Posted on Monday, June 30, 2003

Nextel breaks Constitution

By Johnna Villaviray, Senior Reporter

1st of 2 parts

What began as what could be consi­dered office politics–the sitting president resisting orders from a transplant from an overseas office throwing his weight around–is shaping up into what could be the biggest controversy to erupt since the infamous BW stocks price manipulation in 1999.

A former executive of Nextel Communi­cations Philippines Inc. (NCPI) alleges that its mother company–Nextel International Inc. (NII)–is engaged in an elaborate scheme of corporate layering that allowed the NII to acquire 87 percent of the NCPI in violation of laws on the limitations on foreign ownership.

The Constitution directs that pub­lic utilities–the service of electricity, water and telecommunications–shall be owned at least 60 percent by Filipinos, ensuring that Filipinos control the firm’s operations.

 “A certain Mr. John Jones visited our company [NCPI] in or about January 2001 to March 2001, claimed that Nextel International Inc. (NII) fully controlled ownership of the NCPI and its board, and threw his weight around,” Antonio Urera complained in a 2001 letter to the NCPI Board of Directors.

Urera was serving as NCPI’s president, general manager and chief executive officer at the time.

“I request you to do something to stop Mr. Jones from further maligning and demeaning my person,” he continued.

Apparently, Urera’s complaints against Jones, NII president for Asia-Pacific, fell on deaf ears.

A long-time NCPI staffer said Urera was dismissed because of differences with the Board of Directors. Urera said his “illegal termination” was the direct result of his refusal to accept NII’s control over the NCPI.

The NII entered the Philippine market in 1996 by acquiring shares of NCPI–then known as Infocom Communications Network–through Top Mega, a Hong Kong-based subsidiary.

By now, Urera says, the NII has acquired as much as 87 percent of the NCPI through its 40-percent direct shares and 47-percent indirect shares, the result of the systematic acquisition of NCPI’s local shareholders.

“The large equity interest of the NII inevitably resulted in [its] total control of and influence in the management and operations of the NCPI, clearly in blatant violation of the Constitution,” said Urera in an affidavit submitted to the House of Representatives’ Committee on Transportation and Communications.

In 1995, 60 percent of the firm was owned by the Gotesco Group (20 percent), Jetcom Inc. (32.8 percent) and 7.2 percent by Foodcamp Industries and Marketing. The remaining 40 percent was held by an NII subsidiary, Top Mega (30 percent), and by Joyce Link Ltd. (10 percent).

Urera says the NII has acquired most of the local shareholders through holding companies established by ACCRA Investments Corp., (ACCRACOR) the investment arm of NCPI’s legal counsel–Angara, Abello, Concepcion, Regala & Cruz Law Offices (ACCRA)–and funded by NII money.

The holding companies–Gamboa Holdings Inc., Orient Holdings Philippines and Emerald Investments–were supposedly established days before the acquisition.

“In the surface it looked OK,” Urera acknowledged. “Unless you know what I know, you [wouldn’t] know what’s happening there.”

The NII had begun consolidating its interests outside the United States during the second half of the 1990s.

According to documents the NII filed before the US Securities and Exchange Commission in the first quarter of 2001, the company acquired full ownership of its sister firms in Brazil, Mexico, Argentina, Peru and Chile by the end of 2000. The NII was less of a presence elsewhere, with 32.1 percent in its Japanese operating company, 4.8 percent in Canada and 51.1 percent in the Philippines.

In the same document, parts of which were obtained by The Manila Times, the NII narrated how its direct and indirect shares in the NCPI grew.

“Funds used by Gamboa Holdings to consummate the acquisition of the 20 percent of Nextel Philippines were derived from equity contributions by shareholders of Gamboa Holdings and proceeds of loans made by a lending institution,” the document said. “These loans to Gamboa Holdings and to ACCRAIN [Holdings Corp.] are secured by our cash collateral deposits in the amount of the loans and a pledge of Gamboa Holdings’ shares of Nextel Philippines.”

The lending institution the document was referring to was RCBC Trust. A founding partner of ACCRA, Teodoro Regala, sits on the Rizal Commercial Banking Corp. (RCBC) Board of Directors.

“I am a simple person and I look at the capitalization,” Urera said, insisting that the holding companies were established using funds provided by the NII to buy out NCPI’s local shareholders.

This practice violates the limitations on foreign ownership provided in the Constitution and the Antidummy Law, Urera added.

