G.R. No. 125469 October 27, 1997 PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs.

THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC., respondents. PURPOSE OF LAWS ON SECURITIES / REGULATORY POWERS OF THE SEC OVER PSE TORRES, JR., J.: The Securities and Exchange Commission is the government agency, under the direct general supervision of the Office of the President, 1 with the immense task of enforcing the Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable functions, and one of the most important, is the supervision of all corporations, partnerships or associations, who are grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines. 2 Just how far this regulatory authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar. In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the public offering of PALI's shares. The facts of the case are undisputed, and are hereby restated in sum. The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an application to list its shares, with supporting documents attached. On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application, recommended to the PSE's Board of Governors the approval of PALI's listing application. On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate Development Corporation, which is among the stockholders of PALI, likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested PALI's application to be deferred. PALI was requested to comment upon the said letter. PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and

Resort Complex, thereby implying that they are also asserting legal and beneficial ownership of other properties titled under the name of PALI. On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good Government (PCGG) requesting for comments on the letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a Temporary Restraining Order on the same date, enjoining the Marcoses from, among others, "further impeding, obstructing, delaying or interfering in any manner by or any means with the consideration, processing and approval by the PSE of the initial public offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof. In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject PALI's application, citing the existence of serious claims, issues and circumstances surrounding PALI's ownership over its assets that adversely affect the suitability of listing PALI's shares in the stock exchange. On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in the application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing application and institute such measures as are just and proper under the circumstances. On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and directing the PSE to file its comments thereto within five days from its receipt and for its authorized representative to appear for an "inquiry" on the matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI. On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion of the said order reads: WHEREFORE, premises considered, and invoking the Commissioner's authority and jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange, without prejudice to its authority to require PALI to disclose such other material information it deems necessary for the protection of the investigating public. This Order shall take effect immediately. SO ORDERED. PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the Commission in its May 9, 1996 Order which states: WHEREFORE, premises considered, the Commission finds no compelling reason to reconsider its order dated April 24, 1996, and in the light of recent developments on the adverse claim against the PALI properties, PSE should require PALI to submit full disclosure of material facts and information to protect the investing public. In this

regard, PALI is hereby ordered to amend its registration statements filed with the Commission to incorporate the full disclosure of these material facts and information. Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with Application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned orders of the SEC, submitting the following as errors of the SEC: I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS; II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING APPLICATION; III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION; AND IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE CONSTITUTION. On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and Opposition to Motion to Dismiss. On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for Review. Hence, this Petition by the PSE. The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner is subject to public respondent's jurisdiction, regulation and control. Accepting the argument that the public respondent has the authority merely to supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock exchange whose business is impressed with public interest. Abuse is not remote if the public respondent is left without any system of control. If the securities act vested the public respondent with jurisdiction and control over all corporations; the power to authorize the establishment of stock exchanges; the right to supervise and regulate the same; and the power to alter and supplement rules of the exchange in the listing or delisting of securities, then the law certainly granted to the public respondent the plenary authority over the petitioner; and the power of review necessarily comes within its authority. All in all, the court held that PALI complied with all the requirements for public listing, affirming the SEC's ruling to the effect that:

. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application of PALI for listing of its shares in the face of the following considerations: 1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of the Exchange; 2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE has failed to justify why it acted differently on the application of PALI, as compared to the IPOs of other companies similarly situated that were allowed listing in the Exchange; 3. It appears that the claims and issues on the title to PALI's properties were even less serious than the claims against the assets of the other companies in that, the assertions of the Marcoses that they are owners of the disputed properties were not substantiated enough to overcome the strength of a title to properties issued under the Torrens System as evidence of ownership thereof; 4. No action has been filed in any court of competent jurisdiction seeking to nullify PALI's ownership over the disputed properties, neither has the government instituted recovery proceedings against these properties. Yet the import of PSE's decision in denying PALI's application is that it would be PALI, not the Marcoses, that must go to court to prove the legality of its ownership on these properties before its shares can be listed. In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief. The point is, the PALI properties are now titled. A property losses its public character the moment it is covered by a title. As a matter of fact, the titles have long been settled by a final judgment; and the final decree having been registered, they can no longer be re-opened considering that the one year period has already passed. Lastly, the determination of what standard to apply in allowing PALI's application for listing, whether the discretion method or the system of public disclosure adhered to by the SEC, should be addressed to the Securities Commission, it being the government agency that exercises both supervisory and regulatory authority over all corporations. On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for Review on Certiorari, taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG's motion for leave to file petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997. On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE. PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC over stock exchanges are more limited as compared to its authority over ordinary corporations. In connection with this, the powers of the SEC over stock exchanges under the

