Chicky Notes 2020 – COMMERCIAL LAW (SRC)
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SECURITIES REGULATION CODE (SRC)
OBJECTIVES
• To protect investors
• To prevent fly by night corporations/ quick operators
• To address problems on equality and access to material information
• To enhance the securities market
DECLARATION OF STATE POLICY
• The State shall establish a socially conscious, free market that
regulates itself, encourage the widest participation of ownership in
enterprises, enhance the democratization of wealth, promote the
development of the capital market, protect investors, ensure full and
fair disclosure about securities, minimize if not totally eliminate
insider trading and other fraudulent or manipulative devices and
practices which create distortions in the free market (Sec 2, SRC).
• To protect investors
What is it in the SRC which would allow it to achieve its objectives? How
does the SRC achieve its objectives?
• Registration process
o Information to be disclosed; terms and conditions of the
securities being offered; detailed; financial information
o Will help an investor make a decision
• Reportorial requirements
o Especially if you are a public corporation
• Anti-fraud provisions
• Regulations on market participants
• Sanctions against violators
SEC’S JURISDICTION
• The Commission’s jurisdiction over all cases enumerated under
Section 5 of P.D. No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court (Sec 5.2,
SRC)
• Sec 5, P.D. No. 902-A
o Devices or schemes employed by or any acts, of the board
of directors, business associates, its officers or partnership,
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholder, partners, members of associations or
organizations registered with the Commission;
o Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the state insofar
as it concerns their individual franchise or right to exist as
such entity; and
o Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations,
partnerships or associations.
• Cases
o Yujuico vs. Quiambao; G.R. No. 168639, January 29, 2007
o GSIS vs. CA; G.R. No. 183905, April 16, 2009
▪ Proxy issue intertwined with election of directors –
RTC has jurisdiction
o SEC vs. Subic Bay Golf and Country Club; G.R. No.
179047, March 11, 2015
o Roman, Jr. vs. SEC; G.R. No. 196329, June 1, 2016
SIMULATED SALE OF SHARES
• Validity of the transfer of shares from one stockholder to another of
the same corporation.
• Sought to declare the nullity of the transfers of said property to the
decedent on the ground that they were not supported by any cause or
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consideration, and thus, are considered void ab initio for being
absolutely simulated or fictitious.
• Could be resolved by applying pertinent provisions of the Civil
Code, particularly those relative to obligations and contracts
(Intestate Estate of Alexander T. Ty vs. CA; G.R. No. 112872, G.R.
No. 114671, April 19, 2001)
ACCOUNTING OF DUES
• A claim for accounting of association dues involves an intra-
corporate dispute. Just because the property has already been sold
extra-judicially does not mean that the questioned assessments have
now become legal and valid or that they have become immaterial.
• In fact, the validity of the foreclosure depends on the legality of the
assessments and the issue must be determined by the court if only to
insure that the owner was not deprived of her property without
having been heard (Chateau de Baie Condominium Corp vs. Sps.
Moreno; G.R. No. 186271, February 23, 2011).
ISSUANCE OF CEASE AND DESIST ORDER (CDO)
• Two essential requirements that must be complied with by the SEC
before it may issue a CDO:
o Proper investigation or verification; AND
o A finding that the act or practice, unless restrained, will
operate as fraud on investors or is otherwise likely to cause
grave or irreparable injury or prejudice to the investing
public (SEC vs. Performance Foreign Exchange
Corporation; G.R. No. 154131, July 20, 2006)
SECURITIES
• Covers written and electronic
• Two (2) kinds:
o Equity (e.g. shares) – ownership right in corporation
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o Debt securities – require the issuer to repay the principal
amount loaned to it at maturity date and a stated rate of
interest
• Shares, participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a certificate,
contract, instruments, whether written or electronic in character. It
includes:
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certifies of deposit for a
future subscription;
(c) Fractional undivided interests in oil, gas or other mineral
rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation,
trust certificates, voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in
corporations; and
(g) Other instruments as may in the future be determined by
the Commission (Sec 3.1, SRC).
• Promissory notes, bills of exchange
• Investment contract; Howey Test
• Investment contract
o Elements (Howey Test)
▪ A contract, transaction, or scheme;
▪ An investment of money;
▪ Investment is made in a common enterprise;
▪ Expectation of profits; and
▪ Profits arising primarily from the efforts of others
(SEC vs. Prosperity.com, Inc.; G.R. No. 164197,
January 25, 2012)
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REGISTRATION OF SECURITIES o 19 or less clients

