Republic of the Philippines OFFICE OF THE OMBUDSMAN Ombudsman Building Agham Road, North Triangle Diliman, Quezon City

1101

COMPLAINT-AFFIDAVIT
Re: Investigation to Determine Possible Violations of R.A. Nos. 3019, 6713, 7080, and other pertinent laws arising from or relating to the conversion of the 24% San Miguel Corporation shares from Common shares to Preferred shares, which conversion prejudiced the Philippine government and the country’s coconut farmers in the amount of at least PhP16 BILLION PESOS We, the undersigned coconut farmers and concerned citizens, on our own behalf and in behalf of our farmer-brethren who have been gravely prejudiced by the conversion of the 24% San Miguel Corporation shares (hereinafter “CONVERTED SHARES”) subject of the Supreme Court’s decision in G.R. Nos. 177857-58 and 178193 dated 24 January 2012 and affirmed in the Supreme Court’s Resolution dated 4 September 2012, most respectfully aver:

THE RECENT INCIDENTS:
THE PRESENT PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT’S (PCGG’s) OBSERVATIONS THAT THE CONVERSION RESULTED IN A DIFFERENCE OF 16 BILLION PESOS AND THE PCGG’s “PRELIMINARY REPORT FOR THE TRUTH COMMISSION” THAT OBSERVED THE CONVERSION TO BE A QUESTIONABLE DECISION/AGREEMENT 1. On 5 October 2012, San Miguel Corporation exercised its option to redeem 753,848,312 Series 1 Preferred Shares at the price of PhP75 per share or approximately PhP56.5 billion. 2. On the evening of 5 October 2012, PCGG Chairman Andres D. Bautista was interviewed via phone patch on ABS-CBN News Channel. In the following excerpt from the interview,1 the program host, Mr. Warren De Guzman propounded the following question to PCGG Chairman Andres D. Bautista: “We know there's a lot of controversy surrounding these preferred shares back in 2009. There was controversy about whether or not it should have been transformed from voting Common shares to Preferred shares… Was there a misstep by government in this decision? Could government have gotten more out of this situation?” In response, Chairman Bautista stated that: “Well, Warren, if you do a quick mathematical computation, if you sell the shares now at the price of 110 pesos, you would recover, in our estimate, about 86 billion pesos. But as I've said, if you look at the computation of what we received including                                                                                                                
1

https://www.youtube.com/watch?feature=player_embedded&v=nZ53ska1Evg#!

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all the dividends of the preferred shares is about 70 billion pesos. So, there's a difference of 16 billion pesos.” By way of follow-up, Mr. De Guzman asked, “So, you're saying that this could have been handled better by government.” To which question, Chairman Bautista said, “Well, in hindsight, yes. But you know, to be fair though, the question is if we did not convert, would the prices have gone up? And that is where you can say that hindsight is 20/20. We really don't know. But if you just do the quick math, there seems to be a difference of 16 billion pesos.” 3. The foregoing statements echo the PCGG Chairman’s observations that were widely reported in various newspapers, among which is an online news report (dated 11 March 2011) entitled, “PCGG wants to undo conversion of 24% government stake in SMC.”2 (herein attached as Annex “A”) The report stated that: The Presidential Commission on Good Government (PCGG) is currently looking for legal remedies to undo the grossly disadvantageous conversion of the government’s 24 percent stake in San Miguel Corp. (SMC) from common to nonvoting preferred shares in 2009 during the time of chairman Camilo Sabio. Andres Bautista, PCGG chairman, said they are studying the matter. An audit of all past transactions and deals entered into during the Sabio Commission by the Bautista-led PCGG had identified the conversion of the government’s SMC shares as one of the biggest, multi-billion anomalous transactions that transpired during their predecessors’ administration. Bautista said the primary issue with the conversion was the lock-in price of its SMC preferred shares Series 1, which it can now only sell at the price of P75. The government is estimated to have lost billions from the conversion, especially in view of the recent upsurge in the share price of SMC, which has been pursing an aggressive diversification move under its president and chief operating officer Ramon Ang. Ang is the right hand man of SMC chairman and chief executive officer Eduardo Cojuangco Jr.                                                                                                                
2

http://www.philstar.com/Article.aspx?articleId=665050&publicationSubCategoryId=63

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xxx At the P159.50 share price of the SMC common shares, the government would reap a windfall of more than P120.23 billion if sold at the price. With the conversion of the SMC shares into preferred shares, the SMC can redeem the shares at P75 any time it wants, with holders of the preferred shares getting only an assured eight percent dividends in exchange for converting their shares. At the lock-in price of P75, the government only stands to earn P56.53 billion from the 24 percent SMC shareholding. In an audit report conducted by the Bautista-led PCGG, the SMC stake conversion was found to be a “mistaken” move, especially in light of the recent upsurge in the stock price of SMC shares. “The determination that the conversion was advantageous to the National Government on a purely financial standpoint has, in the light of subsequent events, proven to be mistaken,” the audit report said. xxx [Emphasis added.] 4. The above-referenced “matter” supposedly then being studied by the PCGG is documented in Annex “E” of its “100 Day Report and Plan of Action,”3 entitled Preliminary Report for the Truth Commission (hereinafter, “Preliminary Report” and herein attached as Annex “B"), pages 12-13 of which Preliminary Report identifies the “Conversion of SMC common shares into SMC series 1 preferred shares” as a “questionable decision/agreement,” that is, one which was “made with the color of authority and apparent due diligence but which may be disadvantageous to the government. Closer scrutiny and more in-depth investigation may be in order.”4 5. In its Preliminary Report, the PCGG observed that: “The determination that the conversion was advantageous to the National Government on a purely financial standpoint has, in the light of subsequent events, proven to be mistaken. The SMC offer for conversion which was taken up in this case provided that “the SMC Common Shares shall be converted at an exchange ratio of one SMC Series 1 Preferred Share for every one SMC Common Share tendered; [e]ach SMC Series 1 Preferred Share shall have a par value of P5 per share and an Issue Price of P75 per share. The average market value prevailing at that time was approximately P66 per share. As of 30 November 2010, the value of said common share is pegged at P120. xxx” [Emphasis added.]                                                                                                                
3 4

http://pcgg.gov.ph/updates/100-day-report-and-plan-of-action/ See p. 11 of the Preliminary Report.

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THE FACTUAL ANTECEDENTS:
THE CIRCUMSTANCES CONCERNING THE CONVERTED SHARES THAT LAY THE BASIS FOR VIOLATIONS OF R.A. NOS. 3019, 6713, AND 7080, AMONG OTHERS 6. In the interest of supplementing5 the foregoing “study” made by PCGG in its Preliminary Report, the complainants state that: a. On 21 May 2009, the Board of Directors of San Miguel Corporation (SMC) approved to present to its Common stockholders an offer to exchange their Common shares to a new class of shares to be denominated as Series “1” Preferred shares; b. On 22 June 2009, the conversion of CIIF-block was initiated by the Board of Directors of Philippine Coconut Producers Federation, Inc. (COCOFED) through Resolution No. 1-2009-E, approving the filing of an Urgent Motion to Approve the Proposed Conversion of the SMC Common shares into Series “1” Preferred shares; c. Soon thereafter, COCOFED filed with the Supreme Court its “Urgent Motion to Approve the Conversion of the SMC Common Shares into SMC Series ‘1’ Preferred shares” dated 24 July 2009; d. Purportedly responding to the letter of Atty. Maria Luisa M. Narvadez (Division Chief, PCGG Legal Department), then Solicitor General Agnes VST Devanadera wrote to PCGG Chairman Camilo A. Sabio, in a letter dated 30 July 2009 (herein attached as Annex “C”), to inform the latter “that the immediate concern of the Republic is the preservation of the value of the CIIF SMC shares.” (“Parenthetically,” Solicitor General Devanadera added as though it were purely coincidental that, “on July 24, 2009, [her Office] received a copy of COCOFED, et al’s Urgent Motion To Approve the Conversion of the SMC Common Share Into SMC Series 1 Preferred Shares xxx.”) In her letter, Solicitor General Devanadera opined that, “if the registered owners of the shares and the PCGG, on behalf of the Government, which are the parties-in-interests in the pending sequestration case, signify their approval to/acceptance of the proposed conversion, then the fear that the sequestered property will not be returned in the same condition to the rightful owner, is eliminated because all the parties would have given their conformity to the conversion/redemption. Thus, it is the PCGG that should approve or reject the conversion of the SMC shares. Should PCGG give its prior acceptance and approval in accordance with its procedures and mandate, there should be no legal impediment to the eventual redemption of the SMC Series 1 preferred shares, should the right to redeem be exercised by the SMC.”                                                                                                                
5

These facts are set forth in the Supreme Court’s 19 September 2009 Resolution in G.R. Nos. 177857-58 and 178193. See http://sc.judiciary.gov.ph/jurisprudence/2009/september2009/177857-58.htm

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e. In its Resolution No. 2009-037-756 (hereinafter, “PCGG Resolution” and herein attached as Annex “D”) dated 2 September 2009, the PCGG noted that “the Department of Finance through Secretary Margarito B. Teves, upon the recommendation of the Development Bank of the Philippines, confirms that the SMC shares conversion is financially and economically advantageous and that the same shall work for the best interest of the farmers who are the ultimate and beneficial owners of said shares”—which DOF “confirmation” is dated 8 September 2009 and stamped by the Office of Chairman Camilo L. Sabio as having been received on 9 September 2009 (herein attached as Annex “E”). Remarkably, and in defiance of the laws of time and physics, the PCGG Resolution of 2 September 2009 made reference to the Department of Finance letter that was dated 8 September 2009—one which it had not officially received until ONE WEEK LATER on 9 September 2009! The said PCGG Resolution, likewise, had intimate knowledge of the “Strictly Confidential” communication from Mr. Reynaldo G. David, then Chief Executive Officer and President of the Development Bank of the Philippines dated 4 September 2009—dated TWO DAYS AFTER the PCGG Resolution of 2 September 2009. f. The prescient PCGG Resolution resolved to approve “the conversion of the CIIF owned common shares, as well as the PCGG ITF-CARP common shares, including the qualifying shares issued to PCGG/government nominee-directors in San Miguel Corporation (SMC), to Series “1” Preferred Shares, PURSUANT to the confirmation of the Department of Finance (DOF) and legal opinion of the Office of the Solicitor General (OSG), and SUBJECT to the conditions set forth in the said OSG opinion” and requested “the OSG to seek the approval of the Honorable Supreme Court for the said proposed conversion.” g. In its Resolution dated 17 September 2009, the Supreme Court, speaking through Justice Presbitero J. Velasco, Jr., “after a circumspect evaluation of the incident at bar,” resolved to approve the conversion, “taking into account certain circumstances and hard economic realities.” Looking with approval and much deference to the PCGG’s decision, the Supreme Court reiterated that: Lest it be overlooked, the decision on whether to proceed with the conversion or defer action thereon until final adjudication of the issue of ownership over the sequestered shares properly pertains to the executive branch, represented by the PCGG. Just as it cannot look into the wisdom behind the enactment of a law, the Court cannot question the wisdom and reasons behind the decision of the executive branch to ask for the conversion of the common shares to preferred shares. Else, the Court would be trenching on the well-settled doctrine of separation of powers. The cardinal postulate explains that the three branches must discharge their respective functions within the limits of authority conferred by the Constitution. Under the principle of separation of powers,

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neither Congress, the President, nor the Judiciary may encroach on fields allocated to the other branches of government. The legislature is generally limited to the enactment of laws, the executive to the enforcement of laws, and the judiciary to their interpretation and application to cases and controversies. Jurisprudence is well-established that the courts cannot intervene or interfere with executive or legislative discretion exercised within constitutional limits. xxx Corollary to the principle of separation of powers is the doctrine of primary jurisdiction that the courts will DEFER to the decisions of the administrative offices and agencies by reason of their expertise and experience in the matters assigned to them. Administrative decisions on matters within the jurisdiction of administrative bodies are to be respected and can only be set aside on proof of grave abuse of discretion, fraud, or error of law. The only instance when the Courts ought to interfere is when a department or an agency has acted with grave abuse of discretion or violated a law. A circumspect review of the pleadings and evidence extant on record shows that the PCGG approved the conversion only after it conducted an in-depth inquiry, thorough study, and judicious evaluation of the pros and cons of the proposed conversion. PCGG took into consideration the following: (1) Resolution of the UCPB Board of Directors approved during its July 20, 2009 special meeting, where it categorically decided and concluded that it is financially beneficial to convert the CIIF SMC shares as offered by the SMC. (2) Resolution No. 365-2009 of the UCPB Board of Directors issued on August 28, 2009 reiterating its position that the proposed conversion is financially beneficial, thus:
WHEREAS, in its regular meeting on June 26, 2009, the UCPB Board of Directors instructed the UCPB-TBG to undertake a study on the financial and economic viability of the proposed SMC share conversion; WHEREAS, the UCPB Board of Directors in a special meeting on July 16, 2009 noted and referred to the PCGG and CIIF 14 Holding Companies for appropriate action UCPB-TBG’s study on the financial and economic viability of the proposed SMC share conversion, which states that, “x x x it would be more advantageous to convert the CIIF’s SMC common shares to the proposed SMC Series “1” Preferred Shares.”; WHEREAS, during a special meeting on July 20, 2009 among the UCPB committee, PCGG and CIIF 14 Holding Companies, UCPB-TBG’s study on the financial and economic viability of the proposed SMC share conversion was affirmed and endorsed to the PCGG and CIIF 14 Holding Companies for appropriate action;

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WHEREAS, apart from the legal issues surrounding the CIIF SMC shares and considering the immediate concern to preserve the value of the said shares, taking into account the current global financial crisis and its effects on the Philippine financial situation, and as recommended by the UCPB-TBG, the proposed SMC share conversion is financially and economically advantageous; WHEREAS, in addition, given the dynamic market environment, when the shares are converted, the shareholders will no longer gain from any profits or suffer from any losses resulting from the change in business strategy of SMC, or from any change in the economic situation or market developments; BE IT RESOLVED, That, based on the facts and circumstances prevailing as of even date and the results of the study conducted by the UCPB-TBG, UCPB, as the administrator of the CIIF and in compliance with its mandate under PD 1468, concluded that it is financially beneficial to convert the CIIF SMC shares as offered by the San Miguel Corporation. (Emphasis supplied.)