Revised Securities Act are specifically enumerated, and these do not include the power to reverse the decisions of the stock exchange. Authorities are in abundance even in the United States, from which the country's security policies are patterned, to the effect of giving the Securities Commission less control over stock exchanges, which in turn are given more lee-way in making the decision whether or not to allow corporations to offer their stock to the public through the stock exchange. This is in accord with the "business judgment rule" whereby the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. the said rule precludes the reversal of the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE. Under the listing rules of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing. Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuer's listing application if the PSE determines that the listing shall not serve the interests of the investing public. Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations whose properties are under sequestration. A reading of Republic of the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI, which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC). are under sequestration by the PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the "law of the case" between the Republic and TDC and MSDC. It categorically declares that the assets of these corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988. It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its properties can no longer be questioned, since certificates of title have been issued to PALI and more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on land titles. That a certificate of title issued under the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is fundamental that forest lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or a government reservation, such title is void. PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI did not comply with the listing rules and disclosure requirements. In fact, PALI's documents supporting its application contained misrepresentations and misleading statements, and concealed material information. The matter of sequestration of PALI's properties and the fact that the same form part of military/naval/forest reservations were not reflected in PALI's application. It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the markings of a corporate entity, it functions as the primary channel through which the vessels of capital trade ply. The PSE's relevance to the continued operation and filtration of the securities transactions in the country gives it a distinct color of importance such that government intervention in its affairs becomes justified, if not necessarily. Indeed, as the only operational stock exchange in the country today, the PSE enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon the country's economy. Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give special treatment to the administration and regulation of stock exchanges. 6 These provisions, read together with the general grant of jurisdiction, and right of supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be

vigilant in the supervision of the affairs of stock exchanges so that the interests of the investing public may be fully safeguard. Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's challenged control authority over the petitioner PSE even as it provides that "the Commission shall have absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines. . ." The SEC's regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a corporation's concerns. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the state. The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as necessary or incidental to the carrying out of the SEC's express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange. 7 It is, likewise, observed that the principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities for the promotion of economic development. 8 Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the application for listing in the stock exchange of the private respondent PALI. The SEC's action was affirmed by the Court of Appeals. We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC's mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country. 9 As the appellate court explains: Paramount policy also supports the authority of the public respondent to review petitioner's denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to the national economy, as the business is affected with public interest. As a matter of fact, it has often been said that the economy moves on the basis of the rise and fall of stocks being traded. By its economic power, the petitioner certainly can dictate which and how many users are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally as it may please. Petitioner can either allow or deny the entry to the market of securities. To repeat, the monopoly, unless accompanied by control, becomes subject to abuse; hence, considering public interest, then it should be subject to government regulation. The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office. 10 This is not to say, however, that the PSE's management prerogatives are under the absolute control of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSE's main concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not

to enter) into contracts with third persons, and to perform all other legal acts within its allocated express or implied powers. A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. 11 As to its corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts. 12 Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSE's decision in matters of application for listing in the market, the SEC may exercise such power only if the PSE's judgment is attended by bad faith. In Board of Liquidators vs. Kalaw, 13 it was held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud. In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which, in the general scheme, brings to serious question the qualification of PALI to sell its shares to the public through the stock exchange. During the time for receiving objections to the application, the PSE heard from the representative of the late President Ferdinand E. Marcos and his family who claim the properties of the private respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of sequestration has been issued covering the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan Court. How the properties were effectively transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer. The petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best interest of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the investing public against fraudulent representations, or false promises, and the imposition of worthless ventures. 14 It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to legitimate business, thus: The Securities Act, often referred to as the "truth in securities" Act, was designed not only to provide investors with adequate information upon which to base their decisions to buy and sell securities, but also to protect legitimate business seeking to obtain capital through honest presentation against competition from crooked promoters and to prevent fraud in the sale of securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p. 14). As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and fraudulent transactions, merely by requirement of that their details be revealed; (2) placing the market during the early stages of the offering of a security a body of information, which operating indirectly through investment services and expert investors, will tend to produce a more accurate appraisal of a security, . . . Thus, the Commission may refuse to permit a registration statement to become effective if it appears on its face to be incomplete or inaccurate in any material

respect, and empower the Commission to issue a stop order suspending the effectiveness of any registration statement which is found to include any untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (Idem). Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose to transact through its facilities. It was reasonable for the PSE, therefore, to exercise its judgment in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded. In this connection, it is proper to observe that the concept of government absolutism is a thing of the past, and should remain so. The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment. At this juncture, there is the claim that the properties were owned by TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such properties belong to the Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and forest reserves, and therefore beyond private dominion. If any of these claims is established to be true, the certificates of title over the subject properties now held by PALI map be disregarded, as it is an established rule that a registration of a certificate of title does not confer ownership over the properties described therein to the person named as owner. The inscription in the registry, to be effective, must be made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw. In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the true ownership of the properties of PALI need not be determined as an absolute fact. What is material is that the uncertainty of the properties' ownership and alienability exists, and this puts to question the qualification of PALI's public offering. In sum, the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporation entity, whose business judgments are respected in the absence of bad faith. The question as to what policy is, or should be relied upon in approving the registration and sale of securities in the SEC is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange Commission. In mandating the SEC to administer the Revised Securities Act, and in performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the said laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless registered in accordance with the rules and regulations that shall be promulgated in the public interest and for the protection of investors by the Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency, has supervision and control over all corporations and over the securities market as a whole, and as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of "full material disclosure" where all companies, listed or applying for listing, are required to divulge truthfully and accurately, all material information about themselves and the securities they sell, for the protection of the investing public, and under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its securities. 15 While the employment of

