CASE DIGEST : Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines, Inc. G.R. No. 171815, August 7, 2007 Third Division — Chico-Nazario, J.

 

FACTS

Union Cement Corporation (UCC) was a publicly listed company. Its principal stockholder was Union Cement Holdings Corporation (UCHC), a non-listed company which owned 60.51% of UCC. Bacnotan Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation (ACC) owned substantial portions of UCHC, while Cemco Holdings, Inc. (Cemco) already owned 9% of UCHC and 17.03% directly in UCC. BCI and ACC later decided to sell their combined 51% interest in UCHC to Cemco. After the acquisition, Cemco's indirect ownership in UCC increased by 36%, giving it a total direct and indirect beneficial ownership of 53% of UCC.

The Philippine Stock Exchange (PSE) asked the Securities and Exchange Commission (SEC) whether the mandatory tender offer rule under Section 19 of Republic Act No. 8799, or the Securities Regulation Code (SRC), applied to Cemco's acquisition. The SEC initially advised that the tender offer rule did not apply. National Life Insurance Company of the Philippines, Inc., a minority stockholder of UCC, disagreed and demanded that Cemco comply with the mandatory tender offer requirement. Cemco refused. The Share Purchase Agreement was subsequently executed on August 5, 2004, and the transaction was consummated on August 12, 2004.

National Life then filed a complaint with the SEC seeking, among others, the reversal of the SEC's earlier position, the declaration of the purchase agreement as void, and the application of the mandatory tender offer rule to its UCC shares. The SEC eventually reversed its earlier ruling and directed Cemco to make a tender offer for UCC shares held by National Life and other shareholders belonging to the same class as the shares held by UCHC. The SEC relied on Section 19 of the SRC and Rule 19 of its Amended Implementing Rules and Regulations.

Cemco challenged the SEC ruling before the Court of Appeals. It argued, among others, that the SEC had no authority to order it to make a tender offer, that the mandatory tender offer rule applied only to direct acquisitions of shares in a listed company, and that the SEC's subsequent interpretation could not be applied to its transaction because Cemco had relied upon the SEC's earlier favorable opinion. The Court of Appeals affirmed the SEC ruling. Cemco then appealed to the Supreme Court.

ISSUE

The first issue was whether the SEC had jurisdiction and authority to adjudicate National Life's complaint and order Cemco to make a mandatory tender offer. Cemco argued that the SEC's powers under the SRC were merely administrative and did not include the authority to grant affirmative relief by directing a tender offer. The Court therefore had to determine whether the SEC possessed the necessary adjudicative authority under the SRC and its implementing rules.

The second issue was whether the mandatory tender offer requirement applied to Cemco's indirect acquisition of shares in UCC through its purchase of shares in UCHC, a non-listed holding company. The Court also had to determine whether the SEC's subsequent interpretation of the tender offer rule could be applied to Cemco's transaction despite the SEC's earlier opinion that the transaction was not covered by the rule.

HELD

The Supreme Court AFFIRMED the Decision and Resolution of the Court of Appeals, which had affirmed the SEC's ruling. The Court held that the SEC had authority to adjudicate the complaint and to order Cemco to conduct a mandatory tender offer. Section 5.1(n) of R.A. No. 8799 grants the SEC powers that may be implied from, or are necessary and incidental to, the express powers granted to it to achieve the purposes of the SRC. The Court held that this provision gives the SEC general adjudicative power necessary to perform its regulatory functions.

The Court also relied on Section 5.1(g) and Section 72 of the SRC, which authorize the SEC to issue, amend, and repeal rules and regulations and to supervise compliance with them. Pursuant to this authority, Rule 19(13) of the Amended Implementing Rules and Regulations provides that when there is a violation of the mandatory tender offer rule, the SEC may, upon complaint, nullify the acquisition and direct the holding of a tender offer. The Court held that the SEC's order directing Cemco to conduct a tender offer was therefore within its regulatory and adjudicative authority.

On the mandatory tender offer requirement, the Court held that it applies not only to direct acquisitions but also to indirect acquisitions of shares in a publicly listed company. Section 19 of R.A. No. 8799 requires a person or group acquiring the specified percentage of equity securities of a public company to make a tender offer. Under the applicable SEC rules, the threshold was 35%, and even an acquisition of less than 35% requires a tender offer when it would result in ownership of more than 51% of the outstanding equity securities. The Court held that Cemco's acquisition of UCHC shares resulted in its indirect beneficial ownership of 36% of UCC, and, together with its direct ownership, gave Cemco control of UCC.

The Court emphasized that the purpose of the mandatory tender offer rule is to protect minority shareholders by giving them the opportunity to sell their shares on the same terms when control of a publicly listed company changes. What is decisive is the acquisition of control, not merely the form or method by which the acquisition is accomplished. Thus, control obtained indirectly through the acquisition of a holding company's shares is covered by the tender offer requirement. The Court held that the rule must apply regardless of whether control is obtained through direct or indirect acquisition.

As to the SEC's earlier opinion, the Court held that the July 27, 2004 SEC letter was merely advisory. It was not issued after a public hearing or in a definite and concrete controversy affecting the legal relations of the parties. Consequently, it was not a judgment conclusively determining their rights. The Court held that an advisory opinion of an administrative agency may be disregarded when it is contrary to the governing statute. The SEC therefore properly reversed its earlier position and applied the mandatory tender offer requirement to Cemco's transaction.

The Court also rejected Cemco's argument that the SEC's decision was incomplete. The SEC specifically directed Cemco to make a tender offer for UCC shares at the highest price it paid for the beneficial ownership in UCC, in accordance with Rule 19, Section 9(E) of the Amended Implementing Rules and Regulations. The Court found the SEC's order sufficiently definite because the implementing rules provided the procedure for conducting the mandatory tender offer. Accordingly, the Supreme Court affirmed the Court of Appeals' Decision and Resolution, with costs against Cemco.