Of the 15 magistrates, 12 reportedly gave the Office of the Solicitor General (OSG) the go signal to convert some 24% of common shares in San Miguel into preferred shares, sources intimately familiar with the High Court’s decision told abs-cbnNEWS.com/Newsbreak.

The decision was penned by Justice Presbitero Velasco Jr. Two justices dissented: Justices Conchita Carpio-Morales and Arturo Brion.

Justice Antonio Carpio inhibited from voting since he covered the San Miguel-related coco levy issue when he wrote for a broadsheet.

At stake is the single biggest block of shares in San Miguel—750 million shares—that some 18 million coconut farmers have been trying to claim, based on Marcos-era coconut levy, for the past 2 decades. (Read: Coconut farmers left out in San Miguel’s grand plan?)

If the government opts to swap the contested common shares into preferred, whoever will eventually be awarded ownership of the contested shares—the government or the coconut farmers—would lose their right to challenge the business decisions of the controlling group, the Cojuangcos.

Owners of preferred shares are usually paid higher dividends than owners of common shares. However, preferred shareholders lose their right to vote on major business decisions and the right to be represented in the company’s board.

Various groups have previously criticized the share conversion. Former Senate president Jovito Salonga has branded this as a “plunder in the making.”

The OSG told the court that the share conversion or swap would not change the condition of the assets.

From common to preferred

In August, the government, through the OSG, asked the Supreme Court to allow it to swap the contested shares in San Miguel into preferred shares.

The OSG oversees the Presidential Commission on Good Government (PCGG), which is the agency tasked to conserve sequestered assets while ownership is being contested in various courts. PCGG has sequestered various assets of late dictator Ferdinand Marcos and his allies, including San Miguel chair Eduardo Cojuanco Jr.

Most of the sequestration cases, including the 24% stake in San Miguel that farmers are claiming to have been purchased using coco levy funds, remain unresolved.

The contested shares in San Miguel are currently represented by government-appointed directors in the conglomerate’s board.

Last May, San Miguel disclosed to the Philippine Stock Exchange that it was planning to offer its shareholders the option to exchange some 1.1 billion common shares—which represent 35% of the voting stock—into non-voting preferred shares.

The 1.1 billion common shares include the contested 750 million shares broken down into 446,452,536 San Miguel “A” shares and 307,395,776 “B” shares. It is in the name of the Coconut Industry Investment Fund (CIIF) and controlled by the government.

San Miguel president and chief operating officer Ramon Ang explained in a statement then that “We are doing this to address concerns from some shareholders about San Miguel’s diversification thrust.”

At the time, San Miguel was already in the thick of changing its core businesses. It has sold its stakes in its low growth but stable brewery and food firms, including previous units in Australia and almost half of its stake in San Miguel Brewery, a market leader in the local liquor business.

Then it entered into deals that expanded its portfolio to include the following regulated and potentially high-growth businesses: oil retailer giant Petron Corp, electricity distributor Manila Electric Company (Meralco), telecommunication firms Extelcom and Liberty, a stake in the consortium that will build and operate the Tarlac-La Union expressway. It also recently won the rights over 2 of the biggest power plants that were in the auction block: Limay and Sual.

Based on previous statements of Ang to the media, also in their shopping list are gold and copper company Philex Mines, water concessionaire Maynilad, and the controversial Laiban dam.

Shareholders were originally given up to August 21 to avail of the option to convert. The deadline was eventually extended to September 21 after the OSG sought the approval of the Supreme Court first.

Pros and cons of share swap

Since the San Miguel board announced the share swap plan, market analysts saw the writing on the wall.

They said that this move is, in effect, an offer to buy out the shareholders who are uneasy with the change in San Miguels’ business strategy. They said the plan could potentially lead to the few large shareholders taking the company private.

A non-government organization, Centro Saka Inc., said in a previous commentary that the share conversion is a "major scam or trick in the making designed to swindle" coconut farmers.

Civic group Kilosbayan, on the other hand, branded the conversion plan as “plunder in the making.” Kilosbayan, and other members of Multi-Sectoral Task Force on the Coco Levy Recovery, criticized San Miguel's diversification plan for driving down the company's stock price, thus dragging the funds containing coconut levies, too.

"The administration's proposal is an outrageous attempt to enter into a compromise agreement involving a case the government has already won in the Sandiganbayan in 2004. If the Sandiganbayan's decision is affirmed, the full value of the shares will become government property," Salonga said.

Salonga, together with former Vice President Teofisto Guingona III, former senator Wigberto Tañada, Rep. Ana Theresia Hontiveros and taxpayer Oscar Santos, previously filed a 30-page opposition-in-intervention after Devandera asked the Supreme Court’s nod for the conversion.

In its motion, the government assured that the share swap would not change the condition of the assets. Devanadera earlier claimed that a preferred share is equivalent to the common share because the shareholder is entitled to similar rights and privileges such as the right to receive dividends and the right to vote in certain matters provided by the Corporation Code.

San Miguel has the option to redeem the preferred shares on the third year of the issue.

Higher returns vs right to vote

Preferred shares are debt-like shares unlike common shares that are just pure equity.

Preferred ones usually pay higher yields and are given priority in dividend payouts, but they are not entitled to voting rights. On the other hand, common shares, which do not promise consistent yields, have voting rights regarding company matters such as the election of board members and approval of business plans.

By law, owners of preferred shares are first to get their share of the remaining assets of a corporation in case of liquidation.

The higher returns for preferred shares were previously highlighted when San Miguel’s board approved a dividend yield of 8% for its preferred shares—much higher than the 2% yield for the common shares. The higher dividend yield ratetranslates to P6 per share per annum versus the common dividend of P1.40 per share given in the past many years.

On top of the higher returns, preferred shares also have a face value of P75 per share versus the market price of the common shares of P51 per share when the exchange was first announced.

Last weekend, Ang told reporters that more common shareholders are availing of the conversion option as the deadline draws near.

Earnings

In the first 6 months of the year, San Miguel told the stock exchange that its net income reached P55.62 billion, or a 182% increase over the same period last year, thanks to the sale of its stakes in food and liquor businesses.

However, on a recurring basis, the conglomerate’s earnings actually suffered a 3% drop.

Its share has slumped since it announced its diversification plan in its annual stockholders’ meeting in July 2007.

From P74.50 and P81.50 a piece then, San Miguel’s respective A and B shares traded at P67 and P68 at Thursday’s close.

At these prices, the disputed stake could sell for P51 billion—a whopping P7.5 billion less than its value 2 years ago. - By Lala Rimando, with reports from Aries Rufo, abs-cbnNEWS.com/Newsbreak