this policy is recognized and sanctioned by the laws, nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must satisfy. 16 Pertinently, Section 9 of the Revised Securities Act sets forth the possibleGrounds for the Rejection of the registration of a security: The Commission may reject a registration statement and refuse to issue a permit to sell the securities included in such registration statement if it finds that (1) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; or (2) The issuer or registrant (i) is not solvent or not in sound financial condition; (ii) has violated or has not complied with the provisions of this Act, or the rules promulgated pursuant thereto, or any order of the Commission; (iii) has failed to comply with any of the applicable requirements and conditions that the Commission may, in the public interest and for the protection of investors, impose before the security can be registered; (iv) has been engaged or is engaged or is about to engage in fraudulent transaction; (v) is in any way dishonest or is not of good repute; or (vi) does not conduct its business in accordance with law or is engaged in a business that is illegal or contrary to government rules and regulations. (3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound business principles; (4) An officer, member of the board of directors, or principal stockholder of the issuer is disqualified to be such officer, director or principal stockholder; or (5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its security would not work to the prejudice of the public interest or as a fraud upon the purchasers or investors. (Emphasis Ours) A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to be determined by the Securities and Exchange Commission. This measure was meant to protect the interests of the investing public against fraudulent and worthless securities, and the SEC is mandated by law to safeguard these interests, following the policies and rules therefore provided. The absolute reliance on the full disclosure method in the registration of securities is, therefore, untenable. As it is, the Court finds that the private respondent PALI, on at least two points

(nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in setting the standard for public offerings of corporations wishing to do so. However, the SEC must recognize and implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot be amended or supplanted by mere administrative issuance. In resume, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this case. ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for Review onCertiorari. The Decisions of the Court of Appeals and the Securities and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc. SO ORDERED.

G.R. No. 171815

August 7, 2007

CEMCO HOLDINGS, INC., Petitioner, vs. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC., Respondent. POWER OF THE SEC TO NULLIFY ACQUISITIONS VIOLATING THE LAW CHICO-NAZARIO, J.: This Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set aside the 24 October 2005 Decision1 and the 6 March 2006 Resolution2 of the Court of Appeals in CA-G.R. SP No. 88758 which affirmed the judgment3 dated 14 February 2005 of the Securities and Exchange Commission (SEC) finding that the acquisition of petitioner Cemco Holdings, Inc. (Cemco) of the shares of stock of Bacnotan Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation (ACC) in Union Cement Holdings Corporation (UCHC) was covered by the Mandatory Offer Rule under Section 19 of Republic Act No. 8799, otherwise known as the Securities Regulation Code. The Facts Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders UCHC, a non-listed company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHCs stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks. In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco BCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in UCHC equivalent to 29.69%. In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a result of petitioner Cemcos acquisition of BCI and ACCs shares in UCHC, petitioners total beneficial ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC, to wit4 : Particulars Existing shares of Cemco in UCHC Acquisition by Cemco of BCIs and ACCs shares in UCHC Total stocks of Cemco in UCHC Percentage of UCHC ownership in UCC Indirect ownership of Cemco in UCC Direct ownership of Cemco in UCC Total ownership of Cemco in UCC Percentage 9% 51% 60% 60% 36% 17% 53%

As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC.

In a letter dated 16 July 2004, Director Justina Callangan of the SECs Corporate Finance Department responded to the query of the PSE that while it was the stance of the department that the tender offer rule was not applicable, the matter must still have to be confirmed by the SEC en banc. Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan confirmed that the SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule. On 28 July 2004, feeling aggrieved by the transaction, respondent National Life Insurance Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer. Cemco, however, refused. On 5 August 2004, a Share Purchase Agreement was executed by ACC and BCI, as sellers, and Cemco, as buyer. On 12 August 2004, the transaction was consummated and closed. On 19 August 2004, respondent National Life Insurance Company of the Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC, which were then required by the SEC to file their respective comment on the complaint. In their comments, they were uniform in arguing that the tender offer rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect acquisition arising from the purchase of the shares of a holding company of the listed firm. In a Decision dated 14 February 2005, the SEC ruled in favor of the respondent by reversing and setting aside its 27 July 2004 Resolution and directed petitioner Cemco to make a tender offer for UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in accordance with Section 9(E), Rule 19 of the Securities Regulation Code. Petitioner filed a petition with the Court of Appeals challenging the SECs jurisdiction to take cognizance of respondents complaint and its authority to require Cemco to make a tender offer for UCC shares, and arguing that the tender offer rule does not apply, or that the SECs re-interpretation of the rule could not be made to retroactively apply to Cemcos purchase of UCHC shares. The Court of Appeals rendered a decision affirming the ruling of the SEC. It ruled that the SEC has jurisdiction to render the questioned decision and, in any event, Cemco was barred by estoppel from questioning the SECs jurisdiction. It, likewise, held that the tender offer requirement under the Securities Regulation Code and its Implementing Rules applies to Cemcos purchase of U CHC stocks. The decretal portion of the said Decision reads: IN VIEW OF THE FOREGOING, the assailed decision of the SEC is AFFIRMED, and the preliminary injunction issued by the Court LIFTED.5 Cemco filed a motion for reconsideration which was denied by the Court of Appeals. Hence, the instant petition. In its memorandum, petitioner Cemco raises the following issues:

I. ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER NATIONAL LIFES COMPLAINT AND THAT THE SECS RE-INTERPRETATION OF THE TENDER OFFER RULE IS CORRECT, WHETHER OR NOT THAT REINTERPRETATION CAN BE APPLIED RETROACTIVELY TO CEMCOS PREJUDICE. II. WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE DISPUTE BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT REQUIRING CEMCO TO MAKE A TENDER OFFER FOR UCC SHARES. III. WHETHER OR NOT CEMCOS PURCHASE OF UCHC SHARES IS SUBJECT TO THE TENDER OFFER REQUIREMENT. IV. WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA DECISION, IS AN INCOMPLETE JUDGMENT WHICH PRODUCED NO EFFECT.6 Simply stated, the following are the issues: 1. Whether or not the SEC has jurisdiction over respondents complaint and to require Cemco to make a tender offer for respondents UCC shares. 2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the shares in UCHC, a non-listed company. 3. Whether or not the questioned ruling of the SEC can be applied retroactively to Cemcos transaction which was consummated under the authority of the SECs prior resolution. On the first issue, petitioner Cemco contends that while the SEC can take cognizance of respondents complaint on the alleged violation by petitioner Cemco of the manda tory tender offer requirement under Section 19 of Republic Act No. 8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties since, under the same statute, the SECs authority is purely administrative. Having been vested with purely administrative authority, the SEC can only impose administrative sanctions such as the imposition of administrative fines, the suspension or revocation of registrations with the SEC, and the like. Petitioner stresses that there is nothing in the statute which authorizes the SEC to issue orders granting affirmative reliefs. Since the SECs order commanding it to make a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void. Petitioner further contends that in the absence of any specific grant of jurisdiction by Congress, the SEC cannot, by mere administrative regulation, confer on itself that jurisdiction. Petitioners stance fails to persuade.

In taking cognizance of respondents complaint against petitioner and eventually rendering a judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to Rule 19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code, to wit: 13. Violation If there shall be violation of this Rule by pursuing a purchase of equity shares of a public company at threshold amounts without the required tender offer, the Commission, upon complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be without prejudice to the imposition of other sanctions under the Code. The foregoing rule emanates from the SECs power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with the Securities Regulation Code, more specifically the provision on mandatory tender offer under Section 19 thereof.7 Another provision of the statute, which provides the basis of Rule 19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code, is Section 5.1(n), viz: [T]he Commission shall have, among others, the following powers and functions: xxxx (n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. The foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers of the Commission or which is incidental to, or reasonably necessary to carry out, the performance of the administrative duties entrusted to it. As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power would render the agency inutile, because it would become powerless to regulate and implement the law. As correctly held by the Court of Appeals: We are nonetheless convinced that the SEC has the competence to render the particular decision it made in this case. A definite inference may be drawn from the provisions of the SRC that the SEC has the authority not only to investigate complaints of violations of the tender offer rule, but to adjudicate certain rights and obligations of the contending parties and grant appropriate reliefs in the exercise of its regulatory functions under the SRC. Section 5.1 of the SRC allows a general grant of adjudicative powers to the SEC which may be implied from or are necessary or incidental to the carrying out of its express powers to achieve the objectives and purposes of the SRC. We must bear in mind in interpreting the powers and functions of the SEC that the law has made the SEC primarily a regulatory body with the incidental power to conduct administrative hearings and make decisions. A regulatory body like the SEC may conduct hearings in the exercise of its regulatory powers, and if the case involves violations or conflicts in connection with the performance of its regulatory functions, it will have the duty and authority to resolve the dispute for the best interests of the public.8 For sure, the SEC has the authority to promulgate rules and regulations, subject to the limitation that the same are consistent with the declared policy of the Code. Among them is the protection of the investors and the minimization, if not total elimination, of fraudulent and manipulative devises. Thus, Subsection 5.1(g) of the law provides:

Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders. Also, Section 72 of the Securities Regulation Code reads: 72.1. x x x To effect the provisions and purposes of this Code, the Commission may issue, amend, and rescind such rules and regulations and orders necessary or appropriate, x x x. 72.2. The Commission shall promulgate rules and regulations providing for reporting, disclosure and the prevention of fraudulent, deceptive or manipulative practices in connection with the purchase by an issuer, by tender offer or otherwise, of and equity security of a class issued by it that satisfies the requirements of Subsection 17.2. Such rules and regulations may require such issuer to provide holders of equity securities of such dates with such information relating to the reasons for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such securities, the method of purchase and such additional information as the Commission deems necessary or appropriate in the public interest or for the protection of investors, or which the Commission deems to be material to a determination by holders whether such security should be sold. The power conferred upon the SEC to promulgate rules and regulations is a legislative recognition of the complexity and the constantly-fluctuating nature of the market and the impossibility of foreseeing all the possible contingencies that cannot be addressed in advance. As enunciated in Victorias Milling Co., Inc. v. Social Security Commission9 : Rules and regulations when promulgated in pursuance of the procedure or authority conferred upon the administrative agency by law, partake of the nature of a statute, and compliance therewith may be enforced by a penal sanction provided in the law. This is so because statutes are usually couched in general terms, after expressing the policy, purposes, objectives, remedies and sanctions intended by the legislature. The details and the manner of carrying out the law are often times left to the administrative agency entrusted with its enforcement. In this sense, it has been said that rules and regulations are the product of a delegated power to create new or additional legal provisions that have the effect of law. Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. In fact, petitioner defended the jurisdiction of the SEC in its Comment dated 15 September 2004, filed with the SEC wherein it asserted: This Honorable Commission is a highly specialized body created for the purpose of administering, overseeing, and managing the corporate industry, share investment and securities market in the Philippines. By the very nature of its functions, it dedicated to the study and administration of the corporate and securities laws and has necessarily developed an expertise on the subject. Based on said functions, the Honorable Commission is necessarily tasked to issue rulings with respect to matters involving corporate matters and share acquisitions. Verily when this Honorable Commission rendered the Ruling that " the acquisition of Cemco Holdings of the majority shares of Union Cement Holdings, Inc., a substantial stockholder of a listed company, Union Cement Corporation, is not covered by the mandatory tender offer requirement of the SRC Rule 19," it was well within its powers and expertise to do so. Such ruling shall be respected, unless there has been an abuse or improvident exercise of authority.10 Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to it, such as the 27 July 2004 Resolution, where the SEC opined that the Cemco transaction was not

