Reassuring

A lot of the foreign direct investments that come into our economy do not go into stand-alone businesses. Foreign investors find it safer to take positions in existing companies and grow with those companies.

Partnering with Filipino companies is preferred because the foreign investor benefits from the local knowledge of their partners to navigate the domestic economy. The foreign investor, however, needs to be assured the rules of the game are fair and their Filipino partners will play by them. The foreign investor is, after all, often the minority shareholder.

A recent decision of the Securities and Exchange Commission (SEC) sends a powerful positive signal to those considering investing in our economy. The SEC is the regulatory agency overseeing corporate behavior, especially among publicly listed companies.

In a ruling dated Dec. 15, 2022 and released Jan. 4, 2023 the SEC sitting en banc set aside a prior decision made by its Markets Securities Regulation Department (MSRD) and declared void the 2014 private placement and 2015 stock rights offering made by Strongoaks, Inc. enabling it to control 55.32 percent of Alliance Select.

The earlier MSRD decision to dismiss the complaint on the ground of “forum shopping” was flimsy to begin with. It glossed over the substantial issues raised. Besides, the SEC is the only regulator of Filipino corporations with primary and exclusive jurisdiction over the issues in question.

Strongoaks is a company owned and controlled by the Filipino partners in Alliance Select, a listed company. The private placement enabled them to take management control to the detriment of minority shareholders.

The minority shareholders, a group of Singaporean investors, lodged a complaint. When the MSRD issued its ruling, the minority appealed their case before the SEC en banc.

This corporate saga began on Sept. 1, 2003 when Alliance Select was established to engage in the business of manufacturing and trading canned tuna and other processed seafood. The company then amended its articles of incorporation several times to raise its authorized capital stock, from just P1.6 million in 2003 to P700 million by 2005.

In 2009, a group of Singaporean investors – Yap-Chua, Harvest All Investment Ltd., Victory Fund Limited and Bondeast Private Ltd. – subscribed to shares in Alliance Select. When the company conducted a stock rights offering in 2011, the Singaporeans again bought in. This raised their joint share in Alliance Select to 34.4 percent.

In December 2013, Alliance Select further raised its authorized capital stock to P1.5 billion. On May 5, 2014 the company issued shares. Again, in 2015, the board of Alliance Select doubled its authorized capital stock to P3 billion to fund expansion of the business. In both instances, the shares were sold to Strongoak, enabling it to raise the common shares it owned to 55.32 percent of the total issued.

In both instances, too, no tender offer was conducted in relation to the acquisition. Section 19 of our Securities Regulation Code requires that the company issue a tender offer in such instances that result in one investor controlling a majority of stocks – and therefore management control. The Singaporean minority shareholders were, in a sense, left blind to the transactions taking place.

Section 19 of our Securities Regulation Code provides that “if any acquisition of even less than 35 percent would result in ownership of over 51 percent of total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer.” In Section 19.13, the Code provides that “if there is violation of this rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said purchase and direct the holding of a tender offer.”

This is exactly what the SEC en banc did. The regulatory authority voided the sale of shares to Strongoaks without a tender offer. This decision is consistent with the established principles of good corporate governance recognized under our revised Corporation Code.

Having ruled as it did, the appellants are now asking the SEC to make its decision immediately executory. This is dictated by Rule II, Section 2-5 of the 2016 SEC Rules of Procedure.

The SEC decision in this case is a victory for minority shareholders in our corporations, whether they be local or foreign investors. Precisely because they are in the minority, small shareholders rely on the fair enforcement of the rules to safeguard their own interest.

In the case of Alliance Global, Filipino partners used a third company (Strongoaks) that they control to try and circumvent the rules and conspire to acquire controlling ownership of an apparently profitable company. Had the SEC ruled otherwise, this would have constituted a blow against investor confidence in our market.

Investments move across jurisdictions with ease only if the rules are clear and when there is certainty these rules will be enforced. The Philippines has an unenviable record of spotty rules and spotty enforcement of good governance practices. This is a major reason we have received less investments than our neighbors in the region.

The SEC decision on the Alliance Select case helps us rebuild our reputation as a desirable place to do business in. If wily corporate players are allowed to play fast and loose with the rules, there will be no investor confidence in our economy no matter hard our government works to attract external capital into our economy.

This is therefore a case with great bearing on how our economy progresses.