In re Stock Options to Apex Officers v. Apex Mining Co., Inc.

[SEC-SICD * CASE NO. 3352. September 13, 1990.] IN THE MATTER OF THE STOCK OPTIONS TO APEX OFFICERS, PABLO M. CAPISTRANO , complainant , vs . APEX MINING CO., INC., ET AL. , respondents . DECISION These two actions which were jointly heard refer to actions to compel respondents to allow complainants Rafael Ortigas. Jr. and Pablo Capistrano to exercise their stock option to subscribe to 33,333,333 shares each of respondent Apex Mining Company, Inc. (Apex for short) and for the issuance of the corresponding certificate of stock covering said shares. Complainants alleged, among other things, that they were directors and officers of Apex having served the latter for so many years occupying responsible positions thereat; that at the Board of Directors' meeting of Apex held on April 30, 1975, the then President Fernando Muiz recommended that Messrs. Vicente G. Puyat, Chairman, Rafael Ortigas, Jr, Vice President and Treasurer, and Pablo Capistrano, First Vice-President, be granted stock options to subscribe at par value to shares of stock of Apex in consideration of their past services to the corporation; that the board of directors gave approval to the recommendation and the stockholders of Apex, at their annual meeting on May 7, 1975, adopted a resolution allocating one hundred million (100,000,000) shares of common stock for distribution to deserving officers and employees of the corporation at par value; that on March 31, 1976, the Committee created by the board to evaluate the allocations of the shares recommended to the board that the 100,000,000 shares be apportioned equally among Messrs. Rafael Ortigas, Jr., Vicente G. Puyat and Pablo M. Capistrano at the rate of 33,333,333 million shares for each of the latter to be subscribed at par value; that pursuant to the stockholders' resolution of May 7, 1975, the Board of Directors of respondent Apex adopted a resolution granting Messrs. Rafael Ortigas, Jr., Vicente G. Puyat and Pablo M. Capistrano the option to subscribe at par value 33,333,333 shares each at P0.01; that on August 1, 1978, respondent Apex filed with the Securities and Exchange Commission (SEC) its amended Articles of Incorporation increasing its capital stock from P30,000,000.00 to P60,000,000.00; that on August 29, 1978 a Certificate of Permit to Offer Securities For Sale was issued to respondent Apex by SEC; that the management of the respondent Apex never informed complainants of the approval by SEC of the increase in capital stock of respondent Apex; that on February 28, 1980, complainants, particularly complainant Rafael Ortigas, Jr. wrote respondent Apex advising the latter that he was exercising his stock option to the 33,333,333 share endorsing at the same time a check for the amount of P16,666.67 representing five (5) percent of the subscription value; that on February 29, 1980, respondent Apex wrote complainant Ortigas, Jr. informing the latter that he was no longer entitled to his stock option without stating the reason and at the same time returned the check; that several written and verbal demands were made by the complainants to respondent Apex for the latter to allow them to exercise their stock option but all said demands were turned down by respondent Apex; and that complainants' exercise of their rights to the stock option is a valid exercise having been made within the two (2) years period prescribed by respondent Apex; and that they were entitled under the law to all the rights, remunerations and privileges in the form of stock cash dividends that should have accrued in their favor had respondent Apex allowed them to exercise their option. Respondents, in answer thereto, averred that assuming that the board resolutions granting complainants stock options were true, the same cannot be enforced since the requirements as provided for in said resolutions specifically the provisions mandating complainants to make a deposit of five (5) percent as down payment for their options was diametrically opposed to Section 2 (q) of BED Rule No. 902-A-3 which requires a forty (40) percent down payment of the total price of shares to be subscribed; that considering the non-compliance with the 40% requirement as down payment under the aforesaid rules on the grant of stock option, complainant cannot lay a valid claim thereto nor are the respondents legally obliged to grant the same; that the two (2) years period granted to complainants to exercise their stock option had been overtaken by the passage of BED Rule No. 902-A-3 by the Securities and Exchange Commission on February 25, 1977, which specifically calls for the following requirements. to wit: a. Sec. 2 requires