covered by the mandatory tender offer rule. It was only when the case was before the Court of Appeals and after the SEC rendered an unfavorable judgment against it that petitioner challenged the SECs competence. As articulated in Ceroferr Realty Corporation v. Court of Appeals11 : While the lack of jurisdiction of a court may be raised at any stage of an action, nevertheless, the party raising such question may be estopped if he has actively taken part in the very proceedings which he questions and he only objects to the courts jurisdiction because the judgment or the order subsequently rendered is adverse to him. On the second issue, petitioner asserts that the mandatory tender offer rule applies only to direct acquisition of shares in the public company. This contention is not meritorious. Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company.12 A public company is defined as a corporation which is listed on an exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company.13 Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer.14 Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders.15 Under Section 19 of Republic Act No. 8799, it is stated: Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders. Under existing SEC Rules,16 the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity securities of the public company.17 The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule. This interpretation given by the SEC and the Court of Appeals must be sustained.

The rule in this jurisdiction is that the construction given to a statute by an administrative agency charged with the interpretation and application of that statute is entitled to great weight by the courts, unless such construction is clearly shown to be in sharp contrast with the governing law or statute.18 The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute.19 The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or "any type of acquisition." This is clear from the discussions of the Bicameral Conference Committee on the Securities Act of 2000, on 17 July 2000. SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody controls 67% of the Company. Of course, he will pay a premium for the first 67%. Control yan, eh. Eh, kawawa yung mga maiiwan, ang 33% because the value of the stock market could go down, could go down after that, because there will (p. 41) be no more market. Wala nang gustong bumenta. Wala nang I mean maraming gustong bumenta, walang gustong bumili kung hindi yung majority owner. And they will not buy. They already have 67%. They already have control. And this protects the minority. And we have had a case in Cebu wherein Ayala A who already owned 40% of Ayala B made an offer for another 40% of Ayala B without offering the 20%. Kawawa naman yung nakahawak ngayon ng 20%. Ang baba ng share sa market. But we did not have a law protecting them at that time. CHAIRMAN ROCO. So what is it that you want to achieve? SEN. S. OSMEA. That if a certain group achieves a certain amount of ownership in a corporation, yeah, he is obligated to buy anybody who wants to sell. CHAIRMAN ROCO. Pro-rata lang. (p. 42). xxxx REP. TEODORO. As long as it reaches 30, ayan na. Any type of acquisition just as long as it will result in 30 (p.50) reaches 30, ayan na. Any type of acquisition just as long as it will result in 30, general tender, pro-rata.20(Emphasis supplied.) Petitioner counters that the legislators reference to "any type of acquisition" during the deliberations on the Securities Regulation Code does not indicate that congress meant to include the "indirect" acquisition of shares of a public corporation to be covered by the tender offer rule. Petitioner also avers that it did not directly acquire the shares in UCC and the incidental benefit of having acquired the control of the said public company must not be taken against it. These arguments are not convincing. The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies. As appropriately held by the Court of Appeals: The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance, as a result of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership acquisition to mean both direct and indirect. What is decisive is the

determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. The bottomline of the law is to give the shareholder of the listed company the opportunity to decide whether or not to sell in connection with a transfer of control. x x x.21 As to the third issue, petitioner stresses that the ruling on mandatory tender offer rule by the SEC and the Court of Appeals should not have retroactive effect or be made to apply to its purchase of the UCHC shares as it relied in good faith on the letter dated 27 July 2004 of the SEC which opined that the proposed acquisition of the UCHC shares was not covered by the mandatory offer rule. The argument is not persuasive. The action of the SEC on the PSE request for opinion on the Cemco transaction cannot be construed as passing merits or giving approval to the questioned transaction. As aptly pointed out by the respondent, the letter dated 27 July 2004 of the SEC was nothing but an approval of the draft letter prepared by Director Callanga. There was no public hearing where interested parties could have been heard. Hence, it was not issued upon a definite and concrete controversy affecting the legal relations of parties thereby making it a judgment conclusive on all the parties. Said letter was merely advisory. Jurisprudence has it that an advisory opinion of an agency may be stricken down if it deviates from the provision of the statute.22 Since the letter dated 27 July 2004 runs counter to the Securities Regulation Code, the same may be disregarded as what the SEC has done in its decision dated 14 February 2005. Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling, the same cannot be utilized to determine the rights of the parties. What is to be applied in the present case is the subsequent ruling of the SEC dated 14 February 2005 abandoning the opinion embodied in the letter dated 27 July 2004. In Serrano v. National Labor Relations Commission,23 an argument was raised similar to the case under consideration. Private respondent therein argued that the new doctrine pronounced by the Court should only be applied prospectively. Said postulation was ignored by the Court when it ruled: While a judicial interpretation becomes a part of the law as of the date that law was originally passed, this is subject to the qualification that when a doctrine of this Court is overruled and a different view is adopted, and more so when there is a reversal thereof, the new doctrine should be applied prospectively and should not apply to parties who relied on the old doctrine and acted in good faith. To hold otherwise would be to deprive the law of its quality of fairness and justice then, if there is no recognition of what had transpired prior to such adjudication. It is apparent that private respondent misconceived the import of the ruling. The decision in Columbia Pictures does not mean that if a new rule is laid down in a case, it should not be applied in that case but that said rule should apply prospectively to cases arising afterwards. Private respondents view of the principle of prospective application of new judicial doctrines would turn the judicial function into a mere academic exercise with the result that the doctrine laid down would be no more than a dictum and would deprive the holding in the case of any force. Indeed, when the Court formulated the Wenphil doctrine, which we reversed in this case, the Court did not defer application of the rule laid down imposing a fine on the employer for failure to give notice in a case of dismissal for cause. To the contrary, the new rule was applied right then and there. x x x.

