A.C.G.T.

| © 2014-2015
SPECIAL COMMERCIAL LAWS (FINALS)
ANTI-MONEY LAUNDERING ACT as amended
January 29, 2015
 AMLA is a fairly recent law. This was brought about because we were blacklisted by the IMF. We were considered as one of the biggest
sites for money laundering
 The 1st AMLA was passed in 2001 but it has gone several amendments, the latest one being RA 10365 enacted on March 2013
 These amendments were brought about because we always do minimum compliance. Every time there are requirements by the IMF, we
only do the minimum compliance just to escape the blacklist. Even now, we’re still in the gray list because there is one person which
should be included in the covered persons but never is: the casino
 BSP wants to include the casino but Congress always takes it out (probably because Congress is number 1 there)
 AMLA is criminal law but it is included in the coverage in the Bar for mercantile law (for mercantile law aspect only)

MONEY LAUNDERING

 MONEY LAUNDERING is the process by which money that originates from an illegal source is converted or “cleaned” to make it appear it
comes from a legitimate source
 So prior to AMLA, people from other countries can just come here to Philippines, deposit their money here, create corporations then
declare dividends for themselves. In that way, it appears money comes from a legitimate source.
 IMF insisted Philippines should pass the Anti-Money Laundering Act.
 Take note the definition is not found in the law. It is found in the case of Eugenio:
“Money laundering has been generally defined by the International Criminal Police Organization (Interpol)  as "any act or attempted act
to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources." 

POLICY

SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State to protect and preserve the integrity and
confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money  laundering site for the proceeds of
any unlawful activity. Consistent with its foreign policy, the State shall extend cooperation in transnational investigations and
prosecutions of persons involved in money laundering activities wherever committed.|||  (Anti-Money Laundering Act of 2001, REPUBLIC
ACT NO. 9160 [2001])

PERSONS COVERED BY AMLA

(a)'Covered persons', natural or juridical, refer to:

(1) Banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money changers, remittance and transfer companies
and other similar entities and all other persons and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng
Pilipinas (BSP);

(2) Insurance companies, pre-need companies and all other persons supervised or regulated by the Insurance Commission (IC); 

(3)(i) securities dealers, brokers, salesmen, investment houses and other similar persons managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-end investment companies, common trust funds, and other similar
persons, and (iii) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable
objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange
Commission (SEC);
 Under number 3, these are not your ordinary corporations. Just because you’re a corporation registered with the SEC does not
automatically subject you to the AMLA.
 It has to be a financial institution. Those under number 3 are entities holding a secondary license. The primary license is your
certificate of incorporation. The secondary franchise allows you to engage in specific activities. An ordinary corporation only has
1 franchise. Banks require a secondary franchise. Others such as investment companies also require secondary license from the
SEC

(4) Jewelry dealers in precious metals, who, as a business, trade in precious metals, for transactions in excess of One million pesos
(P1,000,000.00);

(5) Jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions in excess of One million pesos
(P1,000,000.00);

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(6) Company service providers which, as a business, provide any of the following services to third parties: (i) acting as a formation agent of
juridical persons; (ii) acting as (or arranging for another person to  act  as) a director or corporate secretary of a company, a partner of a
partnership, or a similar position in relation to other juridical persons; (iii) providing a registered office, business address or accommodation,
correspondence or administrative address for a company, a partnership or any other legal person or arrangement; and (iv) acting as (or
arranging for another person to act as) a nominee shareholder for another person; and
 Formation agents also refer to the promoters who incorporate companies. They are covered persons

(7) Persons who provide any of the following services:

(i)managing of client money, securities or other assets;
(ii)management of bank, savings or securities accounts;
(iii)organization of contributions for the creation, operation or management of companies; and
(iv)creation, operation or management of juridical persons or arrangements, and buying and selling business entities.
"Notwithstanding the foregoing, the term 'covered persons' shall exclude lawyers and accountants acting as independent legal
professionals in relation to information concerning their clients or where disclosure of information would compromise client confidences or
the attorney-client relationship:  Provided,  That these lawyers and accountants are authorized to practice in the Philippines and shall continue
to be subject to the provisions of their respective codes of conduct and/or professional responsibility or any of its amendments."

 Example. Me as a lawyer is asked by a client to provide corporate secretarial services. Am I now a covered person?
 Not covered if acting as independent legal professional
 However, if you are employed by the company as an internal counsel, you cannot be considered as independent legal professional.
So if you are acting as corporate secretary, or director, you may be considered as covered person

 Significance of being included in the term “covered person”

 AMLA has required certain obligations from a covered person

(3) OBLIGATIONS OF A COVERED PERSON

Sec 9. Prevention of Money Laundering; Customer Identification Requirements and Record Keeping
a) Customer Identification – Covered institutions shall establish and record the true identity of its clients based on official documents.
They shall maintain a system of verifying the true identity of their clients, and in case of corporate clients, require a system of
verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act
on their behalf. The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious
names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency checking non-checking numbered
accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity
of the owners of such accounts.

b)  Record Keeping — All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from
the dates of transactions. With respect to closed accounts, the records on customer identification, account files and business
correspondence, shall be preserved and safely stored for at least five (5) years from the dates when they were closed.||| 

c) Amended by RA 9194
Reporting of Covered and Suspicious Transactions — Covered institutions shall report to the AMLC all covered transactions and
suspicious transactions within five (5) working days from occurrence thereof, unless the Supervising Authority prescribes a longer period
not exceeding ten (10) working days.
Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be
required to report the same as a suspicious transaction.
When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees shall not be
deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791 and other similar
laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, the fact that a covered
or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof,
the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil
proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his
duties in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other law. 
When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees are prohibited
from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or
suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be
published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the
concerned officer and employee of the covered institution and media shall be held criminally liable."

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1. Customer Identification
 This is to ensure that customers are properly identified
 The covered person must develop certain procedures so that its customers are identified and known
 Banks have a KYC system: Know Your Client – including your name, you salary (filled up when you apply)
 Stricter when the customer is a corporation

2. Record-keeping

3. Reporting of covered and suspicious transactions

a. Covered Transaction
(b) 'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of
Five hundred thousand pesos (P500,000.00) within one (1) banking day.
 Regardless of the circumstance of the deposit, the covered person is required to report it to the AMLC. It is a ministerial duty
the moment you reach the threshold amount
 It is IN EXCESS of Php500,000 within 1 banking day

b. Suspicious Transaction
(b-1) 'Suspicious transaction' are transactions with covered institutions, regardless of the amounts involved, where any of the
following circumstances exist:

1. There is no underlying legal or trade obligation, purpose or economic justification;

 Example: You opened an account in the bank. Someone deposited 400k in your account. The bank is not required to
report it since it is not a covered transaction.
The following week, somebody deposited another 400k. Still not required.
Next week, another 400k, and so on. It depends now because when the bank sees that there was no basis for anyone
to deposit in your account 4ook every week because you had no contract with that person transferring money, the
bank can actually inquire what the basis is. Is there a contract or sale?
 If the bank is satisfied, there is no suspicious transaction. If the bank is not satisfied with your reason, the bank can
report you. You just receive money out of the blue. Bank senses something fishy going on.

2. The client is not properly identified;

3. The amount involved is not commensurate with the business or financial capacity of the client;
 Bank will ask you what the source of your income is when you open an account. If you put there your compensation is
20k every month, then 1 day you deposit 450k, and the next day another 450k and so on, it is not commensurate with
your financial capacity
 Again, if the bank is not satisfied with your explanation, the bank can report you to the AMLC for suspicious
transaction

4. Taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid
being the subject of reporting requirements under the Act;
 When it is a covered transaction, the bank is required to report it. Example you deposited 450k today and another
450k tomorrow, that is a suspicious transaction because you might have received 900k and it would then have been
subject to reporting requirement but you deposited them in two to avoid being considered a covered transaction
 So it is not covered but as a mode to avoid, you did it. This could be a suspicious transaction.

5. Any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client's past
transactions with the covered institution;
 So if you deposit 20k per day the suddenly you’re depositing 300k, or 400k, that is a deviation so the bank will ask you
why you are depositing suddenly a different account
 Banks are strict with this. They will really ask you.

6.  The transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been
committed; or SEIDAC

7.  Any transaction that is similar or analogous to any of the foregoing.

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 If a transaction is a covered or suspicious transaction, it does not mean you are already violating the AMLA. There is nothing wrong being
reported because the reporting requirement is automatic when you transact with more than 500k. However, the AMLC will not
automatically charge you with violation of the AMLA.

 Since they are not violations, they are only circumstances which would require a covered person to make a report to the AMLC. These
transactions will trigger an obligation on the part of the covered person.

 We said before that lawyers and accountants acting in their independent capacity do not fall under the term covered person. However,
the actual interpretation of the BSP is this:
“Lawyers and accountants acting in an independent capacity are considered covered persons as far as the first 2 obligations are
concerned.”
 So they are still required to set up a system to identify the clients and to retain records of the transaction but they are not required to
report covered or suspicious transactions.

UNLAWFUL ACTIVITIES
 Section 3B-1 says when the transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or
has been committed, it is required to be reported as suspicious transaction

(From RA 10365) NOTE: Those numbers with specific offenses under them, and laws in BOLD are the ones Atty G. emphasized
Section 3(i) of the same Act is further amended to read as follows:
(i) 'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to the following:

(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the  Revised Penal Code, as amended;

(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002;
a. Sec 4 – Importation of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals||| 
b. Sec 5 - Sale, Trading, Administration, Dispensation, Delivery, Distribution and Transportation of Dangerous Drugs and/or Controlled
Precursors and Essential Chemicals||| 
c. Sec 6 - Maintenance of a Den, Dive or Resort||| 
d. Sec 8 - Manufacture of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals||| 
e. Sec 9 - Illegal Chemical Diversion of Controlled Precursors and Essential Chemicals||
f. Sec 10 - Manufacture or Delivery of Equipment, Instrument, Apparatus, and Other Paraphernalia for Dangerous Drugs and/or
Controlled Precursors and Essential Chemicals
g. Sec 12 -Possession of Equipment, Instrument, Apparatus and Other Paraphernalia for Dangerous Drugs|||
h. Sec 13 - Possession of Dangerous Drugs During Parties, Social Gatherings or Meetings||| 
i. Sec 14 - Possession of Equipment, Instrument, Apparatus and Other Paraphernalia for Dangerous Drugs During Parties, Social
Gatherings or Meetings|||
j. Sec 15 - Use of Dangerous Drugs||| 
k. Sec 16 - Cultivation or Culture of Plants Classified as Dangerous Drugs or are Sources Thereof

 So not all offenses under the Dangerous Drugs Act are considered unlawful activities. Only those specified

(3) Section 3 paragraphs B, C, E, G, H and I of  Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act;
a. Par B - Directly or indirectly requesting or receiving any gift, present, share, percentage, or benefit, for himself or for any other
person, in connection with any contract or transaction between the Government and any other party, wherein the public officer in
his official capacity has to intervene under the law.|||

b. Par C - Directly or indirectly requesting or receiving any gift, present or other pecuniary or material benefit, for himself or for another,
from any person for whom the public officer, in any manner or capacity, has secured or obtained, or will secure or obtain, any
Government permit or license, in consideration for the help given or to be given, without prejudice to Section thirteen of this Act|
|| 
c. Par E - Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits,
advantage or preference in the discharge of his official administrative or judicial functions through manifest partiality, evident bad
faith or gross inexcusable negligence. This provision shall apply to officers and employees of offices or government corporations
charged with the grant of licenses or permits or other concessions

d. Par G - Entering, on behalf of the Government, into any contract or transaction manifestly and grossly disadvantageous to the same,
whether or not the public officer profited or will profit thereby

