The perennial battle for control of Philippine Airlines is on again with renewed ferocity, and this time the Philippine Securities and Exchange Commission rather than PAL's investors is set to decide the outcome.
This latest row started in February after major shareholder Lucio Tan ousted Carlos Dominguez, PAL's government-appointed chairman. Tan assumed that position himself in a move that infuriated Philippines' President Ramos. Tan and the government have been at odds for two years over tax evasion charges stemming partly from Tan's former ties with Ferdinand Marcos.
Tan moved quickly after taking PAL's reins to call for the airline's recapitalisation. He claimed that increasing capital to almost $200 million - nearly twice the current amount - was essential to help finance new aircraft. The government's shareholders feared Tan would use this as a pretext to increase his holding and dilute theirs: none were inclined to inject more capital into an unprofitable airline, but Tan could advance any or all of the $95.5 million cash call from his own business empire, leaving him in undisputed control.
Until now Tan's position has remained precarious because of PAL's unique equity structure. Tan holds just over a third, but he has a controlling interest - 50.5 per cent - in PR Holdings, which in turn owns 67 per cent of PAL. The government's 46 per cent stake is equally held through PR Holdings and direct PAL shares. Manila might hold the largest single stake, but its interest is divided.
To counter Tan's cash call and threatened dilution, the three agencies controlling the government's stake invoked a resolution that all shareholders in PR Holdings agreed to before PAL's privatisation in 1992. This froze share ownership in PR Holdings for three years and allowed for shares in the holding company to be converted into PAL shares at the end of that period.
Based on current holdings this conversion would boost the government's direct equity in PAL to 46.4 per cent. Since Tan would only own 33 per cent with the balance scattered among small investors, Manila would effectively regain control.
When this three-year freeze expired in late March, matters came to a head. The government agencies requested conversion of their stock but as majority owner of PR Holdings, Tan refused. The agencies then petitioned the Securities and Exchange Commission, which put a block on Tan's attempts to recapitalise PAL while it reviewed whether the 1992 shareholder resolution created an absolute conversion right. At presstime, the decision was still pending.
Tan's camp claims it will prevail, arguing that a shareholder resolution, unlike a pre-incorporation agreement, is not binding. Thus the claim, he is not obliged to honour stock conversion requests.
Manila's efforts to wrestle control of PAL away from Tan could be complicated by the imminent privatisation of Philippine National Bank, one of three agencies with stakes in PR Holdings. The government would lose control of the bank's 4.9 per cent stake in PAL if PNB is allowed to convert its PR Holding shares.
Rescinding PAL's privatisation is not part of Manila's policy. Yet, neither the government nor Tan seem able to agree on the airline's strategic direction. Until someone is able to take commanding control, both sides seem determined to fight on.
Source: Airline Business
