Republika ng Pilipinas

KAGAWARAN NG KATARUNGAN

Department of Justice

Manila

 

OPINION NO. 6, S. 2001

 

 

12 February 2001

 

 

 

Undersecretary Ben-Hur C. Salcedo

Officer-in-Charge

Department of Energy

Energy Centre, Merritt Road

Fort Bonifacio, Taguig

Metro Manila

 

Sir:

 

This has reference to your request for opinion on the validity of the Supplementary Implementing Rules and Regulations (“Supplementary Rules”) of Republic Act No. 8479 (the “Downstream Oil Industry Deregulation Act of 1998”), which the Department of Energy (DOE) intends to issue to amend the provisions of Department Circular No. 98-03-004 (entitled “Rules and Regulations Implementing Republic Act No. 8479”) relative to the requirement of initial public offering (IPO) as provided for in Section 22 of R.A. No. 8479.

 

Section 22 of R.A. No. 8479, which was enacted into law on February 10, 1998, and took effect on February 12, 1998, provides:

 

“SEC. 22.  Initial Public Offering.  – In compliance with the constitutional mandate to encourage private enterprises to broaden their base of ownership and in recognition of the vital role of oil in the national economy, any person engaged in the oil refinery business shall make a public offering through the stock exchange of at least ten percent (10%) of its common stock within a period of three (3%) years from the effectivity of this Act or the commencement of its refinery operations:  Provided, That no single entity shall be allowed to own more than five percent (5%) of the stock offering:  Provided, further, That any crude oil refining company and any stockholder thereof shall not acquire, directly or indirectly, any share of stock offered by any other crude oil refining company pursuant to this Section:  Provided, finally, That any such company which made the requisite public offering before the effectivity of this Act shall be exempted from the requirement.”

 

In implementing this provision, Section 25 of Department (DOE) Circular No. 98-03-004, provides:

 

“SECTION 25.  Initial Public Offering.

 

Any person engaged in the oil refinery business shall make a public offering through the stock exchange of at least ten percent (10%) of its common stock within a period of three (3) years form the effectivity of this Act, or the commencement of its refinery operations, or such other period as may be determined under this IRRProvided, That no single person or entity shall be allowed to own more than five percent (5%) of the stock offering:  Provided, further, That any crude oil refining company and any stockholder holding a substantial interest shall not acquire, directly or indirectly, any share of stock offered by any other crude oil refining company pursuant to Section 22 of the ActProvided, finally, That any such company which made the requisite public offering before the effectivity of this Act shall be exempted from the requirement.”  (Underscored portions are the proposed amendments.)

 

The term “Substantial interest” mentioned in the abovequoted proposed amendment to Section 25 will be defined in the proposed Supplementary Rules, as follows:

 

Substantial interest refers to the ownership of shares of stock of a domestic crude oil corporation or entity, held beneficially, on record, or through any contractual arrangement, that would allow such shareholder to exercise voting power sufficient to elect at least one member of the board of directors of such domestic crude oil corporation or entity, and/or the occupation of any senior officer position in a domestic crude oil refining company, giving such person significant decision-making power in that company.”

 

The proposed Supplementary Rules contain other provisions relevant to the conduct and procedure of the IPO, and on which we express no comment since they involve technical or procedural matters that are best addressed by DOE.

 

 

According to the DOE, the deadline fixed in Section 22 of R.A. No. 8479 and in Section 25 of the IRR (Department Circular No. 98-03-004) is about to expire.  Due to the prevailing economic conditions, the necessity of a deferment of the public offering has been requested.  Responding to this, DOE proposes to provide supplementary implementing guidelines on deferment mechanism and cross ownership for the guidance of DOE and other concerned regulatory agencies.

