Increase in minimum float for better corporate governance

By Ann Catherine Co, ACCRA Law Offices

Corporate governance is a system of rules and policies by which a company is directed and controlled. It influences the behaviour of the company including how risks are managed and how objectives are set.

Ann Catherine CoAssociateACCRA Law Offices
Ann Catherine Co
ACCRA Law Offices

In the past decade, the interest in corporate governance, particularly in relation to accountability of the board of directors, has exponentially increased. With the collapse of high-profile corporations such as Enron, WorldCom, and MCI, the US introduced the Sarbanes-Oxley Act, which aimed to weed out corporations with bad governance and restore public confidence.

In Asia, the 1997 Asian financial crisis exposed the weak governance of many corporations, which led the business community to re-examine the effectiveness of their own corporate governance. The government, on the other hand, is stricter than ever in imposing rules and regulations to restore public confidence.

In the Philippines, for publicly listed companies, the Security and Exchange Commission (SEC) has issued several listing guidelines that are required to meet certain governance standards, one of which is the implementation of the minimum public float requirement. In order to become a publicly listed company, the SEC requires a certain percentage of a company’s listed securities to become part of the public float.

The public float, or free float, represents the portion of outstanding stocks made available to public investors for stock trading. This refers to the shares that are freely bought and sold by the public, meaning those shares bought and sold to people or organizations other than directors of the company and its subsidiaries, and people connected to them.

Determining the public float figure is important for investors because it determines how many shares are actually bought and sold by the public, which in turn would show how valuable the stocks are by the number of times they are traded. The minimum public float requirement varies from country to country. In the Philippines, the SEC issued Memorandum Circular No. 13, Series of 2017, increasing the float requirement on initial public offerings (IPOs) from 10% to 20%.

The SEC also required those stocks currently listed and traded in the Philippine Stock Exchange (PSE) to increase their public float to 15% by the end of the year and, again, increase the public float to 20% by the end of 2020.

Whether the minimum public float requirement should be increased or not is subject to many debates in the Philippines. Circular No. 13 cited four reasons justifying its increase. First, by increasing the minimum public float, the market depth increases. This means that the company will become more liquid, which will then attract more investors.

Second, increasing the minimum public float reduces market volatility, which helps in better price discovery. Third, large and dispersed shareholdings lessen the risk of collusive market action, hence encouraging good governance.

Finally, a higher public ownership enhances free float market capitalization, which is important today, especially with the ongoing ASEAN integration where the average minimum public float in ASEAN countries is at 20-25%.

In 2012, when the SEC first imposed the 10% requirement, a lot of companies had a difficult time complying with it. The reason was that the public float affected corporate governance, either directly or indirectly, through the market for corporate control.

While circular No. 13 cited its advantages, some companies are reluctant to increase such for reasons including increased disclosure, potential loss of control, and pressure to perform.

Either way, when circular No. 13 is implemented, erring publicly listed companies will be subject to administrative sanctions provided under section 54 of the Securities Regulations Code.

Ann Catherine Co is an associate at the Cebu branch of ACCRA Law Offices


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