The Supreme Court affirmed that the mandatory tender offer rule applies to indirect acquisitions of shares in publicly-listed companies. This means that when a company acquires a controlling interest in a public company through the purchase of shares in a non-listed holding company, it must also offer to buy the shares of the public company’s minority shareholders. This decision ensures that minority shareholders are protected and have the opportunity to exit the company under the same terms as the majority shareholders, preventing schemes that could dilute the value of their investments.
CEMCO’s Cemented Control: Must Minority Shareholders Be Offered an Exit?
This case revolves around the acquisition by Cemco Holdings, Inc. (Cemco) of shares in Union Cement Holdings Corporation (UCHC), which in turn held a majority stake in the publicly-listed Union Cement Corporation (UCC). The central legal question is whether the mandatory tender offer rule under the Securities Regulation Code applies when control of a public company is acquired indirectly through the purchase of shares in a non-listed holding company. To understand the context, Union Cement Corporation (UCC) had two principal stockholders: UCHC with 60.51% of shares and Cemco itself with 17.03%. Majority of UCHC’s stocks were owned by Bacnotan Consolidated Industries, Inc. (BCI) with 21.31% and Atlas Cement Corporation (ACC) with 29.69%. Cemco then acquired BCI and ACC’s shares in UCHC, effectively increasing its indirect ownership in UCC. This prompted the question of whether Cemco was obligated to make a tender offer to all UCC shareholders.
The Securities and Exchange Commission (SEC) initially stated that the tender offer rule did not apply to this transaction. However, a minority stockholder of UCC, National Life Insurance Company of the Philippines, Inc., challenged this view, arguing that Cemco should be required to make a mandatory tender offer for UCC shares. The SEC then reversed its initial resolution and directed Cemco to make a tender offer. Cemco appealed this decision, arguing that the tender offer rule only applied to direct acquisitions of shares in a public company and that the SEC lacked the jurisdiction to order such relief.
The Supreme Court, however, upheld the SEC’s decision. The court found that the SEC had the authority to issue such an order based on its powers to regulate and supervise activities to ensure compliance with the Securities Regulation Code. The court emphasized that Section 5.1(n) of the Code grants the SEC the power to exercise powers implied from, or necessary to carry out, its express powers. The Supreme Court quoted the SEC’s authority to issue the affirmative relief of ordering a tender offer, stating:
If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code.
Building on this principle, the court found that Cemco was also barred from questioning the SEC’s jurisdiction because it had actively participated in the proceedings and initially defended the SEC’s jurisdiction when it favored them. The court emphasized the importance of protecting minority shareholders. The court further stated that, “While the lack of jurisdiction of a court may be raised at any stage of an action, nevertheless, the party raising such question may be estopped if he has actively taken part in the very proceedings which he questions and he only objects to the court’s jurisdiction because the judgment or the order subsequently rendered is adverse to him.”
The Court then addressed the core issue of whether the mandatory tender offer rule applies to indirect acquisitions. The Supreme Court defined “tender offer” as a publicly announced intention to acquire equity securities of a public company, intended to protect minority shareholders against schemes that dilute share value. Section 19 of Republic Act No. 8799 requires a tender offer when a person or group intends to acquire at least 15% (now 35% under SEC rules) of a listed corporation’s equity security. It further states:
Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect.
The court underscored that the discussions during the Bicameral Conference Committee on the Securities Act of 2000 indicated that “any type of acquisition” resulting in a certain ownership threshold triggers the tender offer requirement. This interpretation, the Court noted, aligns with the SEC’s view that the mandatory tender offer rule covers both direct and indirect acquisitions. This approach contrasts with Cemco’s argument that it did not directly acquire shares in UCC and that the benefit of gaining control should not be held against it. The Court rejected this argument and quoted the legislative intent behind the tender offer rule:
The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance, as a result of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership acquisition to mean both direct and indirect. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. The bottomline of the law is to give the shareholder of the listed company the opportunity to decide whether or not to sell in connection with a transfer of control.
Finally, the court addressed Cemco’s argument that the SEC’s ruling should not be applied retroactively. Cemco relied on an earlier SEC letter stating that the acquisition was not covered by the mandatory tender offer rule. The court dismissed this argument, characterizing the letter as merely an advisory opinion that could be disregarded if it deviated from the statute. The Supreme Court stated that the letter, “was merely advisory. Jurisprudence has it that an advisory opinion of an agency may be stricken down if it deviates from the provision of the statute.”
The Supreme Court held that the SEC’s subsequent ruling, which abandoned the earlier opinion, should be applied. The court referenced the principle that when a doctrine is overruled, the new doctrine applies prospectively, but also applies to the case in which it was announced. Therefore, the SEC decision was deemed complete and enforceable. The court also declared, “Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling, the same cannot be utilized to determine the rights of the parties. What is to be applied in the present case is the subsequent ruling of the SEC dated 14 February 2005 abandoning the opinion embodied in the letter dated 27 July 2004.”
FAQs
| What is a mandatory tender offer? | A mandatory tender offer is a requirement that an entity acquiring a certain percentage of shares in a public company must offer to purchase the remaining shares from other shareholders at a fair price. |
| Why is the tender offer rule important? | The tender offer rule is designed to protect minority shareholders by giving them an opportunity to sell their shares when control of the company changes, preventing them from being disadvantaged by the new controlling shareholder. |
| Does the tender offer rule apply to indirect acquisitions? | Yes, the Supreme Court clarified that the mandatory tender offer rule applies not only to direct acquisitions of shares but also to indirect acquisitions, such as when control is obtained through the purchase of shares in a holding company. |
| What percentage of share acquisition triggers the tender offer requirement? | Under existing SEC rules, acquiring 35% or more of the equity shares of a public company triggers the mandatory tender offer requirement. It also applies if an acquisition of less than 35% results in ownership of over 51% of the outstanding equity securities. |
| What was the SEC’s initial stance in this case? | Initially, the SEC issued a letter stating that Cemco’s acquisition of shares in UCHC was not covered by the mandatory tender offer rule. However, the SEC later reversed this position. |
| Why did the Supreme Court uphold the SEC’s reversal? | The Supreme Court upheld the SEC’s reversal because the initial letter was considered an advisory opinion that could be disregarded if it deviated from the statute, and the SEC had the authority to correct its interpretation. |
| What is the effect of this ruling on future acquisitions? | This ruling clarifies that companies seeking to acquire control of publicly-listed companies must comply with the mandatory tender offer rule, even if the acquisition is structured indirectly through a holding company. |
| What should minority shareholders do if a tender offer is not made when required? | Minority shareholders can file a complaint with the SEC to enforce the mandatory tender offer rule and seek remedies such as requiring the acquiring party to make a tender offer for their shares. |
This case sets a significant precedent for the interpretation and enforcement of the mandatory tender offer rule in the Philippines. By clarifying that indirect acquisitions are covered, the Supreme Court has strengthened the protection of minority shareholders and promoted fairness in the securities market.
For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.
Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: CEMCO HOLDINGS, INC. VS. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC., G.R. NO. 171815, August 07, 2007