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San Miguel’s No-Show Option Agreement

(Article published in the Jan 28, 2009 issue of Manila Standard Today)

Last Friday, in his column “Corporate Securities Info” in the Philippine Daily Inquirer, SEC Commissioner Raul J. Palabrica appears to have given an answer of sorts to Newbreaks’ recent news item, by-lined Lala Rimando, that asked “Where is the tender offer?”  The good commissioner’s response is “it looks like the demand of the minority stockholders for the application of the tender offer rule is premature.” 

I respectfully beg to clarify and qualify. In the minds of the minority stockholders of Petron, at least of those who have approached me about it, it is the good commissioner’s statement itself  that is premature. 

Premature because, as of the time this item goes to my editors, the SEC has apparently not yet been provided, in fact it has not yet decided to ask for, the Option Agreement itself.  Without the best evidence of what the Option Agreement actually contains, how can anybody not privy to the agreement claim that the Option Agreement is really not an indirect and de facto acquisition by San Miguel, here and now and not in two years, of more than 35% of Petron Corporation? 

Let us make a quick rewind.  The first public disclosure by San Miguel of its serious interest in Petron Corporation was made on 05 January 2009.  Essentially, it told the Philippine Stock Exchange that it had entered into an Option Agreement with Sea Refinery Holdings B.V., on 24 December 2008.  The Option Agreement was described as giving San Miguel the option, exercisable within two years, to purchase all of Sea Refinery Holdings B.V. shares in its subsidiary, Sea Refinery Corporation, which in turn owned 51.1% of the outstanding shares of Petron Corporation.


In addition, and this was what must have raised the red flag and prompted the minority stockholders to perk up, there was a casual disclosure that San Miguel, under the Option Agreement, “shall have the right to have representation in the board and management of Petron Corporation.”

The vigilant officials of the PSE must have recognized in that casual statement something not usually found in plain vanilla options.  Hence, they requested for additional information. 

In its 07 January response, San Miguel did not see any need to explain how a mere option could give the option holder the right of representation to the management and board of the target corporation. The following day, Petron Corporation informed the PSE, among other items, that, in a special board meeting, three members of the board of San Miguel had been elected to the board of Petron and that the President and COO of San Miguel has become also the Chairman and CEO of Petron. 

That is some mighty Option Agreement, innit?  At the very least, it deserves to be held up as a model for corporate law practitioners to fashion the option agreements after when they negotiate in the future for their clients. 

Two days later, the newspaper that Commissioner Palabrica writes for says that the price of the option was around $10 million.  The PSE asks San Miguel for “additional” actually confirmatory  information, and responding on the same day, San Miguel said that indeed it “has committed to pay the Ashmore Group approximately $10 million as consideration under the Option Agreement.” But San Miguel did not show PSE the Option Agreement itself.

The PSE was not amused by the hide-and-seek game being played by San Miguel.  On 12 January, the PSE expressed its dissatisfaction saying that in the PSE’s view, San Miguel “failed to provide the Exchange with ALL the information it has requested.”  PSE therefore mandated that it be provided, among other things, “copy/ies of all agreements duly executed that are revelant to the transaction” and, obviously in anticipation of San Miguel’s invocation of an alleged confidentiality clause in the Option Agreement, insisted, parenthetically, that “the confidentiality agreement between the parties does not bind the regulator.”

The following day, 13 January, San Miguel ignored PSE’s statement that “the confidentiality between the parties does not bind the regulator” meaning itself. Instead, it defended its hiding of the Option Agreement.  It claimed that “the right of private parties not to disclose agreements between or among them is protected by the constitutional rights of liberty, property and privacy.”  “They continue to be private agreements and”, says San Miguel, “the documents evidencing the agreements continue to be private documents, not subject to examination or reproduction by the public.”

In other words, it is San Miguel’s contention that all that private parties need to do is enter into confidentiality agreements in order to effectively exclude the agreement from the eyes of the public for whom the regulator acts.

Moreover, San Miguel, extremely protective of Sea Refinery Holdings BV, contended that the latter had no obligation to disclose anything to the PSE. Neither can San Miguel, the counterparty to the agreement, which does have such an obligation, be obliged by the PSE to produce the agreement since the PSE  is not the government.  By implication, San Miguel seems to suggest that it is amenable to producing the Option Agreement if so ordered by the Securities and Exchange Commission, an agency of the government.

It was at this point, one day later, that the PSE decided to segment the situation: the issue of whether a tender offer ought to be made at this time, it referred to the SEC; and the issue of securing a copy of the Option Agreement it decided to be its own concern.

Thus, technically, the only question before the SEC is whether San Miguel ought to make a tender offer at this time, even before it exercises if it so exercises, its option within the allotted two-year period.  And admittedly, if the option agreement, were indeed, purely and simply, only an option agreement, then the informal statements of the members of the Commission, as articulated in the column of Commissioner Palabrica, are perfectly correct.

Unfortunately, San Miguel itself had given indications that the Option Agreement was not pure and simple.  As stated earlier, it is alleged to have provided for, and was the obvious basis for, San Miguel’s having at least 3 seats in the board and active participation in the management of Petron Corporation to an extent beyond that justified by, if at all, its interest of record in the equity of the company (05 Jan disclosure).  Dividends declared by Petron during the option period shall accrue in favor of SRC (19 Jan disclosure) which San Miguel can acquire by exercising the option.

A doubt thus exists on what the agreement between San Miguel and Sea Refinery Holdings BV really is. And the only way the SEC can verify the true nature of the transaction between San Miguel and Sea Refinery Holdings BV which agreement they call Option Agreement is to order the production of the document itself.  It is Law on Evidence 101 that the best evidence of what an existing document contains is the document itself and not what a party says it contains.

         For the SEC Commissioner to thus opine that the Option Agreement does not at this time trigger the application of the tender offer rules, solely, “based on SMC’s disclosures of the salient details of its agreement”, and thus without first seeing the Option Agreement itself, is to prejudge the case.