PSE Circular for Brokers No. 1254-99

May 31, 1999 PSE CIRCULAR FOR BROKERS NO. 1254-99 May 28, 1999 MS . LUISA W . BUENAVENTURA Supervisor, Disclosure Department Philippine Stock Exchange PSE Center, Ortigas Pasig City Dear Ms. Buenaventura : We refer to your faxed letter of even date requiring a written confirmation clarification on the news article that Equitable Banking Corporation ("EBC") may face sanctions for not complying with the 10-day tender offer rule imposed by the Securities and Exchange Commission relative to acquisition of 72.8% of the outstanding capital stock of Philippine Commercial International Bank. LLpr Please be advised that on may 25, 1999, EBC and EBC Investments, Inc. (collectively "EBC Group") filed an appeal with the Securities and Exchange Commission ("SEC") en banc to reconsider the directive of the SEC Money Market Operations Department directing the EBC Group to make an offer to purchase the shares owned by the minority shareholders under the provisions of the SAEC tender offer rules. (We attached for your reference a copy of our appeal letter to SEC.) We are awaiting the SEC resolution on our appeal. We hope we have clarified our position on the matter. Very truly yours, (SGD.) ROMUALD U. DY TANG Senior Vice President 25 May 1999 SECURITIES AND EXCHANGE COMMISSION SEC Building Greenhills, Mandaluyong City Metro Manila Attention: Commission En Banc Re : Non-applicability of the Compulsory Tender Offer Rules under RSA Rule 33(A)-1 to the purchase of PCIB shares Gentlemen: In behalf of our clients, Equitable Banking Corporation ("EBC") and EBC Investments, Inc.("EBCI"), we respectfully appeal from the directive of Ms. Linda A. Daoang, Officer-in-Charge of the Money Market Operations Department, contained in her letter dated 20 May 1999, directing EBC to comply with the following provisions of the Tender Offer Rules under RSA Rule 33 (a)-1 (hereinafter referred to as the "Compulsory Tender Offer Rules"): "A tender offer in compliance with the provision of this Rule shall be made to all security holders when a controlling interest in a company subject to the reporting requirements of RSA Rule 11(a)-1 is acquired through privately negotiated purchases from shareholders who own a majority of the shares. The price of the tender offer shall be equal to that offered to controlling shareholders and the offer shall be subject to the same terms and conditions as the privately negotiated purchase(s). Such tender offer should be made not later than (10) business days following the signing of the agreement between the bidder and the majority shareholders in the privately negotiated purchases(s) and all shares tendered must be purchased." cdll Said directive was based on the position of the Securities and Exchange Commission ("SEC") that under the Share Purchase Agreement (the "Agreement") executed between, EBC, EBCI, on behalf of certain investors, Social Security System ("SSS") and Government Service Insurance System ("GSIS") (hereinafter collectively referred to as the "Buyer") and Benpres Holdings Corporation, Consolidated Robina Capital Corporation, Meralco Pension Fund and John Gokongwei (hereinafter collectively referred to as the "Sellers"), EBC, EBCI, SSS GSIS "acquired in different respective positions" 72% of the outstanding capital stock of Philippine Commercial International Bank ("PCIB"). According to the said directive, under Section 33 (c) of the Revised Securities Act ("RSA"), two or more persons acting as a partnership limited partnership, syndicate, or other group for purposes of acquiring securities of an issuer shall be deemed a "person" for purposes of acquiring the securities of an issuer. Based on the said directive, EBC, EBCI SSS and GSIS acted as a "partnership limited partnership, syndicated, or other group". Thus, EBC, EBCI, SSS and GSIS, as one single person, is deemed to have acquired 72% of the outstanding capital stock of PCIB and should, therefore, comply with the Compulsory Tender Offer Rules. LibLex Our position is that the acquisition by EBC, EBCI, SSS and GSIS of PCIB shares from the Sellers is not subject to the Compulsory Tender Offer Rules for the reasons herein below stated. Please note that although the Agreement was executed in 14, May 1999, he closing of the transaction does not occur until 25 May 1999 and provided that BSP approval to the transaction is obtained. 1. If applied to Banks or Bank shares, compliance with the Compulsory Tender Offer Rules will conflict with the General Banking Act and the Banking Regulations of the Bangko Sentral ng Pilipinas ("BSP") Under Sections X383 (a) and (b) of the Manual of Regulations for Banks, the equity investment of banks in any single enterprise, e.g., PCIB, shall not exceed at any time 15% of the new worth of the investing bank and any such investment, together with other equity investments in all other enterprises, must not, in the aggregate, exceed 50% of the net worth of the investing bank. Because of this limitation, EBC is acquiring PCIB shares equivalent to only 4.86% of the total outstanding voting stock of PCIB. Also, under Section 12-B of the General Banking Act ("GBA"), as amended, EBCI can own only up to 30% of the voting stock of any bank. 1 Included in this 30% limit are all