SC asked to reverse ruling on conversion of disputed SMC shares

Posted on October 9, 2009 blogtopia

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san_miguel MANILA – A group led by former Senator Wigberto Tañada has asked the Supreme Court to reverse its earlier ruling allowing the government to convert its sequestered common shares in San Miguel Corp. (SMC) into preferred shares.

In a 26-page motion for reconsideration, Tañada, together with former assemblyman Oscar Santos, the Surigao del Sur Federation of Agricultural Cooperatives, the Moro Farmers Association of Zamboanga del Sur, and Pambansang Kilusan ng mga Samahan ng Magsasaka, insisted that the conversion of the shares, representing 24% of SMC, would be "grossly disadvantageous to the government and the coconut farmers."

The group cited two main reasons why.

First, they said the conversion would only lead to SMC chairman Eduardo "Danding" Cojuanco owning the shares, over which some 18 million coconut farmers have a pending claim. Second, the market value of the shares is expected to exceed the face value of the preferred shares that SMC would be issuing.

SMC earlier said its offer to swap debt-like preferred shares for common shares was meant to allow stockholders who are doubtful of the conglomerate’s expansion into new businesses reduce exposure to risk.

Preferred shares usually pay higher yields and are given priority in divident payouts. By law, owners of this type of shares are first to get their hands over the remaining assets of a corporation in case of liquidation.

However, unlike common shares, preferred shares are not entitled to voting rights.

This means that if the government opts to swap the contested common shares into preferred, whoever will be awarded ownership of these, would lose their right to challenge SMC’s business decisions.

Cojuanco to own sequestered shares

According to Tañada’s group, the conversion would only allow SMC to redeem and eventually own the sequestered shares.

"If this conversion materialized, the converted shares would eventually be transferred to the absolute ownership of SMC through its exercise of its option to redeem," the petitioners stated, adding that this would enable Cojuanco to acquire the shares.

This was the same thing that former Senate president Jovito Salonga said in a previous petition to disallow the conversion which was dismissed by the SC.

The high court said that the government’s main task is only to protect the shares from dissapation, thus, it cannot prevent Cojuanco or any individual from securing domination of the SMC board or acquiring the subject shares.

It also stressed that once the conversion is accomplished, the preferred shares would remain in the custody of the law until the issue of ownership is finally determined.

The 24% SMC stake is among the assets that the government had sequestered from late dictator Ferdinand Marcos and his allies (including Cojuanco) in belief that they were purchased using coco levy funds two to three decades ago.

Common share price and dividends

Ultimately, the petitioners see no need to convert the government’s common shares in SMC because they said market prices have already increased as of September 2009. They also argued that higher dividends are not guaranteed under the conversion scheme as these depend on the availability of retained earnings.

They pointed out that "class A" common shares are valued at around P63 to P69.50 each while "class B" common shares are priced at P63.50 to P70.

"With this trend of improvement in the value of SMC common shares, it is not farfetched that in three years time these common shares would be able to command a price higher that P75, the expected price for preferred shares," the petitioners said.

The SC had given the government the go-ahead signal to convert the sequestered shares, citing the need to preserve the value of the shares whose prices substantially dropped in the local stock market.

The Class A shares, according to the Court, were only trading at P48 in 2008 from P65 in 2006. The Class B shares, on the other hand, fetched a price of P49 per share last year compared to P74.50 in 2006.