In a March 25 order, the commission affirmed its decision on Jan. 24 that granted ISMI a waiver on the PSE’s Rule on Additional Listing, which requires companies to first undertake a rights or public offering before the PSE approves the listing of additional shares subscribed through private placement, debt-to-equity conversion, share-for-share or property-for-share swap, or similar transactions.
The PSE contends this rule would protect the minority shareholders in the event there would be a significant demand for shares from existing stockholders, particularly if the new shares will be priced at more than 10-percent discount from the market price or at book value, whichever is higher.
"We find the exchange to have exceeded its discretion and have gone overboard in the application of the rule by denying ISMI this exemption. The commission therefore must correct the same under its supervisory powers over the exchange as well as its oversight functions," the SEC said.
The issue at hand involves the deal between ISMI and another listed stock, Philweb.com, on July 2, 2001 that would transform the former from a mining firm into an information technology and multi-media company under the management of Philweb.
As payment for the services, ISMI agreed to let Philweb buy 40 percent of the company for P120 million. This would involve a private placement at a heavily discounted price of P0.01 per share for about 12 million unissued shares our of ISMI’s authorized capital stock.
However, the PSE, supported by the Association of Securities Analysts of the Philippines (ASAP), argued that the transaction should be covered by the PSE rule emphasizing that such rule was crafted not only to protect the rights of all shareholders, particularly the minority, from unjust dilution by protecting their right to subscribe to further issues of a company especially if at a huge discount to market, but also, in a less obvious way, to prevent insider trading.
ISMI wrote the exchange last year that due to its situation as a "moribound company," a rights offering would not be possible since no underwriter would be willing to assume the risks.
But since it badly needed the additional investments and capital infusion to resurrect its operations, the PSE’s insistence that it first undertake a rights offer "would effectively prevent ISMI from pursuing the second course of action and thereby preclude the corporation from any opportunity that can probably bail the corporation out of its present predicament."
"The denial of ISMI’s request for exemption would therefore work to the detriment of all stockholders, majority and minority alike – an effect which ironically the imposition of the rights offering sought to prevent," the SEC said.
ISMI also said the private placement should be exempted from the PSE’s rule since existing shareholders were not interested in the placement anyway. The company submitted a certification that the deal had been approved without any objection by about 91 percent of its stockholders during a general meeting.