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e. Par H -Director or indirectly having financing or pecuniary interest in any business, contract or transaction in connection with which
he intervenes or takes part in his official capacity, or in which he is prohibited by the Constitution or by any law from having any
interest

f. Par I - Directly or indirectly becoming interested, for personal gain, or having a material interest in any transaction or act requiring the
approval of a board, panel or group of which he is a member, and which exercises discretion in such approval, even if he votes
against the same or does not participate in the action of the board, committee, panel or group

(4) Plunder under Republic Act No. 7080, as amended;

(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the  Revised Penal Code, as amended;
 297 and 298 are not included, which refer to attempted robbery. Only consummated robbery are included because if it’s just
attempted, there is nothing to launder there
a. Art 294 - Robbery with Violence Against or Intimidation of Persons|
b. Art 295 - Robbery with Physical Injuries, Committed in an Uninhabited Place and by a Band
c. Art 296 -Definition of a Band and Penalty Incurred by the Members Thereof
d. Art 299 -  Robbery in an Inhabited House or Public Building or Edifice Devoted to Worship||| 
e. Art 300 - Robbery in an Uninhabited Place and by a Band|||
f. Art 301 - What is an Inhabited House, Public Building or Building Dedicated to Religious Worship and Their Dependencies
g. Art 302 - Robbery in an Uninhabited Place or in a Private Building|||

(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;

(7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532;

(8) Qualified theft under Article 310 of the Revised Penal Code, as amended;

(9) Swindling under Article 315 of the Revised Penal Code, as amended;

 RP vs Glasgow Credit: The crime here was estafa, so that is included under unlawful activities

(10) Smuggling under Republic Act Nos. 455 and 1937;  SEID

a. RA 455- Revised Administrative Code
b. RA 1937 – Tariff and Customs Code

(11)  Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000;
 All violations of E-Commerce Act are unlawful activities

(12)  Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as
amended, including those perpetrated by terrorists against non-combatant persons and similar targets; 

(13) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 of Republic Act No. 9372 or The Human
Security Act
(14) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168, otherwise known as the
Terrorism Financing Prevention and Suppression Act of 2012:

(15) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and Corruption of Public Officers under Article 212 of the
Revised Penal Code, as amended;

(16) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as amended;

(17) Malversation of Public Funds and Property under Articles 217 and 222 of the Revised Penal Code, as amended;

(18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised Penal Code, as amended;

(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-Trafficking in Persons Act of 2003;

(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry Code of the Philippines,
as amended;

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a. Section 78 – Unlawful occupation or destruction of forest or grazing lands
b. Section 79 – Pasturing livestock
 If you pasture livestock land considered as forest land, that is violation of sec 79. Any money that you profit from such act if you
attempt to launder it is a violation of the AMLA

(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise known as the Philippine Fisheries Code of 1998;
a. SECTION 86. Unauthorized Fishing or Engaging in Other Unauthorized Fisheries Activities
b. SECTION 87. Poaching in Philippine Waters|||
c. SECTION 88. Fishing Through Explosives, Noxious or Poisonous Substance, and/or Electricity||| 
d. SECTION 89. Use of Fine Mesh Net||
e. SECTION 90. Use of Active Gear in the Municipal Waters and Bays and Other Fishery Management Areas||| 
f. SECTION 91. Ban on Coral Exploitation and Exportation
g. SECTION 92. Ban on Muro-Ami Other Methods and Gear Destructive to Coral Reefs and Other Marine Habitat
h. SECTION 93. Illegal Use of Superlights
i. SECTION 94. Conversion of Mangroves
j. SECTION 95. Fishing in Overfished Area and During Closed Season||| 
k. SECTION 96. Fishing in Fishery Reserves,  Refuge and Sanctuaries||| 
l. SECTION 97. Fishing Or Taking of Rare, Threatened or Endangered Species
m. SECTION 98. Capture of Sabalo and Other Breeders/Spawners||| 
n. SECTION 99. Exportation of Breeders, Spawners, Eggs or Fry||| 
o. SECTION 100. Importation or Exportation of Fish or Fishery Species
p. SECTION 101. Violation of Catch Ceilings||
q. SECTION 102. Aquatic Pollution
r. SECTION 103. Other Violations: failure to comply with minimum safety standards; failure to conduct yearly report on fishponds;
gathering and marketing shell fishes; obstruction to navigation or flow and ebb of tide in any stream, river, lake or bay; construction and
operation of fish corrals/traps, fish pens and fish cages
s. SECTION 104. Commercial Fishing Vessel Operators Employing Unlicensed Fisherfolk or Fishworker or Crew||| 
t. SECTION 105. Obstruction of Defined Migration Paths
u. SECTION 106. Obstruction to Fishery Law Enforcement Officer

(22) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of 1995;
a.SECTION 101. False Statements||| 
b. SECTION 102. Illegal Exploration
c. SECTION 103. Theft of Minerals||| 
d. SECTION 104. Destruction of Mining Structures||| 
e. SECTION 105. Mines Arson||| 
f. SECTION 106. Willful Damage to a Mine
g. SECTION 107. Illegal Obstruction to Permittees or Contractors||| 
h. SECTION 110. Other Violations. — Any other violation of this Act and its implementing rules and regulations

(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known as the Wildlife Resources Conservation and
Protection Act;

(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves and Cave Resources Management Protection Act;
 Sec 7b - Gathering, collecting, possessing, consuming, selling, bartering or exchanging or offering for sale without authority any cave
resource

(25) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002, as amended;

(26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise known as the decree Codifying the Laws on
Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives;

(27) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law;

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(28) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas Filipinos Act of 1995, as amended by
Republic Act No. 10022;
 Sec 6 – Illegal recruitment

(29) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines;
 All violations
(30) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and Video Voyeurism Act of 2009;
 Sec 4 – take photo or video coverage; copy or reproduce; sell or distribute; publish or broadcast persons performing sexual acts

(31) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child Pornography Act of 2009;
 Sec 4 – Unlawful or prohibited acts (e.g. hire a child to perform pornography; produce or direct; publish or offer; possess; provide a
venue; to lure a child; to conspire to commit any of the unlawful acts)

(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610, otherwise known as the Special Protection of Children
Against Abuse, Exploitation and Discrimination;
a. SECTION 5. Child Prostitution and Other Sexual Abuse
b. SECTION 7. Child Trafficking
c. SECTION 8. Attempt to Commit Child Trafficking||| 
d. SECTION 9. Obscene Publications and Indecent Shows||| 
e. SECTION 10(c). Any person who shall induce, deliver or offer a minor to any one prohibited by this Act to keep or have in his company a
minor||| 
f. SECTION 10(D). Any person, owner, manager or one entrusted with the operation of any public or private place of accommodation,
whether for occupancy, food, drink or otherwise, including residential places, who allows any person to take along with him to such
place or places any minor herein described
g. SECTION 10(E).  Any person who shall use, coerce, force or intimidate a street child or any other child to: beg or use begging for a
living; act as conduit or middlemen in drug trafficking or pushing; conduct any illegal activities
h. SECTION 11. Sanctions for Establishments or Enterprises which Promote, Facilitate, or Conduct Activities Constituting Child Prostitution
and Other Sexual Abuse, Child Trafficking, Obscene Publications and Indecent Shows, and Other Acts of Abuse||| 
i. SECTION 12. Employment of Children||| 
j. SECTION 14. Prohibition on the Employment of Children in Certain Advertisements||| 

(33) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; and

(34) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries.”

 If the covered person can determine that the transaction REGARDLESS of amount is related to these unlawful activities, that will be a
suspicious transaction and automatically reported to the AMLA

MONEY LAUNDERING OFFENSES

SEC. 4. Money Laundering Offense.  – Money laundering is committed by any person who, knowingthat any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity:
(a) transacts said monetary instrument or property;
(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property;
(c) conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary
instrument or property;
(d) attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c) above; and
(f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraphs (a),
(b) or (c) above.
Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under
this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.
 Take note that your transaction even if it is a covered or suspicious transaction, that is not an offense. It is only a money laundering
offense if there is KNOWLEDGE that the money is related to an unlawful activity and you attempt to transact it, convert it, etc.

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 Also, a covered person who knows of a covered or suspicious transaction but does not do his duty to report it is also an offense
 The covered or suspicious transaction by itself is not a violation. The violation is when there is an unlawful activity and there are proceeds
and you attempt to transact, convert, or possess them (etc.)

CRIMINAL PROSECUTION
 Prosecution for violation of the AMLA is different from the prosecution of the unlawful activity itself.

SEC. 6. Prosecution of Money Laundering  –

a) Any person may be charged with and convicted of both the offense of money laundering and the unlawful activity as herein defined.
(b) The prosecution of any offense or violation under this Act shall proceed independently of any proceeding relating to the unlawful
activity.

 You don’t need to be convicted of the unlawful activity before you can be convicted of violation of AMLA
 It may be that you are not yet convicted of estafa but you are already convicted of trying to convert the proceeds of estafa to legitimate
funds. Prior conviction is not an element of the crime
Question: Client asks you how to avoid these offenses?
Atty G: You don’t advise them to do anything illegal. If your client did do something illegal, it’s your duty as lawyer to defend him. That’s now a
legal ethics question.

THE ANTI-MONEY LAUNDERING COUNCIL (AMLC)

Members:
SEC. 7. Creation of Anti-Money Laundering Council (AMLC). – The Anti-Money Laundering Council is hereby created and shall be composed
of the Governor of the Bangko Sentral ng Pilipinas as Chairman, the Commissioner of the Insurance Commission and the Chairman of the
Securities and Exchange Commission, as members.

Powers:
SEC. 7. – xxx
The AMLC shall act unanimously in the discharge of its functions as defined hereunder:
(1) to require and receive covered or suspicious transaction reports from covered institutions;
(2) to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity of the
owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for
assistance from a foreign State, or believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever
located, representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful
activity.
(3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General;
(4) to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering
offenses;
(5) to investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering
activities, and other violations of this Act;
(6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be laundered,
proceeds from, or instrumentalities used in or intended for use in any unlawful activity as defined in Section 3(i) hereof
(7) to implement such measures as may be necessary and justified under this Act to counteract money laundering;
(8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations
provided in this Act;
(9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money
laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders;
(10) to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including
government-owned and -controlled corporations, in undertaking any and all anti-money laundering operations, which may include
the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering
offenses and prosecution of offenders; and SEIDAC
(11) to impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions issued pursuant thereto.
(12) to require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on all real estate
transactions involving an amount in excess of Five hundred thousand pesos (P500,000.00) within fifteen (15) days from the date of
registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may also require the Land Registration
Authority and all its Registries of Deeds to submit copies of relevant documents of all real estate transactions.

