Yenkell Cement Corporation (YCC) is a public corporation whose shares are listed at the PSE. It is 60% owned by Yenkell Holdings Corporation (YHC) and 20% by Yengco Exploration Inc. (YEI). The remaining 20% is held by the public. YHC is a private non-listed corporation which, in turn, is 60% owned by Yatlas Mines Inc. (YMI), and 40% by Yacnotan Consolidated Inc. (YCI). On August 8, 2008, the Board of Directors of YEI passed a resolution approving the acquisition of 50% and 25% of the shares held by YMI and YCI, respectively, in the authorized capital stock of YHC.
Yolly, one of the staff members in the office of the Corporate Secretary of YEI, was immediately asked to type the resolution and file the disclosure with the PSE and the Securities and Exchange Commission (SEC). Before doing that, she secretly called her brother who works with a stock brokerage company, to purchase, in the name of Yolly’s husband, 5,000 shares in YCC. After the acquisition was disclosed to the SEC and the PSE, the market price of YCC increased by 50%.
(a) In acquiring 75% of the total capital stock of YHC, should YEI be required to do a mandatory tender offer? (2.5%)
(b) Can Yolly be held liable for insider trading? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
(a) Yes, YEI must conduct a mandatory tender offer. (b) No, Yolly is not liable for insider trading per se, but is liable for unlawful communication. Under the Securities Regulation Code (SRC) and Cemco Holdings doctrine, mandatory tender offer rules cover
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Quick check
Under the Cemco Holdings doctrine, when does an indirect acquisition of shares trigger the mandatory tender offer rule?
The mandatory tender offer rule applies to indirect acquisitions that result in obtaining control over fifty percent of a public company.
What constitutes unlawful communication of material nonpublic information under Section 27.3 of the SRC?
Section 27.3 prohibits an insider from communicating material nonpublic information to someone likely to trade on it.
Why is YEI required to conduct a mandatory tender offer when acquiring 75% of YHC's capital stock?
Acquiring 75% of YHC gives YEI an indirect 45% control over YCC, which combined with its 20% direct stake exceeds 50%.
Under Section 27.3 of the SRC, why is Yolly liable even though she did not personally purchase YCC shares?
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Which statute regulates mandatory tender offers, insider trading, and unlawful communication of material nonpublic information in the Philippines?
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Learn more about these topics
1. Mandatory Tender Offer
Under Section 19 of the Securities Regulation Code (Republic Act Number 8799) and the seminal Cemco Holdings doctrine, the mandatory tender offer rule covers both direct and indirect acquisitions of equity shares in a public company. When an acquisition of shares in a holding company results in acquiring at least fifty percent control over a listed public subsidiary, the indirect acquirer is required to make a tender offer to all minority shareholders of the public corporation to protect them against forced changes in corporate control.
2. Unlawful Communication
Under Section 27.3 of Republic Act Number 8799, it is unlawful for an insider to communicate material nonpublic information about the issuer or the security to any person who thereby becomes an insider, where the insider communicating the information has reason to believe that such person will likely trade securities based on that information. Even if the corporate employee does not personally execute the stock transaction, tipping confidential price-sensitive information to a relative who purchases shares constitutes a punishable violation.
3. Material Nonpublic Information
Under Section 27.2 of the Securities Regulation Code, information is material nonpublic if it has not been generally disclosed to the public and would likely affect the market price of the security after disclosure, or would be considered important by a reasonable investor in determining whether to buy, sell, or hold the security. Leaking upcoming corporate acquisition disclosures prior to official filing with the stock exchange constitutes misuse of material nonpublic information.