http://business.inquirer.net/money/columns/view_article.php?article_id=85738
Ruling on tender offer
By Raul J. Palabrica
Inquirer
Last updated 07:15am (Mla time) 08/31/2007
MANILA, Philippines -- Until the enactment of the Securities Regulation Code in 2000, minority stockholders in large companies were ignored in mergers and acquisitions.
Before, if anyone wanted to gain control of a company, he negotiated quietly with the major stockholders on the purchase of their shares.
For obvious reasons, the offer to buy carried a premium on the shares’ book value. It was a seller’s market and the stockholders took advantage of the situation.
The transaction was announced to the rest of the stockholders and the public after the targeted number of shares had been acquired.
The stockholders who were not in on the deal and were unhappy with the change in ownership usually opted out by offering their stocks to the new group.
A buyer’s market this time, the new owners either ignored the offer or dictated the price they were willing to buy those shares, often at a price lower than that paid to the erstwhile major shareholders.
The cash-strapped stockholder had, like a beggar, no choice but accept whatever price was offered to him and charge to experience the raw deal he got. The other stockholders could only pray that the new management will treat them fairly.
The Code changed the rules on mergers and acquisitions for companies listed on the stock exchange and public corporations (or those with assets worth at least P50 million and have 200 or more stockholders who own a minimum of 100 shares each).
Any person or group of persons acting in concert who intends to acquire at least 35 percent of any class of shares of these corporations, on a one-time basis or over a 12-month period, is required to make a tender offer to all the stockholders.
The prospective buyer must publicly declare, ahead of time, its intention to buy such number of shares it wants to acquire and at what price.
The announcement should also state the time frame and manner by which the offer should be accepted by interested stockholders.
If more stocks than planned to be purchased are offered for sale, the buyer is obliged to buy them proportionately. All the shareholders, not only those who own big chunks of stocks, should be given the opportunity to sell at the offer price.
Ownership ratios
Failure to comply with the tender offer rules could give rise to fines and penalties on the errant buyers.
The scope of the tender offer rules was recently passed upon by the Supreme Court in the case of Cemco Holdings Inc. vs National Life Insurance Co. (G.R. No. 171815, Aug. 7, 2007).
The case involves Union Cement Corp., a publicly listed company owned principally by two stockholders: Union Cement Holdings Corp. (UCHC) and Cemco, at 60.51 percent and 17.03 percent, respectively.
The stocks of UCHC are in turn held by Bacnotan Consolidated Industries Inc. (21.31 percent), Atlas Cement Corp. (29.69 percent) and Cemco (9.00 percent).
In July 2004, Bacnotan and Atlas announced their intention to sell their UCHC shares to Cemco. Upon learning this, National Life, a minority stockholder of Union Cement, demanded from Cemco that it offer to buy its Union Cement shares pursuant to the tender offer rules.
Cemco refused. It purchased the UCHC shares in question and, as a result, became the owner, together with its earlier holdings, of 53 percent of Union Cement’s stocks.
National Life filed a complaint with the Securities and Exchange Commission to nullify Cemco’s purchase and asked that the tender offer rules be applied to its Union Cement shares.
The respondents argued that the tender offer rules apply only to a direct acquisition of the shares of a listed company and do not cover an indirect acquisition made through the purchase of the shares of a holding company of the listed firm.
Strict compliance
The SEC ruled in favor of National Life and ordered Cemco to make a tender offer for Union Cement shares to all shareholders. Undaunted, Cemco sought relief from the Court of Appeals. The appeal was turned down.
Cemco persisted. It brought the case to the Supreme Court.
Strike three, the tribunal dismissed Cemco’s petition.
The court stated that the tender offer rules are meant “to protect minority stockholders against any scheme that dilutes the share value of their investments.”
These rules give “minority stockholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders.”
After reviewing the minutes of the deliberations of Congress on the Code, the tribunal said that “whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies.”
The court agreed with the Court of Appeal’s view that “the bottom line of the law is to give the shareholder of the listed company the opportunity to decide whether or not to sell in connection with a transfer of control.”
With the legal issue out of the way, the next question to be addressed by the parties is: At what price should Cemco buy the rest of the Union Cement shares? The same price as in 2004? Or at the prevailing market price?
No more court actions, please.