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 Number 12 is the latest development. Take note that even if the Registry of Deeds is not a covered person, AMLC now requires them to
report any transaction of 500k. Of course if you buy a house, it exceeds 500k. So any transaction now with the Registry of Deeds is
reported to the AMLC.
 Supposedly Registry of Deeds is not a covered person. They are only private persons. However, they are still required to report
 Registration process now is more stringent since the Registry of Deeds will now look at the basis of the transfer

REMEDIES AVAILABLE TO THE AMLC

1. Freezing of Monetary Instrument or Property
SEC. 10. Freezing of Monetary Instrument or Property. – Upon a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i)
hereof, the Court of Appeals may issue a freeze order which shall be effective immediately, and which shall not exceed six (6) months
depending upon the circumstances of the case: Provided,  That if there is no case filed against a person whose account has been frozen
within the period determined by the court, the freeze order shall be deemed ipso facto lifted: Provided, further,  That this new rule shall
not apply to pending cases in the courts. In any case, the court should act on the petition to freeze within twenty-four (24) hours from
filing of the petition. If the application is filed a day before a nonworking day, the computation of the twenty-four (24)-hour period shall
exclude the nonworking days.
“A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion before the
expiration of the freeze order.
“No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court.”
 STEPS:
a. AMLC will file an ex parte petition for issuance of freeze order with the CA
 Account holder need not be notified
b. If CA finds there is probable cause that the money subject of the petition is related to an unlawful activity, then the CA will issue the
freeze order
 Effect: You cannot withdraw since the account is “frozen”

2. Inquire into Bank Deposits

SEC. 11. Authority to Inquire into Bank Deposits.  – Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act
No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or examine any particular deposit or
investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent
court based on an ex parte  application in cases of violations of this Act , when it has been established that there is probable cause that
the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or
a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving activities defined in
Section 3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which
are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism as defined and penalized
under Republic Act No. 9372.
The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or
non-bank financial institution within twenty-four (24) hours from filing of the application.
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special examination, check the
compliance of a Covered institution with the requirements of the AMLA and its implementing rules and regulations.
For purposes of this section, ‘related accounts’ shall refer to accounts, the funds and sources of which originated from and/or are
materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s).
A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided,That the procedure for
the ex parte application of the ex parte  court order for the principal account shall be the same with that of the related accounts."
The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference.
CASE: RP vs EUGENIO
Facts:
A series of investigations concerning the award of NAIA 3 contracts to PIATCO were undertaken by the Ombudsman and
AMLC. AMLC issued resolution authorizing the Executive Directorof AMLC to sign and verify an application to inquire into
and/or examine the deposits or investments of Alvarez, etc. (the persons involved). AMLC then applied to inquire into the
investments of Alvarez before the RTC which granted it being satisfied of existence of probable cause that the deposits were
related to the offense of violation of Anti-Graft and Corrupt Practices Act.
Ruling:
Still, even if the bank inquiry order may be availed of without need of a pre-existing case under the AMLA, it does not
follow that such order may be availed of ex parte. (This has now been changed by the subsequent amendment of the law)

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Discussion:
 The issue here was that they filed an ex parte application but the SC said that is not allowed because the law does not
provide it. It even compared this with the Freeze
 After the Eugenio case, Congress amended it. Now, ex parte is now allowed with the Court of Appeals.
 Probable cause is required that the money is related to an unlawful activity
 AMLA does not require a court order at all times:
a. Kidnapping for ransom
b. Offenses under Dangerous Drugs Act
c. Hijacking
 If the AMLC suspects that the money is related to these, they can look into the accounts by themselves. For the rest
of the unlawful activities, they need a court order and can get it through a verified ex parte petition through the CA

3. Civil Forfeiture
Section 12 of the same Act is hereby amended to read as follows:
(a) Civil Forfeiture. – Upon determination by the AMLC that probable cause exists that any monetary instrument or property is in any
way related to an unlawful activity as defined in Section 3(i) or a money laundering offense under Section 4 hereof, the AMLC shall file
with the appropriate court through the Office of the Solicitor General, a verified ex parte petition for forfeiture, and the Rules of Court
on Civil Forfeiture shall apply.
The forfeiture shall include those other monetary instrument or property having an equivalent value to that of the monetary
instrument or property found to be related in any way to an unlawful activity or a money laundering offense, when with due diligence,
the former cannot be located, or it has been substantially altered, destroyed, diminished in value or otherwise rendered worthless by
any act or omission, or it has been concealed, removed, converted, or otherwise transferred, or it is located outside the Philippines or
has been placed or brought outside the jurisdiction of the court, or it has been commingled with other monetary instrument or
property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be
segregated for purposes of forfeiture.

(b) Claim on Forfeited Assets.  – Where the court has issued an order of forfeiture of the monetary instrument or property in a criminal
prosecution for any money laundering offense defined under Section 4 of this Act, the offender or any other person claiming an interest
therein may apply, by verified petition, for a declaration that the same legitimately belongs to him and for segregation or exclusion of
the monetary instrument or property corresponding thereto. The verified petition shall be filed with the court which rendered the
judgment of forfeiture, within fifteen (15) days from the date of the finality of the order of forfeiture, in default of which the said order
shall become final and executor. This provision shall apply in both civil and criminal forfeiture.

(c) Payment in Lieu of Forfeiture. –  Where the court has issued an order of forfeiture of the monetary instrument or property subject of
a money laundering offense defined under Section 4, and said order cannot be enforced because any particular monetary instrument or
property cannot, with due diligence, be located, or it has been substantially altered, destroyed, diminished in value or otherwise
rendered worthless by any act or omission, directly or indirectly, attributable to the offender, or it has been concealed, removed,
converted, or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof, or it is located outside the
Philippines or has been placed or brought outside the jurisdiction of the court, or it has been commingled with other monetary
instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to
identify or be segregated for purposes of forfeiture, the court may, instead of enforcing the order of forfeiture of the monetary
instrument or property or part thereof or interest therein, accordingly order the convicted offender to pay an amount equal to the
value of said monetary instrument or property. This provision shall apply in both civil and criminal forfeiture.”
 Money will be forfeited in favor of the government if there is probable cause that the money is related to an unlawful activity
CASE: RP vs. GLASGOW
Facts:
Republic filed a complaint in the RTC for civil forfeiture of assets against the bank deposits in the account maintained by Glasgow. It
opposed the motion to dismiss of Glasgow and asserted prior conviction for unlawful activity is not a precondition to the filing of a civil
forfeiture case.
Ruling:
The Court agrees with the Republic. Whether or not there is truth in the allegation that account no. CA-005-10-000121-5 contains the
proceeds of unlawful activities is an evidentiary matter that may be proven during trial. The complaint, however, did not even have to
show or allege that Glasgow had been implicated in a conviction for, or the commission of, the unlawful activities of estafa and violation
of the Securities Regulation Code.
A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil forfeiture proceeding . Stated
otherwise, a finding of guilt for an unlawful activity is not an essential element of civil forfeiture.

Discussion:
 Conviction is not necessary for there to be forfeiture. It is actually a penalty but the SC said no need for conviction

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 If you recall discussion on Bank Secrecy Law, when a covered institution makes a report under Sec 9, it is exempt from
the Bank Secrecy Law and the Foreign Currency Deposit Act. When AMLC makes an inquiry under Sec 11, it is again
exempt.
 Take note also that even if it is not a breach of the Bank Secrecy Law, the covered person cannot disclose the fact that he
has made a report to any other person because such disclosure is a breach of confidentiality which is penalized under
Sec 14 of AMLA. If you make a malicious report, just to harass somebody, that is penalized under Sec 14
(a) Penalties for the Crime of Money Laundering. The penalty of imprisonment ranging from seven (7) to fourteen (14) years and
a fine of not less than Three million Philippine pesos (Php3,000,000.00) but not more than twice the value of the monetary
instrument or property involved in the offense, shall be imposed upon a person convicted under Section 4(a), (b), (c) and (d) of
this Act.
The penalty of imprisonment from four (4) to seven (7) years and a fine of not less than One million five hundred thousand
Philippine pesos (Php1,500,000.00) but not more than Three million Philippine pesos (Php3,000,000.00), shall be imposed upon
a person convicted under Section 4(e) and (f) of this Act.
The penalty of imprisonment from six (6) months to four (4) years or a fine of not less than One hundred thousand Philippine
pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), or both, shall be imposed
on a person convicted under the last paragraph of Section 4 of this Act.
(b) Penalties for Failure to Keep Records. The penalty of imprisonment from six (6) months to one (1) year or a fine of not less
than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos
(Php500,000.00), or both, shall be imposed on a person convicted under Section 9(b) of this Act.||| 
(c) Malicious Reporting. Any person who, with malice, or in bad faith, reports or files a completely unwarranted or false
information relative to money laundering transaction against any person shall be subject to a penalty of six (6) months to four
(4) years imprisonment and a fine of not less than One hundred thousand Philippine pesos (Php 100,000.00) but not more than
Five hundred thousand Philippine pesos (Php 500,000.00), at the discretion of the court:  Provided, That the offender is not
entitled to avail the benefits of the Probation Law.
If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the
responsible officers, as the case may be, who participated in, or allowed by their gross negligence, the commission of the crime.
If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to
the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the
offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary
absolute disqualification from office, as the case may be. SIcTAC
Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to testify shall suffer
the same penalties prescribed herein.
(d) Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less
than Five hundred thousand Philippine pesos (Php 500,000.00) but not more than One million Philippine pesos (Php
1,000,000.00) shall be imposed on a person convicted for a violation under Section 9(c). In the case of a breach of confidentiality
that is published or reported by media, the responsible reporter, writer, president, publisher, manager and editor-in-chief shall
be liable under this Act."
(e) The penalty of imprisonment ranging from four (4) to seven (7) years and a fine corresponding to not more than two
hundred percent (200%) of the value of the monetary instrument or property laundered shall be imposed upon the covered
person, its directors, officers or pesonnel who knowingly participated in the commission of the crime of money laundering.
(f) Imposition of Administrative Sanctions. The imposition of the administrative sanctions shall be without prejudice to the filing
of criminal charges against the persons responsible for the violation.
After due notice and hearing, the AMLC shall, at its discretion, impose sanctions, including monetary penalties, warning or
reprimand, upon any covered person, its directors, officers, employees or any other person for the violation of this Act, its
implementing rules and regulations, or for failure or refusal to comply with AMLC orders, resolutions and other issuances. Such
monetary penalties shall be in amounts as may be determined by the AMLC to be appropriate, which shall not be more than Five
hundred thousand Philippine pesos (P500,000.00) per violation.
The AMLC may promulgate rules on fines and penalties taking into consideration the attendant circumstances, such as the
nature and gravity of the violation or irregularity.
(g) The provision of this law shall not be construed or implemented in a manner that will discriminate against certain customer
types, such as politically-exposed persons, as well as their relatives, or against a certain religion, race or ethnic origin, or such
other attributes or profiles when used as the only basis to deny these persons access to the services provided by the covered
persons. Whenever a bank, or quasi-bank, financial institution or whenever any person or entity commits said discriminatory act,
the person or persons responsible for such violation shall be subject to sanctions as may be deemed appropriate by their
respective regulators.

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 But the most interesting part is Sec 16
SECTION 16. Prohibitions Against Political Harassment. — This Act shall not be used for political persecution or harassment or as
an instrument to hamper competition in trade and commerce.
No case for money laundering may be filed against and no assets shall be frozen, attached or forfeited to the prejudice of a
candidate for an electoral office during an election period.
 So remember the unlawful activities are plunder, bribery, malversation, violation of Anti-Graft and Corrupt Practices
Act, etc.
 BUT during election season, you cannot file a case. AMLC is helpless against people running for office. So there’s
always a backdoor for politicians.

THINGS TO REMEMBER ABOUT AMLA

1. You don’t need to memorize but be familiar with the covered person, so that if there is a problem, you would know if he is
covered and if he is under the 3 obligations: customer identification, record keeping, and reporting of covered and suspicious
transactions. If you don’t report, it’s an offense.
2. AMLC has 3 remedies in case of violations of AMLA
a. Freeze order through CA
b. Bank inquiry through CA
 Except for Kidnapping, dangerous drugs, and hijacking, in which case no court order is required
c. Civil forfeiture of the moneys related to the unlawful activity
 No conviction required for forfeiture

RA 8799 – THE SECURITIES AND REGULATION CODE

February 5, 2015
 This law was passed sometime in August 2000
 Prior to the SRC, we had the Revised Securities Act, BP No. 178 which was passed in 1982
 Before that, you had the Securities Act, Commonwealth Act No. 83 which was passed 1936
 The very first investment protection law in the Philippines is Act No. 2581, known as “Blue Sky Law”. It was called as such based on old
jurisprudence, saying that these laws were passed in order to protect the public against speculative investments which have no basis
other than clean field of blue sky, in other words, no basis other than air.
 Now, the blue sky laws are the generic terms used to describe the investment protection laws. The blue sky law was passed in 1916. It was
the first investment protection law in the Philippines. But at that point, it solely provided for regulations with respect to issuance of
securities, but it did not require registration for those securities. But when the Securities Act came in 1936, securities were now classified
into speculative and non-speculative securities.