Lastly, petitioner alleges that the decision of the SEC dated 14 February 2005 is "incomplete and produces no effect." This contention is baseless. The decretal portion of the SEC decision states: In view of the foregoing, the letter of the Commission, signed by Director Justina F. Callangan, dated July 27, 2004, addressed to the Philippine Stock Exchange is hereby REVERSED and SET ASIDE. Respondent Cemco is hereby directed to make a tender offer for UCC shares to complainant and other holders of UCC shares similar to the class held by respondent UCHC, at the highest price it paid for the beneficial ownership in respondent UCC, strictly in accordance with SRC Rule 19, Section 9(E).24 A reading of the above ruling of the SEC reveals that the same is complete. It orders the conduct of a mandatory tender offer pursuant to the procedure provided for under Rule 19(E) of the Amended Implementing Rules and Regulations of the Securities Regulation Code for the highest price paid for the beneficial ownership of UCC shares. The price, on the basis of the SEC decision, is determinable. Moreover, the implementing rules and regulations of the Code are sufficient to inform and guide the parties on how to proceed with the mandatory tender offer. WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24 October 2005 and 6 March 2006, respectively, affirming the Decision dated 14 February 2005 of the Securities and Exchange Commission En Banc, are hereby AFFIRMED. Costs against petitioner. SO ORDERED.

G.R. No. 137321

October 15, 2007

PHILIPPINE ASSOCIATION OF STOCK TRANSFER AND REGISTRY AGENCIES, INC., Petitioner, vs. THE HONORABLE COURT OF APPEALS; THE HONORABLE SECURITIES AND EXCHANGE COMMISSION; AND SEC CHAIRMAN PERFECTO R. YASAY, JR., Respondents. POWER TO REGULATE FEES QUISUMBING, J.: This is a petition for review on certiorari seeking to reverse the Decision 1 dated June 17, 1998 of the Court of Appeals in CA-G.R. SP No. 41320, as well as its Resolution2 dated January 13, 1999, denying the motion for reconsideration. The facts are as follows. Petitioner Philippine Association of Stock Transfer and Registry Agencies, Inc. is an association of stock transfer agents principally engaged in the registration of stock transfers in the stock-andtransfer book of corporations. On May 10, 1996, petitioners Board of Directors unanimously approved a resolution allowing its members to increase the transfer processing fee they charge their clients from P45 per certificate to P75 per certificate, effective July 1, 1996; and eventually to P100 per certificate, effective October 1, 1996. The resolution also authorized the imposition of a processing fee for the cancellation of stock certificates at P20 per certificate effective July 1, 1996. According to petitioner, the rates had to be increased since it had been over five years since the old rates were fixed and an increase of its fees was needed to sustain the financial viability of the association and upgrade facilities and services. After a dialogue with petitioner, public respondent Securities and Exchange Commission (SEC) allowed petitioner to impose the P75 per certificate transfer fee and P20 per certificate cancellation fee effective July 1, 1996. But, approval of the additional increase of the transfer fees to P100 per certificate effective October 1, 1996, was withheld until after a public hearing. The SEC issued a letter-authorization to this effect on June 20, 1996. Thereafter, on June 24, 1996, the Philippine Association of Securities Brokers and Dealers, Inc. registered its objection to the measure advanced by petitioner and requested the SEC to defer its implementation. On June 27, 1996, the SEC advised petitioner to hold in abeyance the implementation of the increases until the matter was cleared with all the parties concerned. The SEC stated that it was reconsidering its earlier approval in light of the opposition and required petitioner to file comment. Petitioner nonetheless proceeded with the implementation of the increased fees. The SEC wrote petitioner on July 1, 1996, reiterating the directive of June 27, 1996. On July 2, 1996, following a complaint from the Philippine Stock Exchange, the SEC again sent petitioner a second letter strongly urging petitioner to desist from implementing the new rates in the interest of all participants in the security market. Petitioner replied on July 3, 1996 that it had no intention of defying the orders but stated that it could no longer hold in abeyance the implementation of the new fees because its members had already