SEC approval to issue stock option upon formal petition of granting corporation; b. Sec. 2 (g) requires 40% downpayment of the total price of shares to be purchased; c. Sec. 3 (e) the grant of option must be brought to the attention of SEC within a period required therein; d. Sec. 4 petition for stock option must be published in two newspapers of general circulation; e. Sec. 5 the option registered with the SEC. That none of the above-requirements were complied with; that what complainants claim to be validly due them cannot, from the legal point of view, be enforced for being in violation of existing law; that to allow the grant will be to make the respondents a party to something that is illegal; that complainants have no cause of action; that the instant cases are outside the jurisdiction of the Securities and Exchange Commission; and that the stock options are not legally and validly enforceable for the following reasons: a. The stock options were overtaken by the passage of BED Rule No. 902 -A-3 ; b. The terms and conditions of the alleged board resolution of May 7, 1975 were not complied with; c. The stock option was not approved by the stockholders or at least it is not clear that the stock option was so approved; d. The stock option plan was not approved by the SEC; llcd e. The complainants have lost their privilege to exercise their options when they failed to exercise such privilege upon the termination of their relationship with the respondent corporation. f. Complainants failed to tender payment of the required 40% down payment for subscription. The core of the issue in these two cases boils down on the question of whether or not complainants are entitled to the exercise of the stock option rights granted them pursuant to the resolution adopted by the board of Directors of respondent Apex on June 30, 1976. From the evidence presented, both oral and documentary, the following are the undisputed facts in these cases, to wit: that at the meeting of the board of directors of Apex on April 30, 1975, Mr. Fernando Muniz, the then President recommended that Messrs. Vicente G Puyat, Chairman, Rafael Ortigas, Jr., Vice-President and Treasurer, and Pablo Capistrano, First Vice-President, be given stock option to subscribe at par value, shares of stock of Apex in consideration of their past services to the corporation (Exhibits A" and "A-5"); that the stockholders at their annual meeting on May 7, 1975, approved a resolution allocating one hundred million shares of common stock ". . . to form part of (Apex) stock option plan to be distributed to deserving officers and employees at par value" (Exhibits "B" and "B-4"; that the board of directors of Apex pursuant to the stockholders resolution of May 7, 1975, unanimously adopted a resolution on June 30, 1976, granting Apex key officers, particularly Messrs. Rafael Ortigas, Jr., Vicente G. Puyat and Pablo M. Capistrano the option to subscribe at par value of P0.01,33,333,333 shares each (Exhibits; "C", "C-2" & "C-4"); that complainants, particularly complainant Rafael Ortigas, Jr., within the required two (2) years period counted either from the date of the Certificate of Filing of Amended Articles of Incorporation or from the date of availability of the shares, on August 29, 1978 wrote respondent Apex of his desire to exercise his stock option enclosing at the same time a check in the amount of P16,666.67 representing five (5) percent of the subscription value (Exhibit "G"); and that respondent Apex wrote back complainant Ortigas, Jr. to inform the latter that he was no longer entitled to his stock option without stating the reason thereof. Respondents argue that the stock options granted in favor of complainants were overtaken by the promulgation of BED Rule No. 902-A-3 by the Securities and Exchange Commission on February 25, 1977, which prescribes the steps, procedures and requisites for the grant of the stock option. As thus situated, the said stock options of complainants no longer conform with the requirements as provided for under the aforesaid rules; hence, the same are unenforceable. The problem, therefore, centers on the interpretation of the provisions of BED Rule No. 902-A-3 which seeks to govern the grants of stock option, the purpose being to protect the interest of the investors. Noteworthy is the fact that the rules merely contemplates future grants of stock option by the corporation. But where a stock option by the corporation has already been granted, the aforesaid rule, insofar as it aims to regulate the grant thereof should not apply in these cases. Thus, it is my honest; view, that the stock options given to complainants are valid grants and, therefore, are enforceable. Of