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To sue but not to offend

(Article published in the Sept 14,2011 issue of Manila Standard Today) 

It will not be surprising if Manny V. Pangilinan (MVP) were to not make any move, at this time or any time soon, to claim for Philex Mining the short-swing profits that apparently were realized in 2009 by then Philex director Roberto V. Ongpin (RVO).  RVO admitted to reaping gains when, within a period of about two months from his purchase of 50 million of the mining company’s shares from the Development Bank of the Philippines on 05 November, he sold them, together with other shares and with other persons, to MVP’s Two Rivers.  

While the minority stockholders will be greatly benefitted by such recovery, should it succeed, controlling stockholders, as a general rule, are not disposed to concede to their lesser bedmates any more rights than are required to given to them by law. Moreover, MVP, personally, has a lot more pressing concerns on his mind, such as consoling the Ateneo UAAP basketball players after they had lost their bid for a 14-0 sweep of the elimination round, for him to spend any of his precious time getting for others what he was, according to RVO, willing to part with in exchange for his control of the mining company.

The most suited plaintiffs for such a claw back action are the minority stockholders themselves, such as, according to the Philex disclosures of top stockholders as of June 2011, the religious orders, like the Religious Order of the Virgin Mary, and the trust departments of banks, like Banco de Oro, Rizal Commercial Bank and Trust Company.  Both groups can use additional value to their Philex sharesholdings, the first for the funding of their calling and the second for the calling of their clients.  Primarily for them do I deal in some more detail on Section 23.2 of our Securities Regulation Code. 


The first important feature of a Section 23.2 action is that the time for action is limited, and, for Philex, fast running out.  The suit to recover the short-swing profits by an insider may be brought “no...more than two (2) years after the date such profit was realized.”  The profit was realized by RVO in the first week of December 2009.   That, however, does not give the minority stockholders a full two and a half months to file their suit.  The law appoints the issuer (Philex Mining) as the principal plaintiff and only if the issuer fails or refuses to bring the suit within sixty (60) days after being so requested may any owner of such security file the suit “in the name and in behalf of the issuer.”

In other words, the law requires a minority stockholder to first request the issuer to file the suit for recovery and, only after the receiving a negative response or the lapse of 60 days of inaction by the issuer, is a minority stockholder authorized to take up the cudgels for the issuer.   

Assuming, for the sake of easy computation, that the sale by RVO to MVP was effected on 02 December 2009, the last day for filing the suit, by either MVP or a minority stockholder, in both instances in the name of Philex, is 02 of December this year.  But since, before a minority stockholder can take the initiative of bringing the suit, 60 days of inaction by Philex must lapse, his, her or its letter requesting the suit by Philex must be received no later than 03 October.  For all practical purposes, therefore, a minority stockholder has only these remaining days of September to take the initial action of prodding Philex to bring the claw back suit. 

I can understand if the religious institutions owning shares of Philex will not send out the letter-request; they, after all, have been known (except for rare shining moments like stopping the tanks during EDSA I) to readily abandon themselves in the hands of the Lord; but that is not an action for the trust departments.  Trustees and other fiduciaries have a duty to take any and all actions necessary to protect the interests of their beneficiaries and trustors; they will be courting the ire not only of their clients but also of their regulator if they decide, out of fear or favour, to forego the chance of increasing the value of their trust holdings in Philex by simply not sending out that letter request to Philex itself by the end of this month. 

What ought to encourage the pious religious and the genteel bankers, in addition to adding more value to their Philex shares, is that the suit to recover RVO’s profits in favour of Philex will not entail calling him a thief, or a scoundrel.  It is not even necessary to allege intent on the part of RVO to trade on a short swing. Ruling on Section 16(b) of the Securities Exchange Act of 1934 of the United States, from which is our own Section 23.2 seems to have been, but for minor adjustments to the Philippine legal system, copied, the US Court of Appeals Second Circuit, in the case of Isadore Blau, a stockholder of Air-Way Industries, Inc. v. Edward Lamb and Edward Lamb Enterprises, Inc., 362 F.2d 507 (27 June 1966) observed: 

“The arbitrary, some might say, Draconian, nature of this statute reflects the view of experts who testified at the hearings leading to the passage of the 1934 Act that the unfair use of information by corporate insiders could only be effectively curbed by a law that made it unprofitable for insiders to engage in any short term trading, whether fair or unfair. It might be said that Congress decided in order to throw out the bathwater that the baby had to go too. In order to insure that Section 16(b) efficaciously put an end to unfair insider trading, Congress explicitly made irrelevant the intent of any insider who engages in a short-term transaction, and did not condition the section’s application on proof of an insider’s intent to trade on a short swing.”  (Italics mine – RGG)

So to those raising their eyes to heaven while planting their feet on the ground, as well as the trustees of retirement funds and other accounts holdings Philex shares, you can go ahead to call on RVO to engage in some commercial sharing.  Just don’t call him a “Marcos crony”.  He says he is a Marcos “technocrat” instead.