SEC En Banc Case No. 08-11-242 Artemio V. Panganiban

SECURITIES AND EXCHANGE COMMISSION SEC Bldg. EDSA, Greenhills, Mandaluyong City Republic of the Philippines

ARTEMIO V. PANGANIBAN Appellant,

versus

COMMISSION, CORPORATION FINANCE DEPARTMENT OF THE SECURITIES AND EXCHANGE Appellee. SEC En Banc Case No. 08-11-242

DECISION

that the Commission En Banc revisit and reverse the "no stock option" policy and permit the grant of stock options to independent directors. Panganiban (hereinafter referred to as "appellant") seeking the reversal of the letter- Corporation (hereinafter referred to. as "MPIC") as independent director and praying disallowed the grant of stock options to appellant by Metro Pacific Investments ruling of the Corporation Finance Department (hereinafter referred to as "CFD") which For consideration of the Commission En Banc is the Appeal filed by Artemio V.

FACTS OF THE CASE

corporations including MPIC. In 2008 and 2009, MPIC granted, pursuant to its Executive Stock Option Plan (ESOP), stock options for common shares of MPIC to its corporate officers and employees as well as members of its Board of Directors including its three (3) independent directors, one of whom is herein appellant. Appellant serves as: an independent director of several publicly-listed

independent directors. Subsequently, CFD resolved to deny MPIC's request to registration under the Securities Regulation Code (SRC) for the grant of said stock options, directed MPIC to refrain from awarding stock options to the three (3) CFD, in the course of evaluating MPIC's application for exemption from

1 Republic Act No. 8799 (2000).

Artemio V. Panganiban v. SEC En Banc Case No. 08-11-242 Page 2 of 7 Bration Finance Department of the SEC

reconsider its position of barring independent directors from receiving or accepting stock options under the ESOP, prompting MPIC to cancel the stock option offers.

MPIC; (2) CFD exceeded its authority because there is no statutory or regulatory of its outstanding capital stock; and (3) prohibiting stock option plans to independent alleging and arguing that (1) CFD's denial of the grant of stock options to independent directors deprived appellant of the opportunity to acquire 2,500,000 shares of stock of prohibition against the grant of stock options to independent directors and independent directors are allowed to acquire and own shares in the covered corporations up to 2% independent director and a non-independent director. directors is discriminatory as there is no real and tangible difference.between an Aggrieved, appellant, through a letter-request, sought redress with the CFD

in the Board. Citing Sections 5.1 and 72.1 of the SRC, the CFD invoked the of the grant of stock options to independent directors of MPIC. It maintained its position that the grant of stock options to independent directors would impair the independence of said directors as it would negate the purpose of the law for requiring their inclusion Commission's power to issue rules or set up policies regarding the said matter and to classes of persons. It further emphasized that the prohibition to grant stock options to directors play in guaranteeing the integrity and accountability of public and covered ciassify persons within its jurisdiction and prescribe different requirements for different independent directors is not discriminatory because of the vital role that independent companies. Hence, the instant appeal. The CFD, however, denied appellant's letter-request to reverse the disallowance

disallowing the grant of stock options to independent directors. Appellant's arguments can be summarized as follows: On appeal, appellant asserts that the CFD erred in maintaining its policy of

are bereft of any proscription against offering stock options to independent directors; Rules and Regulations (IRR), SEC Memorandum Circular No. 16-02,3 the Memorandum Circular No. 02-02 and Memorandum Circular No. 06-095 (1) The Corporation Code,2 the SRC and its Amended Implementing

cannot substitute its own judgment for that of the Legislature; supplement laws, and such rules and regulations have the force and effect of law, it cannot exceed or modify the statute it is implementing, thus, it (2) While the Commission can promulgate rules and regulations to

2 Batas Pambansa Bilang 68 (1980). 3 Guidelines on Nomination and Election of Independent Directors. 5 Revised Code of Corporate Governance. 4 Code of Corporate Governance.