put in place the procedures necessary for their implementation. Petitioner also argued that the imposition of the processing fee was a management prerogative, which was beyond the SECs authority to regulate absent an express rule or regulation. On July 8, 1996, the SEC issued Order No. 104, series of 1996, enjoining petitioner from imposing the new fees: WHEREFORE, pursuant to the powers vested in the Commission under Sec. 40 of the Revised Securities Act, PASTRA is hereby enjoined to defer the implementation of the new rates. Further, the members of its Board of Directors and officers are hereby directed to appear before the Commission on Thursday, July 11, 1996 at 2:00 oclock in the afternoon at the Commission Room, 5th Flr., SEC Bldg., EDSA, Mandaluyong City to show cause why no administrative sanctions should be imposed upon them.3 During the hearing, petitioner admitted that it had started imposing the fees. It further admitted that aside from the questioned fees, it had likewise started imposing fees ranging from P50 to P500 for report of shareholdings or list of certificates; certification of shareholdings or other stockholder information requested by external auditors and validation of status of certificates, all without prior approval of the Commission. Thus, for violating its orders, the SEC ordered petitioner to pay a basic fine of P5,000 and a daily fine of P500 for continuing violations: In view of the foregoing, PASTRA is hereby declared as having defied a lawful Order of the Commission for which it is imposed a basic fine of P5,000.00 plus a daily fine of P500.00 for continuing violations payable to the Commission within five days from actual receipt of this Order and it is hereby ordered to immediately cease and desist from imposing the new rates for issuance and cancellation of stock certificates, until further orders from this Commission. SO ORDERED.4 Aggrieved, petitioner went to the Court of Appeals on certiorari contending that the SEC acted with grave abuse of discretion or lack or excess of jurisdiction in issuing the above orders. The appellate court issued a temporary restraining order on July 26, 1996, and a writ of preliminary injunction on August 26, 1996. On June 17, 1998, the appellate court dismissed the petition. It ruled that the power to regulate petitioners fees was included in the general power given to the SEC under Section 40 5 of The Revised Securities Act to regulate, supervise, examine, suspend or otherwise discontinue, the operation of securities-related organizations like petitioner. The appellate court likewise denied petitioners motion for reconsideration. Hence, this appeal. While this case was pending, The Revised Securities Act by authority of which the assailed orders were issued was repealed by Republic Act No. 8799 or The Securities Regulation Code, 6 which became effective on August 8, 2000. Nonetheless, we find it pertinent to rule on the parties submissions considering that the effects of the July 11, 1996 Order had not been obliterated by the repeal of The Revised Securities Act and there is still present a need to rule on whether petitioner was liable for the fees imposed upon it. Petitioner submits that the Court of Appeals committed reversible error: I.

WHEN [IT] FAILED TO RULE THAT THE SEC AND CHAIRMAN YASAY, IN ISSUING THE COMMISSIONS CONTROVERTED ORDERS DATED JULY 8 AND JULY 11, 1996, VIOLATED PASTRAS CONSTITUTIONAL RIGHT TO DUE PROCESS OF LAW; II. WHEN [IT] FAILED TO RULE THAT THE SEC AND CHAIRMAN YASAY COMMITTED GRAVE ABUSE OF DISCRETION AND IN EXCESS OF THEIR JURISDICTION WHEN THEY ISSUED THE COMMISSIONS CONTROVERTED ORDERS DATED JULY 8 AND JULY 11, 1996; AND, III. WHEN [IT] RULED THAT THE SEC AND CHAIRMAN YASAY HAVE LEGAL BASIS IN ISSUING THE COMMISSIONS CONTROVERTED ORDERS DATED JULY 8 AND JULY 11, 1996.7 Essentially, the issue for our resolution is whether the SEC acted with grave abuse of discretion or lack or excess of jurisdiction in issuing the controverted Orders of July 8 and 11, 1996. Petitioner argues that the SEC violated petitioners right to due process because it issued the July 8, 1996 cease-and-desist order without first conducting a hearing. Petitioner likewise laments that while said order required petitioners board of directors to appear before the SEC to show cause why no administrative sanctions should be imposed on them, petitioners board of directors attended the hearing without the assistance of counsel because the Director of the SEC Brokers and Exchanges Department had allegedly assured them that the order was only a standard order and nothing to worry about. Petitioner also contends that even if its board did attend with counsel or present evidence, its evidence would not have been considered anyway because the Order of July 11, 1996 had allegedly been prepared as early as July 8, 1996. In support of this suspicion, petitioner points out that the date "July 8, 1996" was replaced with the date "July 11, 1996" before it was signed by Chairman Perfecto R. Yasay, Jr., who did not attend the meeting. Petitioner adds that the SEC cannot restrict petitioners members from increasing the transfer and processing fees they charge their clients because there is no specific law, rule or regulation authorizing it. Section 40 of the then Revised Securities Act, according to petitioner, only lays down the general powers of the SEC to regulate and supervise the corporate activities of organizations related to or connected with the securities market like petitioner. It could not be interpreted to justify the SECs unjustified interference with petitioners decision to increase its transfer fees and impose processing fees, especially since the decision involved a management prerogative and was intended to protect the viability of petitioners members.8 For its part, the Office of the Solicitor General (OSG) counters that petitioners allegations of denial of due process are baseless. The OSG cites that petitioner was given ample opportunity to present its case at the July 11, 1996 hearing and was adequately heard through the series of letters it sent to the SEC to explain its refusal to obey the latters directives. Also, there is no evidence to support its allegation that the July 11, 1996 Order was prepared in advance or that it was issued without considering the evidence for the parties. As regards the SECs power over petitioners stock transfer fees, the OSG argues that the power to determine said fees was necessarily implied in the SECs general power under Section 40 of The Revised Securities Act to regulate and supervise the operations of transfer agents such as petitioners member-corporations. The OSG adds that petitioners discretion to increase its fees was

