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San Miguel Corporation’s cheap strip tease act

(Article published in the Jan 21, 2009 issue of Manila Standard Today)

Despite having had barely three hours  and a half of sleep the night before, I dragged myself out of bed last Sunday at 4:30 in the morning to make it to the opening bell of The PSE Bull Run 2009, an running event dubbed “Takbo Para Sa Ekonomiya”, at 6:00. 

My rare gesture of self-inflicted pain, to be honest, was not, however, really for the economy.  From where I sit, with my thin wallet in my backpocket, the Philippine economy is not in any moving state of “takbo” but is, instead, stuck in the stagnant condition of “para.” 

What I wanted to do was, in fact, to show support for the PSE’s handling, so far, of San Mig’s obvious reluctance to comply with PSE’s calls for the full disclosure of its Option Agreement with Ashmore’s unit, Sea Refinery Holdings BV which owns 100% of the shares of Sea Refinery Corporation which, in turn, owns 50.1% of Petron Corporation.

In my column last week, I pointed out how PSE has had to go through a process resembling that of a dentist pulling out a wisdom tooth before it was to  able to extract bit by bit same features of the Option Agreement.  Specifically, I question whether SMC’s responses, particularly its letter of 07 January 2009, are in the true sense the “disclosures” required under the law the and PSE rules.


PSE --headed by President Francis Ed. Lim and in this matter acting through COO/Head, Issuer Regulation Division Roy Joseph M. Rafols and Head/Disclosure Department, Pedro “Pete” M. Malabanan, Ateneo lawyers all—was just as dissatisfied with SMC’s 07 January letter.  Writing on 12 January, it “mandated” SMC to provide, by 13 January, a menu of facts, such as and not limited to copies of all the relevant agreements relating to the transaction, at the same time asserting that any confidentiality agreement among the parties does not bind the regulator, and demanded “the complete terms and conditions of the option agreement.” The PSE letter ended with a demand for the disclosure of SMC’s tender offer plans in connection with its “potential controlling stake in Petron Corporation.”     

Instead of complying, SMC, on 13 January, responded and claimed immunity from the required disclosure based on the confidentiality clause, allegedly, contracted between the parties.  Moreover, it argued, on behalf of a company it claims to have no relations with, that Sea Holdings BV has no disclosure obligations to PSE.  SMC also reminded PSE that it (PSE) was not a government agency and that forcing a disclosure would be contrary to the laws of the land.  SMC further hinted, not so subtly, that such an action just might make the perpetrators liable for damages.

Veterans and survivors of the grueling demands of the very taxing tax course that they took under me when they were third year students at the Ateneo Law School, the Lim-Rafols-Malabanan trio was unfazed.  And instead of cringing in fear and retreating with tails between their legs, my legal hounds bared their fangs.  On 14 January, they made their former law professor proud: they demonstrated the skill, pounded out of them in the crucible of countless hours of withering recitation, of analyzing, even while under stress, a complex situation and discerning, after identifying the crucial issues, from what direction the solutions ought to come.

Accordingly, the matter of whether the Option Agreement had triggered the application of the tender offer rules, the PSE Disclosure Department referred to the Securities and Exchange Commission; but the issue of whether SMC can be compelled to make a “full, fair, timely and accurate disclosure of material information” relating to the Option Agreement, the PSE kept for itself to resolve.  SMC was thus told to show cause why “the Exchange should not impose the appropriate penalty/ties and sanctions on SMC” for its violation of Secs. 1,2, and 4.3 of the Revised Rules on Disclosure.

The resolution of the tender offer issue by the SEC, I guess, would have to hew to the Supreme Court pronouncement in the case of Cemco Holdings, Inc. v. Nat. Life Insurance Company of the Philippines, Inc. (529 SCRA 355).  The Supreme Court in that case agreed with both the SEC and the Court of Appeals that “the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or any time of acquisition…Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies…”

Hence, the point of law that the SEC has  to decide on is whether in the particular situation where, under the Option Agreement, SMC had acquired a two-year period to directly acquire shares in Petron as well as the right to name directors in the latter’s board even within those two years, the SMC in the eyes of the law, “intended” to acquire, if it had not yet already, acquired, indirectly, control of Petron.

The issue of the inadequacy of disclosures of SMC is properly for the PSE resolve.  On 15 January, the very day SMC was supposed to show cause, it instead asked for extension of up to the close of business hours of Friday, 16 January, to “prepare a comprehensive reply and/or disclosure” on the matters demanded by the PSE in its 14 January letter.  It assured the PSE that SMC “will comply with all rules and regulations, including, in particular, those that relate to minority shareholder protection and mandatory tender offer rules.” 

To keen observers, keen appears to have actually changed gears.  At the very least, SMC had began to concede the possibility of its having to make the requested disclosure by the PSE, subject to the collatilla, that it be demanded by the rules and regulations. 

In response to the reconciliatory tone of SMC’s letter, PSE on 16 January granted the extension.  And not just as requested but up to 8:00 in the morning of the following Monday, 19 January.  Amor con amor se paga, my friend Rene Saguisag often quotes.  But, lest SMC back slide into complacency, PSE again provided specific guidelines to help in SMC’s preparation of its “comprehensive reply and/or disclosure”.

In the morning of 19 January, SMC did make another “disclosure.”  But as its previous ones, compliance was not complete.  Nothing that was new or that could not be derived from previously available data was disclosed.  Except for how the exercise price was to be determined; the fact, for the first time, that the $10 million “is separate and distinct from the price to be paid for the Option Shares if and when the option is exercised”; and the fact that the option is non-transferable.

There is no assurance that that is all that there is to it in the Option Agreement.  From the way SMC has been conducting itself, SMC is rightfully still suspected of keeping secret what it is in the Option Agreement that justifies its presence in the board and same management during the option period. 

The Option Agreement must be shown otherwise, SMC has only itself to blame, if the audience, as is its wont when the stripper does not go all the way, jeers “harang!”.

At the time this item is submitted to my editors, there is no indication of how PSE will take SMC’s latest “disclosure”.  But, if I know the Lim-Rafols-Malabanan trio well, SMC will not be permitted to get away with its cheap strip tease act.