A MESSAGE TO ALL CALATA CORPORATION SHAREHOLDERS
Re: Involuntary Delisting Proceedings
It will be recalled that three months ago, the Philippine Stock Exchange (PSE) has commenced involuntary delisting proceedings upon Calata Corporation (the “Company”) for violation of disclosure rules. However, as can be read from the newspapers, it appears that recently, the PSE is exerting pressure on the Company to instead submit a Voluntary Delisting.
Voluntary Delisting, which carries with it a requirement of doing a tender offer, is possible ONLY if the Company has the financial capability of conducting the tender offer. In the case of Calata Corporation, the legal and practical consideration makes it impossible to make the tender offer.
First, under the Section 19 of the Securities Regulation Code, a tender offer by a Company of its own shares shall only be made if the Company has sufficient unrestricted retained earnings. Based on its 2016 Audited Financial Statements, Calata Corporation only has around 400 Million Pesos of Retained Earnings. Should a tender offer be made, the Company needs to have around One Billion Pesos to buy back its public shareholders.
Said amount is computed by multiplying the public float which is around 300 million shares by the Company’s book value per share of around P3.00. It should be noted that the price per share of P3.00 is not even the correct tender offer price since under the Securities Regulation Code, the tender offer price should be based on a fairness opinion valuation of the business. Naturally, the Company, being profitable and is currently a 5 PE Company, would have a price per share greater than the book value based on said fairness opinion valuation.
Second, if the Company is forced to do a tender offer, it will not only be contrary to law but also, it will have an effect of liquidating the whole company just to satisfy the Philippine Stock Exchange’s will for the Company to do the tender offer. This is because of the large public float which is almost 70% of the Company.
For the record, the Company has been reporting profitable operations even before it was listed in the Philippine Stock Exchange. To liquidate the Company just because the Philippine Stock Exchange wants a tender offer is not only impractical but grossly unfair.
It is grossly impractical because if the Company will force itself to generate cash for the tender offer despite its limited retained earnings, it will have to sell its assets. This would easily be a red flag for its existing business creditors such as the banking institutions. Necessarily, once it is learned that a liquidation process is being done to generate cash for the tender offer, all creditor banks will call on their loan. As being preferred creditors, it is not hard to understand that they will have to be paid first before the remaining cash, if any will be left, will be used for the tender offer. However, there is no assurance that there will be cash left after all creditor banks have been paid. Bottom line, in this scenario, the shareholders may not even be paid after all.
It is unfair simply because a regulatory violation by a SINGLE SHAREHOLDER should not be a justification to kill a legitimate business which has been profitably operating for the past decades. If this is so, it comes into question why the PSE has not yet delisted a handful of listed companies which have failed to submit their structured reports over the years. Thousands of families are depending on the business which include not only its employees but hundreds of thousands of farmers and dealers who very much depend their livelihood on the business. This does not mean however, that the person responsible should go unpunished. It is simply stated that the tender offer being forced upon the Company is NOT a win-win solution after all.
Calata Corporation has utmost respect for the rules of the Philippine Stock Exchange. However, it is to be understood that all laws, rules and regulation should not be inconsistent with the Constitution of the Republic of the Philippines which states that there should be equality under the laws. Punishing the whole company for the infraction of a SINGLE SHAREHOLDER in order to vindicate the rights of the shareholders creates a legal and constitutional dilemma. While it appears that by forcing the Company to do a tender offer, the Philippine Stock Exchange appears to have protected shareholder interest, it is at the same time punishing the Company, an innocent juridical person which did not have anything to do with the violation committed by the shareholder. Even a juridical person has rights protected under the law and under the Constitution. The fact that the PSE is a self-regulatory organization which has the power to regulate, supervise and punish listed companies, does not give itself absolute power to impose sanctions upon the innocent – Calata Corporation to be clear. Otherwise, not only Calata Corporation is in great danger but also the rest of the listed companies in the Philippine Stock Exchange.
