Business judgment rule

The more I read about the fight over listed energy company First Gen’s investment in Prime Infrastructure Capital’s hydropower projects, the more I find myself sifting through the things that mattered. More than the family dispute, the court cases or the corporate resolutions, we seem to be distracted by narratives, which are important, but are not the end-all and be-all of the situation.

There is indeed a focus on some arguments about the transaction and its nature: a premium was paid, the investment was too expensive, the ownership structure was wrong, the risks outweighed the rewards, etc.

But if, according to these arguments, the project was such an obvious mistake, why were so many others interested in it?

Just a brief background about the deal.

First Gen sold 60 percent of its gas business to Prime Infra for P48.8 billion. Then through First Gen subsidiary FG Aqua Power, it bought a 33 percent stake in Prime Hydropower Energy Inc. (PHEI) for about P61.9 billion. PHEI is the company behind the 600-megawatt Wawa pumped storage hydroelectric (PSH) project in Rizal and the 1,400-megawatt Pakil PSH in Laguna.

First Gen president Giles Puno explained that these hydro projects are expected to contribute around P16 billion a year to First Gen under a 20-year contract.

The STAR recently reported that First Gen independent directors Alicia Rita Morales, Edgar Chua and Manuel Francisco Ayala have all reiterated their support to the company’s investment in these two PSH projects of Prime Infra, saying that after exercising objective and independent judgment in evaluating the projects and at the end of a thorough review process, they concluded that the investment will benefit First Gen, its stockholders and even the country as it would help ensure the security of the power grid and reduce reliance on imported fossil fuels and carbon emissions.

According to reports, Prime Infra’s pumped-storage hydropower portfolio attracted interest from as many as 13 to 15 international companies before First Gen was eventually selected as partner.

The projects secured hundreds of billions of pesos in financing and have been recognized for their national significance. Banks, infrastructure specialists, engineers and investors spent years examining, studying and finding potential in them.

What made the projects interesting to the bankers and the experts are not entirely the percentages, premiums, board resolutions, disclosures. They recognized the value of the assets themselves: the Philippines’ largest energy-storage projects in its history.

That seems worth discussing, especially because we know, and are experiencing, the very problem that the projects aim to solve. We felt the effects of the recent conflict in the Middle East. We were literally bill-shocked when energy prices spiked along with transport costs. We know what dependence on imported fuel looks like because we pay for it every single day.

We are already all too familiar with where to get our energy, whether it be from petrol, coal, hydroelectric or even solar. But energy is economics, as with any form of economics is not just about supply. Demand, unfortunately, does not always cooperate and we need electricity to be available when it rises.

That is where energy storage comes in.

The easiest way to understand Prime Infra’s pumped-storage hydropower is to think of it as a giant battery. Excess power pumps water uphill. Then, when demand rises, the water comes back down and generates electricity. The concept is simple. Building it is not.

The debate over the First Gen transaction seems to have created the impression that the project exists in isolation, detached from the country’s larger energy needs. That could not be further from the truth.

The Philippines needs more energy storage as part of its greater energy security plan; to be less reliant on imported fuel. Those realities will remain long after the present dispute has faded from memory.

Of course, none of this proves that the transaction was perfect. Large investments can be overpriced. Management can make mistakes. Critics can raise legitimate concerns.

The doctrine of centralized management which is recognized under Section 22 of the Revised Corporation Code of the Philippines dictates that all corporate powers, business operations and properties are vested exclusively in a corporation’s board of directors while the business judgment rule dictates that the courts and the Securities and Exchange Commission are barred from intruding into the business decisions of the board provided that these decisions are made in good faith and within their authority.

Corporate directors and officers are presumed to be acting in the best interest of the corporation and the courts, as well as the SEC, will not interfere and will not substitute their own judgment for that of the board, recognizing that business involves inherent risks and the board is best positioned to manage them.

These rules, which are recognized not only here but even in other jurisdictions, allow directors to make risky decisions without fear of prosecution, subject of course to certain exceptions such as fraud, bad faith, gross negligence, among others, all of which have not been raised against the First Gen directors in this particular case.

Also, describing an asset as obviously undesirable becomes more difficult when so many sophisticated players have, apparently, been trying to acquire a piece of it.

That is the part I keep returning to; not the premium, not the percentages, not the press releases, but the asset.

Because if multiple investors looked at the same project and saw value, then the burden is no longer simply to explain why the deal was attractive.

The burden is also to explain why everyone else was wrong. This may be the most interesting question in this entire dispute.

Long after the press releases are forgotten and the court cases are resolved, the question will not be who won the argument. The question will be whether what was built was worth building.

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