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much as 2% of the subscribed capital stock of the covered corporations, which, in listed or public corporations, could constitute a substantial portion in absolute peso terms of their total equity. Compared to the miniscule stock options granted to independent directors, as of 22 August Meralco would be P5.636 billion and 2% of MPIC would be P1.623 billion. Memorandum Circular No. 16-02 and Rule 38.1 (2)(B) of the Amended IRR allow independent directors to acquire, own and hold shares to as 2011, 2% of PLDT would have a market value of.P8.732 billion; 2% of (3) SEC Memorandum Circular No. 06-09, Article 3(D)(2)(iv) of SEC

independent director and a non-independent one that will warrant their exclusion from stock option plans; (4) There is no real and tangible difference between an

swaying the judgment of independent directors because (a) the stock the corporation; (b) said options are part of the compensation of all the work performed by non-independent directors; (c) said option plans will have to be approved by the stockholders and by the Commission; (d) acquire; stock option grantees would be required to pay for the shares they will options being referred to are granted to all directors and senior officers of directors accruing to them as such and are not given as a result of other (5) Stock option grants can hardly be deemed effective' tools for

discriminative against independent directors and will ultimately be a disincentive against serving as independent directors; (6) The "no stock options" policy is too oppressive and

and Hongkong. options is not prohibited in other jurisdictions i.e. New York, Singapore (7) The grant to or acceptance by independent directors of stock

arguments, on the other hand, can be summarized as follows: The CFD filed its Reply Memorandum6 on 15. September 2011. The CFD's

not be compromised; enunciated the policy that independent directors should not be qualified to participate in stock option plans to ensure that their independence would (1) In 2007, the Commission, through SEC Res. No. 452.

enforcement of the SRC, the Commission is left with the task of (2) Being the administrative agency entrusted with the

6 Records, page 58.

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could appear to affect, the independent director's judgment; determining the circumstances or relationship which are likely to affect, or

them for share ownership; should be regarded as a further limitation to the general right granted to (3) Disallowance of stock option grants to independent directors

the protection of investors and the minimization, if not total elimination, of independent directors is consistent with the declared policy of the SRC i.e. fraudulent and manipulative practices; (4) The purpose of prohibiting the grant of stock options to

bringing an objective and detached view to the board room and providing corporation; and (c) they must be independent from management in fact and perception by the public; director and the regular director, viz: (a) independent directors are supposed to be watchdogs of stockholders and of the larger public by an independent check on management; (b) their primary focus is on good governance and not on having pecuniary/ownership interest in the (5) There is substantial distinction between the independent

feel beholden to the management of the corporation if he was granted may be compromised by expectation of economic reward/benefit because it is the Board that initially determines the award of stock option plans and as a result, the independent director would have an attachment or stock options; (6) The independence and objectivity of an independent director

not grant stock options to independent directors. (7) Other countries like Netherlands, France, Brazil and the EEU do

ISSUE

review and reconsider a standing policy. participation of independent directors to stock option or stock ownership plans is proper, and (2) the CFD has sufficient basis in disallowing the grant of stock options to independent directors. In other words, the Commission En Banc is now being asked to The main issue in this case is whether or not (1) the prohibition against the

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RULING

The appeal is meritorious.

Board of covered corporations, viz - Section 38 of the SRC mandates the inclusion of independent directors in the

independent judgment in carrying out the responsibilities of a director. compliance with Section 12 hereof shall have at least two (2) independent directors or such independent directors shall. constitute at least twenty percent of the corporation, its parent or subsidiaries, or any other individuat having a relationship with the corporation, which wouid interfere with the exercise of holders, at least two hundred (200) of which are holding at ieast one hundred (100) shares of a class of its equity securities or which has sold a ciass of equity securities to the public pursuant to an 'effective registration statement in (20%) of the members of such board, whichever is the lesser. For this purpose, an "independent director" shall mean a person other than an officer or empioyee equity securities listed for trading on an Exchange or with assets in excess of Fifty million pesos (P50,000,000.00) and having two hundred (200) or more Section 38. Independent Directors. -- Any corporation with a class of

consequently raise investor confidence, develop the capital market and help sustain high levels of growth in the corporate sector and the economy. corporate governance, protect and safeguard the rights and interest of all investors and Such inclusion is a legislative measure aimed to promote and strengthen

