain investments in public companies in the Philippines," it said.

It added passive investors may not be able to afford to purchase shares that it would be required to accept under the proposed tender offer rules and may condition their entire investment on only a limited level of participation by minorities in the tender offer.

"Assuming all minority shareholders participate in the mandatory tender offer, all minority shareholders will be scaled back pro-rata to achieve the required 65-percent aggregate amount under the proposed rules, while the selling substantial shareholder will never, under premium protection rule, be scaled back due to excess tenders received by the buying investor," the law office said.

Acquisitions involving 35 percent of a listed company are subject to a mandatory tender offer.

This means that the prospective buyer must make an offer to buy the remaining shares held by the issuer’s shareholders at the same terms offered to the controlling shareholder.