Speculative Securities – required to be registered.

Non-speculative Securities – not required to be registered.

 This practice was carried over until the Revised Securities Act until finally we have the Securities Regulation Code
 The SRC provides that ALL securities that will be sold to the public within the Philippines will have to be registered with the Securities and
Exchange Commission. In fact this requirement of registration is the most basic requirement of the SRC which is aimed to protect the
investing public.

STATE POLICIES OF THE SRC LAW

2. 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. To achieve these ends, this Securities Regulation Code is
hereby enacted.

1. To establish a socially conscious, free market that regulates itself.

It will establish a market for stocks and securities. The market is the Philippine Stock Exchange. The relationship between the PSE
and SRC is that although PSE is a private corporation, it was established by law, provided by the Chapter 10 of the SRC Law. Chapter
10 of the SRC provides for the establishment and regulation for what we call the self-regulatory organization (SRO) and PSE is one
such SRO. The PSE is an SRO which is established pursuant to the SRC and it is also regulated based on the provisions of the SRC.
Technically, PSE is a private enterprise, a free market, and an SRO because this market regulates itself, free from interference from
the government.
So the first state policy here is achieved by virtue of Chapter X of the SRC which provides for the establishment and regulations of
the SROs which is the market for securities. In the Philippines, we only have one SRO, which is PSE.

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CHAPTER X
REGISTRATION, RESPONSIBILITIES AND OVERSIGHT OF SELF-REGULATORY ORGANIZATIONS
Section 39. Associations of Securities Brokers, and Dealers, and Other Securities Related Organizations. – 39.1. The Commission shall
have the power to register as a self-regulatory organization, or otherwise grant licenses, and to regulate, supervise, examine,
suspend or otherwise discontinue, as a condition for the operation of organizations whose operations are related to or connected
with the securities market such as but not limited to associations of brokers and dealers, transfer agents, custodians, fiscal and
paying agents, computer services, news disseminating services, proxy solicitors, statistical agencies, securities rating agencies, and
securities information processor which are engaged in business of: (a) Collecting, processing, or preparing for distribution or
publication, or assisting, participating in, or coordinating the distribution or publication of, information with respect to
transactions in or quotations for any security; or (b) Distributing or publishing, whether by means of a ticker tape, a
communications network, a terminal display device, or otherwise, on a current and continuing basis, information with respect to
such transactions or quotations. The Commission may prescribe rules and regulations which are necessary or appropriate in the
public interest or for the protection of investors to govern self-regulatory organizations and other organizations licensed or
regulated pursuant to the authority granted in Subsection 39.1 including the requirement of cooperation within and among, and
electronic integration of the records of, all participants in the securities market to ensure transparency and facilitate exchange of
information.

2. To encourage the widest participation of ownership in enterprises.

For example, the company will issue stocks for sale in the PSE. They will conduct a public offering. Individuals or other interested
parties can buy the shares and as an effect they can have their share in the ownership in the corporation.
This happens when the public holds shares in these corporations. Which is why the SEC requires when a corporation conducts a
public offering, a certain percentage of the shares to be offered to the public is granted to certain classifications. So only a certain
percentage will go to the qualified buyers and certain percentage will go to the ordinary investors. To make sure that the public, the
ordinary investors, will get to own shares in certain enterprises and not just the big investors.

3. Enhance the democratization of wealth

4. Promote the development of the capital market, protect investors, ensure full and fair disclosure about securities.
These four state policies are related to each other. The primary purpose of SRC is investor protection. This is achieved by the
provisions of the SRC. One such is the requirement for registration, which requirement for registration requires the full and fair
disclosure about securities. The thrust of the SRC is when you buy securities, you should be aware of the nature of these securities
and the nature of the company issuing the securities. To enable you to make the proper decisions on your investments. The thrust of
the SRC is full and fair disclosure.
Take note this is different from merit-based approach. Merit-based approach is that when you register your shares and once it passes
registration there is a presumption that your investment is meritorious meaning it is safe, it is protected and you will earn income.
That is NOT the purpose of registration of the SRC, because the purpose of the SRC is full and fair disclosure to let the public know
about the issuing company, about the shares and securities itself and it is now up to the public to make a decision, as long as you
make an informed decision.
Just because the share that you purchased is registered, that does not mean that you will earn income out of your investment. It is
not a guarantee and not an assurance. Full and fair disclosure only, to let the public know the truth about the securities and let them
decide and in that way the public is protected. And in that way, when the public feels secure about their investments, they will make
more investments and as an effect, the fourth state policy, the promotion of the development of the capital market is achieved. And
when we develop the capital market, will not kept at the higher levels but will trickle down to the investing public and it that way
there will be a democratization of wealth.
These four state policies are related. The full and fair disclosure which is the foremost mode of investment protection which the
purpose of which to have investor confidence in the capital market and as a result capital market will develop; and when there are
more investments, the presumption is that wealth will trickle down to the investing public and not just be kept by the majority
owners of the securities.

5. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create
distortions in the free market.
That is embodied under the Chapter 7 of the SRC. So when you take a look at Chapter 7, there are provisions on fraud, etc.

CHAPTER VII
Prohibitions on Fraud, Manipulation and Insider Trading
SECTION 24. Manipulation of Security Prices; Devices and Practices. — 24.1 It shall be unlawful for any person acting for himself
or through a dealer or broker, directly or indirectly:

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(a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading
market (hereafter referred to purposes of this Chapter as "Exchange"):
(i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or
orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or
for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership. CAcDTI
(b) To effect, alone or with others, a series of transactions in securities that: (i) Raises their price to induce the purchase of a
security, whether of the same or a different class of the same issuer or of a controlling, controlled, or commonly controlled
company by others; (ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the
same issuer or of a controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce
such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and
dump, boiler room operations and such other similar devices.
(c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall
because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the
price of the security for the purpose of inducing the purchase or sale of such security.
(d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe
was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. prcd
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange
for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of
the Commission.
24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive
device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the
purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors.
24.3. The foregoing provisions notwithstanding, the Commission, having due regard to the public interest and the protection of
investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section.
SECTION 25. Regulation of Option Trading . — No member of an Exchange shall, directly or indirectly endorse or guarantee the
performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. The
terms "put", "call", "straddle", "option", or "privilege" shall not include any registered warrant, right or convertible security. DA
SECTION 26. Fraudulent Transactions . — It shall be unlawful for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact
necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading;
or
26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon
any person.
SECTION 27. Insider's Duty to Disclose When Trading . — 27.1. It shall be unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the
public, unless: (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other
party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. A purchase or
sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insider's spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in
possession of material nonpublic information if transacted after such information came into existence but prior to dissemination
of such information to the public and the lapse of a reasonable time for the market to absorb such information: Provided,
however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the
material nonpublic information at the time of the purchase or sale. HTCAED
27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not been generally disclosed to the public and
would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for
the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
27.3. It shall be unlawful for any insider to communicate material nonpublic information about the issuer or the security to any
person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating
the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession
of such information.
27.4. a) It shall be unlawful where a tender offer has commenced or is about to commence for:

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(i) Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender
offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has
reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those
acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and
any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where
such communication is likely to result in a violation of Subsection 27.4 (a)(i). SCEHaD
(b) For purposes of this subsection the term "securities of the issuer sought or to be sought by such tender offer" shall include
any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.

POWERS OF THE SEC

The agency that is tasked with the job of interpreting and implementing the SRC is the Securities and Exchange Commission.
Section 5. Powers and Functions of the Commission.– 5.1. The commission shall act with transparency and shall have the powers and functions
provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:
 The corporations who are grantees with primary franchise holders are those which were granted with certificate of incorporation from
the SEC; those who submitted their articles with the SEC. All private corporations are holders or grantees of primary franchise.
 Does it mean that the SEC has jurisdiction over ALL private corporations?
There are those corporations which are governed exclusively by other government agencies as expressly provided by law. For
example, Insurance Companies, they are governed by the Insurance Commission. Insurance companies have two franchisees, first is
the certificate of incorporation and the other is the license is the one that is issued by the Insurance Commission. Now, does the SEC
have jurisdiction over them? Distinguish. Can the SEC issue a secondary franchise?
 The SEC can issue secondary franchise to financial companies, lending companies, investment houses which are not banks. Financial
institutions which are not governed by the BSP because they are not banks or quasi-banks, these are subject to the jurisdiction of the SEC.
1. Primary Franchise – All Corporations
2. Secondary Franchise – Some Corporations
 So, all holders of secondary franchise are holders of primary franchise. But not all holders of primary franchise are holder of
secondary franchise. If you are holder of a secondary franchise, the latter can be issued by the SEC or other government agencies. Is
there any difference with respect to the jurisdiction and regulation that may be implemented by the SEC over these entities?
The law says jurisdiction and supervision over ALL corporations, partnerships who are grantees of primary franchises. That means all
of these! These are grantees of primary franchise does that mean that the SEC will be the one who would regulate over these
companies? What is the extent of jurisdiction that would be exercised by the SEC?
 General Rule: The SEC over a memorandum circular has verified that if a corporation is a grantee of a secondary franchise from the
SEC itself those corporations are subject to a direct jurisdiction and supervision of the SEC. The other holders of secondary franchise
and those grantees of primary franchise sans secondary franchise are subject to supervision and monitoring of the SEC in so far as
compliance with the Corporation Code is concerned, with respect to the officers, the BODs, the reportorial requirements such as
general information sheets and the filing of your financial statements and others that are required by the Corporation Code.
 Is there any exception to this rule when you are a holder of a secondary franchise or even just a primary franchise but you are subject
to the supervision of the SEC by a law other than the Corporation Code?

CASE: Philippine Veterans Bank vs SEC

Facts:
PVB was subjected to penalties by the SEC for failure to submit the reportorial requirements to the SEC based on the SRC.
SEC said, “Hey PVB! You failed to submit your reportorial requirements under the SRC! You are violating the SRC!” PVB is a holder of two
franchises from SEC and BSP. The SEC alleged that the PVB is a public company. PVB said that they are not a public company because
the ownership of the company shares is limited to the World War Veterans, their widows and heirs and also they are not listing their
shares in the stock exchange and therefore should not be submitted to penalties.
Issue: Whether or not the PVB is subject to companies?
Ruling:
SC ruled in favor of SEC. Rule 3 (1) (m) of the Amended Implementing Rules and Regulations of the SRC, which defines a
"public company" as "any corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least
one hundred (100) shares of a class of its equity securities. Therefore, there are two kinds of public companies.Both kinds of public
companies are under the jurisdiction of the SEC as far as compliance with the provisions of the Corporation Code and SRC.
Discussion:

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Take note, if you are a public company, basically you are a holder of a secondary franchise from the SEC because in order to
list in the stock exchange you need to register your shares. You need a license to sell your securities. So that would put you under the
jurisdiction of the SEC.
If you are public company even if your shares are not listed in the stock exchange, you can still be considered falling under
the jurisdiction of the SEC in so far as the provisions of the SRC are concerned.
All public corporations, both types are required to comply with the reportorial requirements under Section 17 of the SRC.
No need to register or secure a certificate saying that you are a public corporation; but the SEC upon determining that you’ve meet
the qualifications or criteria of a public corporation, they can require you to comply with the provisions of the SRC, in so far as the
reportorial requirements. No need to get a license to be public corporations.