• Securities shall not be sold or offered for sale or distribution within ▪ No need for registration
the Philippines, without a registration statement duly filed with and ▪ Not likely for the public at large to be affected
approved by the Commission. Prior to such sale, information on the ▪ Sec 10, SRC
securities, in such form and with such substance as the Commission o More than 19
may prescribe, shall be made available to each prospective purchaser ▪ Public offering; needs registration
(Sec 8.1, SRC). • Exempt transactions
• Registration statement o Sec 10, SRC
o Signed by key executives of the company (e.g. CEO, ▪ Judicial sale
president, CFO, corporate secretary) under oath ▪ Sale of foreclosed securities
▪ Will give the public confidence ▪ Isolated transaction
▪ Information in the registration statement are • Limited character of the offering
reliable ▪ Stock dividends
▪ Creates personal liability of the part of the officers • Regulated by RCC
as to the veracity of the information in the ▪ Sale to own stockholders
registration statement ▪ Issuance to single purchaser
o Accompanied by a verified resolution of the BOD ▪ Conversion of shares
o Approval by the SEC ▪ Brokers transaction
▪ Not a warranty/guarantee that every information in • Regulated by the SEC
the registration statement is true/accurate ▪ Pre-incorporation/capital increase subscription
▪ Guarantee of SEC: admin sanctions against erring ▪ Exchange of securities
registrant corporation or personal liability on the ▪ Private placements (19 persons during 12-month
part of the officers period)
• Exempt securities ▪ Sale to qualified buyers
o Issuances by: • Buyer knows the field of securities;
▪ The government expertise
▪ Foreign government • Unlikely that they are defrauded by the
▪ Trustee/receiver issuer
▪ Regulated entities ▪ Catch all
▪ Bank (except its own shares)
o Sec 9, SRC
o Ratio for exemption is the source
o Issuer: trustworthy; heavily regulated
▪ Investors are deemed adequately protected
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REJECTION AND REVOCATION OF REGISTRATION OF • Tender offer is a publicly announced intention by a person acting
SECURITIES alone or in concert with other persons to acquire equity securities of
• Sec 13, SRC a public company
• Issuer: • Rule 19(13) of the Amended IRR (SRC)
o Has been judicially declared insolvent; o If there shall be violation of this Rule by pursuing a
o Has violated any of the provisions of this Code and rules; purchase of equity shares of a public company at threshold
o Has been or is engaged or is about to engage in fraudulent amounts without the required tendered offer, the
transactions; Commission, upon complaint, may nullify the said
o Has made any false or misleading representation of material acquisition and direct the holding of a tender offer. This
facts in any prospectus concerning the issuer or its shall be without prejudice to the imposition of other
securities; sanctions under the Code.
o Failed to comply with any requirement of the SEC for • SEC has the power and authority to regulate, investigate, or
registration; supervise the activities of persons to ensure compliance with the
o RS is incomplete or inaccurate or contains untrue statement; SRC
or • SEC has the incidental power to conduct hearings and render
o Conviction of an offense involving moral turpitude and/or decisions fixing the rights and obligations of the parties
fraud • Tender offer DOES NOT apply:
o Purchase from unissued capital stock not resulting to 50%
REPORTORIAL REQUIREMENTS or more acquisition
• Applies to: o Purchase from increase in capital stock
o Companies whose shares have been the subject of public o Foreclosure sale
offering o Privatization by government
o Those whose shares are listed on an exchange o Corporate rehabilitation
o Assets of 50M and 200 stockholders (at least 200 of them o Open market at prevailing market price
hold 100 shares or more each) o Merger or consolidation
• Reports include:
o Annual report (Sec 17, SRC) INSIDER TRADING
o Beneficial ownership report (Sec 18, SRC) • Sec 27, SRC
o Other disclosures (PSE Rules) • Insider
o the issuer;
MANDATORY TENDER OFFER o a director or officer (or any person performing similar
• Sec 19, SRC functions);
• Applies to public companies

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o a person whose relationship or former relationship to the
issuer gives or gave him access to material information
about the issuer or the security that is not generally available
to the public;
o government employee, director, or officer of an exchange,
clearing agency and/or self-regulatory organization
who has access to material information about an
issuer or a security that is not generally available to the
public; or
o a person who learns such information by a communication
from any forgoing insiders.
• Unlawful for any insider (inc. spouse, relative by affinity or
consanguinity within the 2nd degree, legitimate or common-law) to
purchase or sell security while in possession of material non-public
information
• Also unlawful to communicate material non-public information
• The provision explains in simple terms that the insider’s misuse of
nonpublic and undisclosed information is the gravamen of illegal
conduct. The intent of the law is the protection of investors against
fraud, committed when an insider, using secret information, takes
advantage of an uninformed investor (SEC vs. Interport Resources
Corporation; G.R. No. 135808, October 6, 2008).
• This duty to disclose or abstain is based on two factors: first, the
existence of a relationship giving access, directly or indirectly, to
information intended to be available only for a corporate purpose
and not for the personal benefit of anyone; and second, the inherent
unfairness involved when a party takes advantage of such
information knowing it is unavailable to those with whom he is
dealing.
• A fact of special significance may be:
o A material fact which would be likely, on being made
generally available, to affect the market price of a security
to a significant extend; or
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o One which a reasonable person would consider especially
important in determining his course of action with regard to
the shares of stock.
REGISTRATION OF MARKET PROFESSIONALS
• Sec 28, SRC
• No broker, dealer, etc shall sell any securities unless he is
registered/licensed with the SEC
BROKER-DIRECTOR RULE
• Sec 30, SRC
• No brokers or dealer shall deal in or otherwise buy or sell, for its
own account or for its own account or for the account of customers,
securities listed on an Exchange issued by any corporation where
any stockholders, director, associated person or salesman, or
authorized clerk of said broker or dealer and all the relatives of the
foregoing within the fourth civil degree of consanguinity or affinity,
is at the same time holding office in said issuer corporation as a
director, president, vice-president, manager, treasurer, comptroller,
secretary or any office trust and responsibility, or is a controlling of
the issuer.
• Reason: to minimize insiders trading
PROXY SOLICITATION
• Sec 20, SRC
• Proxies solicited are restricted for use only in a particular meeting or
for voting on a particular proposal
• Solicitation includes:
o Any request for proxy or authorization;
o Any request to execute or not to execute, or to revoke, a
proxy or authorization;
o Furnishing of a form of proxy or other communication to
security holder under a circumstance reasonably calculated
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to result in the procurement, withholding or revocation of a

proxy.
• Prohibitions:
o No solicitation for undated or postdated proxy or any proxy
which provides that it shall be deemed dated as of any date
subsequent to the date on which it is signed by the security
holder

INDEPENDENT DIRECTORS
• Sec 38, SRC
• Applies to public companies
• Requirement is at least 2 or at least 20% of the members of the board,
whichever is the lesser
• Independent director is a person other than an officer or employee
of the corporation, its parent or subsidiaries, or any other individual
having a relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director.