DOJ Opinion No. 020, s. 2000

DOJ OPINION NO. 020 , s. 2000 February 28, 2000 Hon. JOEL A. BAARES Undersecretary for Privatization and Chairman, Committee on Privatization (COP) Technical Committee Department of Finance Manila Sir : Subject of herein query is the issue of whether or not the Asset Privatization Trust (APT), as the disposition entity for the Philippine Phosphate Fertilizer Corporation (Philphos), one of the government-owned and/or controlled corporations (GOCCs) approved by the President for privatization and also one of the assets transferred to the National Government (NG) for disposition, can dispose of the receivables of the National Government (NG) from Philphos separately from the Philphos shares held by the National Development Company (NDC) should the Republic of Nauru (RON) exercise its right of first refusal in the event of the privatization of Philphos. As stated in the query, Philphos was incorporated in June, 1980 pursuant to a Joint Venture Agreement (JVA) between the NDC and the RON. Its initial equity structure of 60%-40% in favor of the NDC was subsequently changed to 50%-50% after the NDC waived its pre-emptive rights over the new shares issued as a result of the increase in the authorized capital stock of Philphos from P700 Million to P900 Million. Each party invested a total of P450 Million (which, at the time, was equivalent to US$60 Million). As early as 1987, Philphos incurred heavy losses due mainly to its huge foreign borrowings. Said borrowings were guaranteed by the NDC/NG which eventually settled said loans, thus becoming the creditors of Philphos. As of December 31, 1998, the receivables of the NG/NDC from Philphos were estimated at around P50.6 Billion. Pursuant to the policy of the NG to totally privatize Philphos, the APT is currently drafting the bidding rules for the sale of the 450,000 NDC-owned Philphos shares (NDC Philphos Shares) and the NG Receivables (to be re-computed as of June 30, 1999). On October 29, 1999, the APT received a letter from the President of the RON, His Excellency Rene R. Harris, calling the APT's attention to the provisions of the JVA, as well as of the Amended Articles of Incorporation of Philphos which grant to the RON a right of first refusal (ROFR) in the event of the privatization of the NDC Philphos Shares. Under the ROFR, the NDC Philphos Shares will have to be offered first to the other shareholder (RON) at a price per share equal to the "net asset value per share", to be determined by the auditors of the Corporation, if disputed. According to the RON, the pricing formula in the ROFR provision refers to "net asset value per share" which is determined by the difference between total assets and total liabilities divided by the total number of shares outstanding. However, since the Philphos Shares have a negative net asset value, the RON maintains that the ROFR should extend to the NG receivables from Philphos which should be offered together with the NDC Philphos Shares as a "package" transaction to give the Philphos shares a positive net asset value. The RON posits that if the debts of Philphos represented by the NG Receivables did not exist or an arrangement could be worked out such that the debts could be disregarded, the shares of Philphos would presumably have a positive net asset value of P6 Billion, which means that the NDC Philphos shares, equivalent to 50%, would have a "net asset value" of P3 Billion. The RON believes that the primary objective of the ROFR is ordinarily to ensure that the other 50% partner has an opportunity to purchase shares of the selling partner at a price indicative of the intrinsic value of the shares of the selling partner. To determine the intrinsic value of the Philphos shares, the RON proposes two (2) alternatives: Alternative I Under Alternative I, the RON shall purchase from the APT the NDC Philphos Shares, as well as the NG Receivables from Philphos, on the clear understanding that the RON shall, upon receipt of such Receivables, make a capital contribution to Philphos of the amount of the NG Receivables without receiving any further shares therefor. Alternative II In Alternative II, the RON shall purchase only the NDC Philphos Shares with the NG irrevocably committing to make a capital contribution to Philphos of the amount of the NG Receivables without receiving any shares therefor. Following the capital contribution under either alternative, the liabilities of Philphos to the NG will be wiped out, giving the Philphos shares a "net asset value" of approximately P6 Billion and the NDC Philphos Shares amounting to 50% of the total equity, a net asset value of P3 Billion. While the APT is not ruling out other possible modes of privatization of Philphos, the APT nonetheless seeks the opinion of this Department, as the ex-officio legal counsel of the APT and of the Committee on Privatization (COP), on whether the above-discussed position of RON is legally valid such that the APT cannot dispose of the NG Receivables independently of the NDC Philphos Shares in the event that the RON should exercise its ROFR over the NDC Philphos Shares. Article Seven of the Amended Articles of Incorporation of Philphos provides: First, Refusal Rights Provision . In the event any holder of shares , including pledgees of and holders of any interest in such shares (hereinafter referred to as the "Offeror"), desires to sell or transfer his/its shares of the capital stock of the Corporation, such Offeror shall first offer to sell such shares (hereinafter referred to as the "Offered Shares"), pro rata , to the other shareholders of record of the Corporation at a price per share equal to the net asset value per share (which shall be fixed by the external auditors of the Corporation if disputed) as of the last day of the month immediately preceding the month when the offer was made. If a shareholder to whom the offer is made does not accept the offer within ninety (90) days from the date of receipt thereof, then the Offeror may sell or transfer the unaccepted Offered Shares to any party free of the foregoing requirement at a price no lower than the price at which the Offered Shares were thus offered, provided that if the Offeror cannot obtain such price but does receive a bona fide written offer from a responsible third party to purchase the Offered Shares at a price lower than such price, then the Offeror shall furnish the other shareholders of record of the Corporation with a copy of the bona fide offer and such other shareholders shall have sixty (60) days from the date of receipt thereof within which to purchase the Offered Shares at the price provided in such bona fide offer. If a shareholder does not exercise such right within such 60-day period, the Offeror may, within thirty (30) days thereafter, sell or transfer the Offered Shares to the third party at the price provided in such bona fide offer, and if the Offeror then does not so sell or transfer the shares to the third party within such 30-day period, the Offered Shares shall again be subject to the foregoing requirement. . . . xxx xxx xxx (emphasis supplied) It is clear from the above-cited provision of the Articles of Incorporation of Philphos that the RON's right of first refusal pertains only to the sale of Philphos shares with the price therefor having been agreed as corresponding to the "net asset value per share". Moreover, in determining the net asset value of the shares, it is axiomatic that said value would be computed simply by deducting the total liabilities of Philphos (including the NG receivables) from the company's total assets. We therefore opine that APT can dispose of the NG receivables in Philphos independently of the NDC Philphos shares. cdll The ROFR provision does not in terms contemplate a sale of receivables by the selling shareholder. The provision plainly speaks of shares the price of which shall be equal to the net asset value per share. The provision does not say that if the net asset value is negative, that the sale of shares shall include the receivables. Clearly, the sale of the receivables of the selling shareholder in Philphos is not a demandable obligation under the aforequoted ROFR provision. We decline to express our views on the two alternatives presented by the RON insofar as both alternatives are not provided for in the ROFR as they refer to the NG Receivables being plowed back into Philphos without new shares being issued therefor. Please be guided accordingly. Very truly yours, (SGD.) ARTEMIO G. TUQUERO Acting Secretary