 

In support of its proposal, DOE advances the view that the three-year period fixed in Section 22 of R.A. No. 8479 should not be considered mandatory but only directory in the light of the constitutional mandate to encourage investors, on the one hand, and the private enterprises to broaden their base of ownership, on the other hand.  It is stated that based on prevailing economic conditions, it is expected that a public offering at this time may well fall short of the norms of a successful offering both in terms of pricing and distribution.  Considering that the domestic market has significantly underperformed as against other markets in the region, there is a real and imminent risk that an offering of an oil refining company’s common stock will be less than warmly received.  This may contribute to the further erosion of the public confidence in the stock market and the prospects of our economic recovery.

 

Regarding the proposal to limit the prohibition on stock acquisition only to those stockholders owning a “substantial interest” in an oil company, DOE believes that the ownership provision should properly apply only to those prerogatives in oil refining companies where they hold a substantial investment; otherwise, it will result in absurd consequences.

 

According to DOE, applying the provisions of Section 22 strictly and literally would mean (i) that no single person or entity would be allowed to purchase shares of stock of an oil refining company that would represent more than one half of one percent (0.05%) of its common stock, assuming a total offering of ten percent (10%); and (ii) any existing stockholder, regardless of amount of stockholding, of any domestic oil refining entity would be disqualified from participating in the public offering of any other oil refining company.  For example, a person that owns one share in Petron, which has already complied with Section 22, may not purchase a single share in the public offering of the other oil refining companies such as Caltex or Pilipinas Shell.  Such a literal interpretation would work to the undue disadvantage of the average investor who would be prohibited from participating in a public offering of an oil refining company by the sole reason of his minority shareholdings in another domestic oil refining company.

 

As we see it, this Department is being requested to rule on the validity of the proposed Supplementary Rules which would in effect:  (1) extend the three-year period fixed in R.A. No. 8479 for the IPO requirement on oil companies; and (2) apply the prohibition on acquisition of stocks to those having a “substantial interest” in an existing oil company.

 

Section 22 of R.A. No. 8479 provides that “any person or entity engaged in the oil refinery business shall make a public offering through the stock exchange of at least ten percent (10%) of its common stock within a period of three (3) years from the effectivity of this Act or the commencement of its refinery operations x x x”.  At the same time, Section 22 prohibits any “crude oil refining company and any stockholder thereof” from acquiring, “directly or indirectly, any share of stock offered by any crude oil refining company” pursuant to said provision.

 

Two issues are thereby raised for this Department’s resolution:

 

(1)      whether or not the period fixed in Section 22 of R.A. No. 8479 is mandatory, and, therefore, oil companies existing on the date of effectivity of this Act, must make a public offering of their shares within three (3) years from its effectivity, or only directory, such that the IPO may be allowed even after such three-year period under terms and conditions to be determined by DOE; and

 

(2)      whether or not the prohibition on acquisition of shares should be restrictively construed so as not to inhibit any shareholder of any existing oil company from acquiring shares in another oil company, or liberally interpreted as to allow a stockholder who does not own a “substantial interest” in any oil company, to acquire shares of stocks of another oil company.

 

Regarding the first issue, it is helpful to cite certain rules on the interpretations of time in a statute.

 

It has been held true that where the statute “directs the doing of a thing in a certain time, without any negative words restricting the doing of it afterwards, the provision as to time is generally directory, and not a limitation of authority; and in such case, where no injury appears to have resulted and the fact that the act was performed after the time limited will not render it invalid (Phil. Ass’n. of Free Labor Unions vs. Sec. of Labor, 27 SCRA 40; Borkan vs. Beasley, 75 S.E. 341).

 

It is also settled that where the time or manner of performing action directed by the statute is not essential to the purpose of the statute, provisions in regard to time or method of performance are generally interpreted as directory only.  If the act is performed but not in the precise time or manner directed by the statute, the provision will not be considered mandatory if the purpose of the statute has been substantially complied with and no substantial rights have been jeopardized (Sutherland, Statutory Construction, Vol. 2, pp. 216-217).