(3) The Department of Finance, through Secretary Margarito B. Teves, upon the recommendation of the Development Bank of the Philippines, confirmed that the CIIF SMC shares conversion is financially and economically advantageous and that it shall work for the best interest of the farmers who are the ultimate and beneficial owners of said shares. (4) The letter of the OSG dated July 30, 2009 opined that the proposed conversion is legally allowable as long as PCGG approval is obtained, thus:
Parenthetically, x x x our Office received a copy of COCOFED, et al.’s Urgent Motion To Approve the Conversion of the SMC Common Share Into SMC Series 1 Preferred Shares dated July 24, 2009. Attached therewith is the SMC Notice of Regular Meeting and Information Statement dated July 23, 2009 which discusses and compares the common shares and Series 1 preferred shares. As can be gleaned from the x x x Information Statement dated July 23, 2009, the advantages of conversion of the common shares to Series 1 preferred shares are as follows: 1. The Series 1 preferred shares shall be entitled to receive cash dividends upon declaration made at the sole option of the Board of Directors, fixed at 8% per annum as determined by Management. On the other hand, there is no fixed dividend rate for common shares. Further, no dividend shall be declared and paid to holders of common shares unless cash dividends shall have been

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declared and paid to all holders of the Series 1 preferred shares. Moreover, the Series 1 preferred shares are cumulative, which means that should dividend payments get delayed, it would eventually be paid in the future. This feature is not available for common shareholders. 2. The Series 1 preferred shares are redeemable in whole or in part, at the sole option of the Company (SMC), at the end of three (3) years from the Issue Date or on any Dividend Payment Date thereafter, at the price equal to the Issue Price plus any accumulated unpaid cash dividends. Series 1 preferred shares are also perpetual or have no stated maturity. 3. Should SMC decide not to redeem the Series 1 preferred shares at the end of the fifth year from Issue Date, the Dividend Rate will be adjusted to the higher of 8% per annum, and the prevailing 10-year Philippine Dealing System Treasury Fixing (PDST-F) Rate plus a spread of up to 300 basis points. This is an advantage because there is the opportunity for the Series 1 Preferred Shareholders to enjoy a higher dividend rate. 4. The Series 1 preferred preference over common liquidation. shares shares have upon

5. The Series 1 preferred shares shall be listed with the Philippine Stock Exchange within one year from issue date which should provide liquidity to the issue. On the other hand, the disadvantages to the conversion are as follows: 1. Holders of Series 1 preferred shares will have no voting rights except as provided by law. Thus, the PCGG’s representatives in the SMC Board will have been effectively removed from participating in the management of the SMC. 2. Series 1 preferred shares have no maturing date as these are perpetual shares. There is no definite assurance that the SMC will exercise its option of redemption. 3. Holders of the Series 1 preferred shares shall not be entitled to any participation or share in the retained earnings remaining after dividend payment shall have been made on Series 1 preferred shares.

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4. There is no expiry date on the SMC’s option to redeem the Series 1 Preferred Shares. Should market interest rates fall below the Dividend Rate, on or after the 3rd anniversary from Issue Date, the SMC may exercise the option to redeem the Series 1 Preferred Shares. It is also our considered view that the conversion of the CIIF SMC common shares to SMC Series 1 preferred shares does not take them away from the jurisdiction of the courts. In conversion, the SMC common shares are merely reclassified into SMC Series 1 preferred shares without changing the proportional interest of the stockholder in San Miguel Corporation. Verily, the conversion of the SMC common shares to SMC Series 1 preferred shares does not involve a change in the condition of said shares. The conversion of the SMC common shares to SMC Series 1 preferred shares and its eventual redemption is legally allowable as long as the approval of the PCGG is obtained for the amendment of the Articles of Incorporation of SMC, to allow the creation of the proposed preferred share with its various features. As long as the PCGG approval is obtained, the exercise of the redemption feature of the SMC in accordance with the Amended Articles of Incorporation would not constitute a “sale” of the sequestered asset that is prohibited.

Hence, on September 2, 2009, the PCGG issued Resolution No. 2009-037-756 approving the proposed conversion:
WHEREAS, guided by the foregoing, the Commission interposes no objection to the conversion of the CIIF shares in SMC, as well as the PCGG ITF-CARP shares, including the qualifying shares issued to PCGG/government nominee-directors, to Series “1” Preferred shares. NOW, THEREFORE, be it RESOLVED, as it is hereby RESOLVED, that the Commission hereby APPROVES, as it is hereby APPROVED, the conversion of the CIIF owned common shares, as well as the PCGG ITF-CARP common shares, including the qualifying shares issued to PCGG/government nominee-directors in San Miguel Corporation (SMC), to Series “1” Preferred Shares, PURSUANT to the confirmation of the Department of Finance (DOF) and legal opinion of the Office of the Solicitor General (OSG), and SUBJECT to the conditions set forth in the said OSG opinion and requests of the OSG to seek the approval of the Honorable Supreme Court for the said proposed conversion. (Emphasis supplied.)

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The approval by the PCGG, for respondent Republic, of the conversion is a policy decision which cannot be interfered with in the absence of a showing or proof, as here, that PCGG committed grave abuse of discretion.

h. The Court’s “circumspect review of the pleadings and evidence extant on record” led it to believe that “the PCGG approved the conversion only after it conducted an in-depth inquiry, thorough study, and judicious evaluation of the pros and cons of the proposed conversion.” Quite tellingly, of the four items above-enumerated, Item Number (3) stands out as the only one whose date the Court did not indicate, instead, written out simply and simplistically as “[t]he Department of Finance, through Secretary Margarito B. Teves, upon the recommendation of the Development Bank of the Philippines, confirmed that the CIIF SMC shares conversion is financially and economically advantageous and that it shall work for the best interest of the farmers who are the ultimate and beneficial owners of said shares”—as though the date clearly indicated in the DOF’s letter was inscrutable and beyond scrutiny. Unfortunately, the Court’s “circumspect review” did not take note of a glaring con evidenced by the prescient nature of the PCGG Resolution dated 2 September 2009 that considered the DOF letter dated 8 September 2009 (supported by a “strictly confidential” recommendation of DBP dated 4 September 2009). In fine, the Court did not find the PCGG Resolution’s defiance of the laws of time and physics to be a “grave abuse of discretion.” i. The prescient nature of the PCGG Resolution is in stark contrast to the Court’s Resolution dated 17 September 2009, as when it observed that: 1. “The claim that the Cojuangco, Jr. group will be able to oust the government nominees from the SMC Board, buy the sequestered shares without encumbrances, and do so with SMC funds is inaccurate and even speculative.” 2. “The conversion, so intervenors claim, will result in the loss of voting rights of PCGG in SMC and enable Cojuangco, Jr. to acquire the sequestered shares, without encumbrances, using SMC funds.” 3. “It has not successfully been demonstrated, however, how the alleged eventual ownership by Cojuangco, Jr. of the sequestered shares will prejudice the interests of respondent Republic in the preferred shares. It cannot likewise be figured out what distinct benefits the government will obtain if the common shares are converted to preferred shares or used in another manner after final resolution of the ownership issue.”

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4. “That the market value of the preferred shares may be higher than the issue price of PhP75 per share at the time of redemption is possible. But then the opposite scenario is possible.” 5. “In sum, the conversion of the CIIF SMC Common Shares to Series 1 Preferred Shares should be approved in the best interests of everyone including the government and the Filipino people.” 6. “All things considered, conversion to preferred shares would best serve the interests and rights of the government or the eventual owner of the CIIF SMC shares.” j. Despite the Court’s best efforts to consider what would best serve the interests and rights of the government or the eventual owner of the CIIF SMC shares, the government soon lost its voting rights, the price of SMC’s common shares continued on its upward trajectory, and SMC redeemed the converted shares at PhP75 per share—below the market value of PhP110 per share. Indeed, there is no faulting the Court for its inability to look into the future, in the same way that the PCGG Resolution had. As there was, for example, no way that the Court could have predicted that then Chief Justice Reynato Puno would later join San Miguel Corporation as an Independent Director, soon after the honorable magistrate’s retirement. k. As its stands, the Court’s decision dated 24 January 2012 has determined the owner of the CONVERTED SHARES to be the government—and all the coconut farmers as the ultimate and beneficial owners. The conversion has resulted in—as the PCGG Chairman Bautista’s quick math revealed—a difference of PhP16 billion. The clear and unmistakable difference of PHP 16 BILLION is not the result of hindsight, but rather, the gross lack of insight and foresight demanded by the circumstances then obtaining.

PRAYER
Given the foregoing circumstances, consonant with the Ombudsman’s identity as “protector of the people” under Article XI, Section 12 of the Constitution, and in the exercise of its powers and functions and fulfillment of its duties under Article XI, Section 13 and Republic Act No. 6770 “The Ombudsman Act of 1989,” the undersigned complainants seek the Ombudsman’s protection and implore her to: 1. Investigate the apparent coordination, conspiracy, and collusion between and among the BOARD OF DIRECTORS OF PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED) upon whose initiation and instigation the perversion of the CONVERTED SHARES was applied for and eventually approved, AND the public officials and employees of the Presidential Commission on Good Government, Department of Finance, Development Bank of the Philippines, and the Office of the Solicitor

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General who kowtowed to COCOFED and asserted, in concert, the fatally erroneous premise—deficient in and devoid of insight, foresight, competence, and due diligence—that the conversion of the 24% San Miguel Corporation shares from Common shares to Preferred shares was the best way to preserve the value of the shares, primarily, but not exclusive to: PCGG CHAIRMAN CAMILO L. SABIO AND PCGG COMMISSIONERS RICARDO M. ABCEDE (†), NARCISO S. NARIO, TERESIO L. JAVIER, JAIME S. BAUTISTA; SECRETARY OF FINANCE MARGARITO B. TEVES; MR. REYNALDO G. DAVID; SOLICITOR GENERAL AGNES VST. DEVANADERA AND to determine their possible liabilities under Republic Act Nos. 3019, 6713, and 7080, and other pertinent and applicable laws; 2. Investigate and determine the possible involvement and liabilities of then PRESIDENT GLORIA MACAPAGAL-ARROYO given her control and supervision over the Presidential Commission on Good Government, her oath of office under the Philippine Constitution, and her duties and responsibilities to serve the best interests of the Republic and of the Filipino people; 3. Investigate and determine the possible involvement and liabilities of MESSRS. EDUARDO M. COJUANGCO, JR. (Chairman, San Miguel Corporation), RAMON S. ANG (President & Chief Operating Officer, San Miguel Corporation), JESUS L. ARRANZA (Chief Executive Officer & President of the Coconut Industry Investment Fund Oil Mills Group, which own the 14 Holding Companies), and CHIEF JUSTICE REYNATO S. PUNO (Independent Director, San Miguel Corporation), and/or SAN MIGUEL CORPORATION, and all such public officials and private persons who profited from and made possible the conversion, through malicious design and intent, or whose detestable and deplorable (but, nonetheless, inexcusable) lack of insight, foresight, and due diligence has prejudiced the government and the coconut farmers’ in the amount of at least SIXTEEN BILLION PESOS. Other just and equitable reliefs are similarly prayed for. 10 October 2012; Quezon City.

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VERIFICATION AND CERTIFICATION OF NON-FORUM SHOPPING
We, Adelmo V. Arandela, Luisita Zarsadias-Esmao, Vicente A. Fabe, Mauro M. Llorera, Jr., Eduardo M. Mora, Felix P. Pascua, Jr., Romeo C. Royandoyan, all of legal age, after having been duly sworn in accordance with law, depose and state that: We are the complainants in the foregoing Complaint-Affidavit. We have caused the preparation of the said Complaint-Affidavit. We have read the same, and the factual allegations thereof are true and correct of our own personal knowledge or on the basis of authentic documents. We have not commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any other tribunal or agency. To the best of our knowledge and belief, no such action or proceeding is pending in the Supreme Court, the Court of Appeals, or any other tribunal or agency. If we should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or any other tribunal or agency, we undertake to report that fact within five (5) days therefrom to the Office of the Honorable Ombudsman. 
 IN WITNESS WHEREOF, we have hereunto set our hands upon this 10th day of October 2012 at Quezon City, Philippines.

