Shareholders’ rights

Based on the Code of Corporate Governance minority shareholders have six basic rights:

1. Voting right

2. Pre-emptive right

3. Power of inspection of corporate records

4. Right to information

5. Right to dividends

6. Appraisal right

Sec. 80 of the Revised Corporation Code of the Philippines defines that any stockholder of a corporation shall have the right to dissent and to demand payment of fair value of the shares in the following cases.

a.) In case an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of the outstanding shares of any class, or of extending or shortening the term of corporate existence.

b.) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided by the code

c.) In case of merger and consolidation.

d.) In case of investment of corporate funds for any purpose other than the primary purpose of the corporation.

In 2016, an industrial company listed its shares at the Philippine Stock Exchange (PSE) and the IPO price was set at P10.75 or approximately two times book value. Since then, shareholders have suffered significant losses of more than negative 75 percent as the stock price fell dramatically and closed at P2.41 on Oct. 11.

At the company’s 2019 Annual Stockholders Meeting, a proposal to increase the authorized capital stock from P5.2 million to P18.3 million was approved by stockholders holding a significant majority of the shares present or represented during the meeting. However, they did not comprise the required minimum 2/3 of the total issued and outstanding shares of the company and therefore the proposal was not adopted during the meeting. Even for stock market experts, the increase of the authorized capital stock by 3.5 times is a very rare corporate action.

Instead of trying to engage in discussions with its minority shareholders and to convince minority shareholders who owned more than 1/3 of the company, the principal shareholder and Board of Directors decided for a different strategy.

Based on disclosures to the PSE, the principal shareholder of the company acquired an additional 308 million shares from June through September of this year. The additionally acquired shares ensure that the principal shareholder will have enough votes to have the proposed hike of the authorized capital stock approved with at least 2/3 majority of the votes and the company has called for another special stockholders’ meeting earlier this month to increase the authorized capital stock.

During a Board of Directors meeting held in September a rights issue offering was already approved and  the power and authority  was delegated to certain members of the corporation’s senior management to fix the terms and conditions of the rights offering, including, but not limited to, the final issue size which shall be an amount of up to $250 million. Unfortunately for minority shareholders, the company amended its articles of incorporation a few months before the IPO by adding that the holder of common shares shall not be entitled to pre-emptive rights to subscribe to any new issuance of such common stocks.

The company is currently trading at less than 50 percent of its book value of P5.63 as reported on June 30. Any issuance of new shares below book value will automatically dilute the value of the shares of minority shareholders. But based on the Definitive Information Statement disclosed by the company in September, there are no actions to be taken up at the special meeting of shareholders which may give rise to a possible exercise of stockholders of their appraisal right under the Revised Corporation Code of the Philippines.

From my point of view, the SEC failed in its mandate to protect minority shareholders if a principal shareholder can increase the authorized capital stock and issue shares below book value, therefore effectively diluting the value of the shares of the minority without giving those who were voting against this corporate action an appraisal right as specified in Sec. 80 and 81. Corporation Code of the Philippines.

In another case, an integrated resort and casino company delisted its shares for less than 50 percent of its original IPO price. In that case, minority shareholders who did not intend to speculate but to invest for the long term ended up with significant losses.

SEC will hopefully opt to protect minority shareholders in the case of this industrial company should the terms for the stock rights offering turn out to be disadvantageous to minority shareholders. As a principal rule, tender offers and stock rights offerings should never be allowed to go below book value.

The author of this article wants to appeal to the Board of Directors to remember that by following good corporate governance principles, their decisions have to respect the interest of their minority shareholders and, therefore, they have to set the price for the stock rights offering, which is scheduled for Q1 2020, above the respective book value as of Dec. 31, 2019.

At the same time, minority shareholders are hereby encouraged to either attend shareholders’ meetings or to at least to vote via proxy on such corporate actions. As part-owner of a company, shareholders should also voice out their concerns on such actions to the Investor Relations Officer by e-mail to give the management valuable feedback with their concerns and objections.

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Alfred Reiterer is a stock market veteran with 30 years of experience of investing globally. He currently serves on the Board of Directors of Foreign Investors Advisory Group Ltd. and VIP Capital Ltd. in Hong Kong.

The views and opinions expressed in this column are those of the author/s and do not necessarily reflect the official policy or position of SharePHIL nor purport to reflect the opinions or views of SharePHIL or its members. Learn more at http://sharephil.org

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