of the PCIB shares acquired by EBC because EBCI is a wholly-owned subsidiary of EBC. Under the Agreement, the total number of PCIB shared being purchased by EBC and EBCI is equivalent to 38.07% of the total outstanding voting stocks of PCIB. Because of the limitation prescribed under the GBA, EBCI has assign the excess 8.07% to other investors. If EBC/EBCI will be compelled to make a compulsory tender offer for the remaining PCIB shares, the excess over the aforesaid ceilings under the GBA and the BSP regulations will be aggravated. Even if the BSP will allow a dispensation from the aforesaid ceilings as an exceptional case, such dispensation will only the temporary and might only be to the extent of the excess of 8.07%. Even with a temporary dispensation from the BSP, EBCI will not be able to place with other investors the remaining 28% PCIB shares within the period prescribed by the Compulsory Tender Offer Rules. If the honorable Commission will now compel EBC/EBCI to make a tender offer under the Compulsory Tender Offer Rules, it will have to resolve first the following prejudicial question: whether or not the Compulsory Tender Offer Rules prevail over the GBA and the regulations of the BSP. In this connection, we submit that, in case of a conflict between a statute and a regulation, or between two regulation, the statute must prevail over the regulation and the regulation of special application must prevail over the regulation of general application. Based on the foregoing principles of statutory construction, we submit, that the provisions of the GBA must prevail over the Compulsory Tender Offer Rules, and the Banking Regulations which is of special application to banks and bank shareholdings must prevail over the Compulsory Tender Offer Rules which is of general application to listed companies. cdlex 2. There is no partnership among EBC, EBCI, SSS and GSIS In determining whether or not the Compulsory Tender Offer Rules apply to EBC/EBCI, the SEC held that there is a partnership among EBC, EBCI, SSS and GSIS for the acquisition of the PCIB shares. Thus, pursuant to Section 33(c) of the RSA, they are considered as one person. In a partnership, "two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves" (Art, 1767, Civil Code). This is certainly not the case in this transaction. The Buyers did not contribute money to a common fund. Under the Agreement each of the buyers is liable for the payment of the respective PCIB share being purchased by each of them from the Sellers which payment shall be made directly to the Escrow Agent. While the purchases of the PCIB shares will be made simultaneously and were embodied in a single document, this was done so only for the convenience of all parties, and the obligation of the Buyers under the Agreement remain separate and not joint and several. Each Buyer does not answer or cover for any of the Buyers in case such Buyer cannot pay the purchase price for the number of share such Buyer contracted to buy. Under the agreement, each of the Buyers are bound by their respective representations, warranties and covenants. Further, the respective purchases are being made in pursuance if the different corporate objectives of the Buyers. LibLex Neither can it be stated that EBC, EBCI, SSS and GSIS are acting as a "syndicate". The Agreement merely documents the acquisition by each of EBC, EBCI SSS and GSIS are acting as a "syndicate". The Agreement merely documents the acquisition by each of EBC, EBCI, SSS and GSIS of the PCIB shares and the manner in which the same should be paid by each of them. After each of the Buyers shall have acquired full ownership of the PCIB shares, they are free to use have acquired full ownership of the PCIB shares, they are free to use and/or dispose the said shares in the manner they deem fit. There is no agreement among them to use, hold or dispose the shares in a particular manner to promote the economic gain of all of them. Furthermore, among the Buyers, there is no common objective unlike in the case of partners in a partnership or members in a syndicated. As can be gleaned from the press reports regarding the purchase of PCIB shares, the objective of EBC of to eventually affect merger between EBC and PCIB, while the objective of GSIS and SSS is to make a profit out of a portfolio investment through a turn-over of their respective investments in the PCIB shares. Based on the foregoing, it is our position that EBC, EBCI, SSS and GSIS cannot be deemed a single "person" under Rule 33(c) of the RSA. Hence, the Compulsory Tender Offer Rules should not apply because none of EBC, EBCI, SSS and GSIS acquired controlling interest in PCIB. Under the Agreement, the 72% interest of the Sellers in PCIB was divided as follow: EBC-4.86%, SSS-16.96%, GSIS-16.96%. 