‘Preemptive rights’ or privilege?



THE Philippine Stock Exchange defines preemptive rights in its glossary of market terms as “the right of the stockholder of the company to subscribe to all issues or disposition of shares of any class in proportion to his shareholdings.”

The definition makes preemptive rights absolute and not simply a privilege that can be easily taken away. Yet this is not what has been happening, to the disadvantage of the public. Instead, the majority stockholders usually ignore the public after using them to make their company qualify to list their shares on the PSE.

If public investors want to know where I picked up said definition of preemptive rights, I suggest they access www.pse.com.ph for a better appreciation of basic stock market words and phrases.

On October 1, 2014, I wrote a Due Diligencer piece entitled “Denying the public their preemptive rights is undemocratic.” It remains true today and it seems that nobody can do anything about it.

Not even the Securities and Exchange Commission could stop listed companies from depriving their public stockholders of their preemptive rights. As far as the commission officials are concerned, perhaps the self-regulatory organization status that PSE has long been enjoying extends to companies whose shares are publicly traded.

First to know
Have SEC officials, if they are well-informed on the activities of PSE insiders, efficiently monitored how many listed companies have so far amended their corporate charters to remove the provisions governing preemptive rights? They should know the trend because any change in the corporate charter of a company is supposed to pass through their scrutiny–if they would only care to read documents that are submitted to them for their perusal and approval.

Some listed companies pretending to be public may have amended their Articles of Incorporation (AoI) to remove said provision, which is easy to do. By a simple vote of the majority of the members of the board, a company can amend its AoI and do away with the rights of the public stockholders to the issuance of any kind or class of shares.

Yes, by a simple vote, the majority owners of listed companies can have independent directors as their partners in depriving public investors of their rights. If this is not true, then listed companies should disclose how these independent directors vote on resolutions that are contrary to the interest of public investors.

An example only
To illustrate the helplessness of the public against majority stockholders, here is what the board of Top Frontier Investment Holdings Inc. did on Jan. 4, 2010 when they met and approved a resolution that removed the preemptive rights of the company’s stockholders. The same majority ratified it even as the company said in its PSE posting that it had submitted the same for stockholders’ ratification.

Top Frontier listed Inigo Zobel and Joselito Campos Jr. among its incorporator stockholders, who subscribed to P99.8 million worth of shares each and paid P24.95 million of their subscribed shares at a par value of P100 per share. In its latest filing posted on the PSE website, Zobel owns 199.6 million Top Frontier shares, or 59.96 percent.

In turn, Top Frontier holds 1.57 billion common shares or 66.13 percent in San Miguel Corp. Its co-owner of SMC common shares is Privado Holdings Corp., which holds 373.6 million common shares, or 15.7 percent.

Privado Holdings and Master Year Limited hold 49.5 million Top Frontier shares, or 14.96 percent, and 36.85 million Top Frontier shares, or 11.07 percent, respectively. The two companies are owned by Ramon Ang, who is SMC president.

AoI amendment
In amending its AoI, Top Frontier made the denial of preemptive rights cover not only the public but everybody else, including the majority stockholders. This is with respect to “shares of stock to be issued, sold or otherwise disposed by the Corporation; the issuance of any class of shares in payment of a previously contracted debt or equity-linked debt, or shares issued in exchange for property needed for corporate purposes; the issuance of shares out of unissued capital stock or from any increase in the authorized capital stock of the Corporation; re-issuance or disposition of treasury shares; and any other issuance or disposition of the Corporation.”

Said amendment could not be selective. Top Frontier made certain that it covers even the majority stockholders who, after all, are privy to anything that’s going on inside the boardroom. They could be united on issues affecting their holdings, a privilege of insiders that outsiders not allied with them could never experience.

As public investors, their access to the company is limited to regulatory disclosures filed with the SEC and PSE. Does anybody know that without them, there would never even be so-called listed companies? After all, the listing rule requires a minimum public ownership of 10 percent of outstanding shares.

The problem is that listed companies that may not be necessarily public may have become mired in legalese to appreciate the role of individual investors who trade on listed shares. Apparently they forgot to ask themselves this: Depriving the public of preemptive rights may be legal, but is it moral? Just asking.



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  1. How could the PSE and SEC encourage Filipinos to invest when they allow shenanigans like this to occur on a regular basis? Filipinos view big business and politicians no differently – most are hopelessly corrupt.

    While social media keeps big-time government funds under some scrutiny one way or another, there is little interest for publicly offered private investment funds. Most Filipiinos could not care less for the stock and bond markets. It is sad the self-regulatory institutions show the same disinterest in guarding the monies of the small investors. The mom-and-pop investors are always the ones who get burned.