Draft Memorandum Circular on Cross-Shareholding Structure for Publicly-Listed Companies (PLCs)

March 23, 2021 SEC NOTICE TO : All Interested Parties SUBJECT : Draft Memorandum Circular on Cross-Shareholding Structure for Publicly-Listed Companies (PLCs) The public is invited to submit their comments, feedbacks and inputs on the draft Memorandum Circular on Cross-Shareholding Structure for PLCs on or before 2 April 2021 (Friday) . It is requested that comments/inputs be emailed to [emailprotected] with the subject head "MC on Cross-Shareholding Structure for PLCs" using the template provided. Issued on March 23, 2021. ATTACHMENT SEC MEMORANDUM CIRCULAR NO. ______ Series of 2021 TO : PUBLICLY-LISTED COMPANIES SUBJECT : CROSS-SHAREHOLDING STRUCTURE FOR PUBLICLY-LISTED COMPANIES WHEREAS , Section 2 of the Securities Regulation Code declares that the State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market; WHEREAS , the Commission is empowered to under Section 5 of the Securities Regulation Code to enact rules and regulations that promote good corporate governance practices; WHEREAS , the Doing Business Report Survey conducted by the World Bank has identified the prevention of cross-shareholding structure as among the international best corporate governance practices; WHEREAS , cross-shareholding resulting to interlocking shares may create a risk of double counting of the security's value resulting to inaccurate company valuations; WHEREAS , the principle of issuance of shares is to raise capital and that corporations cannot issue shares for themselves to own as it may violate the provisions under Sec. 40. Power to Acquire Own Shares of the Revised Corporation Code; WHEREAS , cross-shareholdings could lead to exclusionary and anti-competitive business practices favoring only existing networks; WHEREAS , cross-shareholdings by a complex network of indirect relations may be used to conceal beneficial ownership; WHEREAS , cross-shareholding may result in conflict of interest situations wherein the same ownership over shares is shared by parties with conflicting interests, thereby resulting to inefficient use of capital; WHEREAS , the parent company and its subsidiaries constitute a single business entity and that ownership cannot be separate among them; WHEREAS , studies show that the ill-effects of cross-shareholding outweighs its benefits; NOW, THEREFORE , the Commission, pursuant to its regulatory power under Section 179 (d) of Republic Act No. 11232 otherwise known as the Revised Corporation Code of the Philippines (RCC) and Administrative Order No. 38, Series of 2013, resolved to issue the following rules: Section 1. Definition of Terms . (a) Cross-shareholding a shareholding structure whereby a subsidiary owns/acquires the shares of its parent company, directly or indirectly through intermediaries. (b) Subsidiary refers to an entity that is controlled by another entity. (c) Control exists if and only if the investor has all of the following: a. power over the investee; b. exposure, or rights, to variable returns from its involvement with the investee; and c. the ability to use its power over the investee to affect the amount of the investor's returns. Section 2. Coverage . The provisions of this Memorandum Circular shall be mandatory for publicly-listed companies (PLCs). Section 3. Cross-shareholding Structures in PLCs . (a) A subsidiary is prohibited from acquiring the shares of its parent company, except for shares without voting rights, e.g. , non-voting preferred shares, which shall in no case exceed 10% of the total shares belonging to the same series or class of shares. (b) This section shall not prevent a subsidiary from continuing to hold shares in its parent company if: (b.1) at the time when it becomes a subsidiary thereof, it already holds shares in the parent company; and (b.2) the cross-shareholding structure existed prior to the effectivity of this Memorandum Circular. In both cases, the parent company shall cause the conversion of the subject shares into non-voting shares within twelve (12) months from the effectivity of this Memorandum Circular. Within the same period, all affected shareholders shall be allowed to dispose their shares to any qualified transferee or exercise their appraisal right pursuant to Section 80 (a) of the RCC. (c) Subscription or share transfer agreements executed in violation of the immediately preceding provision shall be considered as VOID and without legal effect. Section 4. Penalties . If, after due notice and hearing, the Commission finds that any provision of this Memorandum Circular has been violated, the Commission may impose any or all of the sanctions provided under Section 158 of the RCC. This Memorandum Circular shall take effect upon its publication in two (2) newspapers of general circulation in the Philippines. Pasay City, Philippines, _____ March 2021. For the Commission: EMILIO B. AQUINO Chairperson ANNEX C n Draft Memorandum Circular on Cross-Shareholding Structure for PLCs n Note from the Publisher: Copied verbatim from the official document.