In the Matter of San Miguel Corporation vs. Corporation Finance Department, Director Justina F. Callangan

December 9, 2010 SEC EN BANC CASE NO. 10-10-219 IN THE MATTER OF SAN MIGUEL CORPORATION , appellant , vs . CORPORATION FINANCE DEPARTMENT, Director Justina F. Callangan , appellee . FOR : Appeal from SEC-CFD Order Dated 24 September 2010 DECISION This is a review of the Corporation Finance Department's ("CFD," for brevity) 24 September 2010 Order directing San Miguel Corporation ("SMC," for brevity) to pay the assessed penalty of Php2,544,474.60 for 2nd violation of SRC Rule 23.1 (B). This rule provides: "SRC RULE 23 Reports to be filed by Directors, Officers and Principal Stockholders 1. Every person who is directly or indirectly the beneficial owner of ten percent (10%) or more of any class of any security of a company which satisfies the requirements of Subsection 17.2 of the Code, or who is a director or an officer of the issuer of such security, shall: xxx xxx xxx B. within ten (10) days after the close of each calendar month thereafter, if there has been any change in such ownership during the month, file a statement with the Commission, and with an Exchange if the security is listed on that Exchange, on Form 23-B indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during that calendar month; . . . " aTAEHc San Miguel Pure Foods Co., Inc. ("SMPFC," for brevity) issued 18% stock dividends with payment due on 26 July 2010 in favor of its stockholders, which includes SMC. On 18 August 2010, the CFD notified SMC that the latter should have filed SEC Form 23-B (Statement of Changes in Beneficial Ownership in Securities) in connection with its receipt of stock dividends. The CFD maintained that the payment of stock dividends resulted in a change of beneficial ownership, and therefore SMC should have reported the same within 10 days from the end of the calendar month (31 July 2010) when the dividends were due, or within 10 August 2010, in accordance with SRC Rule 23.1 (B). Thus, CFD directed SMC to show cause why it should not be held liable for administrative sanctions. On September 2, 2010, SMC filed its reply to the CFD. SMC explained that on the payment date, SMC complied with the Amended Rule on Lodgment of Securities, Article III, Part A, Section 16 ("Lodgment Rule", for brevity), which provides: "Section 16. Lodgment of Securities. As a condition for the listing and trading of the securities of an applicant company, the applicant company shall electronically lodge its registered securities with the Philippine Depository and Trust Corporation (PDTC), or any other entity duly authorized by the Commission, without any jumbo or mother certificate in compliance with the requirements of Section 43 of the Securities Regulation Code. In compliance with the foregoing requirement, actual listing and trading of securities on the scheduled listing date shall take effect only after submission by the applicant company of the following: (a) Sworn corporate secretary's certificate stating that all the securities have been issued in uncertificated form in accordance with the requirements of Section 43 of the Securities Regulation Code and electronically lodged with the PDTC or any other authorized entity without any jumbo or mother certificate; and HAECID (b) Written confirmation issued by the transfer agent confirming that it has the capability and capacity to handle the issuance and transfer of uncertificated securities; and (c) Written confirmation issued by PDTC or any other authorized entity confirming the electronic lodgment of the applicant's securities. The above requirements shall also apply to follow-on offerings and additional listing applications." SMC argued that the Lodgment Rule provides that the stock dividends accruing in favor of stockholders of public companies to be in scripless form without a jumbo or mother certificate. Thus, the shares issued as stock dividends were in the name of a PCD Nominee Corporation ("PCNC", for brevity) who, for all intents and purpose, exercises the rights of ownership over the said shares. In SMPFC's books, the stockholder of record of the stock dividends is the PCNC and not SMC. To complete the process of payment of the stock dividends, SMC is required to request upliftment of the additional shares representing the stock dividends in order for the same to be recorded in the name of SMC in the books of SMPFC. SMC made such a request but it was still being processed, and the