VICTORIAS MILLING COMPANY,

INC. The Bittersweet Struggle Part 2

Company Background

Victorias Milling Company, Inc. (VMC) is a domestic corporation located in Victorias City,
Negros Occidental. Since its incorporation on May 7, 1919, VMC has engaged in integrated raw
and refined sugar manufacturing.

• VMC continues to lead all sugar centrals with 7,021,820 Lkg (1 Lkg = 50 kgs) of raw sugar
production which comprises 27.20% of production share in Negros Occidental Province

• It also operates engineering services and the following subsidiaries:

o Victorias Foods Corporation (VFC),

o Canetown Development Corporation (CDC)

o Victorias Quality Packaging Corporation (VQPC),

o Victorias Golf and Country Club, Inc. (VGCCI),

o Victorias Agricultural Land Corporation (VALCO)

TIMEFRAME
1919

Victorias Milling Company, Inc. is founded by Miguel J. Ossorio with his wife Paz, his brother
Francisco, Shiras M. Jones, and Claudio R. De Luzuriaga. It has a grinding capacity of 1,500 tons of
sugar cane daily.

1921

The sugar factory begins operations.

VMC begins its refinery operations, the second to be established in the Philippines.

North Negros Sugar Company (NONSUCO), the first mill that MJ Ossorio established in 1917 in the
town of Manapla, begins distillery operations.

1929

From this year onwards, both VMC and NONSUCO sustained sugar exportation to the United States.
VMC builds its fleet.

1941

The Second World War ravages the Philippines and subsequently, VMC’s facilities.

1945

VMC’s facilities commence rehabilitation immediately after the Second World War. The company
also acquires the heavily damaged NONSUCO, and merges the latter’s surviving assets with its own.

1954

The Victorias Golf & Country club opens.

1960

The C-Mill, the first automatic mill in the Philippines, is installed at the raw sugar factory.

The first diesel-electric locomotive joins the company fleet.

1968

VMC starts its food processing operations.

1975

Canetown Development Corporation sets up the Canetown Subdivision to address the residential
needs of VMC employees and retirees.

1985

The VMC food processing plant, now known as Victorias Foods Corporation (VFC) exports canned
light tuna chunks to Canada.

1988

A Yoshimine boiler goes into operation, adding to the steam supply as well as to the electric
generating capacity of the mill.

Victorias Agricultural Land Corporation (VALCO) is set up.

1997
Hit hard by the Asian Financial Crisis, VMC goes under a corporate rehabilitation program.

2003

VMC begins a 15-year debt-to-equity restructuring program.

2012

VMC resumes trading in the Philippine Stock Exchange as the SEC orders the lifting of its trading
suspension.

2014

VMC fully pays all its restructured loans and successfully redeems all its convertible notes.

The Case
Victorias Milling Company, Inc. (VMC) is an agro-industrial complex located in Victorias City,
Negros Occidental. It was founded by Don Miguel J. Ossorio on May 7, 1919. Built on solid
600-hectare ground, it was among the earliest modern sugar firms in the country at the turn of the
century. From its lowly beginnings of 1,500 tons raw capacity, the sugar mill has evolved into
one of the largest integrated raw and refined sugar operations in the world.

VMC is the result of the integration of two sugar mills – the original VMC and the North Sugar
Company or NONSUCO, the first sugar mill built by Don Miguel in 1917 in the Municipality of
Manapla.
During the outbreak of the Japanese war, NONSUCO was almost completely devastated while
VMC suffered extensive damages.

Don Miguel thought that rehabilitating NONSUCO was too impractical to do. He, therefore,
decided to merge its assets with those of VMC.

In 1996, VMC experienced near collapse. It was granted a suspension of payments status under
the Securities and Exchange Commission (SEC). And as a result of 15-year Alternative
Rehabilitation Plan (ARP) developed by creditor banks and upheld by the SEC and the Court of
Appeals, VMC went through quasi-reorganization as well as a conversion of debt to equity
whereby bank creditors comprised 69.5% of the company’s common stockholders.