ADELMO V. ARANDELA National Vice-President Nagkakaisang Ugnayan ng mga Magsasaka at Manggagawa sa Niyugan (NIUGAN) #58 Escobar St., Lopez, Quezon

LUISITA ZARSADIAS-ESMAO National Chairperson Lakas ng Kababaihan sa Kanayunan, Inc. (LAKAMBINI) c/o PAKISAMA, 2nd Floor Partnership Bldg./Center, #59 C. Salvador St., Loyola Heights, Quezon City

VICENTE A. FABE, JR. Chair Pambansang Kilusan ng mga Samahang Magsasaka (PAKISAMA) 2nd Floor Partnership Bldg./Center, #59 C. Salvador St., Loyola Heights, Quezon City

MAURO M. LLORERA, JR. Vice President for Finance Aniban ng Magsasaka, Mangingisda at Manggagawa sa Agrikultura (AMMMA – Katipunan) Farmers’ Center, PCA Bldg., G/F, Diliman, Quezon City

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EDUARDO M. MORA Chairman Pambansang Kaisahan ng mga Magbubukid ng Pilipinas (PKMP) #87 Malakas St. Brgy. Pinyahan, Quezon City

FELIX P. PASCUA, JR. Officer-in-Charge Pambansang Katipunan ng Makabayang Magbubukid (PKMM) 22A Libertad St., Brgy. Hiway Hills, Mandaluyong City

ROMEO C. ROYANDOYAN Surigao del sur Federation of Agricultural Cooperatives (SUFC) and Moro Farmers Association of Zamboanga del Sur (MOFAZS)

SUBSCRIBED AND SWORN to before me this 10th day of October 2012 at Quezon City.

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PCGG wants to undo conversion of 24% government stake in SMC - The Philippine Star » News » Headlines | Printer Friendly

10/10/12 6:14 AM

Headlines

PCGG wants to undo conversion of 24% government stake in SMC
By Rainier Allan Ronda (The Philippine Star) Updated March 11, 2011 12:00 AM Comments (0)

MANILA, Philippines – The Presidential Commission on Good Government (PCGG) is currently looking for legal remedies to undo the grossly disadvantageous conversion of the government’s 24 percent stake in San Miguel Corp. (SMC) from common to non-voting preferred shares in 2009 during the time of chairman Camilo Sabio. Andres Bautista, PCGG chairman, said they are studying the matter. An audit of all past transactions and deals entered into during the Sabio Commission by the Bautista-led PCGG had identified the conversion of the government’s SMC shares as one of the biggest, multi-billion anomalous transactions that transpired during their predecessors’ administration. Bautista said the primary issue with the conversion was the lock-in price of its SMC preferred shares Series 1, which it can now only sell at the price of P75. The government is estimated to have lost billions from the conversion, especially in view of the recent upsurge in the share price of SMC, which has been pursing an aggressive diversification move under its president and chief operating officer Ramon Ang. Ang is the right hand man of SMC chairman and chief executive officer Eduardo Cojuangco Jr. As of yesterday’s close of trading at the Philippine Stock Exchange, SMC common shares stood at P159.50. It hit a high of P189.50 last January. Under Ang, SMC has sold minority stakes in its food and beverage businesses, using the proceeds to buy into high growth industries such as energy, power, mining and telecoms. The 24 percent SMC stake of the government, involving 753,848,312 previously common shares, has already been declared by the Supreme Court as prima facie public funds, and the case filed by the government at the Sandiganbayan to declare its forfeiture in favor of the government is just awaiting final resolution by the anti-graft court. At the P159.50 share price of the SMC common shares, the government would reap a windfall of more than P120.23 billion if sold at the price. With the conversion of the SMC shares into preferred shares, the SMC can redeem the shares at P75 any time it wants, with holders of the preferred shares getting only an assured eight percent dividends in exchange for converting their shares. At the lock-in price of P75, the government only stands to earn P56.53 billion from the 24 percent SMC shareholding. In an audit report conducted by the Bautista-led PCGG, the SMC stake conversion was found to be a “mistaken” move, especially in light of the recent upsurge in the stock price of SMC shares. “The determination that the conversion was advantageous to the National Government on a purely financial standpoint has, in the light of subsequent events, proven to be mistaken,” the audit report said. The SMC offer for conversion which was taken up in this case provided that “the SMC Common Shares shall be

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PCGG wants to undo conversion of 24% government stake in SMC - The Philippine Star » News » Headlines | Printer Friendly

10/10/12 6:14 AM

converted at an exchange ratio of one SMC Series 1 Preferred Share for every one SMC Common Share tendered; each SMC Series 1 Preferred Share shall have a par value of P5 per share and an Issue Price of P75 per share.” The average market value prevailing at that time was approximately P66 per share. As of Nov. 30, 2010, the value of common share is pegged at P120, according to the audit report. “Based on the description of the exchange offer found in SMC’s disclosure statement relating to the offer, it is SMC which has the option to redeem the SMCP1 shares,” the PCGG audit report noted. “Moreover, the enumerated ‘risk factors and other considerations’ in said disclosure provides that there is no stated maturity date and SMC has the sole right to redemption,” the audit further pointed out. The Sabio-led PCGG had invoked the fact that the conversion had been approved by no less than the Supreme Court. In a decision issued by the SC on Sept. 17, 2009, the High Tribunal granted the government’s motion seeking the conversion of the 24 percent sequestered common shares of SMC – registered in the names of Coconut Industry Investment Fund (CIIF) and its holding companies – into Series 1 preferred shares. In a 33-page decision penned by Associate Justice Presbitero Velasco Jr., the Court held that the conversion “is advantageous to the public interest or will result in clear and material benefit to the eventually declared stock owners, be they the coconut farmers or the government itself.” The PCGG’s move was opposed by coconut farmers’ groups and even former Senate president and former PCGG chairman Jovito Salonga. Joey Faustino, executive director of the Coconut Industry Reform Movement (COIR), earlier said that the government’s move to convert their common shares to series 1 preferred shares was being pursued over the opposition of coconut farmers’ groups whose members had contributed to the coconut levy fund collected from them in the 1970s and 1980s. Faustino stressed that it was highly questionable why government had rushed to convert their shares instead of waiting for a final decision from the Sandiganbayan on the government’s ownership of the shares. Waiting for a final decision, Faustino earlier said, would enable government to get a better value for the 24 percent stake through an auction or public bidding process. Salonga and former Sen. Wigberto Tañada had opposed the conversion, saying it will prevent the government from keeping watch over its SMC stake. They argued that the PCGG could not pursue the conversion because it “has no power to exercise acts of strict dominion” over the sequestered shares. Those opposed to the conversion said that the “proposed conversion is only not advantageous to the public interest but is in fact positively disadvantageous.” Salonga and company labeled the conversion as a “devious compromise” favorable only to Cocofed and to Cojuangco, a crony of the late deposed President Ferdinand Marcos.

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! PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT!

Preliminary Report for the Truth Commission!
! ! ! !

[Providing information to the TRUTH COMMISSION concerning or relating to cases or instances of graft and corruption within the PCGG’s respective jurisdictions during the previous administration and for other purposes]!

PCGG PRELIMINARY REPORT FOR THE TRUTH COMMISSION In compliance with Resolution Number 007 of the Truth Commission requesting information relating to cases or instances of graft and corruption, the Presidential Commission on Good Government (PCGG or the Commission) respectfully submits this preliminary report concerning possible instances of graft and corruption, and excesses committed during the previous administration. A. UNLIQUIDATED CASH ADVANCES Based on information obtained from the accounting office of PCGG, former Chairman Camilo Sabio has, to date, unliquidated cash advances amounting to PhP2,158,692.99. Of this amount, PhP1,658,692.99 comes from the fund comprising National Government appropriations and PhP500,000.00 from the fund comprising the donation by the Philippine Development Alternatives Foundation (PDAF) to PCGG representing the accrued interest on the principal amount donated to the Republic. These advances are recorded as these are funds from PCGGmaintained books of account audited by the Commission on Audit (COA). There is no similar record regarding the advances made from the PNB contingency fund.1 Moreover, there is also a pending case before the Ombudsman regarding Chairman Sabio’s failure to remit PCGG-collected deposits to the Bureau of Treasury amounting to Php10,350,000. B. THE PNB-RETAINED FUND The Supreme Court’s decision of 15 July 2003, affirmed by the orders of 18 November 2003 and 13 January 2004, ordered the forfeiture of the Swiss deposits in the estimated aggregate amount of US$658,175,373.60 as of 31 January 2002 in favor of the Republic. The Sandiganbayan issued a Resolution ordering the issuance of a writ of execution and the Writ itself on 22 January 2004. Conformable with the orders, the Philippine National Bank (PNB) agreed to transfer the funds to the Republic except for the amount of approximately US$22,000,000.00 which was held by West Landesbank in Singapore. The PNB also retained, inter alia, 5% of the escrow funds or approximately US$30,000,000.00 as contingent fund for any lawsuit or potential lawsuit against PNB in connection with the Escrow Funds or such other funds held in trust by the PNB for the Republic. It is supposed to cover the legal, administrative and other related costs that may be incurred in the recovery and transfer to the Republic of the amount in Singapore and the Arelma account in the United States.2 The Republic is looking to recover approximately US$60,000,000.00 in these two cases. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1 Other PCGG employees who have, on record, large cash advances are now claiming that they simply allowed these advances to be made in their names as an accommodation to Chairman Sabio who in fact acquired the funds. 2 This retention was the subject of PCGG Resolution No. 2004-Y-002 passed during the term of Chair Haydee Yorac, to wit:

NOW THEREFORE, be it RESOLVED as it is hereby RESOLVED, that … PNB is authorized to retain five per cent (5%) of the amount recovered to cover the necessary administrative and litigation expenses in the recovery of the ARELMA account and the approximately Twenty-two

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As of 31 October 2010, the aggregate amount which PNB “retains” for the Republic is $50,481,999.37, broken down as follows: Principal Cash Balance w/ Custodian Bank
(refers to amount under litigation in Singapore)

$20,035,636.05 30,486,977.60 6,435.06 50,529,048.71 47,049.34 $50,481,999.37

Accrued Interest Sum of the above Less accrued expenses Total

As to attorneys’ fees, PNB financial records show that approximately $9.5 million has already been disbursed as of 30 September 2010:
! PCGG GG! PNB! Total! 2004! 87,371. 50! 668,892 .61! 756,264 .11! 2005! 200,000.0 0! 223,178.1 0! 423,178.1 0! 2006! 334,716.7 3! 420,323.3 1! 755,040.0 4! 2007! 1,004,407.4 3! 707,497.37! 1,711,904.8 0! 2008! 114,420.8 1! 1,120,316. 30! 1,234,737. 11! 2009! 1,304,820.7 1! 1,064,352.3 1! 2,369,173.0 2! 2010 (Jan-Sept)! 530,829.0 9! 1,697,297. 16! 2,228,126. 25! Total! 3,576,566.27! 5,901,857.16! $9,478,423.4 3!

These do not reflect outstanding billing statements from various counsels pending payment. The enormous costs also take on an even more colorful complexion if one considers that the cases pending in New York and Singapore have yet to go to trial proper. Moreover, from the extant records currently accessible, US$3,964,102.97 was disbursed for travel alone between 31 January 2004 and 30 September 2010. Of this amount, US$2,276,478.46 was used by PCGG.
! PCGG! OSG! PNB! Total! 2004! -! -! 2,518.14! 2,518.14! 2005! 29,203.02! -! 11,462.16! 40,665.18! 2006! 95,970.73! 29,702.67! 25,059.86! 150,733.26! 2007! 358,684.38! 183,175.89! 28,057.35! 569,917.62! 2008! 957,439.04! 792,222.39! 47,955.47! 1,797,616.90! 2009! 549,227.33! 223,575.92! 30,277.99! 803,081.24! 2010 (Jan-Sept)! 285,953.96! 292,101.16! 21,515.51! 599,570.63! Total! 2,276,478.46! 1,520,778.03! 166,846.48! $3,964,102.97!

It appears that PCGG’s use of this fund for travel is marked by the following attributes: (1) apparently unliquidated; (2) irregularly disbursed; (3) clearly excessive; and (4) in some instances, ultra vires, in that it was used for travels clearly beyond the stated parameters of the fund. 1. There are no liquidation reports on file. The use of the $2,276,478.46 for PCGG travels has not been accounted for or audited at all. While these trips were funded by money from the account retained by PNB and was never remitted to the National Treasury, it is maintained that these are, and have always been, public funds and should be accounted for. The law, specifically !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !
Million U.S. Dollars (US$22M) still in West Landesbank in Singapore, as well as necessary expenses that may arise in relation to the Escrow Agreement. RESOLVED further that this authority shall expire upon termination of the ARELMA and West Landesbank cases but in no case shall this authority exceed ten (10) years.

