MANILA, Philippines – Presidential aspirant Manuel Villar could argue that he did not violate any law or a regulatory rule when his family’s real estate firms were able to raise billions of pesos through the stock exchange in 2007. However, he crossed ethical lines.

Villar had “improperly interfered” when he attended a meeting of the Philippine Stock Exchange (PSE) board that was called to discuss an issue about Vista Land & Lifescapes Inc., his holding firm, according to Sen. Juan Ponce Enrile during a press conference on Thursday.

Villar was the Senate president in 2007 until Enrile replaced him in 2008.

In June 29, 2007, Villar attended the PSE board meeting purportedly to personally justify to the directors why some Vista Land shares should be allowed to be sold to public investors.

While his corporate lieutenants could have done the job, his presence in the boardroom was meant to rush the board directors in making a decision since Vista Land’s investment bankers and underwriters were about to hit the road to market Vista Land shares to local and foreign investors.

That same day, the PSE board decided to allow the release of some Vista Land shares from escrow. Villar had wanted the board to free up shares equivalent to 30% of the holding firm. The board’s decision was to allow only 11%. It was generally perceived as a decision in Villar’s favor.

“I got the impression that this guy really gets what he wants,” shared a well-placed source who was in that PSE board meeting. “I had shivers.” (Read: When Villar’s business and politics mix)

Villar’s presence at a PSE board meeting is not new to Manila’s business community. The incident has spread around and the general impression at the time was about Villar was throwing his weight around.

Bong Bernas, a corporate lawyer who has listed firms as clients, said businessmen whose empire has reached a certain size and scale are aware of the weight of their position, even if they are just in the private sector. “They don’t want image issues,” he shared.

On Villar’s visit to the PSE, Bernas has this to say: “There was clear conflict-of-interest there. He should not have used the weight of his office for personal gain.”

The Code of Conduct and Ethical Standards for Public Officials and Employees, says a public official “shall avoid conflict of interest at all times.” (Read: When Villar's business and politics mix)

Shares under lock-up

Villar reached out to the PSE board because he wanted to include the shares of his firm, Polar Properties, in Vista Land to be part of the pool of listed Vista Land shares sold to the public.

Polar, which used to be the residential condominium arm of the Villar Group, had 722,615,487 shares in Vista Land at the time the holding firm listed its common shares in the PSE.

 The practice at the PSE was to identify who among the shareholders have 10% or more stake in the company after its shares were listed in the exchange. The physical copy of the shares are then delivered to a bank or another escrow agent, and these could not be withdrawn and sold before the lock-up period of 180 days.

Having a lock-up period is a common rule among stock markets in the world since it aims to protect the minority shareholders. Those who own a considerable stake—described as 10% and above—are likely to have acquired their existing shares at a price lower than how much new investors would buy them from the stock market for the first time during a public offering.

In the case of Polar, it acquired its Vista Land shares at P2.46 per share during a previous share swap exercise. At the time of listing, new investors acquired their Vista Land shares at around P6.85.

With a lock-up period, the existing shareholders would not be able to sell their shares, make a fat profit of around P4.4 per share (P6.85 selling price minus P2.46 acquisition cost), and leave behind the new ones who have yet to earn the same margin.

Since the stake of Polar in Vista Land was equivalent to 11.3%, these shares were set aside to an escrow account. The same was imposed on Fine Properties and Adelfa Properties, which at the time had 47.6% and 24.3%, respectively, in Vista Land.

Just because Polar breached the 10% threshold for the lock-up rule by a slim 1.3%, Polar’s shareholders could not sell any of its shares in Vista Land for 6 months.

At the target price of P6.85 per Vista Land share at the time, each share of Polar was worth P105 million. The entire block was worth P5 billion.

Villar’s presence in the PSE boardroom was an effort to ask the board to reconsider putting off the chance for Polar, which his family also effectively owns, to immediately cash in on the entire or a portion of its block shares.

Corporate lieutenants

The lock-up issue on the shares of Polar stemmed from the lack of coordination between two groups that were working on the Vista Land fund raising.

The cast of characters in this whole scheme included law firms—Picazo Buyco Tan Fider and Santos Law Firm and Romulo Mabanta Buenaventura Sayoc & De Los Angeles Law Office—and those in charge of raising the funds: global coordinator and bookrunner UBS Investment Bank, co-lead manager ABN Amro Rothschild, and lead domestic underwriter BDO Capital and Investment Corporation.

One group was in charge of restructuring the entire Villar Group of real estate companies to raise funds for expansion plans and, as Enrile has alleged, for the campaign kitty of Villar.

Raising funds through the stock market was the chosen route since the real estate group, mainly previous flagship firm Camella & Palmera Homes (C&P), would have difficulty tapping the debt market again. C&P and its sister companies had defaulted on billions of pesos of debts from commercial banks and bond investors in the aftermath of the 1997 financial crisis.

The law firms essentially moved assets and resources around through share swaps, property dividends, among others. In early 2007, Vista Land emerged. It was packaged to be the largest homebuilder in the country and its portfolio of products ranged from low-end to high-end, and from horizontal to high-rise or vertical developments.

This first group arranged and signed the escrow agreement to lock up Polar’s shares for 6 months starting June 20, 2007.

The following day, June 21, the second group—composed of the investment bankers and underwriters—called the attention of PSE’s listing unit. In a letter request, this group asked that the shares of Polar be excluded from the lock up period.