not purely a management prerogative and was properly the subject of regulation considering that it significantly affects the market for securities.9 We find the instant petition bereft of merit. The Court notes that before its repeal, Section 47 of The Revised Securities Act clearly gave the SEC the power to enjoin the acts or practices of securitiesrelated organizations even without first conducting a hearing if, upon proper investigation or verification, the SEC is of the opinion that there exists the possibility that the act or practice may cause grave or irreparable injury to the investing public, if left unrestrained. Section 47 clearly provided, SEC. 47. Cease and desist order.The Commission, after proper investigation or verification, motu proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained may cause grave or irreparable injury or prejudice to the investing public or may amount to fraud or violation of the disclosure requirements of this Act and the rules and regulations of the Commission. (Emphasis supplied.) xxxx Said section enforces the power of general supervision of the SEC under Section 40 of the then Revised Securities Act. As a securities-related organization under the jurisdiction and supervision of the SEC by virtue of Section 40 of The Revised Securities Act and Section 3 of Presidential Decree No. 902A,10 petitioner was under the obligation to comply with the July 8, 1996 Order. Defiance of the order was subject to administrative sanctions provided in Section 4611 of The Revised Securities Act. Petitioner failed to show that the SEC, which undoubtedly possessed the necessary expertise in matters relating to the regulation of the securities market, gravely abused its discretion in finding that there was a possibility that the increase in fees and imposition of cancellation fees will cause grave or irreparable injury or prejudice to the investing public. Indeed, petitioner did not advance any argument to counter the SECs finding. Thus, there appears to be no substantial reason to nullify the July 8, 1996 Order. This is true, especially considering that, as pointed out by the OSG, petitioners fee increases have far-reaching effects on the capital market. Charging exorbitant processing fees could discourage many small prospective investors and curtail the infusion of money into the capital market and hamper its growth. Furthermore, there is no merit in petitioners contention that even if it had appeared at t he hearing of July 11, 1996 with counsel and presented its evidence, the SEC would not have considered it because the Order of July 11, 1996 was in fact prepared earlier on July 8, 1996. It is clear from the order itself that the July 11, 1996 Order was edited from the computer file of the July 8, 1996 Order, and that the error in the date was merely an oversight in editing the softcopy before it was printed. Similarly, there is no merit to petitioners claim that it was misled into attending the July 11, 1 996 hearing without counsel. Whether the Director of the SEC Brokers and Exchanges Department assured petitioners board that the July 8, 1996 Order was only a standard order and nothing to worry about, is a question of fact which this Court cannot entertain considering that this Court is not a trier of facts.12 Needless to stress, the assurance could not be interpreted as outright prohibition to bring in petitioners counsel.

Moreover, it devolved upon petitioner to protect its interests adequately considering the clear implications of the Order of July 8, 1996. Petitioner had only itself to blame for its failure to present its evidence during the July 11, 1996 hearing.
1wphi1

In Philippine Stock Exchange, Inc. v. Court of Appeals,13 the Court held that the SEC is without authority to substitute its judgment for that of the corporations board of directors on business matters so long as the board of directors acts in good faith. This Court notes, however, that this case involves, not whether petitioners actions pertained to management prerogatives or whether petitioner acted in good faith. Rather, this case involves the question of whether the SEC had the power to enjoin petitioners planned increase in fees after the SEC had determined that said act if pursued may cause grave or irreparable injury or prejudice to the investing public. Petitioner was fined for violating the SECs cease-and-desist order which the SEC had issued to protect the interest of the investing public, and not simply for exercising its judgment in the manner it deems appropriate for its business. The regulatory and supervisory powers of the Commission under Section 40 of the then Revised Securities Act, in our view, were broad enough to include the power to regulate petitioners fees. Indeed, Section 47 gave the Commission the power to enjoin motu proprio any act or practice of petitioner which could cause grave or irreparable injury or prejudice to the investing public. The intentional omission in the law of any qualification as to what acts or practices are subject to the control and supervision of the SEC under Section 47 confirms the broad extent of the SECs regulatory powers over the operations of securities-related organizations like petitioner. The SECs authority to issue the cease-and-desist order being indubitable under Section 47 in relation to Section 40 of the then Revised Securities Act, and there being no showing that the SEC committed grave abuse of discretion in finding basis to issue said order, we rule that the Court of Appeals committed no reversible error in affirming the assailed orders. For its open and admitted defiance of a lawful cease-and-desist order, petitioner was held appropriately liable for the payment of the penalty imposed on it in the SECs July 11, 1996 Order. WHEREFORE, the instant petition for review on certiorari is DENIED for lack of merit. The Decision dated June 17, 1998 and Resolution dated January 13, 1999, of the Court of Appeals in CA-G.R. SP No. 41320 are affirmed. Costs against petitioner.