False issues (Part 2)

If the problem within Eastern Telecommunications Philippines, Inc. (ETPI) were just your garden-variety battle between majority and minority shareholders for control of management, this issue wouldn’t be worth the volume of column-inches devoted to it in print media.

But as we explained previously, the minority interest, held by a local subsidiary of Australian Gigahertz Network, Inc. (AGNI), tried to turn this into a diplomatic matter. So far, this hasn’t happened. Canberra simply asked Manila to examine the claims of AGNI to determine the "impartiality" of certain appointees of the Presidential Commission on Good Government who ousted the AGNI-nominated Board chairman and president and chief executive officer.

The ouster, which was executed by ETPI directors representing a majority of the shares, was assailed by AGNI as part of a plot to take over ETPI and hand it to an allegedly unqualified buyer at a price well below the fair value of the shares.

In his letter to then Trade Secretary Johnny Santos, the Australian Ambassador said that AGNI feared that "recent developments will lead to damage to the company and share-holder value and may be a precursor to an unfair take-over bid." AGNI further claimed that the actions of the PCGG appointees in the ETPI board "severely jeopardized" the AS40 million investment of an Australian investor group.

Pending in the Makati regional trial court is a case filed by the ousted Board chairman of ETPI asking that he and the former president and CEO be restored to their positions and that no transfer of ETPI shares be allowed in favor of the prospective buyer, ISM Communications (ISM), which AGNI claimed "is identified with Roberto Ongpin, a close associate and former Minister of Trade and Industry of Ferdinand Marcos."

AGNI apparently wants to abort an option to buy ETPI shares granted by a company allegedly affiliated with AGNI. The object of the purported transaction is no other than the 40 percent shareholding of AGNI itself. But AGNI claims that it is not a party to the lawsuit brought by ISM against that member of the "Australian syndicate" that owns the shares and that, in any event, the suit is "vexatious and baseless."

But there is another impending purchase of ETPI shares which AGNI is opposing. ISM is reportedly also acquiring most of the shares of the Nieto group. If this pushes through, ISM, through an alliance with a majority bloc consisting of 50.2 percent of the shares, would effectively become part of the controlling group.

ISM could then proceed to purchase the sequestered 20 percent of the "Africa group," as well as the 10.2 percent bloc owned by the government in its own right. ISM, with the sympathy of the majority, would then be able to take over ETPI.

AGNI’s objections to these proposed transactions proceed on several grounds: One is the alleged undervaluation of the shares. Also, ISM, with a supposed net worth of only P12 million, is trying to gobble up ETPI which is worth P3 billion.

The second principal objection is that the proposed sales violate preemptive and first-refusal rights granted existing stockholders under ETPI’s by-laws. Since AGNI is already a 40 percent shareholder, it would not as a foreign equity holder itself benefit from those rights. But there is admittedly a technical obstacle to the sales under the by-laws.

The third objection has to do with current policy of the PCGG which states that "recovered ill-gotten wealth should not be offered to former associates of former President Ferdinand E. Marcos." The argument centers on whether ISM as a separate corporate entity, where Bobby Ongpin is owner of record of only a small portion of the shares, can be deemed to be a "former associate" of Marcos, as distinguished from Ongpin personally. Are ISM and Ongpin one and the same?

The second and third grounds of AGNI will have to be decided by the Makati regional trial court, or the Supreme Court if the case ultimately reaches the High Court. However, the concerns aired by AGNI need to be addressed, particularly the measure of protection given to the Australian investors. These concerns, I suspect, are shared by all foreign investors who are turned off by our frequently rambunctious internal corporate wars where these investors can be at a real disadvantage.

To start with, AGNI is indeed the largest single investor in ETPI, but it does not constitute the majority. Under our law, foreigners are limited to 40 percent shares in the telecommunications industry. A 40 percent bloc will still be out-voted by the 60 percent Filipino holding or, as in the case of ETPI, by a combination of smaller stockholders who together make up more than 50 percent of outstanding stock.

There is theoretically nothing inherently wrong with this until you consider that the majority can control management and even the direction of the company. If you were a conspiracy theorist, you might sense a possible force-out scenario where the majority works with a take-over specialist to achieve the ouster not only of management nominated by the foreign investors, but also of the foreign group itself.

Of course, any arrangement which enhances the value of shares should benefit all equity holders, including foreign owners. But the history of these maneuvers is that, somehow, the foreign investors often find themselves with no participation in management, but with the prospect of having to sell out at bargain basement prices.

Arguably, they are brought to this juncture after injecting substantial new money and devoting management expertise to reversing years of financial losses and improving the company’s competitive posture.

I’m not all that sure this is what’s happening at ETPI. There is a lot of debate within that company on the real benefits of bringing in the Australians. A lot of the sound and fury seem like Monday-morning quarterbacking.

Is there need to revise Constitutional limitations on foreign investment in certain industries? Should investors, like all buyers, just beware? Are they entitled to special protection for the money they bring in, or should they learn to live by the rules of the game, as it is played here?

These are the hard questions, to which we soon must have answers. When we look at our galloping neighbors in Asia, we’re clearly not the only game in town.