NOTE: This was a story I wrote a year as part of my coverage of the Lopez family’s battle against a hostile Arroyo government in 2008. The family business was under attack due to the conglomerate’s media arm ABS-CBN’s news coverage that was critical of the then Arroyo government. This story is a post-mortem of the tumultuous annual stockholders meeting, which starts the Lopezes’ war for control of their ‘crown jewel.’ Not long after, the Lopezes will give up Meralco for their other battles. 
This was published on April 29, 2008 on the news sites of ABS-CBN and Newsbreak, but the links are both dead now. There have been many changes and challenges within the Lopez family itself, as well as in the boardrooms of the companies they run. I hope that sharing this piece of history provides context to the never-ending evolution of the Lopez family.

Meralco’s annual stockholders meeting Tuesday was a classic lesson on how to win a corporate war.

With the Lopez family keeping their grip on Meralco’s board by clinching more seats in the 11-man board than the government, what was displayed was the importance of being the incumbent.

The Lopez family always had control of the company’s board, except for the years that former president Ferdinand Marcos wrestled it away from them during the Martial Law years. Even when they only had less than 20 percent direct stake in the company, the Lopezes still controlled the board through proxies, which authorized them to populate the board with their nominees.

When that grip was threatened Tuesday, with Winston Garcia, president of another major stockholder, Government Service Insurance System (GSIS), stepping up his public pressure, financial muscle, and legal remedies to vote more government representatives
in the board, the Lopez family did not buckle down.

After all, it is easier to keep their control of the board now and face the legal battles afterwards, than relinquish it to a foe then reclaim it later on. Unless court decisions are fast tracked, a corporate law expert told abs-cbnnews.com/Newsbreak that legal proceedings can drag for about a year,

By then, board members, including those representing the disputed proxies, would have served their term already. Whoever has control of the board also has control of the company’s resources to fight the court cases against the other.

In other words, one might win the legal battle but lose the corporate war.

It was evident that the Lopezes would rather win the corporate war when, midway into the 12-hour long stockholders’ meeting—the longest in the Philippine corporate history—acting corporate secretary, Anthony Rosete, declared a Securities and Exchange Commission (SEC) order as null and void so the meeting could push through.

Rosete’s decision had the blessings of the majority of the board, which, at that time, was still had the Lopezes’ firm grip. According to Monico Jacob, Meralco regulatory management head, before Rosete read out the decision to nullify the SEC order, the board deliberated on it first. The three government nominees on the board who objected to the order were overwhelmingly outvoted by the nine votes for the Lopezes.

Being outvoted for not having enough seats on the board was a scenario that Garcia was trying to prevent during and in the run up to the May 27 stockholders meeting. If he does not have enough votes in the board, his stand on future issues and contentious decisions the Meralco management would be taking will most likely be set aside.

Previous efforts since April to mediate between the two parties only resolved minor issues but did not address crucial details that cropped up a week before the My 27 meeting, such as how the proxies would be solicited, validated, and canvassed.

Even last minute efforts on the eve of the stockholders meeting to stave off a public fight in full view of thousands of shareholders, Meralco employees, media and spectators in the packed Meralco Theater did not bear any fruit. Both camps stood their ground. They were both dead set to fight for board control.

Legal battle

Garcia fought a well thought of legal battle.

After the May 26 board meeting, when Garcia realized that despite his complaints, the Lopezes would not budge on the validation of the proxies, which would decide who will have board control. He then resorted to legal means.

Garcia, who has been on other boardroom rows before, filed Monday at least two cases in different lower courts –in Pasay and Pasig cities—reportedly as decoy to the Meralco lawyers. Usually, shareholders run to the regular courts to seek legal intervention on a board dispute.

The cases were eventually withdrawn as Garcia’s lawyers were apparently working on their cease and desist petition at the SEC.

Thus, the Lopezes were caught unaware of the SEC surprise during the stockholders meeting itself. “We only knew about it [the same time] just like everyone else,” said Christian Monsod, Lopez nominee in the Meralco board.

The SEC order was sort of Garcia’s way to checkmate the Lopezes.

There was already a quorum. About 86 percent of thousands of shareholders were represented either by being present or through their proxies. Thus, the meeting had to proceed with the Lopezes having no time to go to the courts to block the SEC order.

Protect Investor Rights

Early into the stockholders meeting Tuesday, SEC director for Compliance and Enforcement Department, Hubert Guevara, took the floor and informed the attendees about the commission’s Cease and Desist Order on the conduct of the meeting and the election of the board of directors. The order also directed Guevara to supervise the canvassing of the votes for board directors, including those cast in 4,433 proxies, of which 99.7 percent or 4,418 proxy forms were disputed. GSIS lawyers challenged most of them citing the questionable process by which management solicited the proxies.

(Proxy givers should be stockholders of Meralco as of March 17, 2008, have properly signed the forms, and in cases of those provided by corporations, a board resolution should have been attached.)

The Order favored Garcia who, since last week, has been publicly complaining about the process and transparency of the validation process. Garcia claimed the Lopezes were manipulating the proxy validation process since assistant corporate secretary Anthony Rosete, a long-time Meralco employee, was in-charge. Garcia said, “How can Rosete be expected to be impartial when he is obviously an ally of the Lopezes?” (Read how Rosetebecame responsible for the proxy validation process here)

When the Meralco board, through Rosete, defied the SEC Order, the crucial item in the 10 reasons they cited was that SEC has no jurisdiction already over intra-corporate disputes.

