• Toenec of Japan should not withdraw its P50-M investment

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    Emeterio Sd. Perez

    Emeterio Sd. Perez

    LAWYERS. Bayani Tan e-mailed Due Diligencer in connection with a piece that appeared in this space on July 9. He did not exactly react to the subject but had asked for certain details on where the piece entitled, “SEC tells Japanese: You can’t take your money back”, was based.

    Such details could be easily found if he, or anyone else interested in knowing how the SEC operates, surfs www.sec.gov.ph, the website of the Securities and Exchange Commission.

    But from the tone of his letter, Tan, who is corporate secretary and member of the board of a number of listed companies, sounded like he had a solution to the legal issue in the query posed by a Japanese company in connection with the additional paid-in capital (APIC) of P50 million in its local venture.

    In a poser to the SEC, the lawyers asked if their client could get back the P50 million investment. The SEC said it could not. In effect, the SEC told Toenec of Japan that what it had infused already belongs to the company.

    Due Diligencer would not know how Toenec Philippines, the local company, could go around the rules elucidated in a legal opinion issued by Camilo Correa, SEC general counsel.

    Perhaps, in so many years that he had been dealing with the SEC, Tan the corporate lawyer has had some experience similar to the P50-million legal poser. After all, he, being a careful lawyer, has presumably sought the SEC’s legal opinion when in doubt over the applications of the regulatory agency’s certain rules.

    Anyway, APIC, as Due Diligencer knows it, represents the amount paid by a stockholder in excess of the par value of the shares issued by a company.

    To illustrate: SM Investments Corp. issued 173.298 million common shares in 2013, or P1.733 billion at P10 par value, but which were sold to various investors at different prices. For instance, in a private placement, the holding company, which is the listed flagship of the group of companies controlled by businessman Henry Sy Sr. and his family, sold 7.3 million common shares at P900 each for gross proceeds of P6.570 billion. This particular share sale created an APIC of P890 per share, or a total APIC of P6.497 billion (P6.570 billion minus 7.3 million common shares multiplied by a par value of P10).

    How come SMIC reported in a quarterly filing APIC of P57.799 billion as of March 31, 2014? The Sy-controlled company had an APIC that is too big to be ignored that the company’s small stockholders, who make up the public, would probably want to know where the amount would go.

    Answer: SMIC has accumulated the total APIC over the years. As a matter of fact, it had only P35.456 billion as of December 31, 2010, including P425.491 million APIC that resulted from the conversion of SMIC’s convertible bonds. This APIC slightly increased to P35.537 billion as December 31, 2011.

    Here is the good news. SMIC’s lenders, instead of leaving, availed themselves of their option to convert their loans to common shares at P453.39 per share. By the fourth quarter of 2012, the company’s share price surged to a high of P900.50 for a gain of P447.11 per share, which translates to a paper return of 98.615 percent.

    The SMIC story cited here has one message: Toenec of Japan could choose to stay in the Philippines and maintain its P50 million infusion in Toenec Philippines. Then it should wait until its local venture improves financially. How to do this? Ask your lawyers to seek the guidance of SEC examiners who are mostly CPAs and lawyers.

    Chances are, if Toenec Philippines has a deficit, the SEC would advise that it undergoes quasi-reorganization by applying the company’s APIC, including the P50 million put in by Toenec of Japan. If the APIC would not be enough to get rid of said deficit, then it could reduce its par value.

    In a corporate reorg, the SEC has the last say. But a company’s lawyers could propose how to do it and their suggestions would be subject to the SEC’s approval.

    When Toenec Philippines is finally back to profitability, it could go public by selling at least 10 percent of its outstanding common shares to outsiders. In its public offering, it could include the sale of the Japanese group’s holdings to dilute their ownership to the legally allowable limit of 40 percent.

    By selling its holdings at the initial public offering price, which is usually at over P1 par value, Toenec of Japan may even make more than the P50 million that it wants to withdraw but could not because under a SEC policy, what a stockholder has put in as capital, it could not take back.

    esdperez@gmail.com

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