The law prescribes that “it shall be unlawful to falsely simulate the existence of such minimum of stock or capital as owned by such citizens, [to evade] the Antidummy Act.”

In March Reps. Prospero Nograles and Harlin Abayon filed a resolution seeking a congressional investigation into NCPI’s ownership. The panel has had two hearings since.

“We don’t have a direct link yet,” Nograles acknowledged. “You have to pierce the veil of corporate entity to find out who really owns [the NCPI].”

The 20-percent share of the Gotesco Group in the NCPI, then Infocom, was transferred in 1998 to Gamboa for $9 million. Urera said that ACCRACOR’s $1.5-million investment representing 60 percent of Gamboa was obtained through a loan backed up by a cash collateral of the NII.

In 2000 Emerald Investments acquired Foodcamp, which held 7.7 percent of the NCPI.

Emerald was incorporated days before the deal as a domestic company owned by ACCRAIN Holdings, which put in P1.5 million for its 60-percent common shares, and Orient Holdings Ltd, which invested P98.5 million representing 40 percent preferred shares. Orient is a wholly owned subsidiary of the NII.

In 2001 Emerald bought 20 percent of Jetcom’s 32.8-percent share of the NCPI.

Urera alleges that funds for the transactions were in the form of loans given by the RCBC and secured by cash collateral deposits by the NII or a subsidiary, Nextel International (Delaware) Ltd.

“They made it appear that a legal entity provided the domestic funds,” he said.

Another sign of deception, Urera continued, concerned the names of the holding companies established to acquire the local shareholders of the NCPI.

Gamboa, the company that acquired 20 percent of the Gotesco Group’s share of the NCPI, is also the name of the street where ACCRA’s head office in Makati is located.

Emerald, which acquired Foodcamp and Jetcom, is also the name of the street where NCPI’s office is located, and Orient, which partly owns Emerald, shares the name of the building–Orient Square Building–that houses NCPI offices in Makati.

For the NCPI, questions of ownership have already been settled.

In a statement issued in May, the NCPI management said the National Telecommunications Commission had ruled in an order dated May 6, 2003, that the company, now known as Next Mobile Inc., complied with the constitutional limitations on foreign ownership.

The Manila Times earlier reported that the SEC has consistently and categorically declared in numerous opinions that, on the basis of Opinion No. 18, series of 1989 of the justice department, “shares belonging to corporations or partnerships at least 60 percent of the capital of which is owned by Filipino citizens shall be considered of Philippine nationality.”

This means that as long as the percentage of Filipino ownership of the capital stock of the corporation is at least 60 percent, the corporation shall be considered a Filipino corporation.

The law limits to 40 percent the maximum equity stake of foreigners in Philippine corporations.

The NCPI management is confident that it has broken no laws. A long-time staffer of the company said there were reports that Urera publicly accused NII executives because talks over an exit package bogged down.

The Manila Times earlier wrote that the NCPI management believes Gamboa is a Filipino corporation since the justice department and the SEC did away with the strict application of the “grandfather rule” and adopted the “control test” method for determining corporate nationality for purposes of investment in another corporation.

Under the control test, if the corporate stockholder is at least 60-percent Filipino-owned, its holdings in a company are also considered Filipino-owned.

Urera is having a hard time believing that the NII did not control the NCPI when he was president and chief executive officer of the company.

And in the quarterly registration statement the NII filed before the US SEC for the 2001 fiscal year, the NII does not appear to believe so either.

The document included the Philippines on a list of its “managed operating companies.”

In an e-mail sent by Lo Van Gemert, NII president and chief operating officer, to top executives of its sister companies, Gemert announced that overall supervision of the operations in the Philippines has been given to John Jones, NII president for Asia-Pacific.

“Initially John will be assessing potential opportunities in the Asia/Pacific markets, and will also be responsible for operations. Tony Urera, president of the Philippines, will report directly to John,” the e-mail said.

Another e-mail, this time sent by Patrick Leach, head of the NII Human Resource Department, showed the bonus package planned for the NCPI staff.

Urera gave the congressional panel copies of the e-mails to support his charge that the NII had taken effective control of the NCPI, as demonstrated by Jones’s demand that NCPI’s chief technology officer be replaced by a foreigner.

“That is against the Constitution,” he insisted. “A big company like this comes in here, throws its weight around making Filipinos look like fools. [And all] because it thinks it can always pay off somebody.”

Conclusion