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5.Commercial Suggested Answers (1990-2006), Word

5.Commercial Suggested Answers (1990-2006), Word

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Insider
(2004)

Ms. OB was employed in MAS Investment
Bank. WIC, a medical drug company,
retained the Bank to assess whether it is
desirable to make a tender offer for DOP
company, a drug manufacturer. OB
overheard in the

Page 91 of 103 course of her work the plans of
WIC. By herself and thru associates, she
purchased DOP stocks available at the stock
exchange priced at P20 per share. When
WIC's tender offer was announced, DOP
stocks jumped to P30 per share. Thus OB
earned a sizable profit. Is OB liable for breach
and misuse of confidential or insider
information gained from her employment? Is
she also liable for damages to sellers or
buyers with whom she traded? If so, what is
the measure of such damages? Explain
briefly. (5%)

SUGGESTED ANSWER:

OB is an insider (as defined in Subsection
3.8(3) of the Securities Regulation Code)
since she is an employee of the Bank, the
financial adviser of DOP, and this relationship
gives her access to material information
about the issuer (DOP) and the latter's
securities (shares), which information is not
generally available to the public. Accordingly,
OB is guilty of insider trading under Section
27 of the Securities Regulation Code, which
requires disclosure when trading in
securities.

OB is also liable for damages to sellers or
buyers with whom she traded. Under
Subsection 63.1 of the Securities Regulation
Code, the damages awarded could be an
amount not exceeding triple the amount of
the transaction plus actual damages.
Exemplary damages may also be awarded in
case of bad faith, fraud, malevolence or
wantonness in the violation of the Securities
Regulation Code or its implementing rules.
The court is also authorized to award
attorney's fees not exceeding 30% of the
award.

Insider Trading
(1995)

Under the Revised Securities Act, it is
unlawful for an insider to sell or buy a
security of the issuer if he knows a fact of
special significance with respect to the issuer
or the security that is not generally available,
without disclosing such fact to the other
party. 3.a) What does the term “insider”
mean as used in the Revised Securities act?
3.b) When is a fact considered to be “of
special significance” under the same Act?
3.c) What are the liabilities of a person who
violates the pertinent provisions of the
Revised Securities Act regarding the unfair
use of inside information?

SUGGESTED ANSWER:

3a. “Insider” means 1) the issuer, 2) a
director or officer of, or a person controlling,
controlled by, or under common control with,
the issuer, 3) a person whose relationship or
former relationship to the issuer gives or
gave him access to a fact of special
significance about the issuer or the security
that is not generally available, or 4) a person
who learns such a fact from any of the
foregoing insiders with knowledge that the
person from whom he learns the fact is such
an insider (Sec 30b, RSA)

3b. It is one which, in addition to being
material, would be likely to affect the market
price of a security to a significant extent on
being made generally available, or one
which a reasonable person would consider
especially

Mercantile Law Bar Examination Q & A (1990-2006)

important under the circumstances in
determining his course of action in the light
of such factors as the degree of its
specificity, the extent of its difference from
information generally available previously,
and its nature and reliability. (Sec. 30c, RSA)
3c. The person may be liable to 1) a fine of
not less than P5th nor more than P500th or
2) imprisonment of not less than 7 years nor
more than 21 years, 3) or both such fine and
imprisonment in the discretion of the court.
If the person is a corporation, partnership,
association or other juridical entity, the
penalty shall be imposed upon the officers of
the corporation, etc. responsible for the
violation. And if such an officer is an alien, he
shall, in addition to the penalties prescribed,
be deported without further proceedings
after service of sentence. (Sec 56 RSA)

Insider Trading; Manipulative
Practices (1994)

1) Give a case where a person who is not an
issuing corporation, director or officer
thereof, or a person controlling, controlled by
or under common control with the issuing
corporation, is also considered an “insider.”
2) In Securities Law, what is a “shortswing”
transaction. 3) In “insider trading,” what is a
“fact of special significance”?

SUGGESTED ANSWER:

1) It may be a case where a person, whose
relationship or former relationship to the
issuer gives or gave him access to a fact of
special significance about the issuer or the
security that is not generally available, or a
person, who learns such a fact from any of
the insiders, with knowledge that the person
from whom he learns the fact, is such an
insider (Sec 30, par (b) Rev Securities Act)

2) A “shortswing” is a transaction where a
person buys securities and sells or disposes
of the same within a period of six (6)
months.