Jacob, who was once an SEC chairman explained in a press conference why: “When I was in the SEC, the jurisdiction to handle corporate disputes was already transferred to the regular courts. Corporate disputes include fights for board control.

SEC’s Order, however, cited the Securities Regulation Code, which empowers them to protect investors’ rights. The Order read, “In support of the its prayer for the issuance of a provisional remedy, petitioner (GSIS) alleges that….the right of the investing public…to an honest and fair election of Meralco’s Board of Directors will be trampled upon.”

It said GSIS is a major shareholder of Meralco and it has a valid complaint on the process of how the proxy validation went.

Therefore, expect that the legal battle after the Tuesday board meeting will be on this question: Was the battle about protecting the right of investors or board control?

No majority shareholder

Intervention of a court or a quasi-judicial body in a corporate dispute is not unusual. But very few make it to the public view. Meralco’s is imbued with public interest since its franchise is Metro Manila and nearby areas. Its electricity rates have impact on the
coutnry’s economic measures, including inflation.

Preceding the SEC’s Order for the Meralco board was the 2006 Supreme Court order for addressed to the board of Equitable-PCI Bank (now Banco de Oro), which also had warring stakeholders.

The SC’s temporary restraining order then was to allow a minority shareholder, Trans-Middle East’s Martin Romualdez, to vote his share.

But the difference between the boardroom row of Equitable-PCI Bank and Meralco was that the former had a clear majority. Romualdez was the swing vote.

In the case of Meralco, there is no clear majority. The Lopezes have 33.4 percent, GSIS and other government entities have 35.2.

Thus, proxies for the remaining 31.4 percent would determined which camp would control the board.

In the 11-man board, the Lopezes already had five nominees, the government had four, while two slots were reserved for independent directors, as required by the SEC’s Corporation Code.

In a close 5-4 fight, the proxies determine which camp will have the fifth slot.

Garcia was hoping to have the fifth slot to effect changes, such as the removal of current chief executive officer Manuel Lopez, president Jesus Francisco, and treasurer Rafael Andrada.

But since the disputed proxies vote-all proxies from financial institutions Hongkong and Shanghai Bank, Citibank, and Standard Chartered Bank, which accounted for about 900 million votes or majority of the 4,400 disputed proxies, were counted, the Lopezes kept their fifth slot and their management.

Right after the results of the voting was announced late Tuesday night, the newly elected directors had an organizational meeting where they re-affirmed the current management line-up. Thus, Lopez, Francisco, and Andrada are staying on.

Quorum and voting

Votes were added cumulatively. One share was equivalent to votes for any or all of the 14 nominees to the 11-man board. The Lopezes and the government each had six board nominees.

In the run up to the May 27 meeting, both the Lopezes and GSIS actively campaigned for proxies, especially from the financial institutions, which hold blocs of Meralco’s publicly listed shares.

In the end, three of the financial institutions acting as custodian for several investors—Hongkong and Shanghai Banking Corp, Citibank, and Standard Chartered bank—played it safe. Their proxies listed all 14 nominees so it appeared that they neither sided with the Lopezes nor with cash-rich GSIS, which is a major client in the capital markets.

During the seven-hour canvassing of the votes, those from the financial institutions were disregarded since their vote-all instructions had a neutral effect: Nobody among the nominees would move up or down because of these institutions’ proxy votes.

However, the role of these proxies—from the financial institutions and those which favored the Lopez nominees—was important in determining if, in the first place, there was indeed a quorum, which means the stockholders meeting had to push through.

One of the instructions in the SEC Order was to disregard the proxies in favor of the Lopez nominees in the board. If the Lopezes heeded it, there would still have been a quorum, but with the government and GSIS effectively getting the upperhand.

The Lopezes only has a direct stake in Meralco through First Philippine Holdings Corp. of 33.4 percent. GSIS, on the other hand, could have go on to count the proxies favorable to them, added it to their and the other government entities’ 35.2 percent direct stake, and snatched the power to control the board of the biggest power distributor in the country from the Lopezes.

At the end of the day, for defying the SEC Order, the Lopez family, garnered roughly 50.6 percent votes from shareholders’ direct stake and proxies out of the 86 percent shares represented during the stockholder meeting.

Therefore, the Lopez family won round one of the Meralco boardroom battle.

They still have to contend with Garcia being one of the voted directors though.

Lower electricity rates

Since the start of the boardroom row, Garcia said he has come out in public about his complaints against the Meralco board and management members because of two causes: to reduce electricity rates and ensure transparency in the power companies’ transactions,
especially those with other Lopez-controlled companies.

In an environment of rising oil and food prices, not to mention record-high inflation rates, these would normally be attractive public interest issues. In fact, the boardroom row has stirred spirited public debates on why electricity rates in the Philippines is the second highest in Asia, next to Japan.

But in the end, the fate of the Lopezes and Garcia in Meralco rested in the hands of the company’s shareholders, not the general public.

And in round one of the Meralco boardroom battle, the Lopez family won it.

They still have to contend with Garcia, though, who was one of the voted directors. After all, Garcia, as described by others, is a “one man wrecking crew.”