(a) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies
on all aspect of the securities market and propose legislation and amendments thereto;
If there are laws being contemplated in Congress which concerns securities, the SEC will be part of the working group for the
drafting of those laws. Even for the IRR for securities law, the SEC will always be a part of that.
There was this law passed, PERA (about retirements). Then we (ACCRA Lawfirm?) were part of the technical working group for IRR,
we are working with SEC, BIR and BSP. SEC was part of the technical working group because it was securities law.
Similarly with the Real Estate Investment Trust Act, it was supposed to create a trust fund for buying real estate so that corporations
using the real estate will just lease from these public companies to generate wealth for the public. SEC and BSP were a part of the working
group.

(b) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;
This is for the securities under Section 8 of the SRC Law.:
“SECTION 8. Requirement of Registration of Securities. — 8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.”

(c) Regulate, investigate or supervise the activities of persons to ensure compliance;

(d) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;
Such as the PSE. Under this supervision authority of the SEC, the SEC can penalize PSE because although PSE is a private corporation,
it is supposed to be regulated by the SEC. The problem of PSE was that the SRC provides a limit to ownership of brokers in the shares of the
PSE. It was supposed to be set at 20%. The brokers who incorporated the PSE did not want to let go of their shares. They wanted to keep the
control of the PSE. Because of that they violated the limit provided by the SEC. They were fined by the SEC at 100 pesos a day.The SEC has the
power to do that under the SRC.

(f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulation and orders;
So this is the rule-making power of the SRC. Quasi-legislative power.Such rules are given great weight by the Courts.

(h) Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any
private institution, corporation, firm, association or person in the implementation of its powers and function under its Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties
prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its
supervision;
Not an amendment but an addition to the power of the SEC under the Corporation Code. Like the power of the SEC to call a meeting,
under the petition of a stockholder. The SEC can issue an order to have a meeting. But under the provisions of the Corporation Code, if there is
no petition of the stockholder, they cannot issue an order to have a meeting because there has to be an initiated petition by the stockholder.
Paragraph K now allows the SEC to compel even without a petition.

(l) Issue subpoena ducestecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order
the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person
under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws;

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Does this include to subpoena bank accounts? It does not because of the term, subject to the provisions of existing lawswhich
would be your bank secrecy laws. This power is limited. So that phrase was intended to protect the bank accounts.

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or
associations, upon any of the grounds provided by law; and
(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.

JURISDICTION OF CASES
SRC Section 5.2. The Commission’s jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise
of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1)
year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases
filed as of 30 June 2000 until finally disposed.
This section transferred ALL cases enumerated under section 5 of PD No. 902-A from the SEC to the RTC (including Commercial Courts). These
cases intra-corporate disputes, election over corporate officers, suspension of payments:

PD No. 902-A. Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide cases involving.
a) 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.
b) 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;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations.

REGISTRATION REQUIREMENT
What is required before Securities can be sold?SRC requires that it must be registered.
CHAPTER III
REGISTRATION OF SECURITIES
Section 8. Requirement of Registration of Securities.– 8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.

TYPES OF SECURITIES
What are securities?
Section 3. Definition of Terms. - 3.1. "Securities" are 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.

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Two major types of securities are:
1. Equity Securities
2. Debt Securities

Shares of Stocks are equity securities representing ownership in an enterprise.

Bonds, debentures, notes, evidences of indebtedness are debt securities. The difference between the bonds, debentures, notes, etc
is with respect to the term and as to the collateral because bonds are of the longest term. Bonds are generally backed by a real estate
mortgage. Debentures are medium-term. Notes which are shorter term debt securities.

1. ASSET-BACKED SECURITIES:
 Asset-Backed Securities are defined under RA 9627 which means that certificates issued by an SPE (Special Purpose Entity), the
repayment of which shall be derived from the cash flow of the assets in accordance with the Plan.Under the Securitization Act of 2004,
these SPEs will buy receivables or bonds, basically debt securities. These debt securities have very large face amount, in millions. Ordinary
investors cannot really buy them. In turn, the SPE will turn around and issue securities. These securities issued by SPEs are Asset Back
Securities.
 Why do you call them as Asset Back Securities?
They are backed up by these debt securities which are recognized as assets of these SPEs. Since these are debt securities, whatever
earnings from these debt securities like interests, discounting, these are the income which flows down to the holders the Asset Back
Securities. These debt securities are normally have very big face amounts so the ordinary investing public cannot buy them but when the
SPEs buy them in bulk, then, it will in turn create its own securities and distribute it to the public. These are smaller denomination
securities.
 These debt instruments are assets of the SPE and they are the basis of the SPE in issuing the Asset Back Securities. For example they will
buy debt securities worth 20m pesos, in turn, this is one debt securities, the SPE then in turn divide this into several securities which
would be easily accessible or made more affordable to the investing public.

2. INVESTMENT CONTRACTS:
SRC Rule 3.1-1 - Definition of Investment Contract and Derivative
1.   An investment contract means a contract, transaction or scheme (collectively “contract”) whereby a person invests his money in a
common enterprise and is led to expect profits primarily from the efforts of others.
a.    A presumption that a contract is an investment contract arises whenever a person seeks to use the money of others on the promise
of profits.
b.    When two or more investors “pool” their resources, there is a common enterprise, even if the promoter does not do more than
receive a broker’s commission.
 When do you have a common enterprise?
When two or more investors pool their resources, what they have is a common enterprise; which is an essential element of an investment
contract.
 What is the test that is used to determine WON it is an investment contract?Howey Test (as discussed in the case below)

CASE: SEC vs Prosperity.com Incorporated

Facts:
There is this company which sells websites without providing internet service. At the same time, by referring to PCI his own down-
line buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States, and insurance
coverage worth P50,000.00. To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own down-lines.
These second tier of buyers could in turn build up their own down-lines. For each pair of down-lines, the buyer-sponsor received a US$92.00
commission. The SEC, through its Compliance and Enforcement unit, issued a Cease and Desist Order against PCI. The SEC ruled that PCI's
scheme constitutes an Investment contract and, following the Securities Regulations Code, 2 it should have first registered such contract or
securities with the SEC.
Issue:
Whether or not PCI’s scheme constitutes an investment contract.
Ruling:
There was no investment contract. The Securities Regulation Code treats investment contracts as "securities" that have to be
registered with the SEC before they can be distributed and sold. An investment contract is a contract, transaction, or scheme where a person
invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. 
The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co.  that, for an investment contract to exist, the
following elements, referred to as the  Howey  test must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3)

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investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.  Thus, to
sustain the SEC position in this case, PCI's scheme or contract with its buyers must have all these elements.
An example that comes to mind would be the long-term commercial papers that large companies, like San Miguel Corporation
(SMC), offer to the public for raising funds that it needs for expansion. When an investor buys these papers or securities, he invests his money,
together with others, in SMC with an expectation of profits arising from the efforts of those who manage and operate that company. SMC has
to register these commercial papers with the SEC before offering them to investors.
Here, PCI's clients do not make such investments. They buy a product of some value to them: an Internet website of a 15-MB
capacity. The client can use this website to enable people to have internet access to what he has to offer to them, say, some skin cream. The
buyers of the website do not invest money in PCI that it could use for running some business that would generate profits for the investors. The
price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI creates, using its computer facilities and
technical skills. Actually, PCI appears to be engaged in network marketing.
Discussion:
There was no investment. Instead what they paid is a purchase price for the product which is the website. In applying the Howey
test, it appears that not all the elements are present. This is not an investment contract; it is not a security. It does not need to be registered.

3. FRACTIONAL UNDIVIDED INTERESTS IN OIL, GAS OR OTHER MINERAL RIGHTS:

That is provided for under the Mining Act. Under the Regalian Doctrine, all resources are owned by the State; but the State can
explore and extract these resources in partnership with Filipino citizens. The Mining Act provides for two rights to extract resources. That
would be under:
1. MPSA – Mineral Production Share Agreement
2. FTAA – Financial and Technical Assistance Agreement
Which allows the private entity to partner with the government in extracting oil, minerals and gas. These rights under these
contracts are considered as securities. So if you sell them to the public, you have to register.

4. DERIVATIVES LIKE OPTION AND WARRANTS

Derivatives under the SRC Rules
Derivative with respect to equity securities, means a financial instrument, including options and warrants, whose value depends on the
interest in or performance of an underlying security, but which does not require any investment of principal in the underlying security.
Kinds of Derivatives:
a. Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined
price, called the exercise or strike price, on or before a predetermined date, called the expiry date, which can only be extended in
accordance with Exchange rules.
Can be buy or sell.
b. Call options are rights to buy and put options are rights to sell.
c. Warrants are rights to subscribe or purchase new shares or existing shares in a company, on or before a predetermined date, called the
expiry date, which can only be extended in accordance with Exchange rules. Warrants generally have a longer exercise period than
options.
 Warrants areonly rights to buy
 Warrants generally have a longer exercise period than options and are evidenced by warrant certificates.
 Kinds of Warrants:
1. “Detachable Warrant” – means a Warrant that may be sold, transferred or assigned to any person by the Warrantholder separate
from, and independent of, the corresponding Beneficiary Securities. 
2. “Nondetachable Warrant” – means a Warrant that may not be sold, transferred or assigned to any person by the warrantholder
separate from, and independent of, the Beneficiary Securities. 

 Warrants allow you to buy the underlying shares at a predetermined price on a predetermined date. This is a kind of derivative because as
defined a derivative is a kind of security whose value varies depending on the value of the underlying security.
 For example, you have a warrant which allows you to purchase a certain security at 100 per share not later than February 15, 2015. On
February 15, 2015, let’s say the shares are selling at 200 per share. Can I sell you the warrant? Are you willing to buy the warrant for 50
pesos?
 Yes because it will allow me to buy the shares at a 50 pesos discount because I will pay 50 pesos for the warrant and I will pay 100
pesos for the share. I gain the difference of 50 pesos from my cost of 150 minus the 200 actual cost of the shares in the market.
 I will sell it to you for 80 pesos, will you buy it? Yes. Because that is still a gain of 20 pesos. The actual cost of the warrant is 80 pesos
and the cost of the share is 100 pesos, so you have 180 but if I buy the shares without the warrant, I will be paying 200 pesos.
 The value of the warrant fluctuates depending on the value of the underlying security. That is why it is called a derivative because its
value is derived from the value of the underlying security. Warrant itself is a security. It has to be registered. Derivatives are also
classified as securities.

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5. CERTIFICATES OF ASSIGNMENTS, CERTIFICATES OF PARTICIPATION, TRUST CERTIFICATES, VOTING TRUST CERTIFICATES OR SIMILAR
INSTRUMENTS:
What is the difference between the certificates of assignments and certificates of participation?
Recalling the laws on sales, when you sell incorporeal rights, you don’t do a contract of sale, you execute a deed of assignment.
Certificates of assignments and certificates of participation are sales of incorporeal rights particularly debts, credit. If you sell the whole
credit, what you can have as a security is in the form of a certificate of assignment. If you sell a portion of the credit, is a certificate of
participation. Both embody a credit. Trust certificates are actually deposit certificates.
Voting Trust Certificates is when you give the person a right to vote their shares. This allows a third person to vote the shares. This is also
a security. Just the right to vote.

6. PROPRIETARY OR NONPROPRIETARY MEMBERSHIP CERTIFICATES IN CORPORATIONS:

 Non-proprietary share or certificate is an evidence of interest or privilege over a certain property of a corporation in view of  
the amount paid by the holder for the said share/certificate.  While the holder is entitled to the use of the property, he has no right over
dividends or of the assets of the company upon liquidation thereof. 
 Proprietary share or certificate is an evidence of interest or participation or privilege in a corporation which not only entitles the holder to
enjoy the use of a specific property but also to dividends or earnings of said company. Upon liquidation of the company, a holder of a
proprietary share shall have proportionate ownership right over its assets. 
You normally see this in sports clubs, where they issue these kinds of shares. If it is a non-proprietary, the holder of the share has the right
to use the facilities of the club but they cannot take part in the dividends and if the club is liquidated, they cannot share in the liquidation.
If proprietary shares, you can use the facilities, you have a share in the dividend distribution and upon liquidation, you can also get a share
in the liquidating dividends.