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Section 16 of E.O. No. 248 as amended by E.O. 298, states that: “Within [60] days after his return to the Philippines, in the case of official travel abroad… every official or employee shall render an account of the cash advance received by him in accordance with existing applicable rules and regulations and/or such rules and regulations as may be promulgated by the [COA] for the purpose.” And Section 18 of the said E.O. provides that: “Every official or employee assigned or authorized to travel should, within [30] days after his return..., submit a report with his recommendations….” 2. Actual disbursements were made in an irregular manner. Checks were not cut in favor of PCGG or a responsible officer of the Commission. Of approximately 135 letter-requests from PCGG to PNB for disbursements from this fund, around 118 directed PNB to make the check payable to Ms. Cristina A. Beronilla, a clerk at the Legal Department, allegedly “in order to facilitate encashment”. Again, there are no acknowledgment receipts or liquidation reports or official receipts to support alleged expenditures. a. Ms. Beronilla took a one-year leave in June 2010 which was approved by the previous commission. She has never reported for work under the new commission and submitted her resignation as of October 2010 (after the incident described below). b. Her sister, Ms. Ellaine Santos, also a clerk at the Legal Department, is currently the subject of an internal fact-finding investigation after she was stopped by PCGG security on 28 October 2010 while attempting to bring out boxes of official files which she allegedly thought were “personal files of her sister, Cristina Beronilla”. 3. The amounts spent on each trip are gravely excessive especially if considered along with the fact that these have not been subject to any liquidation whatsoever. a. In requesting funds, the Chairman or Officer-in-Charge first writes a letter addressed to PNB making the necessary representations and giving the following information: (a) persons making up the delegation3; (b) inclusive dates of the trip; (c) a short description of the trip’s objective; and (d) the amount requested. This letter would have an attached summary of projected travel expenses. A number of items in said summary are flagged as follows: i. “Representation allowance” of US$1000.00 is provided to every single member of any delegation, even individuals who are tasked to do simple clerical and secretariat work.4 This notwithstanding the clear language of Section 13 of E.O. 248, as amended by E.O. 298, that: “[I]ndividuals traveling on official business may, upon approval of the President, be allowed non-commutable representation expenses not exceeding US$1000.00, duly supported by bills or receipts, as shall be absolutely necessary to enable them !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
In some cases, no names would be given and would only indicate “PCGG Secretariat”. This practice appears to have been abandoned only in 2010. However, officials of a particular rank were still provided with a blanket representation allowance of US$1000 without any liquidation being made.
4 3

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to uphold the prestige of the Republic of the Philippines, to represent the country with dignity and distinction, and to carry out their functions and objectives more effectively. ii. Aside from “representation allowance”, “contingency funds” is another constant in these projected budgets and appears to be arbitrarily determined. There is no detectable standard for the amounts requested (e.g., x amount per day or % of total) and these ranges from a low of US$1000 to a high of US$36,000. To reiterate, these have not been subject to any accounting or liquidation. iii. Whether or not the traveling civil servant is a commissioner tasked “to confer with foreign counsel” or an office assistant tasked “to provide clerical support to OSG lawyers”, travel is invariably on business class (based on quoted airfare). This notwithstanding the clear language of Section 10 of E.O. 248, as amended by E.O. 298, that: “In case officials and employees authorized to travel are not provided with transportation by the host country or sponsoring organization or agency, they shall be allowed official transportation, which shall be of restricted economy class unless otherwise authorized by the President of the Philippines”. iv. For a good number of the trips, “hotel accommodations” shows up as an expense item separate and distinct from the requested Daily Subsistence Allowance (DSA) at UNDP rates. The operational definition of the DSA covers “lodging, meals, gratuities and other expenses”. Section 12 of E.O. 248, as amended by E.O. 298, provides that: “Government personnel who travel abroad shall be entitled to the [DSA] as provided under the [UNDP] Index…. The DSA shall be apportioned as follows… (a) 50% for hotel/lodging….”5 b. The former members of the Commission and certain officials traveled so frequently that it is indeed suspect whether such trips were really necessary and advantageous to the government interests which the Commission are mandated to protect. To cite a few examples: Chairman Sabio undertook between 41-50 foreign trips between September 2005 and June 20106 and Comm. Jaime Bautista undertook approximately 60 foreign trips between June 2006 and May 2010.7 c. The sizes of the delegations varied but a delegation size of more than 10 individuals is commonplace. This would be a composite of PCGG and OSG officials. The PCGG delegation would frequently include individuals to serve in a secretariat or administrative manner even as the objectives !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5 This practice appears to have also been abandoned only in 2010. But instead of following the E.O. and living within the DSA, the more recent practice was to peg the DSA at US$150 (about half the UNDP rate) and still provide a separate budget line for hotel accommodations which are consistently much higher than the total UNDPpegged DSA. 6 This only refers to trips charged to PNB, whether partially or fully, and does not include other trips made which were charged to the CIIF Oil Mills Group or any other entity. 7 While it is not suggested that all these trips were useless junkets, it is very difficult to make a determination of their benefits as no reports are available and mission orders drawn up prior to the trip are usually couched in general terms. Furthermore, these numbers only represent trips financed by the PNB fund and do not include other trips such as those financed by CIIF or the regularly appropriated budget of PCGG.

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of these trips arguably would not require extensive secretariat services (as, say, organizing a conference would). There are also about 10 instances where the communication to PNB would simply make reference to the travel of “PCGG secretariat” with no mention of who exactly makes up said group, although the number of people can be gleaned from the projected summary of expenses (ranging from 3-5). Again, for the most part, each would be given representation allowance of US$1000.00 per trip and accommodated on business class no matter the destination. No reports were also required to be submitted. d. To bring the point home, consider the following example: An amount of US$46,000 was requested (15 September 2008 letter to PNB) and released for the travel of two persons, a commissioner and his chief of staff, to Singapore. The trip was for 17-30 September, or a period of two weeks, for the ostensible reason of “confer[ring] with the Republic’s counsel and determin[ing] which courses of action the Republic should take considering the developments after the pre-trial conference.” This particular trip was excessive on so many levels: (a) the objective did not require a two-week sojourn; (b) the objective would have been better served if the commissioner was accompanied by a lawyer well-versed in the proceedings instead of his Chief of Staff; (c) the total amount expended is unconscionable and hotel accommodations were charged over and beyond the DSA; (d) business class rates are reflected even though this is a short flight to Singapore; (e) representation allowance of US$1000.00 were given to each; (f) a contingency fund of US$10,000.00 was provided; and (g) none of these were ever liquidated.8 4. A number of trips financed by the PNB-retained fund were arguably outside the scope or coverage of said fund. The 2004 resolution which allowed the retention of this fund by PNB is clear that it is for any lawsuit or potential lawsuit against PNB in connection with the Escrow Funds or such other funds held in trust by the PNB for the Republic, and the legal, administrative and other related costs that may be incurred in the recovery and transfer to the Republic of the amount in Singapore and the Arelma account in the United States. However, it also been used to fund trips which arguably are not within the parameters given above. There would only be “saving clauses” tangentially relating to the objectives of the fund. To illustrate: a. Reason for Rio de Janeiro travel of 13-27 August 2008 based on the 7 August 2008 letter to PNB: “to attend the International Law Association’s 73rd Biennial Conference where the contingent shall endeavor to pass a resolution supporting the Republic’s position in the West LB case pending before the Singapore High Court, and to advocate resolutions strengthening the Republic’s claim of sovereign immunity in future recovery efforts abroad.” It is noteworthy that the contingent included nineteen (19) members and at least one non-lawyer and that the amount !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8

The worst part of this narrative is that this example is not a singular incident but is in fact quite ordinary.

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requested and released for this particular trip was US$160,000.00. It also bears noting that the Rio Conference was only from 18-21 August 2010. b. Reason for Vienna travel of 17-29 September 2008 based on the 11 September 2008 letter to PNB: “to attend the Open-Ended Intergovernmental Working Group on the Review of the Implementation of the UN Convention Against Corruption and the 2nd Inter-sessional Meeting of the Open-Ended Intergovernmental Working Group on Asset Recovery to pursue the Commission’s advocacy of Philippine sovereign immunity in relation to our asset recovery effort as judicially expounded in the Arelma case.” For this particular trip by 2 individuals, the amount of US$80,916.00 was requested and released. It also bears noting that the UNCAC meetings were only held on 25 and 26 September 2010. c. Reason for Vienna travel on 9-17 May 2009 based on the 5 May 2009 letter to PNB: “to participate in the Open-Ended Intergovernmental Working Group on the Review of the Implementation of the UN Convention Against Corruption and the Open-Ended Intergovernmental Working Group on Asset Recovery of the UN Convention Against Corruption where the contingent shall endeavor to pass a resolution supporting the Republic’s position in the West LB case pending before the Singapore High Court, and to advocate resolutions strengthening the Republic’s claim of sovereign immunity in future recovery efforts abroad.” Again, it bears noting that the UNCAC meetings were only held on 13 and 14 May 2010.!9 Finally, based on records from the CIIF Oil Mills Group (OMG), Chairman Sabio had 10 foreign trips which were charged to CIIF between 2006 and 2009. Of these, 6 trips were to attend board/stockholders’ meetings of the United Coconut Planters International based in Paris and 4 trips were made for the purpose of attending agricultural industry affairs. For his travel alone, CIIF OMG spent a total of PhP2,265,121,83. Of this total, PhP714,069.30 or approximately 1/3 thereof represented per diems collected by Chairman Sabio. This occurred at a time when CIIF OMG was incurring heavy operating losses (roughly PhP1.4 billion from 20052007). What makes matters worse is that, upon checking the CIIF OMG-funded trips against the records of disbursements from the PNB-retained funds, there are at least two instances of overlap: Dates
March 2008 • • • •

CIIF
9-13 March 2009 Florida, USA NIOP annual convention Charged airfare (US$2,036), per diem (US$1,500), hotel • • • •

PNB
3-16 March 2008 Singapore Charged DSA (US$389/day for 14 days) • • • • 12-20 March 2008 Washington, DC Charged airfare (RP-US-RP); DSA (US$344/day)

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9 It is not the position of the current Commission that participation in these kinds of conferences are to be discouraged, only that the proper sourcing of funds ought to have been undertaken.

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September 2008

• • • •

(US$1,688) 17-20 September 2008 Paris, France UCPI Stockholders’ mtg. Charged per diem (US$1,050), hotel (US$2,310)

• • • •

17-29 September 2008 Vienna, Austria UNCAC meetings Charged DSA (US$341/day); (US$8,255)

hotel

Action taken: The Commission will be issuing memoranda to each PCGG official or employee who undertook foreign travel (from the period of September 2005 to June 2010) to submit accomplishment and liquidation reports. C. APPARENT MISUSE OF PUBLIC FUNDS 1. Bloated personnel complement. Per COA, the PCGG hired 6 private lawyers, 41 consultants and 85 office-based personnel paid under PCGG’s expense entitlement during the last commission’s term. The office-based personnel ranged from additional drivers and utility workers to “special assistants”. When the current Chair assumed office, there were still approximately 72 of said office-based personnel.10 2. Superfluous counsel. On 30 March 2010, the previous Commission (through Chairman Sabio) entered into a Retainer Agreement with Donal A. O’Buckley (the brother in-law of Chairman Sabio) to “provide consultancy services in the case of Osqugama F. Swezey, et. al. v. Merill Lynch, et. al. pending before the Supreme Court of the State of New York County of New York”. This notwithstanding the fact that PCGG had already retained, at much cost, a wellknown law firm (Paul Hastings) to represent the Republic. A review of O’Buckley’s billing statement showed that not only were the rates relatively high (US$600/hour for O’Buckley, $225/hour for a paralegal and $125/hour for an administrative assistant), the actual work done was relatively minimal, such as: “review online research and draft memo of paralegal” (6 hours); “review of pleadings” (6 hours); “legal research and sharing of information with Chairman Sabio” (4.5 hours); “appearance at court to listen and observe legal arguments” (3 hours); and “meeting at Philippine Consulate to discuss oral arguments and official lunch with PCGG” (7.5 hours). Also, on one single day, he charged 2.5 hours ($1500) for a “strategy consideration meeting with Chairman Sabio” and 2 hours ($1200) for “dinner with PCGG at the Radisson”. His bill also included $600 for the photocopying of 1500 pages of documents or a charge of $2.50 per page. It is noteworthy that the current going rate for photocopying in the state of New York is 20-50 cents per page. Through Resolution No. 2010-020-797 dated 3 June 2010, PCGG requested PNB to release the amount of US$26,755.00 in favor of Mr. O’Buckley as payment for professional services rendered on 5-28 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
10 This is grossly disproportionate if one considers the fact that the regular personnel complement of the PCGG is only 135 employees (comprising of the permanent, co-terminus, casual and contractual kinds). The new Commission is in the process of rightsizing and has already trimmed the numbers by not renewing approximately half of the assignments/contracts, as these were considered redundant personnel. More rightsizing measures are planned for the beginning of 2011.