The reason, apparently, was that the two groups are not abreast of the goal of the other. The investment bankers and underwriters, for instance, had already included the Polar shares in the pool of primary and secondary shares they were about to offer to public investors. The more shares the bankers could sell, the higher the chance they could produce the fresh funds that Villar and Vista Land were aiming to raise.

Proceeds from the sale of the 2.12 billion primary shares would translate to over P14.5 billion in fresh funds for the coffers of Vista Land. On the other hand, proceeds from the 986 million secondary shares will yield almost P7 billion, but this will go to the existing Vista Land shareholders, including Polar.

Apparently, the investment bankers wanted to sell 2% out of Polar’s 11% stake since this means another P1 billion in fresh funds for Polar’s shareholders, which include the Villar family.

Polar is 53% owned by Adelfa Properties, where spouses Manuel and Cynthia Villar have a combined 99% stake, based on the 2009 SEC records.

“Director Vivian Yuchengco said the board is in this predicament because of the fault of the underwriters and counsels who insisted on the structure. She suggested that sanctions be given to these professionals who caused these problem knowing fully well that the Exchange requires the lock up,” according to the minutes of a PSE board meeting provided by Enrile during the Thursday presscon.

No lock-up rule

“We didn’t know what rule we will apply to allow the release of Polar shares that were already locked up,” a source who was present in the board meetings said. The source spoke to abs-cbnnews.com/Newsbreak on condition of anonymity.

The minutes of the board meetings confirmed that the PSE has no specific rule on how to apply the lock-up requirement in the mode of listing that Vista Land took.

Vista Land did not raise funds through an Initial Public Offering (IPO), which is the more common mode.

Vista Land raised funds through an alternative mode called Listing By Way of Introduction (LBWI), which is a way for companies to trade their shares and have access to liquidity. Some companies avail of this to prepare them for an IPO, which involves more stringent financial and documentary requirement. Others basically just want an avenue for their employees to trade their stock options through a financial market.

At the heart of the issue on whether Polar shares should be locked up or not is the difference between the listing date of the shares under an IPO mode and LBWI. Once the shares were listed in the stock exchange, public investors could already buy or sell them.

In an IPO, the company first offers the shares to the public before it lists the sold shares on the stock exchange. In an LBWI, the company lists its existing shares first on the stock exchange, before it could sell additional or new shares to raise funds.

Not having rules that could be directly applied to the Polar shares issue, the PSE’s Listings Department considered the lock up rule for IPOs: “The applicant company shall cause its existing stockholders or security holders who own an equivalent of at least 10% of the issued and outstanding shares not to sell, assign or in any manner dispose of their shares for a minimum period of 180 days after the listing of the said shares.”

All was fine and smooth as Vista Land’s lawyers agreed with the PSE to lock up the Polar shares and even executed the escrow agreement on June 20, 2007.

This was only raised when the other professional group working for Villar wanted to undo what the first group has already signed up and committed to.

Moreover, those who crafted the lock-up rules for the LBWI mode did not consider when or if the lock-up period applies to existing shareholders, like Polar, who would want to sell their shares in the company also on the same day that the company’s shares were listed.

According to the rules of the PSE for LBWI mode, the listed firm, in this case Vista Land, must “conduct a public offering of its shares within one year following the listing by introduction.”

There is no PSE rule that bans a firm that lists via LBWI to offer its shares to the public simultaneously with its listing.

Roadshows

As the PSE management and Vista Land counsels deal with these issues, the investment bankers and underwriters were uneasy. The roadshows on the Vista Land shares was to start 8 days after, or on June 29, 2007.

PSE president and chief executive officer Francis Lim raised the issue to the board. The PSE directors, however, only had one regular board meeting before June 29.

On June 27, the board members had a regular meeting and the case of Vista Land-Polar was in the agenda. The meeting ended without the board arriving at a final decision.

A special board meeting was called on the morning of June 29. Board members were surprised when Villar walked in with Lim.

Villar was in that special meeting with the group of Atty. Gemma Santos, the legal counsel for Vista Land, and the representatives of UBS, according to the meeting notes.

“Mr. Villar thanked the members of the board and gave a short background on the application of the Villar group to release shares in lock up so that they could be included as part of Vista Land’s public offering,” the minutes of the meeting chronicled.

Villar and UBS reportedly tried to bat for the lifting of the lock-up rule not only on Polar shares but also on Fine Properties (48% stake in Vista Land). They were eyeing some 30% of the locked up shares to be added to the shares for sale.

He stayed for less than an hour.

After the board members’ caucus, they debated the case of Vista Land from 10:00a.m. to 10:30a.m.(Read: How Villar ‘pressured’ the PSE board)

At the end of the meeting, the board has agreed to allow the release of the escrowed shares of Polar. Some 2%, out of the 11%, were eventually included in the pool of secondary shares for sale.

In a day, Polar’s 11% shares in Vista Land was listed on the exchange. Two percent of which were sold by the underwriters. At the end of the day, Polar was left with only 9%, which means it did not reach the 10% trigger level for the lock-up rule anymore.

In 2008, Polar’s stake in Vista Land has been whittled down to 5.35%. This means its owners have already cashed in somewhere in the vicinity of P2 billion from selling its shares in the listed company.