ALTERNATIVE ANSWER:

2) It is a purchase by any person for the
issuer or any person controlling, controlled
by, or under common control with the issuer,
or a purchase subject to the control of the
issuer or any such person, resulting in
beneficial ownership of more than 10% of
any class of shares (Sec 32 R Sec Act)
3) In “insider trading,” a “fact of special
significance” is, in addition to being material,
such fact as would likely, on being made
generally available, to affect the market price
of a security to a significant extent, or which
a reasonable person would consider as
especially important under the circumstances
in determining his course of action in the
light of such factors as the degree of its
specificity, the extent of its difference from
information generally available previously,
and its nature and reliability (Sec 30 par c
RSecAct)

Manipulative
Practices (2001)

Suppose A is the owner of several inactive
securities. To create an appearance of active
trading for such securities,

Page 92 of 103 A connives with B by which A
will offer for sale some of his securities and B
will buy them at a certain fixed price, with
the understanding that although there would
be an apparent sale, A will retain the
beneficial ownership thereof. a) Is the
arrangement lawful? (3%) b) If the sale
materializes, what is it called? (2%)

SUGGESTED ANSWER:

a) No. The arrangement is not lawful. It is an
artificial manipulation of the price of
securities. This is prohibited by the Securities
Regulation Code. b) If the sale materializes,
it is called a wash sale or simulated sale.

Securities Regulation Code;
Purpose (1998)

What is the principal purpose of laws and
regulations governing securities in the
Philippines? (2%)

SUGGESTED ANSWER:

The principal purpose of laws and regulations
governing securities in the Philippines is to
protect the public against the nefarious
practices of unscrupulous brokers and
salesmen in selling securities.

Securities;
Definition (1996)

Define securities

SUGGESTED ANSWER:

Stocks, bonds notes, convertible debentures,
warrants or other documents that represent
a share in a company or a debt owned by a
company or government entity. Evidences of
obligations to pay money or of rights to
participate in earnings and distribution of
corporate assets. Instruments giving to their
legal holders rights to money or other
property; they are therefore instruments
which have intrinsic value and are
recognized and used as such in the regular
channels of commerce.

(Note: Sec 2a of the Revised Securities
Act does not really define the term
‘securities.’)

Securities; Selling of Securities;
Meaning (2002)

2002 (18) Equity Online Corporation (EOL), a
New York corporation, has a securities
brokerage service on the Internet after
obtaining all requisite U.S. licenses and
permits to do so. EOL’s website
(www.eonline..com), which is hosted by a
server in Florida, enables Internet users to
trade on-line in securities listed in the various
stock exchanges in the U.S. EOL buys and
sells U.S. listed securities for the accounts of
its clients all over the world, who convey their
buy and sell instructions to EOL through the
Internet. EOL has no offices, employees or
representatives outside the U.S. The website
has icons for many countries, including an
icon “For Filipino Traders” containing the
day’s prices of U.S. listed securities expressed
in U.S. dollars and their Philippine peso
equivalent. Grace Gonzales, a resident of
Makati, is a regular customer of the website
and has been purchasing and selling
securities through EOL with the use of her
American Express credit card. Grace has
never traveled outside the Philippines. After a
series of erroneous stock picks, she had
incurred a net indebtedness of US$30,000.
with EOL, at which time she cancelled her
American Express credit card. After a

Mercantile Law Bar Examination Q & A (1990-2006)

number of demand letters sent to Grace, all
of them unanswered, EOL, through a Makati
law firm, filed a complaint for collection
against Grace with the Regional Trial Court of
Makati. Grace, through her lawyer, filed a
motion to dismiss on the ground that EOL (a)
was doing business in the Philippines without
a license and was therefore barred from
bringing suit and (b) violated the Securities
Regulation Code by selling or offering to sell
securities within the Philippines without
registering the securities with the Philippine
SEC and thus came to court “with unclean
hands.” EOL opposed the motion to dismiss,
contending that it had never established a
physical presence in the Philippines, and that
all of the activities related to plaintiffs trading
in U.S. securities all transpired outside the
Philippines. If you are the judge, decide the
motion to dismiss by ruling on the respective
contentions of the parties on the basis of the
facts presented above. (10%)

SUGGESTED ANSWER:

The grounds of the motion to dismiss are
both untenable. EOL is not doing business in
the Philippines, and it did not violate the
Securites Act, because it was not selling
securities in the country.
The contention of EOL is correct, because it
never did any business in the Philippines. All
its transactions in question were
consummated outside the Philippines.

Tender Offer
(2002)

2002 (6)
A. What is a tender offer?
B. In what instances is a tender offer required
to be made?

SUGGESTED ANSWER:

A. Tender offer is a publicly announced
intention of a person acting alone or in
concert with other persons to acquire equity
securities of a public company. It may also
be defined as a method of taking over a
company by asking stockholders to sell their
shares at a price higher than the current
market price and on a particular date.

B. Instances where tender offer is required to be
made:

a)

The person intends to acquire 15% or

more of

the equity share of a public company
pursuant

to an agreement made between or among
the

person and one or more sellers.

b)

The person intends to acquire 30% or

more of

the equity shares of a public company within
a

period of 12 months.

c)

The person intends to acquire
equity shares of a public company that
would result in ownership of more than
50% of the said shares.

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