stock certificates have not been issued in the name of SMC. SMC stresses that the issuance of the stock certificates is necessary for SMC to exercise all its rights as owner of the shares. Thus, SMC maintains that it did not violate SRC Rule 23.1 (B) when it did not file its SEC Form 23-B as of the subject payment date. Further, SMC claimed that the increase of its shareholdings in SMPFC did not result in a change of its percentage of ownership in SMPFC since the stock dividend declaration benefited all shareholders. Thus, the filing of SEC Form 23-B can only be properly made after uplifting and issuance of the stock certificate. In any case, SMC belatedly filed its SEC Form 23-B together with the said reply to the CFD on September 2, 2010 even before the shares were uplifted. Upon considering SMC's explanations, the CFD issued the assailed order. The CFD rejected SMC's arguments, and ruled that SRC Rule 23.1 (B) contemplates a situation where there is any change in the security ownership (due to the increase of number of shares) in a reporting company despite the fact that stock certificates have not yet been issued in the name of the beneficial owner and that the process under the Lodgment Rule has not yet been completed. Thus, SMC makes the present appeal, reiterating its previous explanations, and emphasizing its argument that compliance with the Lodgment Rule delays the actual payment of stock dividends such that it would be unjustifiable to require SMC to report that its shareholdings in SMPFC has changed prior to the upliftment of the shares representing stock dividends. ETHCDS We find that the CFD made no reversible error in issuing the assailed order. SRC Rule 23.1 (B) is quite unequivocal in requiring a beneficial owner to file SEC Form 23-B to report changes in the ownership of shares . And, this is required whether or not the changes in the ownership of shares result in a concomitant change in the percentage of ownership in a reporting corporation. The Lodgment Rule does not affect compliance with this reporting requirement. It is true that the Lodgment Rule requires publicly listed shares issued as stock dividends to be in scripless form, and registered in the name of a PCNC. However, PCNC only acquires legal title over the shares, and beneficial ownership remains with the stockholder entitled to the dividend in this case, SMC. From the moment a stock dividend is declared due on the payment date, beneficial ownership is immediately bestowed upon the stockholder. Thus, starting from the payment date, any and all rights, and privileges derived from the shares declared as stock dividends accrue in favor of SMC. And, SMC already has the right to demand such rights or privileges from PCNC. In other words, contrary to SMC's arguments, SMC can already exercise its rights as beneficial owner over the shares from the date of payment of the stock dividends. The uplifting of the shares, and issuance of the certificate only serves to transfer legal title from PCNC to the stockholder-beneficial owner, SMC. Moreover, as a matter of policy, PCNC does not even exercise the voting rights over any lodged share despite possessing legal title over it. And, in fact the upliftment of shares, and issuance of the stock certificate in the name of the beneficial owner by PCNC is a purely ministerial duty. PCNC has no discretion to deny such requests that comply with the established documentation procedures. Thus, from the moment the stock dividends are declared due, there are no doubts or clouds over SMC's acquisition of beneficial title over such shares, and there is nothing to prevent SMC from filing the corresponding SEC Form 23-B. And, in fact, SMC was able to file its SEC Form 23-B on September 2, 2010, despite the fact that the shares were still lodged and registered in the name of PCNC. Thus, it is clear that SMC violated SRC Rule 23.1 (B) for no valid reason, and the penalty imposed by CFD is justified. WHEREFORE, premises considered, this Appeal is hereby DENIED for lack of merit. San Miguel Corporation is hereby DIRECTED to immediately pay the assessed penalty of Php2,544,474.60 for 2nd violation of SRC Rule 23.1 (B), in compliance with the Corporation Finance Department's 24 September 2010 Order. SO ORDERED. Mandaluyong City, December 9, 2010. (SGD.) FE B. BARIN Chairperson (SGD.) MA. JUANITA E. CUETO Commissioner (SGD.) RAUL J. PALABRICA Commissioner (SGD.) MANUEL HUBERTO B. GAITE Commissioner (SGD.) ELADIO M. JALA Commissioner