3. Enforcing the Compulsory Tender Offer Rules against EBC/EBCI alone is unfair, discriminatory and without legal basis Their is nothing in the Compulsory Tender Offer Rules which states that if there is a group of buyers (even assuming that they constitute a syndicate), then any member of the group can be compelled to make the tender offer alone for the entire remaining shares of the minority shareholders. We believe that the reason no such provision exists is because it will be vulnerable to attack as a provision that results in unfairness and discrimination. When a member of the group purchases a percentage of the initial block, such member may only be committed and prepared to buy the same percentage of the remaining shares, not the entire balance. In this particular case, if the SEC compels EBC/EBCI to make the tender offer for the remaining PCIB shares, EBC/EBCI has no contractual right, power or basis to compel SSS and GSIS to join proportionately in such tender offer. Will the SEC then compel SSS and GSIS to join? What if the SSS and GSIS take the position that they are not subject to the Compulsory Tender Offer Rules because of their own statutory charters and their own investment ceilings or restrictions, and are beyond the SEC's jurisdiction? If so, is it legal and fair for the SEC to compel EBC/EBCI to make a compulsory tender offer for the entire balance of the PCIB shares? aisadc 4. The Compulsory Tender Offer Rules may be beyond the rule-making powers of the SEC under the RSA if applied to shares in banks which are exempt securities under the RSA The Compulsory Tender Offer Rules are not found in the Revised Securities Act. Said rules were promulgated by the SEC in the exercise of its rule-making powers to implement the provisions of Section 33 of the RSA which sets forth the law on Tender Offers. Section 33 of the RSA provides that: "SECTION 33. Tender offers. (a) (1) It shall be unlawful for any person, directly, or indirectly, to make a tender offer for, or request or invitation for tenders of, any class of any equity security which is registered pursuant to this Act if, after consummation thereof, such person would, directly or indirectly, be the beneficial owner of more than ten (10%) per centum of such class, or such reasonable percentage as fixed by the Commission, unless at the time copies of the offer or request or invitation are first published or sent or given to security holders, such person has filed with the Commission and furnished the issuer a statement containing such of the information required in Section 32 of this Act as the Commission may prescribe . . ." LibLex A reading of Section 33 of the RSA reveals that said section regulates only any voluntary public offer to the shareholders of a company to purchase their shares at a fixed price and does not regulate a privately negotiated purchase of shares from a shareholder. However, the Tender Offer Rules under Rule 33 (a)-1 expressly regulates the acquisition of shares through a privately negotiated purchase by compelling the buyer in such acquisition to make a tender offer if as a result of the said acquisition the buyer will acquire controlling interest in the subject company. This may be a case of an invalid expansion of the statute. More particularly, Section 33 of the RSA regulates only a tender offer "for any class of any equity security which is registered pursuant to this Act ". However, the Compulsory Tender Offer Rules regulate "any tender offer for a class of equity securities (other than non-voting securities) of a company that is subject to the reporting requirements of RSA Rule 11(a)-1 ", i.e., all listed companies. The shares of stock of a banking institution although listed at the Philippine Stock Exchange and subject to the reporting requirements under RSA Rule 11(a)-1, e.g., PCIB, are not registered with the SEC, being an exempt security under Section 5 of the RSA. Thus, while the tender offer for the shares of stock of a banking institution is not regulated by Section 33 of the RSA because the shares are exempt securities, the same is regulated by the Compulsory Tender Offer Rules. This may be another clear case of an invalid expansion of the statute. LLcd The issuance of an administrative rule or regulation must be in harmony with the enabling law. If a discrepancy occurs between the law and implementing rule or regulation, it is the former that prevails. This is because the law cannot be a mere administrative issuance. An administrative agency cannot amend an act of Congress (Nasipit Lumber Company, Inc. vs. National Wages and Productivity Commission, 289 SCRA 667). The rule-making power must be confined to details for regulating the mode or proceeding to carry into effect the law as it has been enacted. The power cannot be extended to amending or expanding the statutory requirements or embrace matters not covered by the statute (University of Sto. Tomas vs. Board of Tax Appeals, 93 Phil. 376; Del Mar vs. Philippine Veterans Administration, 51 SCRA 340). Thus, the Compulsory Tender Offer Rules may be invalid to the extent said rules unduly expand Section 33 of the RSA, more particularly, with respect to the coverage of bank shares which are exempt securities under the statute. We trust that the Commission En Banc will give due consideration to EBC/EBCI's foregoing position on this matter and will include this appeal as part of its agenda at its regular meeting this week. Very truly yours, PICAZO BUYCO TAN FIDER AND SANTOS By: (SGD.) ANTONIO A. PICAZO Footnotes 1. Section 12-B. The total voting stocks which any corporation, including its wholly or majority-owned subsidiaries, may own in a bank shall not exceed thirty percent (30%) of the voting stock of that bank . . ."