INSTANCES WHEN A SECURITY IS TO BE REGISTERED

CHAPTER III
REGISTRATION OF SECURITIES
Section 8. Requirement of Registration of Securities.– 8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.
These are the securities that will have to be offered to the public in the Philippines.
We have a client who is intending to sell their shares in Korea. There is no need to register the shares because the SRC will only take place
when the shares are sold in the Philippines. BahalanadawangPinoysnamopalitsa shares sa Korea. Wala nay pakiang SEC.But it has to be offered
to the public or public offering in the Philippines.

SRC Rules
Public Offering means a random or indiscriminate offering of securities in general to anyone who will buy, whether solicited or
unsolicited. Any solicitation or presentation of securities for sale through any of the following modes shall be presumed to be a public
offering:
i. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or any part thereof ; 
ii.  Presentation in any public or commercial place; 
iii.  Advertisement or announcement in any radio or  television, or in any online or e-mail system; or 
iv. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or mailing the same to
prospective purchasers.
Prior to registration, you cannot sell the securities in the Philippines.

STAGES BEFORE THE SECURITIES ARE SOLD TO THE PUBLIC IN THE PHILIPPINES:
1. Pre-Filing Stage – you have not yet filed your registration with the SEC. At this point, you cannot sell securities in the Philippines; you
cannot disseminate information about your shares in the Philippines.
 You cannot sell nor disseminate information.
 This is a very long process. The issuer will need to find an underwriter, a legal team, a finance team.The legal team will
prepare the registration statement and preliminary prospectus and the finance team to check them under due
diligence.They will make some necessary corrections and the legal team will make final corrections.
2. Filing Stage
 Under Section 8 of the SRC, before you can sell your securities, you need to file a registration statement and get the
approval by the SEC of that registration statement.
 You need to file your application.

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 The documents required to be submitted to the SRC are the registration statement together with the preliminary
prospectus.
3. Pre-Offering Stage
 This stage, the moment thatafter you file your registration statement and your preliminary prospectus with the SEC, it is
what we call, Pre-Offering Stage.
 Section 8.1.  Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration
statement duly filed with and approved by the Commission. Prior to such sale, information on the  securities, in such form and
with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. 
 You cannot sell yet in this stage because they must also comply with the requirement of filing AND approval of the
registration statement by the SEC.
 The basis for the submission of the registration statement together with the preliminary prospectus. BOTH.
 SECTION 12.  Procedure for Registration of  Securities. — 12.1. All securities required to be registered under Subsection 8.1 shall
be registered through the filing by the issuer in the main office of the Commission, of a sworn registration statement with
respect to such securities, in such form and containing such information and documents as the Commission shall prescribe. The
registration statement shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3 and 8.4.
 During the pre-offering period, meaning after you already filed but before approval, we cannot sell securities yet.
 You are only allowed to disseminate your preliminary prospectus to the public.
 This preliminary prospectus is also known as red-herring prospectus. This term came from the USA. Preliminary prospectus
was actually required to be written in a red ink. And red-herring fishes are used to mislead the hounds. It is a false trail red-
herring. That prospectus has not yet been approved by the SEC so that prospectus is a false trail.
 Take note under 8.1 the preliminary prospectus filed with the SEC will be circulated to potential investors prior to the
effectiveness of the registration statement. You can already disseminate your preliminary prospectus provided that it
contains a statement that the registration and the prospectus has not yet been declared effective. You have to put it in
bold print in your prospectus.
 Rule 8.1.d. Allows the dissemination of the preliminary prospectus during the pre-offering period.
 SRC Rule 8.3 also provides for certain written communications which are not deemed offers for sale. These written
communications can be disseminated during this stage. These are actually advertisements, notice,
circulars,letters,etcpublished or transmitted to any person after the registration statement has been filed and contains any
of the following information required. At this point, not yet approved.
 You can only disseminate your preliminary prospectus and disseminate your advertisements.
 These advertisements are also known as tombstone advertisements because you are just advertising but you are not
allowed to sell but this has not yet been approved by the SEC. Mura siya’gpatay. Walaygamit.
 These are advertisements which are allowed to be circulated after a registration statement has already been filed with the
SEC but not yet been approved.
3.1 Payment of Filing Fees - Section 12.5.  (a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of
not more than one-tenth (1/10) of one per centum  (1%) of the maximum aggregate price at which such securities are proposed to be
offered.
3.2 Publication –Section 12.5 (b)Notice of the filing of the registration statement shall be immediately published by the issuer, at its
own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such
other manner as the Commission by rule shall prescribe, reciting that a registration statement for the sale of such security has been
filed, and that the aforesaid registration statement, as well as the papers attached thereto are open to inspection at the
Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such
reasonable charge as the Commission may prescribe.
3.3 Approval or Denial - The moment that the SEC will approve your shares, the SEC will issue an order declaring the registration
statement either effective or rejected. Or the SEC can allow you to amend your registration statement.
Section 12.6. Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the
issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed
to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the
registration statement to be effective if it finds that the registration statement together with all the other papers and documents
attached thereto, is on its face complete and that the requirements have been complied with.
3.4 Oath from the Issuer - Section 12.7 Upon effectivity of the registration statement, the issuer shall state under oath in every
prospectus that all registration requirements have been met and that all information are true and correct as represented by the
issuer or the one making the statement.
4. Offering Period –You can now sell your securities because you already filed your registration statement and it has already been
approved or made effective by the SEC.

21
 A.C.G.T.| © 2014-2015
Take note that the SEC’s approval is not a stamp of merit of the security. It is just a statement that you have fully and fairly
disclosed all material information about the issuer and about the security. And it is still up to the investing public whether or
not they are going to invest. The SEC does not assure or guarantee returns or profits on the investment.
5. Notice of Completion
 The period of offering is only for a limited period of time. SRC Rule 8.1 paragraph d provides that a written notification of
completion or termination of the offering shall be filed with the SEC within in three business days from such completion or
termination indicating therein the number of securities sold. What you have there is a notice of offering completion.

Review of the Stages of Registration:

1. Pre-filing Period – No Information, No Sale
2. Filing Stage
3. Pre-Offering Period – You already filed your registration statement and your preliminary prospectus and you are allowed to
disseminate information about your securities through your preliminary prospectus or through your tombstone advertisements.
 You pay your filing fees.
 You make a publication.
 Then the SEC will either require to amend your registration statements or reject it right away or approve your registration
statement.
 Once you are approved, you are now required to issue and oath that the requirements have been complied with to be
stated or stamped in the prospectus.
4. Offering Period – You are now allowed to sell your securities but only for a limited period of time allowed by the SEC.
5. Notice of Completion – Once that limited period of time lapses. A written notification of completion or termination of the offering
shall be filed with the SEC within in three business days from such completion or termination indicating therein the number of
securities sold.

SHELF REGISTRATION
 What happens when your offering period is done but there are still unsold securities?
You will only need to update your registration statement and you can sell those securities again. This is a Shelf Registration.
Only an updated registration statement can be filed with the SEC then you can sell. There is no need to wait for an approval.
 When a corporation needs huge amount of capital, it may resort to public offering of its shares. Hence the law requires those shares to be
registered before offered for sale for the protection of the investing public. So that before they can actually invest in a certain company
they know the material facts about those companies. So that they are assured that at the end of the day, you are not merely holding a
certificate with no basis other a clear field of a blue sky. To make sure that you have something like a basis for your investment.Public
offering is one of the sources of capital.

PUBLIC OFFERING
February 12, 2015
 WHEN are securities required to be registered? (Does it involve any kind of sale? For example, if I offer you shares from my company- the
issuing company, does it mean that I need to register the securities first before I can offer it for you in particular? What is the requirement for
the sale of securities which would require that the securities should first be registered with the SEC?)

General rule: There has to be a public offering of the securities. The sale has to be a public sale.
 What does “public offering” mean?

SRC Rule 3(N) Public Offering means a random or indiscriminate offering of securities in general to anyone who will buy, whether
solicited or unsolicited. Any solicitation or presentation of securities for sale through any of the following modes shall be presumed
to be a public offering:

i. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or any part
thereof
ii. Presentation in any public or commercial place;
iii. Advertisement or announcement in any radio or  television, or in any online or e-mail system; or
iv. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or mailing the
same to prospective purchasers.

It is not targeted to one or specific persons but to the public as a whole. How is it done? You advertise in the newspapers, in the
radio, television, etc. or even if you do not advertise and you sell it to everyone. If you sell securities indiscriminately, or a public
offering of securities, that is the time that the securities in general are required to be registered. But the sale must occur in the
Philippines otherwise, if it’s not in the Philippines, there’s no need to register.

22
 A.C.G.T.| © 2014-2015
 Is public offering synonymous with listing your shares in the stock exchange? And do you have to list your shares to the stock exchange
for the requirement of registration to take place? NO.

CASE: POWER HOMES UNLIMITED CORP VS SEC

Facts:
Petitioner is a domestic corporation registered with SEC. Respondent Manero requested public respondent SEC to investigate
petitioner’s business as he attended a seminar conducted by such petitioner where it claimed to sell properties that were inexistent,
without any broker’s license and to inquire whether or not it involves “legitimate network marketing”. The relevant issue is whether
petitioner’s business constitutes an investment contract which should be registered with SEC before its sale or offer for sale or
distribution to the public.
Ruling:
An investment contract is defined in the amended IRR (R.A. 8799) as a “contract, transaction or scheme (collectively contract)
whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others”. One test to
determine whether a transaction falls as an investment contract is the Howey Test which requires a transaction whereby a person (1)
makes an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts
of others.
SEC found the petitioner as a marketing company that promotes and facilitates sales of real properties and other related
products of real estate developers through effective leverage marketing. SC ruled that the business operation of petitioners constitutes
an investment contract that is a security and as such, it must be registered with the SEC, otherwise SEC cannot protect the investing
public from fraudulent activities. The strict regulation of securities is founded on the premise that the capital markets depend on the
investing public’s level of confidence in the system.
Discussion:
 In this case, the investment contract was NOT listed in the stock exchange, because it was like a networking scheme. It was just open
to the public and anyone who would put up their money would go in and invest then get your own down line.
 The SEC ruled that this kind of arrangement qualifies as an investment contract.
 Applying the Howey test, the SC said that this is an investment contract and being such, there is therefore a need to register the
securities.
 When they sold these securities without registration, Power Homes was considered to be in violation of the SRC.
 So you see class, the registration requirement will not only take place if the shares are being sold in the stock exchange, but it will
also take place if securities are sold to the public or there is public offering when you randomly, indiscriminately offer your securities
to the public and that is when registration requirement arise.

PROCESS OF REGISTRATION
 What needs to be filed for the SEC to register the securities?
A registration statement + prospectus (preliminary prospectus or red herring prospectus). Before filing, no sale or information is
allowed. After filing- now termed as the pre-offering period, you have already filed but it is not yet approved by the SEC so you are
NOT allowed to sell but you are ALLOWED to disseminate information through tombstone advertisements or by disseminating the
preliminary prospectus itself.

So you go to the whole process of registration. You pay the fees. You do the publication. The SEC will evaluate. And then SEC
approves. If it approves, the issuer will have to make a sworn statement to be stated in the prospectus that he has complied with all
the registration requirements. After that, he can begin selling the securities and that is now what we call as the offering period. Once
the offering period has lapsed, or all the securities have been sold, you will now need to have a notice of confirmation of the closing
of the offering period.