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April 2010. He was thereafter paid. This was unprecedented in terms of prompt payment for counsel fees and made while similar billings from other retained counsels were then (and still are) pending. In fact, at the time said resolution approving the O’Buckley bill was made, the lead counsel in the subject case of Swezey v. Merill Lynch (where Mr. O’Buckley was “consulting” on), the firm of Paul, Hastings, Janofsky & Walker, had outstanding billings amounting to US$708,602.40 dating back to 18 November 2009.11 3. Newspaper abuses. During the term of the last Commission, approximately 1,900 newspapers per month (or 61 newspapers per day) were being purchased and distributed to various offices in the PCGG. Based on official records, for the period of January 1, 2010 to August 31, 2010 alone, PCGG spent a total of Php278,634.35 as payment for newspaper subscriptions. Considering the size of the Commission and the number of departments and offices in the entire Commission, this consumption of newspapers is excessive. Verbal testimonies include accounts of one particular commissioner requiring that 4 copies of each major daily be delivered to his office (as he needed two of each kind for his home and two for his office staff). 4. Water bills. PCGG paid the total of Php336,292.49 (in 2008) and Php505,750.01 (in 2009) for water to Manila Water Company Inc. Considering the number of employees (253 in 2008 and 273 in 2009), this consumption of water is deemed excessive and disproportionate. It can be noted too that for just a period of one year (from 2008 to 2009) there is an increase in expense amounting to Php169,457.52. Verbal testimonies cite the use of the 12 of the IRC Wack-Wack property of water from the office for all inhabitants purposes, including cooking, laundry, bathing toilet, and cleaning. While the inclusion of some of these matters may seem relatively trivial as accounts of graft and corruption, these are symptomatic of the excesses prevailing during the last administration.

Paul Hastings was paid US$252,271.36 in 2009 and has a pending bill, as of 31 October 2010, of US$750,671.08. 12 Informal settlers who are comprised of PCGG employees and their families, roughly around 30 in number, who were all allowed to stay in the empty lot by the Commission.

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11

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D. ADMINISTRATIVE AND/OR CRIMINAL CASES Based on the records retrieved from the Office of the former PCGG Chairman Camilo L. Sabio, the following administrative and/or criminal cases have been filed against PCGG officials:
Case!
OMB-C-A-090606-J January 25, 2010!

Respondent/s! Chairman Camilo L. Sabio !

OMB-C-A-090611-J and OMB-C-C-090601-J January 25, 2010! OMB-C-A-100122-B and OMB-C-C-100121-B April 5, 2010!

Chairman Camilo L. Sabio Dir. J. Ermin Ernest Miguel ! Chairman Camilo L. Sabio Comm. Ricardo M. Abcede Comm. Tereso L. Javier Dir. J. Ermin Ernest Miguel#

OMB-C-A-10-012B and OMB-C-C-100122-B April 5, 2010!

Chairman Camilo L. Sabio Comm. Ricardo M. Abcede Comm. Tereso L. Javier Comm. Narciso S. Nario Comm. Nicasio A. Conti #

Alleged Violation! Respondent failed to remit PCGG-collected deposits to the Bureau of Treasury amounting to Php10,350,000; respondent acknowledged receipt of this sum in the form of cash advances and partial remittances of the MidPasig Land Development Corporation to PCGG from the proceeds of sale of Anscor shares in 2006. ! Respondents violated regulations relative to the use of government-issued cellular phones. Respondent Sabio has a total excess bill of Php25,594.76 and respondent Miguel has a total excess bill of Php53,012.67. ! Respondents violated the prohibition against using more than one government vehicle. Based on records, respondent Sabio received 3 vehicles; respondent Javier received 2 vehicles; respondent Abcede received 2 vehicles; and respondent Miguel received 2 vehicles in his name.! Respondents entered into lease-purchase agreements without proper bidding. Lease Agreement No. 5320 dated 18 April 2007 was entered into between PCGG and the UCPB Leasing & Finance Corporation for the lease of five vehicles in the total amount of Php5,393,000.00. Moreover, another (undated) agreement was entered into between the same parties for the lease of another six vehicles in the total amount of Php6,734,610.00. !

Based on requests for records, the Legal Department provided a list of cases filed against PCGG officials and pending with the Office of the Ombudsman. Aside from the foregoing, these cases were also listed: 1. 2. 3. 4. OMB-C-C-09-0019-C OMB-C-A-09-0017-C OMB-C-C-09-0598-J OMB-C-A-09-0609-J 5. OMB-C-A-09-0608-J 6. OMB-C-C-09-0597-J 7. OMB-C-C-09-0597-J

No files on these could be produced. Verbal reports were made to the present Commission that towards the end of the term of former PCGG Chairman Sabio, the

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files of all administrative and/or criminal cases were pulled out from the Legal Department and transferred to the Office of the Chairman. However, these files appear to be missing at present. Action taken: The present Commission has written the Office of the Ombudsman requesting documents pertaining to these cases and, should there be any, to include copies of other cases filed against PCGG officials that are not covered by those mentioned above. E. QUESTIONABLE DECISIONS/AGREEMENTS: What follows is an enumeration of contractual agreements and/or decisions that were made with the color of authority and apparent due diligence but which may be disadvantageous to the government. Closer scrutiny and more in-depth investigation may be in order. 1. IBC-13’s JVA with R-II Builders/PRIMESTATE This joint venture agreement over the property known as Broadcast City has been assailed in the press and in the Senate (specifically by Sen. F. Drilon) as being disadvantageous to the Republic and as constituting a midnight deal (e.g., PCGG Resolution No. 2010-010-797 interposing no objections is dated 19 March 2010). While arguably easing the financial woes of IBC-13 and ostensibly enhancing its value, there are indeed a number of red flags to be raised in the JVA:
• • The JVA has not been submitted nor reviewed by the Privatization Council pursuant to Section 3 of EO No. 323. Article III, Section 3.5.a of the JVA states that: “Considering that equity other than cash is to be contributed by IBC-13, IBC-13’s contribution of the 3.6401hectare Residential Development Portion shall be valued at (P364,000,000.00).” This would mean a valuation of only P9,999.99 per square meter. This may not reflect the true fair market value and said valuation was not submitted to COA’s Technical Services Office for review. Section 3.5.b of the same article stipulates that: “Upon execution of this Agreement, IBC-13 shall turn-over and assign its rights to the Project Site13 in favor of R-II BUILDERS/PRIMESTATE or its nominee or assignee, immediately transferring possession and perform such other acts necessary to fully contribute the Residential Development Portion under a separate title, free and clear from any and all liens, encumbrances and legal impediments…” It appears therefore that the JVA will mean that R-II/PRIMESTATE will build a residential condominium building on 3.64 hectares which will then be transferred in its name. In effect, IBC-13 will be left with only 5,000 square meters. Article I, Section 1.5.c. provides that “IBC-13 shall be entitled, as its share in the net revenues of the Residential Development, to IBC-13’s Guaranteed Share in Revenues which is a guaranteed amount of [P728,000,000.00]….” This amount is a little misleading however as the breakdown states that “[P450,000,000.00]

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
13 The Project Site is defined under the JVA as the parcel of land located at Capitol Hills, Diliman, Quezon City with an area of 4.141 hectares, more or less owned and registered in the name of IBC-13.

Page!11!of!15! !

shall be offset or used to compensate R-II BUILDERS/ PRIMESTATE for the construction and development of the New Broadcast City.”

These concerns were echoed in the Audit Observation Memorandum sent by the Commission on Audit to PCGG on 28 August 2010.14 2. Conversion of SMC common shares into SMC series 1 preferred shares On 17 September 2009, as an incident in the COCOFED, et. al. v. Republic case (G.R. Nos. 177857-58), the Supreme Court resolved to approve the conversion of the 753,848,312 SMC common shares registered in the names of CIIF companies to SMC Series 1 preferred shares (SMCP1).15 The OSG had earlier opined to PCGG that the conversion and eventual redemption is legally allowable as long as the approval of PCGG is obtained for the amendment of the Articles of Incorporation of SMC. The OSG added that should PCGG give its prior acceptance and approval in accordance with its procedures and mandate, there should be no legal impediment to the eventual redemption of the SMCP1 should the right to redeem be exercised by SMC. In its Resolution No. 2009-037-756 dated 02 September 2009, PCGG approved the conversion pursuant to the confirmation of the DOF and the legal opinion of the OSG, and requested the OSG to seek approval of the Supreme Court for the proposed conversion. In a letter to PCGG dated 8 September 2009, the DOF confirmed that the proposed conversion is advantageous to the National Government on a purely financial standpoint. As mentioned above, the Court approved said conversion. Based on the description of the exchange offer found in SMC’s disclosure statement relating to the offer, it is SMC which has the option to redeem the SMCP1 shares: As and if declared by the Board, [SMC] may redeem the Series “1” Preferred Shares on the third anniversary from the Issue Date or on any Dividend Payment Date thereafter, in whole or in part, at a redemption price equal to the Issue Price of the Series “1” Preferred Shares plus accrued and unpaid dividends, whether declared or undeclared, for all dividend periods up to date of actual redemption by [SMC]. The redeemed Series “1” !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
The Memo raised the following points: The valuation of the 3.64-hectare contribution to the residential development portion of the project is pegged at PhP364 million or at PhP9,999.00/square meter [only]; this was not subjected to a technical review by the COA Technical Service Office. • The arrangement in the JVA is skewed in favor of RII Builders, Inc./PRIMESTATE where IBC will be left with only 5,000 square meters for its Broadcast City with a relatively small 2-storey commercial building which may earn a small income. • IBC-13 is effectively disposing of its 3.64-hectare land contribution to the JVA, in favor of RII Builders, Inc./PRIMESTATE, but without an absolute guarantee that it will receive in full the cash components of its share, i.e., PhP150 M and PhP128 M. • The JVA does not appear on record that it was submitted, much less reviewed, by the Privatization Council. 15 The proposed conversion was embodied in the Information Statement issued by SMC dated 23 July 2009 which discussed and compared the two types of shares. •
14

Page!12!of!15! !

Preferred Shares shall not be considered retired and may be reissued by [SMC] at a price to be determined by the Board. Moreover, the enumerated “risk factors and other considerations” in said disclosure provides that there is no stated maturity date and SMC has the sole right to redemption: The Series “1” Preferred Shares have no fixed maturity date, and the Series “1” Preferred Shares are not repayable in cash unless [SMC], at its sole discretion, redeems or purchases them for cash. Furthermore, holders of the Series “1” Preferred Shares have no right to require [SMC] to redeem the Series “1” Preferred Shares. The Series “1” Preferred Shares are only redeemable at the option of [SMC] on the third anniversary of the Issue Date of the Series “1” Preferred Shares or on any Dividend Payment Date thereafter. Accordingly, if a Series “1” Preferred Share holder wishes to obtain the cash value of the investment, the holder will have to sell the Series “1” Preferred Shares in the secondary market. The determination that the conversion was advantageous to the National Government on a purely financial standpoint has, in the light of subsequent events, proven to be mistaken. The SMC offer for conversion which was taken up in this case provided that “the SMC Common Shares shall be converted at an exchange ratio of one SMC Series 1 Preferred Share for every one SMC Common Share tendered; [e]ach SMC Series 1 Preferred Share shall have a par value of P5 per share and an Issue Price of P75 per share. The average market value prevailing at that time was approximately P66 per share. As of 30 November 2010, the value of said common share is pegged at P120. The Supreme Court however has stood by its approval and stated in its 11 February 2010 Resolution that: [T]he conversion of the shares along with the safeguards attached thereto will ensure that the value of the shares will be preserved. In effect, due to the nature of stocks in general and the prevailing business conditions, the government, through PCGG, chose not to speculate with the CIIF SMC shares, as prima facie public property, in the hope that there would be a brighter economy in the future, and that the value of the shares would increase. 3. PIMECO MOA PIMECO is a corporation sequestered by PCGG in 1986. Previously, in 1975, PIMECO had entered into a lease-purchase agreement (LPA) with MPCP (a wholly-owned subsidiary of GSIS) over MPCP’s meat packing complex, a valuable 12.3-hectare property in Pasig City. A case for reconveyance was filed covering the individuals ostensibly owning shares in PIMECO.
Page!13!of!15! !

