Shallow stock divestment claims
The excuse usually invoked by people who are caught in conflict-of-interest situations in their business transactions that could result in civil or criminal liabilities surfaced during the recent congressional investigation on “ghost” and substandard flood control projects.
When Sarah Discaya, the co-owner of nine construction companies under investigation, was asked about her shareholdings in one of those companies, she said she had already divested her shares in it, but she remained its chief financial officer.
Upon further questioning, she admitted that her shares were transferred to a close relative.
The same divestment alibi was used by some lawmakers with interests in companies that had been awarded flood control projects that are being investigated by Congress.
It was apparent they wanted to give the impression that since they no longer had any financial interests in those companies, there was no conflict of interest on their part when they approved the appropriations in the national budget for their projects.
Divestment of shares means selling the stocks owned by a stockholder in a company to a third party for, among others, ethical reasons or to comply with rules that require avoidance of conflicts of interest in some commercial activities.
The idea is, once those shares are unloaded, the divesting party supposedly forfeits all beneficial interests over them and would no longer have any say, directly or indirectly, in their disposition.
For a shares divestment to be considered valid and effective, it is essential that the sale is genuine. That is, the stock certificates of the divesting party are cancelled, new stock certificates are issued to the buyer and the change of ownership is recorded in the stock and transfer book of the corporation.
And for good measure, when the corporation submits the General Information Sheet (GIS), it is required to submit periodically to the Securities and Exchange Commission (SEC), the new ownership structure is accurately reported.
If all these requisites are complied with, any claim or aspersion of conflict of interest that relates to the divested shares can be fended off easily.
In the Philippine context, to date, reports of stock divestment can be relied upon as credible only if they involve companies that are listed on the Philippine Stock Exchange.
The rules of the exchange require timely and accurate reporting of changes or movements in stock ownership in those companies, especially if they would affect the composition of the board of directors or the market price of their stocks.
Failure to do so could give rise to hefty fines and even suspension of trading rights, which could be disastrous to the erring company’s reputation.
For companies that are not listed, it is easy for any of their stockholders to say or claim that they have divested their stocks if they are caught or reported to be in a conflict of interest situation.
But even if they do divest, chances are they would make a sham sale of their stocks to close relatives or friends, or to make it look as arms-length, to a corporation whose stockholders are their family members and, sometimes, household help.
Thus, on paper, the supposedly divesting stockholder had ceased to have anything to do with the corporation, but in reality, he or she continues to participate in its management and, most importantly, receive the fruits of stock ownership.
If the payback from those shares involves billions of pesos, like in the flood control projects earlier mentioned, making an honest-to-goodness break from the corporation would be a big disincentive to be truthful.
Going back to the probe on flood control projects, it would be easy to validate the claims of stock divestment made by Discaya and some lawmakers by simply asking the SEC to make available copies of the GIS submitted by the companies involved and ordering their corporate secretary to submit their stock and transfer book.
This assumes that those corporations are compliant with the SEC’s reportorial requirements, which is a big question mark. But there is no harm in trying.