 

Examining Section 22, it will readily appear that the three-year period fixed therein does not import mandatoriness but should be regarded as directory only.  There is no sanction provided in the law for non-compliance with the IPO requirement within the period fixed in Section 22.  No substantial prejudice to the rights of third persons may be perceived either for failure to conduct the IPO within the said period.  To interpret the period as mandatory would mean that after it has lapsed, oil companies may no longer conduct an IPO, and this is obviously not what the law envisions to happen.  The intention of the law is “to broaden the base of ownership” of oil companies, and this intention or purpose of the law will definitely be served by construing the three-year period liberally.

 

It is our considered view, therefore, that the time provision of Section 22 is only directory or permissive and will not prohibit an IPO to be conducted after the lapse of said period.  The important thing is that the purpose of the law – which is to broaden the base of ownership of oil companies is achieved, and as to when it shall be accomplished, may, we believe, be the subject of reasonable regulation by the DOE.

 

Anent the second issue, it is our opinion that the prohibition on stock acquisition should likewise be interpreted in the light of the intention of the provision which is the dispersal of the ownership base of oil companies, and the interpretation should be consistent with the property rights of persons.  “An interpretation which preserves rights or benefits enjoyed under common law is favored where the result avoids absurdity, retroactivity, unconstitutionality, is in keeping with good policy, is consistent with what is otherwise indicated to be the purpose of legislation or is evident from a consideration of the statute read as a whole and in conjunction with other related statutes (Sutehrland, Statutory Construction, 4th Ed., Vol. 3, p. 46).

 

In its proposed Supplementary Rules, the DOE would apply the prohibition on acquisition of shares only to a stockholder with a “substantial interest” in an existing oil company.  Thus, any stockholder with less than “substantial interest” would not be prohibited to acquire a share or shares in another oil company.

 

“Substantial interest” is defined in the proposed Supplementary Rules as transferring to ownership of shares in an oil company sufficient to enable the owner thereof to elect at least one member of the board of directors, or occupation of a senior officer position in such company.

 

We agree with DOE’s view that applying the prohibition in Section 22 strictly and literally would mean disqualifying any existing stockholder, regardless of amount of stockholding, of any oil company from participating in the public offering of another oil company from participating in the public offering of any other oil refining company.  Such a literal interpretation would work to the undue advantage of the average investor who would be prohibited from participating in a public offering of an oil refining company by the sole reason of his minority shareholdings in another oil refining company.  The constitutional mandate of broadening the ownership of public enterprises will clearly be violated in this case.  It will also be violative of one’s right to property since the prohibited stockholder would be deprived of the right to invest his funds in any profitable venture as he sees fit.

 

It is the rule that administrative interpretation should give the statute a reasonable or liberal construction which will best effect its purpose rather than one which will defeat it (82 C.J.S., p. 593) even though such construction is not within the strict literal interpretation of the statute (In re Marshall, 69 A 2d, p. 619), cited in Martin, G. R., Statutory Construction, Revised Ed., p. 67).  Decisions have frequently enunciated the principle that the intent of the legislature will govern (U.S. vs. Corbel, 215 U.S. 233).  It is to be noted that a strict construction should not be permitted to defeat the policy and purposes of the statute” (Ash Sheep Co. vs. U.S., 252 U.S. 159).  The court may consider the spirit and reason of the statute, as in this particular instance, where a literal meaning would defeat the clear purpose of the law makers (Crawford, Interpretation of Laws, Sec. 78, p. 294, cited in People vs. Manantan, supra, p. 665).

 

Given the foregoing discussion, we believe that the prohibition in Section 22 of R.A. No. 8479 should refer to stockholders with a “substantial interest” in a crude oil refining company.  “Substantial interest” should refer to ownership or control, whether direct or indirect, of shares of stock, in such oil company sufficient to elect a director in said oil company.

 

In this connection, in the absence of any strong legal reason for disqualifying a person who occupies a “senior officer position” in an oil company, and in the absence of a clearer definition of what “senior officer position” means, we are not persuaded to agree that “substantial interest” should also refer to “occupation of any senior officer position” in an oil company.

 

Wherefore, the issues herein raised are hereby answered accordingly.

 

Very truly yours,

 

 

 

HERNANDO B. PEREZ

Acting Secretary

 

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