Once that’s done, there’s no more sale of the shares. But if you have shares left over or securities leftover, and you want to resell
them, you can just do a shelf registration which means you just have to update your registration statement and file with the SEC and
so this time, there’s no need for SEC approval, just an updated registration statement.

 While the General rule is that when you’re offering your shares to the public or you do a public offering of your shares, either by
listing it in an exchange or offering it to anyone who wants to buy- you REGISTER, there are exceptions:

Section 9 gives you Exempt Securities and Section 10 gives you Exempt Transactions.

 What is the difference between exempt transactions and exempt securities?

If your securities are exempt, no matter how many times you transact it, it is always exempt. If it’s an exempt transaction, the
securities itself aren’t exempt. So if your circumstance fall under any kind of the exemptions in Section 10, no need to register. But if
it’s outside the exempt transaction, those securities will need to be registered.

23

CODAL (SRC)
Section 9. Exempt Securities 9.1 The
requirement of registration under
Subsection 8.1 shall not as a general rule
apply to any of the following classes of
securities:
(a) Any security issued or guaranteed by
the Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
Government.
(b) Any security issued or guaranteed by
the government of any country with which
the Philippines maintains diplomatic
relations, or by any state, province or
political subdivision thereof on the basis of
reciprocity: Provided, that the Commission
may require compliance with the form and
content for disclosures the Commission may
prescribe.
(c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicating body.
(d) Any security or its derivatives the sale
or transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commisssion, Housing and
Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
(e) Any security issued by a bank except its
own shares of stock.
A.C.G.T.| © 2014-2015
EXEMPT SECURITIES
REASON
In (a), the securities issued by the Government are non-risk because it
can never go bankrupt. Because if it needs more money, it will just tax
you more.
In (b), based on the Comity of States. The same way you treat your own
government, so should you treat the government of other countries.
And of course, ordinarily no private individual will really buy securities
of a different government because these are issued in such big
amounts. Ordinarily, only another government will buy the securities of
a foreign government. The purchase of securities from a foreign
government is considered a political decision and not subject to
registration requirement.
In (c), the reason is that before you sell, it has already been approved
by the proper adjudicatory body which is normally the courts.
In (d), the contracts issued by the IC or Insurance Commission include
insurance policies which need not be registered. Even if the insurance
have an investment portion- or a “variable insurance policy”
(investment you got there is more than the coverage), you need NOT
register it. So ALL types of policies issued by insurance companies even
if they have investment aspects, are not subject to registration because
insurance companies are already supervised by the IC.
Pre-need plans (which are not issued by insurance companies and so
NOT supervised by the Insurance Commission i.e. CAP, Prudential, etc.)
are subject to registration requirement.
In (e), the securities here that are subject to the exemption are ONLY
the debt securities issued by the banks (Remember that there are 2
types of securities in general the equity securities and debt securities).
So equity securities and shares of stock issued by banks are NOT
covered by the exemption.
The debt securities or evidence of indebtedness issued by quasi-banks
are covered by the exemption since quasi-banks are under the
supervision of the BSP and because of SRC rule 9.2 par.1
SRC Rule 9.2 – Exempt Securities 1. Any evidence of indebtedness
issued by a financial institution itself that has been duly licensed by the
Bangko Sentral ng Pilipinas to engage in banking/quasi-banking activity
shall be exempt from registration under Section 8.1 of the Code;
provided that the purchase and sale of such security shall not be
considered exempt from the coverage of the provisions of the Code on
antifraud, civil liability or others.
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CODALS (SRC)
SEC. 10. Exempt Transactions. - 10.1. The
requirement of registration under Subsection
8.1. shall not apply to the sale of any security in
any of the following transactions:
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee
in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder
selling or offering for sale or delivery in the
ordinary course of business and not for the
purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt.
(c) An isolated transaction in which any
security is sold, offered for sale, subscription or
delivery by the owner thereof, or by his
representative for the owner’s account, such
sale or offer for sale, subscription or delivery
not being made in the course of repeated and
successive transactions of a like character by
such owner, or on his account by such
representative and such owner or
representative not being the underwriter of
such security.
(d) The distribution by a corporation, actively
engaged in the business authorized by its
articles of incorporation, of securities to its
stockholders or other security holders as a
stock dividend or other distribution out of
surplus.
(e) The sale of capital stock of a corporation to
its own stockholders exclusively, where no
commission or other remuneration is paid or
given directly or indirectly in connection with
the sale of such capital stock.
A.C.G.T.| © 2014-2015
EXEMPT TRANSACTIONS
REASON
In (a), these generally require court orders and the law presumes that
the court will not order the sale of it will not redound to the public
good.
In (b), same basis as the previous number- you get the supervision of
the court (judicial- court; extrajudicial- clerk of court)
In (c), if for example I am the issuer and I sell it to you in a one-time
transaction, can I be exempt under this paragraph? No. My ordinary
business is manufacturing and I am not regularly engaged in selling
securities- I am not a finance company, etc. and then I issue shares, and
I sell it to you. Am I exempt? Who should be the seller? Can the issuer be
considered the owner of the security? NO.
So a corporation issuing stocks is the owner of the stocks? If you’re the
owner, how will you record it? It records it as an asset. So does a
corporation record its shares as an asset? NO. It is considered as a
capital.
So the issuer is NOT considered the owner of the securities. The issuer is
merely the originator, maker or creator of these securities. So this
paragraph does not apply to an issuer of the security itself. The seller in
this case has to be the owner of the security- meaning he has already
purchased the security from the issuer and then he will sell it in an
isolated transaction not in the ordinary course of his business. The sale
will be exempt. But if I, the issuer will sell to you shares from my
authorized capital, I cannot use this section to be exempt. Because I am
not the owner of my own shares. It does not mean though that I cannot
be exempt, I can be exempt basing from another paragraph, but just
not this paragraph (c).
In (d), the paragraph doesn’t talk about cash. When you own securities
as an investment, as an asset, you use that to distribute to your
shareholders in a form of a property dividend. So stock dividends,
exempt. Property dividends in the form of securities- also exempt.
In (e), when a corporation sells stocks to its stockholders- exclusively
meaning no 3rd person buying the securities, it is exempt because the
guiding principle in requiring the registration of securities is “full and
fair disclosure” – to make sure that before the public buys your
securities, you have all the material and pertinent information about
that particular security or that particular issue. With that as basis for
registration, the Stockholders are presumed to know about the
corporation with whom they are already stockholders. If they buy
additional shares, it is now on their own lookout. Unlike a 3 rd party who
knows nothing about the issuer.
25

(f) The issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, where the entire mortgage
together with all the bonds or notes secured
thereby are sold to a single purchaser at a
single sale.
(g) The issue and delivery of any security in
exchange for any other security of the same
issuer pursuant to a right of conversion
entitling the holder of the security surrendered
in exchange to make such conversion:
Provided, That the security so surrendered has
been registered under this Code or was, when
sold, exempt from the provisions of this Code,
and that the security issued and delivered in
exchange, if sold at the conversion price,
would at the time of such conversion fall
within the class of securities entitled to
registration under this Code.  Upon such
conversion the par value of the security
surrendered in such exchange shall be deemed
the price at which the securities issued and
delivered in such exchange are sold.
(h) Broker’s transactions, executed upon
customer’s orders, on any registered Exchange
or other trading market.
A.C.G.T.| © 2014-2015
What if for example, you have here a corporation and you want to
increase your shares by 10 million pesos. Increase will be subscribed by
the existing SHs- so 25% subscription. This particular issuance of stocks-
purchase by virtue of an increase, does this qualify as an exemption
under this paragraph (e)? NO. Paragraph (e) only pertains to an
issuance of stock from its authorized but unsubscribed or unissued
shares. The example given gives a situation where it’s not yet
authorized- no ACS yet. And thus, does not fall under the exemption
under (e). So again, this paragraph (e) only coversAUTHORIZED and
unissued shares.
In (f), this is a sale to a single purchaser thus NOT making it a sale to the
public. Does this pertain to a scenario where I offer the bond to
everyone, so I advertise and only 1 bought? Can I claim that my
transaction is exempt? NO.
The important thing here is that before you issue the security, you
already have that buyer in mind. And you issue the security particularly
for that buyer alone, and not just anyone.
So what do you call the securities with a right of conversion?
Convertibles shares so (g) talks about convertible shares. So you
convert these shares to some other type of stock provided that the
conditions under (g) are met then your conversion is exempt- but only
the converted share is exempt.
Such as when you sell the converted share subsequently, that will NOT
be covered with this particular provision anymore.
The kind of transaction in (h) is involving listed shares. When you say
listed shares, it means it’s being traded in the exchange, being listed in
the Stock Exchange.
So what’s the difference between a registered securities and listed
securities? So ALL listed securities are registered. BUT not all registered
securities are listed because even if you don’t list as long as you sell it
randomly to the public, you are required to be registered- any mode.
Here, listed securities are always required to be registered because
when you list, you are selling randomly to the public. The listing of your
securities is basically having a forum where you can sell your shares.
And the forum or the market is what we call the stock exchange or the
PSE- market place people buy and sell market securities.
When you have an issuer, and he wants to list its shares in the PSE
obviously wanting to sell it to the public- he has to register under Sec
8.2. Then people will buy- this is the PRIMARY trading (you bought it
directly from the issuer/issuing entity). So these people who own shares
will have their own brokers- the stocks in the PSE aren’t kept but
traded. So now, the security holders are selling the shares that they
bought through the brokers- this is SECONDARY trading. So this
SECONDARY TRADING is EXEMPT.
However, you’re still offering these shares to the public- which means
there’s supposed to be a need to register. BUT why is this exempt?
Because if you require secondary trading to be registered, no one will
use the stock exchange anymore since the purpose of stock exchange
is to facilitate, hasten the buying and selling.
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 A.C.G.T.| © 2014-2015

But take note that if it’s a sale, an off-market transaction, it is not

covered by this exemption because securities need to be registered in
an exchange. For example: If I advertise to the public- so this one needs
to be registered. If subsequently, I advertise to sell what I just
purchased from the advertisement- this 2 nd transaction needs to be
registered.
(i) Subscriptions for shares of the capital stock In (i), when you subscribe during incorporation or in an increase, it is
of a corporation prior to the incorporation still exempt. The situation when you subscribe to an increase is NOT
thereof or in pursuance of an increase in its exempt under par (e) but it is EXEMPT under par (i). It maybe that
authorized capital stock under the Corporation you’re not exempt on this paragraph, but you may be exempt on
Code, when no expense is incurred, or no another.
commission, compensation or remuneration is
paid or given in connection with the sale or
disposition of such securities, and only when
the purpose for soliciting, giving or taking of
such subscriptions is to comply with the
requirements of such law as to the percentage
of the capital stock of a corporation which
should be subscribed before it can be
registered and duly incorporated, or its
authorized capital increased.
(j) The exchange of securities by the issuer In (j) this is different from conversion in (g) because in conversion there
with its existing security holders exclusively, is a convertible share- a built in conversion mechanism. For this one, it is
where no commission or other remuneration is simply an exchange.
paid or given directly or indirectly for soliciting
such exchange.
(k) The sale of securities by an issuer to fewer In (k), the sale of fewer than 20 is called private placement. So this is
than twenty (20) persons in the Philippines the issuer equivalent of an isolated transaction- in the situation where
during any twelve-month period. the issuer would sell directly to one person, can he fall under par. (c)? It
cannot. Issuer is not the owner. But can it call under par. (k)? YES.

