Are minority stockholders protected in acquisitions?

Amicus Curiae
Maris Donna G. Kwok

Posted on August 05, 2015

As the Philippine economy grows, shares of stocks are actively traded in the stock market. In the face of the Greek financial crisis and price fluctuations, some investors are selling their stocks, while some investors are taking this opportunity to purchase stocks at their desired price. Some say minority stockholders may be neglected when the majority stockholders of their company sell their equity interest to an outsider.

Are the rights of the minority stockholders adequately protected against the corporate giants acquiring ownership and control by purchasing substantial number of stocks?

What if by acquiring the shares of stocks of a company, one also indirectly controls the subsidiary of that particular company. What rules must one comply with in purchasing the shares of stock of a listed company who substantially owns another listed company?

Does the law protect the interest of the existing minority stockholders of the parent and of the subsidiary?

Luckily, minority stockholders of a public company are protected under the Securities Regulation Code (SRC) wherein the tender offer is mandatory. Tender offer means a publicly announced intention by a person to acquire equity securities of a public company.

If a stockholder achieves a certain amount of ownership in a corporation, is the stockholder obligated to buy the shares of the other stockholders who want to sell?

Indeed, the law makes it mandatory for the acquiring person to offer to buy the shares of the other stockholders.

Under Rule 19 (2) of the Implementing Rules and Regulations of the SRC, “any person or group of persons acting in concert, who intends to acquire thirty-five percent (35%) or more of equity shares in a public company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all holders of such class. Any person or group of persons acting in concert, who intends to acquire thirty-five percent (35%) or more of equity shares in a public company in one or more transactions within a period of twelve (12) months, shall be required to make a tender offer to all holders of such class for the number of shares so acquired within the said period. If any acquisition of even less than thirty-five percent (35%) would result in ownership of over fifty-one percent (51%) of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such a tender offer shall be required to accept any and all securities thus tendered.”

While the SRC does not distinguish between direct and indirect acquisitions of the equity shares in a covered corporation, the Supreme Court ruled in Cemco Holdings vs. National Life Insurance Company that “the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or any type of acquisition. The legislative intent of Section 19 of the SRC is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. 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. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may be effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. 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.”

The tender offer rule gives minority stockholders the opportunity to exit a public company by selling their shares at the same price as those of the majority stockholders in case they are not contented with the new stockholder taking over their company.

Therefore, laws and jurisprudence are in place to protect the interest of the minority stockholders of a company. Moreover, Securities and Exchange Commission (SEC) regulates the acquisition of control of the listed company. But there are certain issues which the Cemco Case and SRC have not addressed, for instance in acquisitions resulting in indirect control, there are no guidelines for the price in the tender offer to the subsidiary corporation. To aid the public, I believe the Congress and the SEC should find ways to address and clarify the same.

Maris Donna G. Kwok is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices.


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