Supposing a disgruntled executive would repeatedly and secretly trade his shares without any disclosure? Supposing a competitor listed company would entice a willing executive in another competitor listed company to repeatedly and secretly trade his shares? Based on the rules, on the fourth unreported trade, REGARDLESS OF THE AMOUNT AND NUMBER OF SHARES TRADED, the listed company shall be delisted. This may not have happened before and may create a very dangerous and damaging PRECEDENT if Calata Corporation would be delisted. Moreover, with the current situation in Calata Corporation and with how the PSE is currently handling the situation, it appears that we have now been opened to the door of this possibility which may very well happen in the future. Perhaps, until and unless the burden of reporting trades of substantial shareholders, directors and officers be passed on the brokers, there is no stopping a SINGLE INDIVIDUAL (may he be a director, officer or substantial shareholder) from deciding the fate of a listed company by getting it delisted just because of unreported trades.
The question now is this – Will the PSE revisit its rules in order for it to be consistent not only with its mandate but also with the Constitution of the Republic of the Philippines? It is basic in law that he who has committed a punishable act, should be punished. An innocent person, natural or juridical, should never be punished for a wrong not done. In this case, a SINGLE SHAREHOLDER has committed the violation and NOT Calata Corporation. The Company has repeatedly pleaded with the PSE that forcing a tender offer will have an effect of killing the Company and that if a punishment has to be imposed, it should just be upon the person who committed the violation.
The PSE is forcing a tender offer from Calata Corporation. To be able to do that, it is exerting extreme pressure upon the Company to do a voluntary delisting. Given the current legal limitation and financial limitation on the retained earnings of the Company, it was repeatedly relayed that a tender offer will not only kill the Company, but also, it will not ensure that shareholders will be properly and sufficiently compensated as its creditor banks will surely exhaust the Company’s cash as preferred creditors before allowing the company to use its money (if there will be left) for the tender offer. Worse, with this, the shareholders may not be even paid at all, if there would be no money left.
The Company, on the other hand, is offering a solution, which is to allow another listed company (MGHI) to inject the operation of its subsidiary into Calata Corporation. When this happens, the incumbent management shall step down and privatize its business. Just to be clear, management or any of its substantial shareholders shall not receive any financial consideration from this scenario as this is not a secondary share sale. The mode of acquisition is simply an infusion of capital into the Company which will be translated into equity and not a payment to a selling shareholder. By this, old management has voluntarily relinquished any right, benefit and business advantage which can be derived from a listed vehicle. This ultimate and self-imposed punishment of management is even greater than what is in the rules which only imposes a 5-year suspension from trading and 5-year disqualification of directors from sitting as such in a company going public.
With the acquisition, the public shareholders in the “new” Calata Corporation will have new management, a new and promising business and a new hope that their investment will be recovered. Instead of meeting a dead end, the investment made from hard earned money is given a fighting chance to grow and yield profit. It will not really be material if there is a dilution in the percentage ownership of shareholders as long as the price of their shares will increase brought about by the continuing increase in value the new business will create.
It is understandable for a regulator to be skeptical but it will not hurt if this solution is given a chance. After all, the decision to push through is a “corporate act” and should be left to the shareholders of both Calata Corporation and MGHI and NOT the PSE. Calata Corporation is confident that once, everything is threshed out in the annual stockholders’ meetings of both companies, it will be clear that the proposed solution is the win-win solution for all. The Company is open to discuss further, the details of the planned deal and its feasibility if only to shed light to all doubts and questions that the PSE may have.
Delisting should be the ultimate and last resort against erring listed companies. It is respectfully posited that the PSE should promote the protection and growth of public investment and not make delisting as its first option. Should the Company be involuntarily delisted by the PSE, all shareholders including the public shareholders shall be stuck with untradeable shares and deprived of their right to encash said shares which were bought through their hard-earned money.
In the case at hand, the one who erred is not even the listed company but rather a shareholder. Further, there is a solution which is being offered which is intended to protect the interest of all parties concerned. If the resolution of this issue should be a just and fair one, the PSE should at least give Calata Corporation and MGHI an opportunity to make their deal happen.
At the end of the day, the PSE and Calata Corporation is still in agreement that the protection of the public shareholders should be advanced. The difference lies in the manner and means in doing it. Calata Corporation believes that until and unless there is a possible win-win solution being offered, delisting is not the ultimate solution to the situation at hand.