MANILA, October 27, 2004 (STAR) By Aurea Calica - The Department of Justice (DOJ) defended before the Supreme Court yesterday the Social Security System (SSS)’s sale of its equity stake in Equitable PCIBank to Banco de Oro (BDO) Capital and Investment Corp. through the "Swiss challenge."

Justice Secretary Raul Gonzalez, acting as counsel for the SSS, told the SC that the petition filed by Senators Sergio Osmeña III, Juan Flavier, Rodolfo Biazon, Alfredo Lim and Ana Consuelo Madrigal along with private individuals Luis and Patricia Sison should be dismissed for lack of merit. Gonzalez said the status quo order issued by the high court should be set aside.

The senators contend that the sale of the SSS’ equity stake in Equitable PCIBank through the Swiss challenge unduly favored BDO Capital.

Osmeña said the Swiss challenge procedure violated public policy because government assets should be disposed of through public bidding.

"The Swiss challenge is not a mode of public bidding but a mechanism for awarding government contracts on (a) negotiated basis," Osmeña said.

He said the Swiss challenge is allowed for certain infrastructure projects under the build-operate-transfer (BOT) law and not to shares of stock.

In a 56-page comment, the DOJ said transparency and fair competition were not sacrificed despite the SSS’ use of the Swiss challenge procedure, since this is acceptable in the sale of shares and is not limited solely to BOT projects as the senators claimed.

The DOJ said Commission on Audit (COA) Circular No. 89-296 requiring public bidding would not apply to the disposal of merchandise inventory held for sale in the regular course of business of a government-owned or -controlled corporation (GOCC).

Despite this exception, Gonzalez said, the SSS deemed it best to hold a public bidding using the Swiss challenge to determine the best price for the shares.

He added that the SSS pushed through with the bidding despite the fact that BDO Capital was put at a disadvantage because it had already announced its offer and signed an agreement with the SSS on Dec. 30, 2003.

According to the DOJ, the Swiss challenge procedure upholds the three principles of essential public bidding: There was an offer to the public, an opportunity for competition and basis for the comparison of bids.

"The right match will be advantageous to SSS, as it will effectively set a floor price for the sale of the shares," the DOJ said.

It added that the price of P43.50 per share was reasonable, considering that SSS stocks were being traded at P34.50 per share at the time of sale to BDO Capital.

In Opinion No. 55 dated June 27, 2003, the DOJ confirmed that the use of the Swiss challenge procedure in a non-BOT project was allowed.

The SC also held that in the case JG Summit Holding vs Court of Appeals, a right to top or match a bid might be validly granted in a public auction as long as the basic principles of bidding were not violated.

"Even if BDO Capital is given by SSS the right to match the highest bid in the public auction of the shares, all the other bidders are going to be exposed to the same risks and conditions of which they were informed before they gave their actual bids."

"Hence, there is no violation of the underlying principle behind a public bidding which is competition and transparency," the DOJ said.

The DOJ stressed that BDO Capital was not given undue preference because it would still have to match the highest bid before the award will be granted to it.

The DOJ said the conduct of public bidding without the Swiss challenge format would actually be disadvantageous to the government, since it would have to settle for the bids even if they were all lower than P43.50 per share.

The SSS itself setting a floor price might also not prove successful in creating competition among possible buyers and result in a failure of bidding.

"The situation did not arise in the Swiss challenge because there is a ready purchaser of the shares at the price of P43.50," the DOJ said. "Moreover, public respondent simply intended to be fair to BDO Capital, whose bid or offer had already been disclosed to the public."

The Swiss challenge would have been held on Oct. 20 had the SC not issued its status quo order on Oct. 5.

BDO Capital also said its agreement with the SSS was legal, as ruled by the COA and the DOJ.

"The (DOJ), in its letter dated April 29, confirmed that it found nothing legally objectionable with the provisions of the share purchase agreement," BDO Capital said.

BDO Capital also belied claims that the price of SSS shares could be sold for as much as P60.

It said that the last time SSS shares were traded for P60 per share was in 1987, adding that the prices of SSS shares never exceeded P60 since then. In 2002, it said, the market price was as low as P16 and later climbed to P34.

"The only reason it is at the P40 level is because of the market’s response to BDO Capital’s price of P43.50," it added.

Reported by: Sol Jose Vanzi

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