MANILA - The Supreme Court on Thursday granted the government’s motion seeking the conversion of the 24% sequestered common shares of San Miguel Corp. (SMC)—registered in the names of Coconut Industry Investment Fund (CIIF) and its holding companies—into Series 1 preferred shares.

In a 33-page decision penned by Associate Justice Presbitero Velasco Jr., the Court en banc held that the conversion “is advantageous to the public interest or will result in clear and material benefit to the eventually declared stock owners, be they the coconut farmers or the government itself.”

“Respondent Republic, thru the PCGG [Presidential Commission on Good Government], is hereby directed to cause the CIIF companies, including their respective directors, officers, employees, agents and all other persons acting in their behalf, to perform such acts and execute such documents as required to effectuate the conversion of the common shares into SMC Series 1 preferred shares, within 10 days from receipt of this resolution,” the SC ordered.

The High Tribunal noted that the PCGG has held on to the sequestered shares for more than 20 years, and now may be the right time for it to relinquish its role in the corporation in light of the claim that the sequestration of the CIIF SMC shares “has frightened away investors and stunted growth of the company.”

The conversion, the SC added, is necessary to preserve the value of the 753,848,312 sequestered CIIF SMC common shares in light of the worldwide economic crisis that started last year and adversely affected the country’s banks and financial institutions, resulting in billions of loses.

It further noted that the CIIF SMC shares traded in the local stock market have substantially dropped in value in the last two years.

The SMC Class “A” shares, according to the Court, were traded at P65 in 2006 but went down to P57.50 in 2007. The value of the shares further depreciated to P48 per share as of November of last year.

On the other hand, SMC Class “B” shares, which fetched a price of P49 per share in November 2008, were priced at P61 in 2007 and P74.50 in 2006.

The Court added that as of June 1, 2009, Class “A” and Class “B” common shares of CIIF SMC closed at
P53.50 and P54 per unit, respectively.

“No doubt, shares of stock are not the safest investments, moored as they are on the ever-changing worldwide and local financial conditions. The proposed conversion would provide better protection either to the government or to the eventually declared real stock owners depending on the final ruling on the ownership issue,” the SC said.

The Court said the owners of preferred shares, being considered creditors, shall have preference in the corporate assets of SMC in case it suffers short- or long-term serious financial setbacks and seek insolvency protection.

Likewise, the Court agreed with the Office of the Solicitor General (OSG) that the conversion would result in a higher dividend rate of 8% per annum.

The SC held that a fixed dividend rate of 8% per annum translates to P6 per preferred share or a guaranteed yearly dividend of P4.523 billion for the entire sequestered shares as compared to the dividends for common shares for the past years, which only reached P1.055 billion per annum with P1.40 per unit share.

The conversion, according to the High Court, is also necessary to assuage fears of some groups on the possible dissipation of SMC assets due to the firm’s decision to acquire shares, in Meralco and Petron and to venture into water via the Laiban Dam Project as well as into telecommunications via Qatar Telecom.

“The proposed conversion will address the concerns and allay fears of well-meaning sectors, and insulate and protect the sequestered CIIF SMC shares from potential damage or loss,” the Court said.

Meanwhile, the Court branded as “speculative” the claim of oppositors-intervenors led by former senator Jovito Salonga that the conversion is a devious compromise favorable only to SMC chairman Eduardo “Danding” Cojuangco and petitioner Philippine Coconut Producers Federation Inc. (Cocofed).

It explained that the perceived full control by Cojuangco over SMC after the common shares are released from sequestration is irrelevant to the propriety of the conversion.

“Intervenors have not been able to demonstrate how the domination of SMC by Cojuangco Jr., if that should come to pass, will prejudice or impair the interests of respondent Republic in the preferred shares. The more important consideration in the exercise at hand is the preservation of the preferred shares and the innumerable benefits and substantial financial gains that will redound to the owner of these shares,” the Court said.

The SC said the claim of Salonga’s group that the conversion would result in the loss of voting rights of PCGG in SMC and enable Cojuangco to acquire the sequestered shares using SMC funds is “incorrect.”

“Should conversion push through, SMC, not Cojuangco, becomes the owner of the reacquired sequestered CIIF SMC common shares. Should SMC opt, however, to sell said shares in the future, prospective buyers, including possibly Cojuangco Jr., have to put up their own money to acquire said common shares. Thus, it is erroneous for intervenors to say that Cojuangco Jr., with the use of SMC funds, will be acquiring the CIIF SMC common shares,” the SC pointed out.

The SC added that PCGG’s main task is to protect the CIIF SMC common shares from dissipation; thus, it cannot prevent Cojuangco or any individual from securing domination of the SMC board or acquiring the subject shares.

“Even if the conversion is approved, nothing can prevent the government from prosecuting the people whom intervenors tag as responsible for greasing the government and the coconut farmers of billions of pesos.”

Salonga’s group earlier claimed that the conversion of the CIIF SMC shares would give to Cojuangco and president Ramon Ang an opportunity to oust the government nominees to the SMC board, and buy the sequestered shares with the use of SMC funds.

“The conversion of the shares and the lifting of sequestration over them take away these protections and make them vulnerable to corporate chicanery. These are condition-altering proposals that no reasonable sequestrator would ever do, as they loosen the sequestrator’s grip on the property, at a time when the government has already won the trial and has the privilege of waiting,” the petitioners stressed.

They noted that the government is still holding the SMC shares in the capacity of a sequestrator; as such, its function is to ensure that the said shares are preserved and the value protected pending the determination of the true ownership of the contested property.

The petitioners added that the government’s authority over the subject shares is limited to the purpose of sequestration, thus, the conversion of sequestered shares from common to preferred is not an option.

The Court said, “In sum, the conversion of the CIIF SMC common shares to serie 1 preferred shares should be approved in the best interest of everyone concerned including the government and the Filipino people.”

It added: “Once the subject conversion is accomplished, the preferred shares shall remain in custodia legis and their ownership shall be subject to final ownership determination by the Court.’

In the dispositive portion of the decision, the Court said: “Until the ownership has been resolved, the preferred shares in the name of the CIIF companies shall be placed under sequestration and PCGG management.”

As for the “net dividend earnings and/or redemption proceeds from the Series 1 Preferred Shares,” the Court said these shall be deposited in an escrow account with the Land Bank of the Philippines or the Development Bank of the Philippines.”

(Read more bacground: SC OKs 'no voting rights' for disputed shares in San Miguel)