SMALL investors have not asked – either they have forgotten, or are afraid to ask – the majority stockholders of public companies in which they may be heavily invested, for enlightenment on preferred shares: What are these shares for? What happened to our pre-emptive rights? Where are the five members of the regulatory body of the Securities and Exchange Commission (SEC) who are supposed to protect us?
Yes, the issuance of preferred shares would appear to be a capital-raising strategy. But at the same time, it also deprives the public investors their pre-emptive rights with the connivance of SEC officials. If this is not the intention of additional stock issuances, then why shouldn’t listed companies issue common shares instead of preferred shares, which could be worse in some cases when these carry voting rights?
Unluckily for the public, they may not be aware that interest is due preferred shares but which, ironically, is not treated in financial filings as expense. Instead, they are sourced from retained earnings. This practice by CPAs and lawyers unjustly depletes a company’s pile of net profits. Why should a form of borrowing—which preferred shares actually are —be entitled to dividends when their earnings are expressed in percent? The percentage alone suggests debts and not ownership.
The public’s right
This issue is being raised here to inform the public that they should insist on their right as stockholders. They should not allow SEC officials to ignore them and their privilege to subscribe to additional shares even if these are preferred shares. For this reason alone, the small investors should not remain complacent but should assert their right as stockholders. They should be vigilant over any corporate act of company insiders that could be implemented only with the SEC’s imprimatur.
Here is one misleading filing that the SEC tolerates. Has anyone noticed the continued posting of public ownership reports (POR) on the website of the Philippine Stock Exchange (PSE) that do not reflect the true ownership profile of a listed company? Imagine a POR showing the public owning the equivalent of more than 40 percent of outstanding common shares! Some filings even attribute to the public majority control of more than 50 percent.
If SEC officials and their counterparts as market watchers at the Philippine Stock Exchange were to review every POR filing, they would surely find these anomalous and incredible entries. It is easy to find out the anomaly. Just read the disclosures on the election of the members of the board and try to decipher their connections and loyalty. Having done this, you would discover the truth: All members of the board are nominees of the majority, including the independent directors.
What happened to the PORs’ contents? Are they only for show since SEC officials do not bother at all to read them anyway?
The SEC should have reviewed its rules governing ownership of shares in listed companies after the Supreme Court defined the 60-40 percent ownership ratio in favor of Filipinos. SEC Chairman Teresita J. Herbosa and her fellow commissioners should have studied well the ownership profile of Philippine Long Distance Telephone Co. (PLDT) before acting on the company’s request for approval of the issuance of additional shares.
By allowing PLDT to issue 150 million voting preferred shares to effectively dilute foreign ownership to the 40-percent legal level, the SEC has adopted a policy that tolerates the circumvention of the Constitution’s 60-40 ownership rule. Who will now stop foreign conglomerates from taking over local companies that need money for expansion? The SEC, in effect, has facilitated the entry of foreign money into local ventures in the guise of boosting capital by subscribing to voting preferred shares.
Whatever happened to the SC’s suggestion that the 60-40 percent ownership ratio should mean Filipinos should own at least 60 percent of each class of shares? In the case of PLDT’s issuance of 150 million voting preferred shares to the PLDT Beneficial Trust Fund, SEC officials failed to ask who controls said fund. As a matter of fact, they could have noticed that First Pacific Co. Ltd. of Hong Kong even used the fund-held PLDT voting preferred shares to retain control of the company’s 13-person board.