Moreover, for a number of reasons, MPCP-GSIS attempted to rescind this LPA which rescission was objected to by PIMECO and PCGG. In 2008, the Sandiganbayan ruled in favor of the latter and declared the rescission invalid. MPCP-GSIS raised the issue to the Supreme Court on certiorari. On 11 December 2009, a Memorandum of Agreement (MOA) was entered into by and between PCGG, Peter Sabido, PIMECO, and Consolidated Prime Development Corporation (CPDC). CPDC is primarily interested in PIMECO because of the Pasig property. Acquiring a controlling interest in PIMECO would allow it to negotiate with MPCP-GSIS as it would, through PIMECO, now have legal interest in the LPA. The said agreement allowed PIMECO’s shareholders, ostensibly Independent Realty Corporation and Peter Sabido, to sell their shares to CPDC for Php10,909,090.91 and Php20,000,000.00, respectively. The MOA also gave PCGG the amount of Php89,090,909.09 as settlement in consideration of its consent to the said compromise agreement.16 The thinking was that this was beneficial as it would end a litigation whose results were still uncertain over property which PCGG may be unable to afford or acquire anyway even in the face of resolution in its favor.17 While this agreement may be seen as favorable to the government at first glance, certain facts cast doubt as to the wisdom of entering into it as it can be argued that, for all legal intents and purposes, PIMECO is a surrendered corporation by both Jose Campos (as to the IRC part) and Roberto S. Benedicto. The provenance of Peter Sabido’s shares can arguably be traced to funds from the Traders Royal Bank (a bank beneficially owned and controlled by Benedicto for the benefit of Mr. Marcos). The point then being that PCGG can arguably assert 100% ownership over the assets of PIMECO, as a surrendered company (not just a sequestered company), pursuant to the compromise agreements entered into by the !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
16 A joint motion dated 28 January 2010 for the approval of the MOA was filed by PCGG, PIMECO and Sabido with the Sandiganbayan; this was granted on 24 March 2010. A joint manifestation was also filed by PIMECO and MPCP-GSIS in the Supreme Court stating that they have amicably resolved their dispute; this was noted by the Court in a resolution dated 16 June 2010 and the case was thereby considered closed and terminated. 17 OSG’s September 2009 opinion: [C]onsidering the pendency of the petition for certiorari, prohibition and mandamus filed by MPCPGSIS before the Supreme Court praying that the rescission of its [LPA] with PIMECO be upheld and that it be allowed to exercise its rights as owner of the 12.9 hectare property, it is still premature for the PCGG to entertain any proposal for the acquisition of the subject property. This is because in the event that the Supreme Court nullifies the rescission of the Lease-Purchase Agreement, then MPCP-GSIS retains ownership of the subject lot; hence, any proposal involving the same should be directed to MPCP-GSIS alone. On the other hand, if the validity of the [LPA] is upheld by the Court, the issue of whether PIMECO has now become a surrendered corporation by virtue of the Compromise Agreement executed by Benedicto in favor of the PCGG must still be resolved by the Sandiganbayan." In ¶7 of the joint motion for approval of the compromise agreement dated 28 January 2010 before the Sandiganbayan: [T]he PCGG has no means of realizing the value on PIMECO’s Lease-Purchase Agreement with MPCP-GSIS. This is because, while PCGG may have a hold on a quantity of PIMECO shares in the instant case and, through IRC, own a quantity of PIMECO shares, the value thereof, and those belonging to Peter A. Sabido, may ultimately depend on whether or not the Supreme Court upholds the continued validity of the [LPA] and then the financial capacity of PIMECO to continue with the [LPA].

Page!14!of!15! !

government with Campos and Benedicto.18 This may involve a radical change in the theory of the case but it should have been more thoroughly examined as a feasible legal position especially in the light of the fact that the Republic cannot be estopped by the mistakes of its agents. It is noteworthy that this MOA was concluded in a short span of 4 months from initial contact. Why did PCGG enter into the MOA and allowed Sabido to gain Php20,000,000.00 if his shares in PIMECO are fruits of ill-gotten wealth (from TRB funds) to begin with? Why enter into the MOA when we had the advantage in the rescission case filed by MPCP-GSIS?19 Was the MOA really the best course of action in the face of the foregoing assertions? Conclusion The Commission would like to note that this report embraces, for the most part, internal issues and does not cover possibly graver incidents of graft and corruption in sequestered and surrendered corporations supposedly subject of PCGG’s oversight functions. The current Commission has no representation on the boards of these corporations and is currently in a bind as to how it can fully and effectively exercise its mandate. Moreover, even with regard to internal issues, this prepared report is constrained and hamstrung by the paucity of records on certain matters and the state of record-keeping when the present Commission assumed office. Finally, it is underscored that this is a preliminary survey into the issues raised, with a view to identifying matters which ought to be the subject of deeper investigation. No accusations therefore are being leveled and no findings as to administrative, criminal and/or civil liability are being made. The new Commission stands firm alongside President Aquino and his administration’s commitment against corruption. It is hoped that this report can provide the baseline for examining questionable practices in the past and holding accountable those individuals who may have fallen short of the public trust. It is the new Commission’s hope that the PCGG will be a model agency whose hallmarks will be transparency and accountability to the people, and which can again lay full claim to being the Presidential Commission on Good Government. !

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
This would, admittedly, require PCGG and the Republic to change its theory of the case. Even if, assuming arguendo, we had lost the rescission case, the Republic would still have benefited as MPCP is wholly owned by GSIS.
18 19

Page!15!of!15! !

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Hcpiililir at f|)E Jt flippiiut y f

Office of tljt Solicitor @citeral
July 30, 2009

Hof . Camilo A. Sabio t Chairperson Presidential Commission on Good Goemmem IRC Building, 82 EDSA, Mandaluyong City

Ami. : Atty. MARIA LUISA M. NARVADKZ. Division Chiei, Legal Department

Dear Chairperson Sabio, Relative to the letter dated July 22, 2009 of Atty. Narvadez, atuduiig' therewith the letter dated July 20, 2009 of AtLy. Jose A. Barcelon, F.itst VicePr'esidcnt/Hcad, Off ce of die CorporaLe Sectetoty & Legal Services Gr up, United i o Coconut Planters Batik (UCPB), concerning his @UC y on the proposed offet of the San Miguel Corporation (SMC) oti May 21, 2009 for die shareholders to exchange
their Class "A" and "B" common shares f r a new class of shar s to be denominated o e as Scr es "1" Preferred Shares, please be informed that i the immediate, concern oi'

the Republic is the preservation of the value of the GUI' SMC s'tjales. This concern,
is pressing considering the cuiient: global financial crisis and liow ji; is expected to

#1

=tT{fct^ie=l5]iiljppr e'f Saf 6iarirriadori/iTliB"pror i@ i l l i i the CIIF SMC shares is rooted in the direshold principle that: the coconut levy fundsare public in chaxaete.t.

It will be recalled that; the Supreme Court has declared that the coconut levy
funds are prima facie public funds;1 hence, the assets purchased therewith arc public: or government assets2. Cor.ol1a.tijy, the Sandiganbsyau lias declared that the cuconur

Jcvy funds arc owned by the government .in ttust for all the coconut farmers.-' The Republic lias thus die duty and responsibility to preserve the value of the CU SMC T

1 372 SCRA 462 [2001] @ 2Resolut on dared February 16, "1993, KrpubBc w, Sumhtanh.i aTt, G-R. No. 96073 i y 3 pp. 66, Partial Saunj.jwy judgment dated May 7, 20O1, Civil Optic; No. UO33-F

.:@ Building. ^ Ai.noi.wlo SI.; l*ac^pLV(([aq<\ JMat'KCrlv. Pfilf ppln-ss.' f ll N'l. .^;^> H'fi.W.f i fax No, (632) 81 7/iU,3? Wr?h*IJf? v^v^w.or .gr^^.fih o l a t a

PCGG Letter dated July 22, 2009, regarding file attached Letter dated July 20, 2009 of Atly. Jose A. Barceior.;, Fitst Vlce-P^esident/PIcad, Office of the Corpo.mte Secretary & Legal Services Group, United Coconut Planters Bank (UCPS)

shares, the lattc* having been purchased wish coconut levy funds and the. fotme.t
being its ultimate owner.

Accordingly, there is an imper tive need to contain the expected fall-out f om a r

the global economic crisis and, as such, the value of the aforementioned sliates must be protected and maintained in order for the gover ment to maximize the benetit3 n
that- can be derved thcref om for the cochnut farmers and the coconut industry; i t hence, it is out considered opinion that t^ie conversion of the CIIF l MC common S shades to SMC Ser es 1 preferred shares is an option to preserve their value. i However, Lhe net proceeds of auch convex::iioii,

including the net dividends, should

be deposited in. axi escrow account, and st ch conversion shouM not prejudice the

previously ment oned deckrations of ih i Supreme Court and Saiidiganbayaii i
regarding" tlie charactex/oature of the CU!!' SMC shares. Futtriw, the Series 1 prefctted shaxes should recaain sequestered and tiip. dividends theteon. Should the Se ies 1 prefer red sliares be redeetned, wIjir.iJiej; in whole or it\ part, die proceeds should also tcrnaia sequestered.

i f Parenthetically, on July 24, 2009, ourjjOf ce received n copy of COCOFEB,
c;: @!-";. .Jrge;iiL Lviot cui: 10 /ippfovc die <...o:n |V .i:3.io>:> or \ >~ iSMC Common Siiate Into i SMC Seiies 1 Ptetei'ted Shf i'e.s dat d July 2 l e Notice of

2h

fi, 20Uy. Attached therewith is the SMC Statement dated July 23, 20094 wlilch

Exgulat Meeting and lofotrnat i.jii t:

discusses and compares the cotr nou shates and Series 1 ptefetreel sbai-es. As carx be a e gleaned from (lie SMC Notice of Regular Iv-Lcctitig and Inf uiiation Statement dated ^=f-uly---23j=2089-^tl-iG-iad:v?L[i(ages=Bf=EGH!V5EBi|( 90=o iTe=:EGiEHf5fFrshaies-to--tscaE5-il f

i fh

preferred shades ate as follows: i. The Scries 1 preferred shares shall bp entitled t receive cash dividends upon o declarat on tna.de at the sole option M the Hoatd of Directors, f xed at 8% per i i
ajununi as (.letc^raincd by Majjagcmenr. On the other hand3 lhetf; is no fixed irate o wnimoa shares. 1' fot dividend fate f r lommon 3hares. liunlier,

no dividend shall be declared arid

paid to holdr.ts of common shateq unless cash dividends shall have been holdr.tg share?

declared and paid to all holders of <lie Scr es 1 preferred skates. Moreover, i the Ser es 1 preferred shares aie cumulative, which r.xans that should i

1A copy of which, is hereto attackeJ fig Anttti "I"

PCGCt Letter dared July 22, 2009, regarding die atached Letter dated Juljr 20, 7VV9 or Any. Jose t A. Batcelon, First Vice-Presideiit/Had, Of ce of i f the Corpuratc Secretst.y &c Lcg^ Sel-viccs Group, United Coconut Planters Bmik (UCPD)

dividend paymexits get delayed, it wo Jd eventually be paid in the future, This feature is not available fo,t common 3hareholders.
The Series 1 ptcf t ed shares ate leijleemable in whole or ID par , at the sole ct t

option of tiie Company (SMC), at t le end of three (3) years &om the Issue
Date or on axiy Dividend Payment ' Jate thereaf er, at the pidce equal t the t o Issue Price plus any accumulated ui

paid cash dividends. Seides 1 preferred shares ate also peipctual or have no ; taced matur ty. i 3. Should SMC decide not to redeem t le Series 1 yjicSexte.d shares al: the end of Oividend Rule will be adjusted to the prevailing 10-year Philippine Dealing System Treasury Fixing (PDST-F) Rate plus a spread of up t 300 hasis 1 o points.3 This is an advantage because there is die opportunity for the Scries 1 i Pfeferied Sliareholdets to enjoy a bMieJr dividend .tate.
liighei: of 8% per annum, and thi; s the f fth year from Issue 1-late, tin i

4. The Series 1 pteferred shaixs havd piefeience over common shares upon

liquidation.

|

5. The .Ser es 1 Preferred Shates sli: 11 be listed -willi the Philippine St ck i o F.xchangc within one yea.t itotn iayi e date which should provide liquidity to
Lhe issue.

e On the other hand, the disaHvaniages Co ^hc conversion ar as follows:

1. HoldMs of Ser es 1 prefced shati.s will have no voting tights except as i a

5 p, 18, Annex "1"

PCGG .Lettet dated July 22, 20U9, regarding the attached Letter dnteti July 20, 2009 uf Any. Jose A. BarceJon, First Vice-Piejideot/HeMl, Oflffe uf tlie Cor]:)!)I.atc Secretary iSc Legal Stirpices Otuup, United Coconut Planters Bank (UCPB)

provided by law6. Thus, the FCGG's representatives in the SMC Bo aid will have been effectively removed ftotn patltr.ipnr ng in the management, of the i

SMC.
2. Series 1 preferred shares have no maturity date as these are perpetual shares.

There is no definite assurance that the SMC will exercise its option of
redemption.

3. Holders of the. Scries 1 preferred shar s shall not be entitled to any e participation or share in the retained earnings temaininp after dividend
payment shall lmve been made on Series 1. preferred shares.

