For some, any move that insulates the Manila Electric Company (Meralco) from the claws and clutches of political infestation is an occasion for flaring tinderbox tempers. For that matter, given last years insidious squabbles within the Meralco board, any that fortifies the existing equity configuration, one decidedly beneficial both to the greater capital market and the institutional fortitude and corporate independence of critical enterprises, inflames dormant pesky passions.

Damning intra-corporate credit extended internally among shareholders packaged with requisite unanimity agreements as well as a limited call option, one vocal critic described the internal loan as an “attempt to defraud the investing public”. Seething, the same likened the debt to “a clear case of large-scale estafa” – a patently criminal act.

In commercial parlance, such drool and venom spitted and spewn on efforts to solidify Meralco’s existing equity base are as colorful as cusses come. Note verbiage ranging from “circumvention”, “skirting”, “shortchanging”, “loophole”, and “duplicity” employed to prick and puncture legitimate capital processes.

The ranting, raving and even the threats of suits to coerce resultant tenders reappear like persistent gadflies. Never mind that no predicate tender exists much less a sale evidenced by transferred ownership of shares that compel subsequent tenders.

Against such acrimonious political polemic there is nothing illegal in the debt and limited warrant route recently taken to protect the integrity of investments in Meralco.

It is not uncommon to take the debt route where acquisition involves underlying control and corporate stability. After all, corporate peace is just as important. Possession is less important than solidity and steadfast capital bases. In an essential utility the criticality of the latter cannot be overemphasized given insidious hostile infestation had once shaken both corporate rafters and the general economy.

On the Securities and Exchange Commission tender requisites, where a tender for ownership in excess of 35% is made within a 12-month period, when no tenders exist, no subsequent tenders are required. To understand that we need to appreciate the logic of ownership at one end, and control at the other.

A tender is defined as “a broad solicitation to purchase a substantial percentage of a company’s registered shares for a limited period of time. The offer is at a fixed price, usually at a premium over the current market price contingent on shareholders tendering a fixed number of their shares.”

A purchase must exist. Without ownership transfers, no act can be considered a tender to either purchase or a contingent tender to sell.

Two things are important.

One, creeping acquisition is delineated within a 12 month period. To deny creeping acquisition would be to emasculate the capital markets by denying investors who want to infuse capital into a listed company.

Two, without the exercise of a call option ownership is NOT transferred. Thus no sale can be consummated forcing subsequent tenders. Shares subject of a loan transaction do not belong to the creditor unless requisite conditions kick in or a loan call demands payment. On the latter, to compel subsequent tenders the transfer of shares must be consummated within a 12-month period from the original build-up net of acquisitions in the open market.

Is the route chosen a slip through regulatory loopholes? Worse, is the move detrimental to shareholders and the capital markets in general? The answer to both is no. specially when the total volume shorn of open market purchases might be substantially below the requisite threshold.

Ownership does not necessarily imply control and vice versa. It would be folly to indiscriminately equate one with the other as is wantonly understood. Here is where most misconceptions from the generally un-initiated fester and where, by simplistically labeling the recent Meralco transaction as a basic “sale”, the tagging indicates a profound lack of understanding of capital market complexities.

One, the debt route prevents speculative pricing from affecting equity fortification. The prospect of a bidding war is detrimental as values escalate based on artificial forces. A prospective call option grants effective purchase rights but not expensive obligations until values reflect true worth.

Two, the debt route does not involve the bourse. Moreover, depending on the loan rates against costs of equity, Meralco’s resulting lower weighted average cost of capital should redound to its consuming public.

Because the debt route is non-invasive, it results in a more stable utility and this distinct benefit permeates to minority investors as much as it flows directly to the public. The conditionalities appended to the call option strengthen stability within capital structures, preventing hostile attacks. Thus, political risks diminish greatly and Meralco becomes more attractive both to investors and creditors including those left holding minimal but consequently better earning shares.

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