Applicability of Mandatory Tender Offer Rule (SEC OGC Opinion No. 24-38)

Consolidated Mines, Inc. (“CMI”) is a public company that wants to raise funds to be used for corporate purposes. To do this, it is considering calling on existing shareholders to subscribe to additional shares up to a maximum of 100% of their current shareholding. The shares to be issued will be taken from the unissued shares of the company which are sufficient to cover 100% of the outstanding shares. However, the additional shares may not be of the same class as those currently owned by the shareholders. CMI has class A and B common shares which have the same rights and privileges, except that the former are exclusive to Filipino citizens. One of the existing shareholders who might subscribe to said additional shares is Shareholder A who currently owns 49% of the outstanding shares of the company.

CMI asked the following questions to the Securities and Exchange Commission (“SEC”):

1. If only Shareholder A responded to the request for additional subscription, or if the resulting structure is that Shareholder A will own more than 50% of the outstanding shares of CMI, will the mandatory tender offer rule still apply? If so, is Shareholder A required to pay for all tendered shares, including those subscribed to after the call for additional subscription?

2. Are the shareholders who did not respond to CMI’s call for additional subscription considered to have waived their right in the tender offer?

3. Under the same transaction, may the shareholders assign their right to subscribe to their respective proportionate share to any other shareholder, including Shareholder A?

4. If instead of the additional subscription to be paid in cash, the advances of Shareholder A are converted to equity, and as a result, Shareholder A becomes the majority owner, will the mandatory tender offer rule apply? At what stage will Shareholder A have to comply with the tender offer rule – upon application for conversion or upon approval? Will the same conversion rate approved by the Commission be used in determining the purchase price for all tendered shares?

5. What procedural and substantive requirements must CMI and/or Shareholder A comply with in the options contemplated?

The Mandatory Tender Offer Rule

Jurisprudence defines Tender Offer as a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. Its purpose is to ensure that minority shareholders get the same benefit for their shares as the controlling shareholders. It gives the minority shareholder 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.

While the Mandatory Tender Offer Requirement is generally the rule, it has exceptions.. One of these instances is “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.” Thus, the mandatory tender offer rule does not apply only to direct acquisition of shares in the public company. The SEC stated that the legislative intent of Section 19 of the Securities Regulation Code of the Philippines (“SRC”) is to regulate activities relating to the acquisition of control of the listed company and for the purpose of protecting the minority stockholder of a listed corporation. Whatever may be the method by which control of a public company is obtained, the mandatory tender offer applies.

As to the first question, a purchase of securities from the unissued shares of a public company is exempt from the mandatory tender offer requirement as long as such acquisition will not result to a 50% or more ownership of securities by the purchaser or such percentage that is sufficient to gain control of the board. 

Applied to this question, while the shares to be purchased by Shareholder A will come from the unissued capital stock, it will still not fall under the exemptions to the mandatory tender offer requirements since Shareholder A will own more than 50% of the outstanding shares of the company. Thus, the mandatory tender offer rule under Rule 19.2.5 of the SRC Implementing Rules and Regulations (“IRR”) will apply and Shareholder A will be required to make a tender offer for all the outstanding equity securities to all the remaining stockholders at a price supported by a fairness opinion issued under the IRR. 

As to the second question, the SEC stated that neither the SRC nor its IRR provide that the failure of the shareholder to respond to a corporation’s call for additional subscription is considered a waiver of their right in the tender offer. Instead, Rule 19.11 of the IRR states that the lapse of the offer shall prevent the offeror, within the stated 6-month period, from announcing another offer or acquiring any securities of the target company which would require such person to make a mandatory tender offer under the SRC or its IRR, without prior approval from the SEC.

As to the third question, the SEC answered in the negative. Shareholders cannot assign their right to subscribe to their respective proportionate share to any other shareholder/s. The pre-emptive right, in Section 38 of the Revised Corporation Code (“RCC”), is the right of a stockholder to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings.. The stockholder must be given a reasonable time within which to exercise their pre-emptive rights. Upon the expiration of said period, any stockholder who has not exercised such right will be deemed to have waived it. 

If a stockholder sells his shares to another, the transferee acquires the same right to a preference in subscribing for or purchasing new stocks issued by the corporation, as an incident to the stock. The transferee steps into the transferor’s pre-emptive right only if the latter failed to exercise such right before the transfer was made. To rule otherwise would allow the pre-emptive right attached to the original stock to be exercised twice. 

Here, shareholders cannot assign their pre-emptive right to acquire their proportionate share to other stockholders. To allow otherwise would in effect violate the underlying foundation or basis of this right, which is to maintain the proportionate voting strength and control of existing stockholders. 

That said, a shareholder may assign his shares and the corresponding right to subscribe to his proportionate share as long as the pre-emptive right can no longer be exercised by the assignee such as when the assignor has already previously exercised such right. 

As to the fourth question, , the SEC opined that the Mandatory Tender Offer Rules applies as long as this transaction results in the acquisition of ownership of the indicated threshold percentage of the total outstanding equity securities of the public company. 

The SEC cited Section 19.9.2 of the SRC IRR which says that in a mandatory tender offer, the offeror is required to offer the highest price paid by him for such securities during the preceding six (6) months. If the offer involves payment by transfer or allotment of securities, such securities must be valued on an equitable basis. The SEC also cited Section 19.9.6 of the same IRR which says that when the offeror increases the considered offer after the tender offer has commenced, the offeror shall pay such increased consideration to all security holders whose tendered securities have been accepted for payment by such offeror, whether the securities were tendered before the variation of the tender offer’s terms or not. 

As to the question on the period of payment, the SEC cited Section 19.9.7 of the SRC IRR, which says that the Offeror shall either pay the consideration offered or return the tendered securities not later than ten (10) business days after the termination or withdrawal of the tender offer. 
Finally, as to the last question, the SEC said that the procedural and substantive requirements for the mandatory tender offer rules are found in the SRC, its IRR, and processes implemented by the SEC’s Market and Securities Regulation Department (“MSRD”). The SEC advised to consult with MSRD regarding registration and exemption from registration of securities, exemptive relief, tender offer, and other SRC-related applications.