After reading “When is tender offer in securities mandatory?”, read also “What are the Powers and Functions of the Philippine Competition Commission?”
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Tender offer refers to a publicly announced intention by a person acting alone or in concert with other persons to acquire outstanding equity securities of a “public company”.
- The purpose of the mandatory tender offer rule is to protect minority shareholders against any scheme that dilutes the share value of their investments.
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The mandatory tender offer rule gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders.
In order to better understand when tender offer of securities is mandatory, we understand what tender offer is.
What is Tender Offer?
Tender offer refers to a publicly announced intention by a person acting alone or in concert with other persons to acquire outstanding equity securities of a “public company” as defined in the Securities Regulations Code Rule 3, or outstanding equity shares of an associate or related company of such public company which controls the said public company. (Securities Regulations Code, Rule 19.1.9.).
It is an offer by the acquiring person to stockholders of a pubic company for them to tender their shares therein on the terms specified in the offer. (CEMCO Holdings v. National Life, G.R. No. 171815, 07 August 2007).
What is a Public Company?
A public company is any corporation with a class equity securities listed on an Exchange or with assets in excess of PhP50,000,000.00 and having two hundred (200) or more stockholders holding at least one hundred (100) shares each. (SRC, Section 19; SRC-IRR, Rule 3.1.16.)
A public company is not limited to a company whose shares of stock are publicly listed. Even companies whose shares are offered only to a specific group of people may be considered a public company. (Philippine Veterans Bank v. Callangan, G.R. No. 191995, 03 August 2011).
When is tender offer of securities mandatory?
The law says:
The Implementing Rules and Regulations of the Securities Regulations Code states that:
“Rule 19.2. Mandatory tender offers
19.2.1. Any person or group of persons acting in concert, who intends to acquire fifteen percent (15 %) of equity securities in a public company in one or more transactions within a period of twelve (12) months, shall file a declaration to that effect with the Commission.
19.2.2. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of the outstanding voting shares or such outstanding voting shares that is sufficient to gain control of the board in a public company in one or more transactions within a period of twelve (12) months, shall disclose such intention and contemporaneously make a tender offer for the percentage sought to all holders of such securities within the said period. If the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of such tender offer shall be proportionately distributed across selling shareholders with whom the acquirer may have been in private negotiations and other shareholders. For purposes of SRC Rule 19.2.2, the last sale that meets the threshold shall not be consummated until the closing and completion of the tender offer.
19.2.3. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of the outstanding voting shares or such outstanding voting shares that is sufficient to gain control of the board in a public company through the Exchange trading system shall not be required to make a tender offer even if such person or group of persons acting in concert acquire the remainder through a block sale if, after acquisition through the Exchange trading system, they fail to acquire their target of thirty five percent (35%) or such outstanding voting shares that is sufficient to gain control of the board.
19.2.4. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) of the outstanding voting shares or such outstanding voting shares that is sufficient to gain control of the board in a public company directly from one or more stockholders shall be required to make a tender offer for all the outstanding voting shares. The sale of shares pursuant to the private transaction or block sale shall not be completed prior to the closing and completion of the tender offer.”
Under this Rule, tender offer is mandatory in the following circumstances:
- Any person or group of persons acting in concert, who intends to acquire 35% or more of equity shares in a public company directly from one or more stockholders;
- Any person or group of persons acting in concert, who intends to acquire 35% or more of equity shares in a public company in one or more transactions within a period of 12 months; or
- If any acquisition of even less than 35% would result in ownership of over 50% of the total outstanding equity securities of a public company.
What are the exemptions from the Mandatory Tender Offer Rule?
Rule 19.3 of the SRC-IRR lists the exemptions from the mandatory tender offer requirements. To wit:
Rule 19.3. Exemptions from the Mandatory Tender Offer Requirement
19.3.1. Unless the acquisition of equity securities is intended to circumvent or defeat the objectives of the tender offer rules, the mandatory tender offer requirement shall not apply to the following:
19.3.1.1. Any purchase of securities from the unissued capital stock; Provided, the acquisition will not result to a fifty percent (50%) or more ownership of securities by the purchaser or such percentage that is sufficient to gain control of the board;
19.3.1.2. Any purchase of securities from an increase in authorized capital stock;
19.3.1.3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor;
19.3.1.4. Purchases in connection with a privatization undertaken by the government of the Philippines;
19.3.1.5. Purchases in connection with corporate rehabilitation under court supervision;
19.3.1.6. Purchases in the open market at the prevailing market price; and
19.3.1.7. Merger or consolidation.
Why should tender offer of securities be mandatory?
In the case of CEMCO Holdings v. National Life, G.R. No. 171815, 07 August 2007, the Supreme Court held that the purpose of the tender offer rule is to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders.
In the same case, the Supreme Court ruled that tender offer covers both direct and indirect acquisition. What is decisive is the determination of the power of control. The bottom line of the law is to give the shareholder of the public company the opportunity to decide whether or not to sell in connection with a transfer of control. Thus, the Rules apply even if one will acquire the shares in the corporation that owns the shares of a public company including subsidiary.
What are the obligations of a person making a tender offer?
A person who intends to make a tender offer shall:
- Make an announcement of his intention in a newspaper of general circulation, prior to the commencement of the offer;
- At least two (2) business days prior to the date of the commencement of the tender offer:
- File with the SEC a required form for tender offer (SEC Form No. 19-1), including all exhibits and amendments thereto, with the prescribed filing fees; and
- Hand deliver a copy of such form, including all exhibits and amendments thereto, to the target company at its principal executive office and to each Exchange where such class of target company’s securities are listed for trading.
- Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days after the termination of the tender offer, copies of the final amendments to the form.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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