Philippines legislation guide
By Agustin R. Montilla IV
Romulo Mabanta Buenaventura Sayoc & de los Angeles
Tel: +632 848 0114 Fax: +632 815 3172 Website: www.romulo.com
The Philippine Stock Exchange or PSE has recently adopted two measures intended to improve both liquidity and transparency of the onshore equity market. The PSE has also issued a warning of its impending re-imposition of another long suspended rule. Each of these developments presents opportunities for advisers, investors and managers covering the Philippines. The rule changes clarify the regulatory regime for the Philippine equity capital markets and should spur further activity in a market that looks to be continuing recent advances.
In the past two years, the Philippines has been among jurisdictions where trading volumes and values have markedly increased. Between 2009 and 2010, domestic market capitalisation on the PSE increased by over 80% and the value of trades done by over 50% according to the World Federation of Exchanges. It also ranked the PSE index eight among the world’s Top 10 market indexes by performance in 2010, having added 37.6%.
The PSE is preparing all listed companies, brokers and custodians to face the task of maintaining – and for many companies, the challenge is simply reaching – the required 10% minimum public ownership level. The Philippines has had historically high business ownership concentration levels and the PSE has had to effectively suspend any real public ownership rule since the 1990s. Listed companies have until November 30 2011 to meet or exceed the 10% minimum. Compliance will be determined based on the PSE’s previously issued guidelines for public ownership levels of listed companies, which generally excluded interests that hold more than 10%. However, holdings of pensions and mutual funds are considered public for as long as the holdings are not in the pension fund’s ‘employing company or its affiliates’.
This creates a rationale for listed companies in the Philippines to expand their shareholder base through private placements or follow-on offerings. There have been a few private placements since 2010, most recently that of Metro Pacific Investments Corporation (MPI:PM). But market volatility has affected the follow-on market following San Miguel Corporation’s (SMC:PM) US$850 million follow-on offer last April. Falling outside the PSE’s free float requirement would lead to a fine based on the listing fees payable by the company and the amount of time that the 10% minimum is not met. That could result in a penalty of up to three times the normal listing fee.
The other steps taken by the PSE have been to issue guidelines for fairness opinions and valuation reports and to issue amendments to its rules on listing without a prior public offer, or what is known as a listing ‘by introduction’.
The fairness opinion rules provide standards for independence and content. In addition, the PSE now requires that issuers of valuation reports and fairness opinions must be accredited by the PSE. Such accreditation needs to be renewed every year. Most major investment banks and advisers have already obtained accreditation, as such reports and opinions are a key component to mergers and acquisitions as well as listings by introduction. Accreditation, while not overly burdensome, is not without its own set of requirements. Among them, a firm needs to show a steady client base and at least five engagements in the last five years.
The revised rules on listing by introduction have now introduced the concept of an initial listing price supported by a fairness opinion. In addition, the new rules strengthen the previously soft requirement for a company that listed by introduction to conduct a public offer by providing for a combination of sanctions. These included suspension, a fine equivalent to the annual listing fee, and a buy-back of shares prior to delisting. The delisting penalty also applies to a company listed by introduction that is then used as a ‘backdoor’ route to listing a different business without a public offer.
With a new Congress that has barely completed one year in office, the regulatory focus on the Philippines has been the effect of the Supreme Court’s recent ruling in Gamboa vs Teves, issued on June 28 2011. This found the corporate structure of Philippine Long Distance Telephone Company (PHI:US/TEL:PM) to be non-compliant with the nationality requirements for utility companies. The court clarified in its decision that, in determining compliance with the Philippine Constitution’s nationality requirements, only shares that are entitled to vote for directors should be considered. This development means clearer options for businesses and their structuring advisers. The decision remains subject to the outcome of various motions for reconsideration.