'^&-

Sec. 6. CIass.f/(t t on ofshvxcft, @ xM ti Pieftilud ph;U'i'R of arock is&ucd by any corpo.t;itio< ttiajr ha givexi preference in the disttibution of Lhe assets of die corporat on, jn case of liquidation and in tlie. distr bution of dividends, or sucih other preferences ns may be: i i staied in the urJdes of incorpomUon which sire nut vlulaUvc uf ih.i; p,F,uvioJwt6 of rlils Code: Provided, 'I.Tin! t p^tfci^^d shares of stock m.;iy be issued o.oly -wllii a slated pac vtilun. 'Die lidani of dittictOJif , -whete autlioj.izcd l in the RitJclrm of incurpoialici.u, oiay iix lhe, Ir.una r lld tonditiuns of preferred akareg of stock or jiny se.i"i s t iherecf: Piavided, That such tcuns and condition? sbftll be cff'iir.tive npnii the filing of i\ cariif ciue tlicrcof witli i IJiC S^curir es and Hxcbf fvge Coinmissiorii l ^XX JiXK X^,S

_^^ "

Whergjiic PX(i^f_j^(: m_ i coip_u^i_O.n^^^^ holders of such 3ha1.es shall nevertheless he ef tilJf d to vote on the; following mtitteia: t t I, A'ii iidriieQt of the articles of mcoipolatJoa,

$>) ^'^
^K i/ (ff;M V;'^*

2. Adoption And amendment of by lawf ; i 3, Siik, kfi?c. cxchf Ligej mortgngc, pledge or ofiter disposition of till or subatMitifilly nl! of die l cnryjcjmtc propert ; y 4. Incurring, ciljatii) or increasing bonded indchi^dj^tidj 5. Iiun^isp c,c df dEaac nf capital stock; t 6. Merger or consoiidntiou of thq corpor t on with smoiher corpomrion oi: olIiKt cornotations; ai 7- Investment of <;Qipora[e funds in smollici' toipowtioi; oc busitiqee in accordance with thi.i Code S. and Dieaolutioa of llie corpotsitioii.

Exccpl: as pm-uidr.d in the immediately picccdjjig pwngidph, tht vole titfc.tr.f ary io approve a pa^ticujaii cojqpot3tc act aa provided in (b.15 Cofif shall be deemed to refet only to st cks with iroiing rtglit?. o

VCGG ].cl:tet dated July 22, 2009, regarding the attached I.t-itet dated Jiiljr 20, 2009 of Ally. Jose A. Barcdoo, Kist Vicc-PiEsidaic/Hciid, Oliia- of ihc Coqjorate ScCfCLf jy i^ Tr^3l Services Group, l Unit d Coconut Phntci.3 Bunk (UCPB) e

4. There is no expity date on the SMC's option to redeem the Ser es 1 Preferred i
Shares. Should market interest r tes fall below the Dividend Kale, on or after a 1 lie 3 rd anniversary from Issue Date, die SiMC may exercise the option lo

redeem the Ser es 1 Preferred Shaie3. i It is also our considered -view that the conversion of ihe CUP .SMC common
shares lo SMC Scries 1 preferred shares does not lake them away from the jurisdiction of the courts. In conversion, the SMC common shntcs are merely

ixciassifir.d into SMC Scries 1 preferred shares without changing the proportions] jotp.tcst of the Eloc-kholder in Sari Miguel Corporation. Verily, die conversion, of ilie Ql'l SMC common, shares to SMC Series I pr ferred shares does not involve a change in e the condition of said shares. .

I The conversion of the SMC common shatea to SMC Scries 1 preferred shares ', and its eventual redemption is legally allowable as long as the approval of the PCGG
is obtained for the amendment of the Articles or Incorporation of SMC, to allow the creation of the proposed pr ferred shaf ; with ils various features. e t As long as the

PCGG approval i:s obtained, the exercise or' the redemption feature of the SMC in
sccorilpnice with the Amended Attielea of Incotporar.ion would riot constitute ;i "sale" of the sequestered iiseet that is prohibited. The rationale for nor allowing the pale of a sequestered property is as follows:

Equally evide.nl is that rhc jrcaott to the provisional remedies in

/i,i(,

operat ons ot activities ag-lliat,.if .tiie_ yj.:nt_tliat_the_m:it;uBaUuu of i l

llc.reun:ned_M ta_riglitiiiLyrm_ie.SLMjM JlM^^ ^ /f @. condition as it was at the time ot'sciiuc.slfiUlU-ti-7

f{
'@ ' Applying the above rationale of the Supreme Court, if the rrgisfeted sequestration case, signify their approval
owners of the shares and the PCGGi, on behalf of (he Govetuiiient, which are the

partks-m-ifiteJxsiii in the pending

@ Republic vs. Sandignnbaysn, 192 SCKA 743 [1SW]

^epi&lk of tl)t $HjfUppiM

0(titt of Hie ^>0Hc tor Central
FOGG .Letter dated July 22, 2009, regarding the attached Letter tinted July 20, 2009 of Atty. Jose A. BaTCQlon, First Vicf-Pxrdde,nt/He;idn Of ce of e i f ilic Corpor te Secretary & Leyal Services Group, a United Coconut Plsmtera Bant (UCTB)

to/acceplauce of the proposed conversion, then the teax that Lliti: sequestered property will not be rclnined in the same condition to the rightful, owner, h; eliminated because all die patties would have gr en their conformity to the e

convcisJotiAcdcrnplioii. Thus, it is the PCGG that should approve or reject the
conversion of the SMC shares- Should PCCtG give its poos: acceptance and appiovAJ. in accordance with its procedures and mandate^ there should b'e no legal inipeditucm:

to the eventual redemption of the SMC Series 1 preferred share?, sboiild the right to redeem be exercised by the SMC.
Ui case the redemption of the SMC Sc'ticg 1 preferred shares tv.ke? place,, @whether in die three -yeiur ot five-yeiir Jxriod, the proceeds .from such rcdemptior.-. should immediately be deposited in hji eyeiov aeconrj^ itx a government bank/depositary, i.e., the Development Bank of the Philippines (DBP) or the Lane.

Bank of the Philippines (LBP).
Best petson;il .tejJafds.

-JVerjrtruIy=ynurp-l

@@ ~^~

AGISES YSYr)EVANAl3EBA
Snjjf itor Gcriexal c

3 Building. 134 Amo'SOlu SI-, l.'.-ympi VMcps, IA*i.iS Olr. Ili^JHiir s. Tel. No. (63?) IS.63.8i R No. (6W) 017AO..1? WeWle wvvw.cisg.gov.ph e

REPIJIU.K (M l 111 I'HIIJIM'INF.S

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT

RESOLUTION NO. 2009-037-756
Wl lhRJiAS. the Commission receivnl lioiu the I hilled Coconut Planters Ban! 1.1 !CTB) (locumcnts peitaining to llie pioposed ollei of San Miguel Coipoialion (SMC ) !i> ils shareholdeis io exchange then Class "A" ami "IV common shaics foi a new class ui shaies to be denominated as Senes "l" Piefcned Shares,

Wl ir.REAS, the Coconut Industry Invcstmenl I und (GUI') through the Oil' Holding Coiporations collectively own 'M6/I52,536 Class "A" and 307,395,7 /6 Class "B" shares in SMC;

; '

;. !; ;

WlihKI-AS, m addition to the foiegoing block of shares, the I'CGG I U--CARP
own 19,32/1,884 and 8,240,525 Class "A" and Class "15" shaies, Respectively,

W'HhKtiAS, Ilio llonorahle Supreme Court declaied that ihe (Jill' is jiritna Jaac. public in character and afiumed Ihe power of llie Commission to exercise, the rights ol a btockholdei over ali the sequesleied shares in I K'I'li "foi the puipose of, among otheis, electing or removing duectois, amending a charter, or making or amending, hv laws' (Republic versus COCUhkD. et al. .VI SCRA 162), \ I II'.RHAS, among (he plopeities sequestered by llie PCGG weie shares of stock m the San Miguel Coipoiation, including iheir increments such as cash and stock dividends.

including 77% of the outstanding capital stock of the SMC legisleied m the name of the
Coconut Industiy Investment Fund (CIIFr) Companies and the so-called "1-1 Holding Companies, WHf'Rf.AS, the Commission instituted an action for leconveyance, icversion, accounting, iestitntion and damages docketed as Civil Case No 0033-1' m Ihe /*

]
H_y *

' "! '

Sandiganbayan which pmmiilgated its Decision on May 27, 200-1 declaring the Cllf
block of San Miguel Corporation's shaies and all then increments as owned by the Government in trust for all the coconut farmeis,

/

Wl IhRHAS, the Commission is maiulaled to pieservc and conserve sequesteieri

assets 1o pi event their dissipation pending final adjudication by the coiuls of then
ownership,

WIU'RBAS, the United Coconut Planteis Bank (IJCl'B) Boaul of Duectois, in a
special meeting on July 20, 2009, categorically decided and concluded that it is j f t? ' financially benef cial to eonveit the Cllf SMC shaies as offered by the San Miguel i ( oi poration Copy of the UCPB Secretary's Ceitificale is heieto atlached as Annex A,

WIII-.RHAS, Ihe Department of Finance through Secretary Marganto li feves,
upon the lecoiuniendation of the Development Bank of the Philippines, confirms that the ^\ C shares conversion is f nancially and economically advanlageous and that the same i ,-,liall (Aoik foi tlie besl mleiest of tlie farmeis who are the ultimate and beneficial owners of said shaies Copy of the DOl7 conliimatiou is herelo allardied Annex "B " , ;

:. ,',

WIIHREAS, the Commission likewise lefened Ihe matter to the Off ce of the i Solicitor General (OSG) lor guidance,
WI II'.RliAS, in a letter dated JO July 2009, a copy of which is attached as Annex :'C", the OSG opined

[RC ISuililing, U 82 TDSA, Mauilaluyong City, Philippines
Tel. Nu. 727-2'J-2^ Telefax: 72S-9U-39 I'six: 727-29-20

Re.whitiim \

J(W-()J7-'56

Page .-@ <ij J

" X A" x please he informed tinit the immediate concern of the Republic is she [.'reservation of (lie value, of tin' ('III1' S\ ( ' shares /'/us concern is presstnsi considering (he current global financial crisis aiul how it is expected to af fect (he Philippine financial situation. Tlie pnoritization of preserving the value of the C JIF SM(' shares is rooted in the threshold principle thai (he coconut lew funds are puhhc in character It will be recalled that (lie Supreme C .ourt has declared that the coconut levy funds are pruna facie public funds: hence, the assets purchased therewith are public or government assets ( orollanlv, the Siuidiganhavtin has declared

that the coconut levy funds are owned bv the government in trust for all the coconut farmers. The Republic has thus the duty and responsibilitv to /.'reserve

the value of the (.'I//1' SMC shares; t/ie latter having been purc/iasvd with coconut /(?vv funds and the. former beuii!>_ its ultimate o\ ner.

Accordingly, there is an imperative need to contain the expected f all-out Jruiti (he global economic crisis and, as such, the value of the aforementioned shares must be protected and maintained in order (or the government to maxwu.-.f the benefits that can he derived therefrom tor the coconut fanner?, and the coconut industry; hence, it is our considered ojumon that tiie conversion of the ('///' SMC common shares to SM(' Series I pref erred shares is an option to preserve their value However, the net procatuis of such conversion, including I' net Oivniends, should be liepositea1 in tin i.'.sr/int1 account, and such conversion he s/hjuid not prejudice the previously mentioned declarations of the Supreme Lou/1 and Saiu.liganbayan regarding the character/nature of the Cllb' SM(' shares hurthc.r. the Series 1 preferred shares should remain sequestered and the dividends thereon. Should the Series I preferred shares be redeemed, wliether pi \ hole or in part, the proceeds shouhi also remain sequestered. Parenthetically, on July 27, 2009, our Office received a copy of ("CH 't )}'}@' >. et al '.v Urgent Motion To Approve the ( 'onversion of the ,S'A /< ' .} Common Share Into SMC Series I /'referred Shares dated July 24. 20>N Attached therewith is the SMC Notice of and Series / preferred shares Regular Meeting and inf ormation Statement doted July 23, 2009 which discusses and compares the common shares As can he gleaned from the SM( ' Notice of Regular Meeting and Information Statement dated July 23, 2009, the advantages of conversion of the common shares to Series I preferred shares are as f ollows 1 The Series 1 preferred shares shall be entitled to receive cash

dividends upon declaration made at the sole option of the Board o! Directors. ':\ a at V-n per unnum as determined by Management (.hi the other hand, there is no fixed divulend rate for common shares biirtficr, no dividend shall be declareil and paid to holders of common shares unless citsh dividends shall have been declared and paid to all holders of the Series I preferred shares Moreover, the Series I preferred shares are cumulative, which means that should dividend payments get delayed, it would eventually he paid in the future. Ihis feature is not available fur co/iimon shareholders. 2 The Series I preferred shares are redeemable in whole or in

part, at the sole option of the ( 'ompany (SM( '), at the end of three ( U wars from the Issue l)aie or on anv Dividend Payment Date thereafter, at the price equal r<> the Issue Price plus any accumulated unpaid cash dividends. Series I preferred shares are also perpetual or have no stated maturity 3 Should SA-IC decide not to redeem the Series 1 preferred shares

at the end ofthe f th year from Issue Date, the Dividend Rate will he ad i f justed to the higher of 8% per annum, and the prevailing 10 year Philippine Dealing S\ tcm I reasury I'txing (PI)Sl' I') Rate plus a spread of up to 300 basis points. 1'his is an advantage because there is the opportunity for the Series I Preferred Shareholders to enjoy a higher dividend rate.

Resolution Xo 2(1119-031-156

I'aoe 3 a! I

@@/.