pertinency hereto is Section 8 of BED Rule No. 902-A-3 , which reads: "SECTION 8. All corporations which have granted or issued options prior to but are to be exercised after the effectivity of these rules are required to report the same to the Securities and Exchange Commission within thirty days after these rules shall have become effective showing: llcd a) Name of issuer; b) Address or principal office of the corporation: c) Listing of the members of the board of directors, executive officers and other officials performing technical functions at the time of the granting or issuance of said stock options, and d) A listing of the persons or person in whose favor such grant or issuance of options were made indicating the number of shares given to each at how much per share the same have been disposed of and the date such option rights have been exercised". All that may be gleaned from the above provision is that a corporation which have granted stock option before the effectivity of these rules are required to make a report of the stock options already granted to employees. The purpose being to monitor such grants already made. Nothing is, however, contained in said rules which mandate the corporations which have granted stock options before the promulgation of the rules to comply strictly with the requirements as prescribed therein. As borne out by the records of the case, complainants were granted the stock option rights on June 30, 1976, long before the rules governing the grant of stock options has been promulgated by the Securities and Exchange Commission The attempt on the part of the respondents to give the rules a retroactive effect would only render said rules constitutionally doubtful for it will violate certain rights which have already accrued in favor of complainants. The failure of the corporation to make a report to the Securities and Exchange Commission, assuming it was true, on the subject stock options granted to complainants pursuant to Sec. 8 of the aforesaid rules, did not affect the validity of the stock options granted to complainants. If ever, it will only subject the respondent Apex to some administrative sanction. Respondents' argument that the stock option was not approved by the stockholders or at least it is not clear that the same was so approved is not worth even an iota of belief not only because said stock option plan was given approval by the stockholders in a resolution passed on May 7, 1975 (Exh. "B" & "B-4") but more so it was implemented by the Board of Directors of respondent Apex in a resolution adopted on June 30, 1976 (Exhibits "C', "C-2" & "C-4"). Again, respondents' claim that complainants are no longer entitled to the stock option plan, the effectivity period of the option having elapsed when they offered to exercise the same is likewise found not worthy of belief, for in truth and in fact, complainants exercise of the option were well within the two (2) years period prescribed by the board. I also find respondents' assertion that the stock option plan has not been approved by the Securities and Exchange Commission to be not worth considering because at the time the stock option rights were granted to complainants, there was yet no need to secure per- mission of the SEC for the grant of the options. It was only two (2) years later, on February 25, 1977 that BED Rule No. 902-A-3 governing the grants of stock options was passed and promulgated by SEC. Moreover, I deem it absurd the claim of respondents that upon termination of complainants' officership with respondent Apex, complainants have lost the privilege to the stock option. The terms and conditions set and fixed for complainants' exercise of the options did not require them to remain in the service of respondent Apex in order to exercise the options. For all the foregoing, I find complainants to be entitled to the exercise of their stock option rights and to all the benefits and privileges accruing in their favor had they been allowed to exercise the said stock option at the time they became legally due. WHEREFORE, judgment is hereby rendered in favor of the complainants and against the respondents directing the latter: a) To allow complainants Rafael Ortigas, Jr. and Pablo M. Capistrano to exercise their stock option rights to subscribe to 33,333.333 million shares each of Apex shares of stocks at a par value of P0.01 per share. b) To pay complainants Rafael Ortigas, Jr. and Pablo M. Capistrano all such cash/stock dividends, interest and such other benefits accruing in their favor had they been allowed to exercise such stock option rights by the respondents. NO PRONOUNCEMENT AS TO COSTS. SO ORDERED. (SGD.) ALBERTO P. ATAS Hearing Officer