In order to survive, the Company closed down, leased, and spun-off all its non-sugar operations
except Engineering Services. It has focused on improving revenue generation and embarked on
continuing Cost Reduction Program.

In spite of its being under rehabilitation, VMC has continued to demonstrate strength and
competitiveness as shown by its operating and financial performance in the first 8 years of its
rehabilitation program.

Statement of the Problem

Explanation on how does VMCI fare vis-à-vis OECD’s principle on the equitable
treatment of shareholders at this phase?

Discuss shareholders’ rights and key ownership functions according to the OECD
manual. In the case of VMCI, what rights were overlooked or inadequately attended to?
What functions were inadequately attended to?

Analysis
“Discuss the OECD Principle on disclosure and transparency. What elements of this
principle were overlooked by the executive officers of VMCI? How could they have
addressed such an oversight?”

Problem:

VMCI suffered large debts from several creditors. It shows a poor regulatory system. In relation
to this, its fate has been relegated not merely to the desks of its Board of Directors, but already to
the halls of the Securities and Exchange Commission (SEC).
Recommendation:

Disclosure is important, but is difficult to apply. Disclosure is the key not only to attracting
capital, but also attracting new executives, new technologies, new alliances and marketing
partnerships.

The corporate governance framework should ensure that timely and accurate disclosure is made
on all material matters regarding the corporation, including the financial situation, performance,
ownership, and governance of the company.

A strong and fair regulatory system should first be launched so that transparency and disclosure
can play their role in attracting more capital to the region. It is important because it establishes
confidence in the dissemination of accurate information, and thud attracts investment.

“How does VMCI fare vis-à-vis OECD’s principle on the equitable treatment of
shareholders at this phase? Explain.”

Principle:

The corporate governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.

Problem:
Specifically, members of the board and key executives should be required to disclose to the
board whether they, directly, indirectly, or on behalf of third parties, have a material interest in
any transaction or any matter directly affecting the corporation. In the case of VMCI, the ARP1
was basically the rehabilitation plan of the Mancom, subject to a number of conditions raised by
VMCI’s board. Therefore, VMCI has failed to comply with the principle mentioned.

On the other hand, the shareholders have raised their objections regarding the issuance of new
shares of stocks required. It was evidenced that the shareholders have been deprived to exercise
their preemptive rights given that SEC approved the condition as stated in the ARP1 that the
shareholders should subscribe to the entire 194.95 million new shares of stock amounting to
P567.08 million which VMCI will issue to accumulate fresh capital.
The corporate governance framework should ensure the equitable treatment of all shareholders,

Recommendation:

It then suggests that stakeholders, should be able to freely communicate their concern about
illegal or unethical practices to the board and their rights should not be compromised for doing
this.

“Discuss shareholders’ rights and key ownership functions according to the OECD
manual. In the case of VMCI, what rights were overlooked or inadequately attended to?
What functions were inadequately attended to?”

Problem
VMCI didn’t address some of the basic rights of its shareholders and its key ownership
functions. It didn’t obtain relevant and material information on the corporation on a timely and
regular basis. If it has done such, then shareholders would assess the performance of the
corporation and might come up with possible remedies that might sustain its financial position
and resolve its financial distress. Share in the profits of the corporation was also claimed as an
issue in relation to the deprivation of the shareholders preemptive rights, hence, being unable to
exercise such right would result to a decrease in shares ownership which means that the
dividends that they are about to receive would be lesser.

Recommendation:

Corporate governance framework should protect and facilitate the exercise of shareholders’
rights.

Basic shareholders’ rights should include the right to: 1) secure methods of ownership
registration; 2) convey or transfer shares; 3) obtain relevant and material information on the
corporation on a timely and regular basis; 4) participate and vote in general shareholders
meeting; 5) elect and remove members of the board; and 6) share in the profits of the
corporation.

On the other hand, shareholders should the right to participate in, and to be sufficiently informed
on, decisions concerning fundamental corporate changes such as: 1) amendments to the statutes,
or articles of incorporation or similar governing documents of the company; 2) the authorization
of additional shares; and 3) extraordinary transactions, including the transfer of all or
substantially all assets, that in effect result in the sale of the company.