such shares may be lawfully acquired. Specifically, SRC Rule 38(2)(B) allows an independent director to own at most 2% of the shares of the covered corporation and/or its related companies or any of its substantial sharehoiders, but has no express prohibition on the acquisition of shares through stock options by independent directors. Code of Corporate Governance provide limitations on actual and beneficial equity ownership of shares of an independent director but do not clarify under what modes The Commission recognizes that the amended IRR of the SRC and the Revised

shares of an independent director. Thus, by analogy, it would be erroneous to maintain a "no stock option" policy absent any express prohibition in the SRC- and in the IRR, or independence from management of an independent director on relevant facts and circumstances and not solely on their ownership of shares. The Hong Kong Stock Exchange Main Board Listing Rules even provide a similar limitation on ownership of approved by the United States Securities and Exchange Commission and the Hong Kong Stock Exchange Main Board Listing Rules, which do not expressly prohibit the grant of stock options to independent directors. In fact, both rules based the assessment of France are expressly provided for in their laws, rules and regulations. Also worth considering are the Final Corporate Governance Rules of the New York Stock Exchange Furthermore, the "no stock option" policy of other countries like Netherlands and

Artemio V. Panganiban v. Corporation Finance Department of the SEc Page 6 of 7 SEC En Banc Case No. 08-11-242

in any Memorandum Circular/Order issued thereunder prohibiting independent directors from participating in stock option plans of covered corporations.

distinction between a regular and an independent director. orders to. put into effect the intentions of the SRC in requiring the inclusion of independent directors in the Board of covered corporations as there is a substantia! However, the Commission is not precluded from issuing any rules, regulations or

who does not hold any position in the management of the covered corporation or of its related companies or substantial shareholders and one who is free from any business or materially interfere with the exercise of independent judgment. Thus, an independent director is expected to check the management and controlling stocKholders, and to safeguard the interests of all its stockholders by reducing insider control, large shareholder manipulation and managerial opportunism in the form of excessive compensation. other relationship or transaction that could, or could reasonably be perceived to, provide a neutral and non-partisan view in overseeing corporate affairs, and in effect, The SRC and its Amended IRR clearly sets apart an independent director as one

of them wil receive and benefit from, there appears to be no incentive on the part of the independent directors to constrain the Board from taking advantage of such reward as well as such opportunity in choosing a date when the stock price is low. Thus, it is but only necessary to provide restrictions over such grant to ensure the intent of the SRC in requiring the inclusion of such independent directors be realized. determine the: date on which th e stock option plan will be given to independent directors. When the Board of Directors approves the stock option plans from which all may reasonably be perceived to be materially compromised by the very expectation of economic reward and benefit from the grant of stock options and by the opportunity to The impartiality and objectivity expected from an independent director could, or

substantial shareholders to two percent (2%) of the outstanding capital stock. This limitation was intended to safeguard their independence from management and controlling stockholders. Accordingly, the grant of stock options to independent directors should likewise be subject to said ownership limitation such that any award of stock options to the independent director shall not cause his actual and beneficial ownership of shares to exceed 2% of the outstanding capital stock. of Corporate Governance confined the actual and beneficial equity ownership of shares of an independent director in the covered company or any of its related companies or As pointed out by appellant, the Amended IRR of the SRC and the Revised Code

provided that the two percent (2%) ownership limitation under SRC Rule 38(2)(B) is strictly observed. allowed the participation of independent directors in an employee stock option plan, At any rate, the Commission En Banc, in SEC Resolution No. 296, series of 2012,

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of 2012, allowing the participation of independent directors in the executive or in employee or executive stock option plans of covered or related companies, is hereby abandoned. Let the standing policy be that embodied in SEC Resolution No. 296, series Iaw and regulations. No. 452, series of 2007, insofar as it prohibits independent directors from participating employee stock option or stock ownership plans, subject to the limitations imposed by WHEREFORE, premises considered, the appeal is GRANTED. SEC Resolution

SO ORDERED.

City of Mandaluyong, 05 July 2012.

A TERESITA J. HERBOSA Chairperson

MA. JUANITA E. CUETO Commissioner RAUL J. PALABRICA I OISSENT Commissioner

WWM MANUEL HUBERTO B. GAITE Commissioner ELADIO M. JALA. Commissioner