3 groups for retention of 35% threshold on tender offers

Three prominent business organizations have joined the Philippine Stock Exchange (PSE) in its call for the retention of the current 35-percent threshold on tender offers involving listed corporations, saying a lower trigger point will discourage foreign investors as it will jack up stock market transaction costs and expose investors to unnecessary risks.

The PSE, Investment Houses Association of the Philippines (IHAP), Financial Executives Institute of the Philippines (FINEX) and the Bankers Association of the Philippines (BAP) have come out with their position paper to guide the Securities and Exchange Commission (SEC) in reviewing whether there is a need to revert to the 15-percent threshold as stated in the Securities Regulation Code.

The position paper was signed by PSE president and chief executive officer Francis Lim, BAP president and former prime minister Cesar Virata, FINEX president David Balangue, and BPI Capital Corp. and IHAP president Natividad Alejo.

They explained that a lower threshold will discourage foreign investment flows into the Philippines and result in a decrease in M&A (merger and acquisition) activity, among other things. The drop in M&A activity, in turn, "will lower stock market trading volume," they said.

They said a lower threshold will also delay stock market deals and expose them to increased risks, even if these transactions do not involve a change-in-control situation.

"The delays may allow various speculators, punters, risk arbitrageurs and even corporate insiders to diminish the expected returns of long-term financial investors," they said.

Risk arbitrageurs are sophisticated stock market players who take both buying and selling position for the same stock and making money from the difference.

A tender offer is a solicitation from a company or a third party to buy shares of a corporation for a fixed period of time usually at a premium or a price higher than what is prevailing in the market.

The rules aim to protect minority owners who may be left out, if the buyer extends the offer only to strategic partners or majority owners of a company. As practiced in other countries, the tender offer rules contemplate a change-in-control situation in an affected company.

The rules, thus, require the buyer to extend the offer to all stockholders of the affected company, if the level of the buyer’s investment touches off a trigger point or threshold.

The PSE, IHAP, BAP and FINEX explained that many direct investment companies will not consider an investment that is not within the range of $10 million to $20 million. While they are active stock market players, direct investment companies are not keen on getting control of a listed company.

But the business associations said that, even if the DI firms have no intention of controlling a listed company, there are higher chances that they will set off a lower tender offer trigger because of the low market capitalization of locally listed companies.

The study showed that at a 15-percent tender offer threshold, a $20-million investment will already require a tender offer, if placed in 195 percent or 82 percent, of the 237 listed firms.

The same study noted that a $10-million investment already represents a 15-percent market capitalization of 174 percent or 73 percent, of the listed firms in the PSE. The same amount will affect only 61 percent of the listed stocks, if the threshold is retained at 35 percent.

"These data show that with a higher threshold, the prospective investor has a bigger universe in terms of investment options without hitting the TOT (tender offer trigger)," capital market players said. In the same paper, they said a lower threshold will jeopardize PSE plans to introduce derivatives in the stock market.

They noted that all major stock markets around the offer derivatives, sophisticated market instruments that give holders the option to either buy a stock or sell it.