SEC tells Japanese: You can’t take your money back

Emeterio Sd. Perez

Emeterio Sd. Perez

THE Securities and Exchange Commission has issued a legal opinion which should be read by foreigners wanting to go into business in the Philippines in partnership with Filipinos. Issued on June 11, 2014, it was well researched by a SEC lawyer or lawyers and signed by another lawyer, Camilo S. Correa, SEC general counsel.

Due Diligencer, who does not know if Correa did the research himself or assigned a fellow SEC lawyer or lawyers to do the job, is summarizing said opinion. If not satisfied with its interpretation, then its advice is for those interested to go over the entire opinion and surf for it at

* * *

THE Japanese stockholders of Toenec Philippines Inc. have learned a costly lesson in investing in a local company. Either they did not get the best legal advice or their lawyers themselves failed to review the rules of the Securities and Exchange Commission on the use of additional paid-in capital or APIC.

APIC is defined as premium paid over par value. It is an accounting entry under equity, which means that, like capital stock and retained earnings or deficit as the case may be, it belongs to the stockholders.

The experience the Japanese went thru in rehabilitating Toenec Philippines cost them P50 million. To others, the lesson is a reminder to foreign investors and their Filipino lawyers that the Philippines’ SEC is a regulatory body. Sometimes it may be investor-friendly, but when it issues a legal opinion it follows the law and supports it with decided legal cases that you have to go to the Supreme Court to dispute it.

* * *

If you were the foreigners who are the minority stockholders in Toenec, will you go to court? Here are some of the facts:

The Japanese who invested in Toenec Philippines that created that P50-million APIC had only the best intention for the local venture. By putting in the money, they had hoped to erase the company’s deficit, which the Philippine Contractors Accreditation Board (PCAB) had cited in refusing to renew the accreditation of Toenec Philippines.

When the Japanese investors put in P50 million, they were surprised to find themselves in an even worse predicament: PCAB said that with the additional infusion which it said was equity, the Japanese ownership in Toenec Philippines would breach the 40 percent foreign ownership limit.

* * *

Now they wanted their money back but could not get it back so their next recourse was the SEC. To be able to utilize the money, they asked the SEC that they wanted to use their money, which was entered as APIC, in paying for more Toenec Philippines shares.

As foreigners, the Japanese said they would not violate the 60-40 ownership ratio in favor of Filipinos because their local partners would also subscribe pro-rata to additional shares so as not to dilute the required minimum ownership below 60 percent. Then they said they would use the P50 million APIC as payment for their additional subscription.

IF PCAB refused to accredit Toenec Philippines for a resulting foreign ownership of more than 40 percent, the SEC said an investment becomes a corporate asset. As such, it could not be withdrawn or returned to its owner but it could be used for some other purposes, such as returning the company to profitability by getting rid of its deficit.

* * *

What happens when APIC is used to eliminate a deficit?

Again, another loss for the Japanese, because in applying their P50 million against the deficit, they would end up losing 60 percent of it to Filipinos, leaving them with only 40 percent. Computed, the Filipinos would in effect own P30 million of the money and the Japanese P20 million.

In short, the Japanese stockholders were forced into generosity they did not want. It just so happened that they and their lawyers did not consult the SEC first for a legal opinion before they contributed

P50-million APIC to the stockholders’ equity of Toenec Philippines.

As a general rule, APIC, according to the SEC, could be used in financially reviving an ailing company but it could not be withdrawn and converted “into a loan or pay additional subscription to capital stock…”


Please follow our commenting guidelines.

Comments are closed.