'1 ht' Series 1 preferred shunts have preference over common

shares upon liquidation ') the issue On ihe other hand, (he disadvantages to the conversion are as fallows' 1 Holders of Sene> I pieferred shares will have no \ o(in% rw jits The Series I Preferred Shares shall be listed with the Philippine

Stock h.xchange within one year from issue dale which should provide liquidit to y

except as provide! by law. [hits, (he P(.(r(r's representatives in the S\ C Boora )i /// have been efje lively remove.il fr<>m par ticipatm^ m the manage men! of the .i Si\ fC. 2 Series I preferred shares have no maturity date i/s these ere

perpetual shares, i'here is no definue assurance that ihe SMC will exercise its option of redemption i Holders of the. Series I preferred shares shall no! he entitled to

a'w Lhirticipation or share in the retan led earnings remaining after dividend payment shall have been made on Series I preferred shares. @/ There is no expiry date on the SM( "s option to redeem the.

Sene\ ! Preferred Shares Should market interest rates fall below (he l.hvidend Hate. o>i <>r after the 3 anniversary from Issue j kite, the SM(.. may exercise the oution 10 redeem the Senes 1 Preferred Shares. /; is also our (onsuiered view that the conversion of the CHF SMi ' common shares to SMC Series I pref rred shares does not take them auav from e the jurisdiction of the courts In conversion, rhe SMC common shares arc merely re das sifted into SMi ' Series I prefer/a I shares without changing the i'enlv. the proportional interest of the stockhohier in San Miguel ( 't>i partition o! involve a change in the condition of send shares. I he conversion of the SMC common shares to SMC Series 1 preferred shares and us eventual redemption is legally allowable as long as the approval or the I'i.'ijG is obtained for the amendment of the Articles of Incorporation of SAKf to allow the creation of the proposed preferred share witlt its various features As long as the l'C(>(_r approval is obtained, (he exercise of the. redemption f eature, of the SMC in accordance with the. Amended Articles of [@@'.corporation would not constitute a "sale" of the \ -ipiestered asset that is pro' ni'iiicd I he ranonaie for not allowing the sale of n scijucstcrca1 property is as follow .i KxjUtii lv evident is that the resort to the provisional remedies in (jitestion should entail the least /'os.sihle interference with business operations or activities so tiiitt. m the event that the accusation of the business- enterprise being "ill-gotten" be not proved, it mav be returned tti n\ nv jir owner as far as jit f possible in the same iondition as n was at the time of , sequestration. Applying the above rationale of the Supreme ( 'ourt. i the registered f . owners of the shares and the /'( C ,C. on behalf of the ( iovemment, winch are the. parties-in interests in the pending sequestration case, sigtujv their approval to acceptance of the proposed conversion, then the fear that the sequestered property will not be relumed in the same, condition to the rightful owner, is cumulated because all the pai ties wouhl have given their conformity to the conversion redemption Thus, it is the Pi "< i( I that should approve or reject the conversion of the SMC shares. Should I'i 'GG givu its prior acceptance r,n<i approval in accordance with its procedures and mandate, (here should be no

conversion of the SM'f common shares to SMC Series I pref er/ed slnires iit>e\

I;

Mud:

Resolution A'o. 2009-0 J'/-7 56

Pafie. </ t

legal impediment to the eventual redemption of the SAJC Series 1 pref erred shares, should the light to redeem be exercised bv the SMC. In case the redemption oj the SMC Series I pref erred shares takes place, whetlicr in the three-year or f ive- year period, the proceeds from such redemption should immediately be deposited ui on escrow account in a government hank depositary, i.e., the Development Bank of the Philippines (DBF) or the Land Bank of the Philippines fl.BPJ. "

WHEREAS, guided by the foregoing, the Commission interposes no objection to the conversion of the C11F shares in SMC, as well as the PCGG ITF-CARP shares,
including the qualifying shaies issued to PCGG/goverument iioiniuee-diiectois, to Seiies "1" Preferred shares

NOW, TlLbREFORJE, be it RESOLVED, as il is hereby RESOLVED, that the
Commission hereby APPROVES, as it is hereby APPROVED, the conversion of the CUT1' owned common sliaies, as well as the PCUG ITF-CARP common shares, including the

qualifying shares issued to PCGG/governrnerrt nominee-directors in San Miguel Corporation (SMC), to Seiies "I" Preferred Shares, PURSUANT to the confirmation of the Department of Finance (DOF) and legal opinion ofihe Off ce of the Solicitor General i (OSG), and SUliJhCT to the conditions set forth in the said OSG opinion and requests the OSG to seek the approval of the Honorable Supreme Court for the said proposed
conversion

Done this 2"" day of September 2009, Mandaluyong City.

CAMIIX.) L. SABIO |
/ Chairman Jl\

RJC/ARDO M. ABCEDE Commissioner

/NARCISO S. NAR1O
// (Commissioner *", " "~~y:

TKKESOlV/J 'JAVIER
Commissioner

ykiM s.jJAifnsTA k
/ / C^oiiunissioner

QARIfl

@

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By : -H-n, nv ->1.-nA.@/@; ; i I

@@

Republic of Itie Philippines

DEPARTMENT OF FINANCE
Ruia [JuulcvaiU Q^mi:[_r3{i|[)(}cai [H', Si. Slicd ' PRCBifiEHfl'Af tul,IMPSf;u IN uu <3O< l[) OOl'tSPMiHEHr OfFICFOrillR .1 Fn.'.1lnrP.rjFS.-TI.()l.'lSH if SUfM. l f

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itGAL,,H@,,,EN, 1 IMS:

m SepXtfmber 2009
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daie: _kq2.t...!L.2a L_.

1Q.!^Q_.AJ^L__
JJeCo k-

PrE oi'lAIRfiwfcAi un: sABin '" ci'iAiRMW CAKi'
DalB RBC*'ed; @^ men.1,-' __ -@ ,- ; ' *.i^MT*riiES i^ j^j. p.ehM*ncelf .~_L_ a

i:ece!ved by@,

Chairman

[

IRC Building #82 EDSA,

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENV*1^ of the commission
" '\ SECRBTABY *ece votl By: i - n f)i) j

Mandaluyong City lie: Exchange Offer to convert the CIIF SMC
Common Shares lo Preferred Shares

Gentlemen,

ANNEX

r f

We ref r lo the above-referenced Exchange Offer of San Miguel e Corp. (SMC) and in response Lo and in compliance with the request by
the Presidential Commission on Good Government. In this regard, we hereby confirm, upon the recommendations of the Development Bank of

the Philippines (DBP), Ihe proposed conversion of the OIF SMC common shares to Preferred Shares is advantageous to the National Government on a purely financial standpoint. Based on the recommendations of DBP, the conversion is
advantageous due to the following reasons:

1. The market value of the common shares would he immediately enhanced by PHP9 per share or PHP7.09 B. This
is easily a 1/1% premium over market without the backing of any positive news.

2. The preferred shares give OIF a defined yield of 8% per year regardless of SMC's profitability especially in light of the uncertainty of dividends to its common shareholders given
diversification from its core business. The dividend yield on

S jMC__cQmmQii shares from _19_90 t_ 1^ lialf of 2009 is_gn o jy
1.7"/u per year, 'total cash dividends received by OIF since

purchasing the SMC shares in 1983 to date (26 years) is

PHP12.79 B. 'I his translates to an average of PMP492 M per year. Tlie 8% yield on preferred shares is equivalent to a staggering PHP4.52 13 per year. In 3 years' time, the entire

PHP12.79 B dividend earnings of CUF on its SMC common
shares easily surpasses the yield it gener tes on its SMC a preferred shares. 3. If CI1F were to stay on as common shareholder, it would be

vulnerable to dilution that could erode the value of its stake in SMC. We have seen this in 2005 when CIIF failed to fully
exercise its pre-emptive rights due to funding constraints.

Note that the 27% solid bloc was reduced to roughly 24%. In today's price, that 3% reduction is valued at roughly PHP6.2 B. The potential for an upside if CIIF were to stay on
as common shareholder is limited to share price movement

which is unlikely to surge dramatically over a 3-year horizon. While the risk of a diminution of its slake is high given so many possible scenarios and the fact that SMC's cashflows are being stretched by the preponderance of the projects it
wants to enter info (e.g. Laiban, TPLEX). By converting to

preferred shares, if would be locking in the value of its

shares within the range of PHP49.44 B to PHP5G.54 B which
range includes the market value of the 24% bloc today and if it were to be converted to preferred shares. A copy of the DBP recommendation dated 04 September 2009 is
hereto attached for your ready reference. Thank you.

Very truly yours,

MARGARITC? B. TEVES Secretary of Finance

0 (.) 8 5 4 7

DATE

4 SEPTEIMBER^2(K)9

Development Bank of the Philippines
STRICTLY CONFIDENTIAL

FOR FROM SUBJECT

SECRETARY GARY B. TEVEt REYNALDO G. DAVID CIIF SMC SHARES

Respectfully submitting, for th<; Secretary's consideration, our view on the
pioposed conversion of the Cllf-owned SMC common shares to preferred shares.

Background- The CIIF Oil Mills own 753,848,312 common shares of GIvIC representing 24% of the total outstanding capital stock of SMC. The Cllf's original equity in SMC in 1983 was 31% but decreased to 27% in 1990 afier the HCGG recognized the sail; mails by CIIF the SMC share'? were sequestered. This fulther decreased to 24% in 20(15 when PCGG, due to lack of funds, only partially sxerc;i<;eil its pro-omplive liyht in SMC's share
issuance.

Market Value. The 24% CIIF bloc in SMC has a market value of PHP49.4-4 B as of 4 September 2009. Averaye historical prices covering the last 15 days and as far back as 2007 are as follows (amount in in PUP): Average Price Period Last 10 days Last 15 "days
_L_ast 30_day _s~

Market Value
_nf ciif's 24'-::

"SMC "T^MCLr
65.01

6!v40
65.20

49JTb~

6<i81

" G4J3fT
57.40
"7rf.2O"

YTD 2009 2008

162.74
GO.rSCT

50.56 B
'4.B2 B

" 2007 [_ 72.10

|_73,5j _!

Proposed Exchange. SMC tias offered to convert 1 ,104,UUU,oou common shares (or 35% of total outstanUinij) to preferred shams ai a ratio of 1: 1 Issue price of the preferred shares is P75 pet share with a cumulative yield of 8% per year. The shares aie redeemable at the option of SMC. If no redemption is made by the fi"' yoar, tiro dividend late increases to 3% over
the 10-year GS rale prevailing at (hat time. SMC also has the opiion to purchase the preferred shares at any time and price.

^^*e.

The ,rlarl,e

Analysis.

From a purely financial standpoint we ar-

, @

conversion is advantageous duo 1 11,^2 ,eLonV
1 Tl', lnarkt8' value o( (lle @@ori.r.u.n sha.es would l,

V'*w tllaf tt e
?w thyf the
i,n,,,-dla,Hv

enhancer] by PHP9 per shale @,- PI if,' OH B

( hi-, r V'" H ' - f-)'

2 T he preferred shares cjive CUP a defined yipld of 8 = ;, . ,

,.ors|.

regardless of SMC's piofifabilily espeidRlly In light of Hie unoeiiainfy \ f dividends to its common shareholders given diversification from it?, core business I he dividend yield un oMQcomrnqn isiiaios from 19yo to I5' half of 2009 is only 1 .7% pel year. Total cash dividends ipr.ni-, JT~by Clll: sinco purchasing the SMC shares in 1983 to date (20 yen is) is
I 'I lt'12. ,'8 U. Thir-, tiiinskiles to an ,iVfi,Hge of PI II ''192 M p<;r year Tilt: B% yield oil piefened shares is r;i|Liivalent to a r-iagyenn-g [--' Ml '4.52 B pel yenr In 3 years1 time, the ontire (-'I II Mli 79 B flividenu eantings of ( dlt- on its !-j(V1C" common shnres easily j..iui|jRsses the yield

it generates on its SM< ' preferred sbar n e
3. If i ;1IF were to stay on ns common Eharetioktet, it would he vulneinblB

lo dilution liial cnulH ruoiln the value of ill, stake in SMC. We have seen this in 2005 wlinn CIIF failed to fully oxeioise its pie-eniptivH
rights due to funding cniirtr inl'; a reduced to rougtily 'JA0', at roughly PHI-'G 2 B. Nole tlifil tli '.> /"), solid IjP<.@ @: wns In today's pnt:.e, that 3".a [eduction i<= vnlue.:

I lie polential for an upside if CUT weir- In stay

on as common shaioholdei is limited to share price movement which is unlikely to singe dramatically ovm a 3-year hou-'on. While ihii u.-.k of a diminution of its r.take is high given so many pur.nihlo nsnivinos and the fart thai BMC's cashflows i\ . lieing stretched b1, the preponderance of the projects it wants In enter Into (e.g. Laiban.

TPI EX)

By converting to piefened shares, it would he locking in the

"alne' of its shares within the range of PI IP49.44 U to PHPor..;,4 B which range includes the maikel value of the 2<V.'<, bloc today and ir it were to be conver ed to profeiied shares t

l-or your information

RHYNALOO G. DAVID

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