30 June 2017

Sold Down

Philippine Stock Exchange (PSE) had been condemned by the minority shareholders when it delisted Calata Corporation (CAL) due to violations of the disclosure rules under the Securities Regulation Code (SRC). Disclosure rules stated in SRC Rule 17.1 require a public company to file a current report to make an accurate disclosure to the public of every material fact or event that occurs which is expected to influence the investors decisions in relation to those securities. In the event a news report appears in the media involving an alleged material fact or event, a current report must be made within the prescribed period in order to clarify the news report that can create public speculation if not denied or clarified by the public company. PSE alleged that CAL had committed 55 violations of the disclosure rules from 6 October 2016 to 20 June 2017. First violation of the disclosure rules carries a fine of P50,000, second violation carries a fine of P75,000, third violation carries a one month trading suspension, and fourth violation will be a ground for delisting. CAL was fined a total of P300,000 and the PSE decided to start involuntary delisting proceedings. The imposition of monetary penalties and trading suspension are without prejudice to any regulatory action that can be undertaken by the regulators in connection with the violations. Despite the absolute violation of the disclosure rules, the minority shareholders are against the decision of the PSE to delist CAL due to the absence of an exit mechanism. To appease the minority shareholders, the PSE proposed voluntary rather than involuntary delisting on the condition that a tender offer will be conducted. CAL rejected the proposed voluntary delisting as it does not have enough retained earnings to buy back outstanding shares at book value per share. Although the tender offer price must be based on a fairness opinion valuation of the business, there are no rules under the SRC that pegs the tender offer price to the book value per share. PSE had bended the disclosure rules to accommodate an exit mechanism but CAL had chosen the road most traveled to enrich themselves at the expense of the minority shareholders. When corporate governance breaks down, minority shareholders must sell and never forget. Those who break the rules are scum but those who abandon those rules are worse than scum.