Does this exemption apply where I advertise in the newspaper but only
15 bought? Does this situation fall under this paragraph? NO. By the
mere act of offering to the public indiscriminately, you are already
required to register no matter that only 15 or 1 bought. So when we talk
about private placement, before you actually issue the security, you
already have the 15 buyers in mind- or 19 or less persons. It’s not an
indiscriminate offer, but you already know who your buyers are.
(l) The sale of securities to any number of the Qualified buyers are those persons who are determined by the law to
following qualified buyers: already have knowledge, know-how and experience regarding
Bank; investments so they do not need to be protected.
Registered investment house;
Insurance company;
Pension fund or retirement plan maintained by
the Government of the Philippines or any
political subdivision thereof or managed by a
bank or other persons authorized by the
Bangko Sentral to engage in trust functions;
Investment company; or
Such other person as the Commission may by
rule determine as qualified buyers, on the basis
of such factors as financial sophistication, net
worth, knowledge, and experience in financial
and business matters, or amount of assets
under management.

 Do you need to secure approval from the SEC before you undertake an exempt transaction?

o NO, you can issue your securities right away but it can always be questioned by anyone. So if anyone questions and it’s proven, you
may be subject to liabilities under SRC including criminal liability.

27
 A.C.G.T.| © 2014-2015
 What do you do to ensure that your transaction is really exempt?
10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied
upon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a fee
equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities (SRC)

 10.3 of the SRC says that you can actually ask the commission for a confirmation. Once SEC issues this confirmation, no one can
question the exemption of your securities from registration. But it’s not a requirement that you should get a confirmation. If
you’d rather risk being questioned than paying the 1/10 th of 1%, then by all means you may do that, but EXCEPT for (k) and (l)
which requires notice of exemption (Rule 10.1) which is different from a confirmation. A notice of exemption only requires a
minimal fee and you need to have a letter notifying the purchaser that such transaction is exempt under (k) or (l) of Sec. 10, SRC.

SRC Rule 10.1 – Exempt Transactions

4. Application for Confirmation or Declaration of Exemption
B. In cases which involve distribution of securities by way of stock dividend, the Commission shall determine the sufficiency of the
retained earnings of the issuer company prior to issuing a confirmation thereto.

 It looks like a harmless provision but SEC determined or interpreted this to mean that if you’re doing a stock dividend, you need
to get a confirmation. When you report stock dividend to the SEC, you need to pay the 1/10 th of the 1% fee which is weird because
of all the transactions in section 10, stock dividend is the safest since in the 1 st place, there’s no sale, the issuer is not receiving
money, in the 2nd place, it’s given only to the existing SHs but now this is the one which the SEC in practice requires confirmation.

TENDER OFFER
SRC Rule 19 – Tender Offers
I. Tender offer means a publicly announced intention by a person acting alone or in concert with other persons (hereinafter referred to as
“person”) to acquire equity securities of a public company as defined in SRC Rule 3.
 It is a public announcement of an intention to buy particular shares at a particular price. You do it in public- take out advertisements,
newspaper, tv, radio or even do it by letter to all of the stockholders as long as you make the offer public.

 In general, when is a tender offer required?

It is required when you intend to buy shares in a public company. It is the 1st requirement. When the issuer is the public company and
you meet the required threshold level, you need to do a tender offer. So even if you want to buy 100% of the shares of stock of a
PRIVATE company, you need not do a tender offer.

 When you say public company what does that mean?

Public Company means any corporation
 with a class of equity securities listed on an Exchange or
 with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two
hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities (SRC Rule 3 M). 

 When is tender offer mandatory?

It becomes mandatory when you acquire in a one-time transaction 35% or more of the equity securities or even if you don’t acquire 35%
or more in a one-time transaction but you acquire 35% or more within a 1year or 12-month period which we call as a creeping
transaction (you spread out your transaction).

Instances when MANDATORY Discussion

A. Any person or group of persons acting in concert, The first one-no question about it. If I want to buy 36%
who intends to acquire thirty five percent (35%) or of the stocks of a particular company, I have to do a
more of equity shares in a public company shall tender offer.
disclose such intention and contemporaneously
make a tender offer for the percent sought to all
holders of such class, subject to paragraph (9)(E)
of this Rule.
In the event that the tender offer is
oversubscribed, the aggregate amount of
securities to be acquired at the close of such
tender offer shall be proportionately distributed
across both selling shareholder with whom the
acquirer may have been in private negotiations and
minority shareholders.

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 A.C.G.T.| © 2014-2015
B. Any person or group of persons acting in concert, nd
The 2 one, this month I will buy 5% then next month,
who intends to acquire thirty five percent (35%) or another 5%. Do I need a tender offer? Not yet. Next,
more of equity shares in a public company in one or another 5%- until it reaches 35% or more within 12
more transactions within a period of twelve (12) months- so you may now do a tender offer-CREEPING
months, shall be required to make a tender offer to transaction.
all holders of such class for the number of shares
so acquired within the said period.
C. If any acquisition of even less than thirty five If I already have 49% share in a particular public
percent (35%) would result in ownership of over company and I want to buy 5% more, it will not qualify
fifty one percent (51%) of the total outstanding under the 1st mandatory requirement. But it will now
equity securities of a public company, the acquirer qualify to another requirement. You now need to do a
shall be required to make a tender offer under this tender offer- let anyone know you want to buy.
Rule for all the outstanding equity securities to all
remaining stockholders of the said company at a
price supported by a fairness opinion provided by
an independent financial advisor or equivalent third
party.  The acquirer in such a tender offer shall be
required to accept any and all securities thus
tendered.
D. In any transaction covered by this Rule, the sale of
the shares pursuant to the private transaction shall
not be completed prior to the closing and
completion of the tender offer.  Transactions with
any of the seller/s of significant blocks of shares
with whom the acquirers may have been in private
negotiations shall close at the same time and upon
the same terms as the tender offer made to the
public under this Rule.  For paragraph (2)(B), the
last sale meeting the threshold shall not be
consummated until the closing and completion of
the tender offer.

 Take note: Whatever your intention is, will not matter. As long as within the 12-month period, it will bring your acquisition to
35% or more. Even if from the start you only wanted 5% and then eventually you need another 5% more.
 What if you just tell yourself “Ah, I don’t want to do tender offer so I’ll just buy 5% every year”, are you now required to do
tender offer? NO. Because it will no longer fall under the requirement.
 Remember that it is not counted using a calendar year. Any 12-month period. So an example:

 Within any 12-month period kung asa musud imong 35%. This is a creeping transaction.

 So what if for example, I want to buy 1,000 shares. So that is my offer. I will advertise- P5 per share:
Stockholder A has 1,000 shares
Stockholder B has 500 shares
Stockholder C has 500 shares
So a total of 2,000 shares now. How will you buy then? Pro rata.

SECTION 19 (d) Where the securities offered exceed that which a person or group of persons is bound or willing to take up and pay for,
the securities that are subject of the tender offer shall be taken up as nearly as may be pro rata, disregarding fractions, according to the
number of securities deposited by each depositor. The provisions of this subsection shall also apply to securities deposited within ten (10)
days after notice of an increase in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first
published or sent or given to security holders.

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Stockholder A has 1,000 shares → 500
Stockholder B has 500 shares → 250
Stockholder C has 500 shares → 250
1,000 shares
 Is there an instance where you’re required to buy all?Yes.

Rule 19 C. If any acquisition of even less than thirty five percent (35%) would result in ownership of over fifty one percent (51%) of the total
outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the
outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an
independent financial advisor or equivalent third party.  The acquirer in such a tender offer shall be required to accept any and all
securities thus tendered.
 If your tender offer would amount to ownership of over 51%, you are required to buy all that has been tendered. Even if you just
wanted to buy 1,000 then you’re required to buy all the 2,000.
 What if you wanted to buy 1,000 shares at P5 per share. You have offers 100, 500, 200, which are not enough. You need 200 more
and no one is offering. So you say, okay because no one wants to sell anymore, I will buy for P8 per share, increasing your price. And
now everyone wants to offer you. So you now bought the 200. What happens to the 800 that was already bought?

Section 19(e) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by
increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security
holder whose securities are taken up and paid for whether or not such securities have been taken up by such person before the variation
of the tender offer or request or invitation.
 If you increase your price to P8 to get the last 200 shares, you have to pay the same price for the first 800. If you vary your offer
subsequently, then you have to pay that increased price to the offerors whom you’d already taken up.

 Why is there a need for you to do a tender offer?

It is an important protection mechanism for the minority shareholders because this will allow them to sell their shares at the price that
the majority shareholders are selling theirs because ordinarily, if I want to take over the corporation- I will buy from the majority
shareholders because that will give me control. So now that I have control, I can direct the operation, I can form the policy, I can say
whether or not dividends will be declared. In that way, if I’m already a controlling shareholder, I can squeeze out the minority so I can
make their shareholdings in the corporation so unprofitable that they would want to divest their shares. So they now want to divest their
shares- who would now buy it? No one. Because any one buying their shares would be in the same position- a minority shareholder so it
would drive down the prices of the minority shares. Now, when they are already selling for 1cent per share, I will swoop in and buy the
share. That is what the tender offer rule is trying to prevent.

When you do a tender offer, at least you offer it to everyone. So that if the minority could see that the majority stockholders are selling,
then it may also want to sell its shares. With the new controlling shareholder, there will be a change in management and they may not be
favourable to the minority. So the tender offer rule is designed to protect the shareholders to ensure that they can sell their shares at the
same rate that the majority shareholders are selling. In fact this is explained in the CEMCO case (this paragraph along with the 2 preceding
paragraphs basically constitutes Maam’s discussion as to what is relevant to the CEMCO case).

CASE: CEMCO Holdings, Inc. VS National Life Insurance Company of the Philippines
Facts:
Unit Cement Corporation (UCC) has 2 principal SHs- UCHC & petitioner CEMCO. Majority of UCHC’s stocks were owned by BCI &
ACC. CEMCO on the other hand, owned 9% of UCHC stocks. BCI informed the Philippines Stock Exchange (PSE) of its resolution and
subsidiary ACC to sell to CEMCO its stocks. CEMCO’s acquisition amounted to at least 53% of the shares of UCC, increasing by 36%. As a
consequence, the PSE inquired as to whether the Tender Offer Rule is not applicable to such purchase.
Ruling:
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. It is in place to protect minority shareholders against any scheme that dilutes the share value of their investments.
It gives minority shareholders the chance to exit the company under reasonable terms, giving them opportunity to sell their shares at
the same price as those of the majority shareholders. Respondent CEMCO is hereby mandated 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, strictlyin accordance with SRC Rule 19, Section 9(e).

 Are there any other modes of protecting minority shareholders other than the tender offer?
Yes, you can protect your clients if they are minority shareholders by having them execute a shareholder’s agreement with the majority.
And then in that shareholder’s agreement- this now is a purely contractual obligation. In that agreement, you can put in a “ tag-along”
clause or “drag-along” clause. It works like a tender offer.

 “Tag-along” clause means that if a majority shareholder sells his shares, the minority shareholder can compel the buyer to also
purchase his shares. Minority tags along with the majority.

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 “Drag-along” clause if the majority shareholder sells his shares, the minority shareholder also has to sell his shares. The majority will
drag along the minority.

You can use them if your client is a minority shareholder in a PRIVATE company because remember that tender offer rule will only apply to
public companies.

February 28, 2015

WHEN ARE TENDER OFFERS REQUIRED
1. In case of an acquisition of a share of a public company (2 types of public companies- a.) those that are listed and b.) those with assets
of at least 50 million pesos with 200 or more stockholders holding 100 or more shares each) and they reach the threshold level under
the law and the IRR
 A tender offer is basically a public announcement that you intend to purchase the shares of a certain corporation. So you will say
in your announcement that whoever wants to sell their shares, I am willing to buy at this price.
2. The law only provides for the limit of 15% but the IRR has increased it to 35 % whether it is a single transaction or a creeping
transaction over a 12 month period and
3. The IRR has also added another threshold that is any amount of acquisition wherein the ownership of the equity securities of a public
corporation will now exceed 51% of the total outstanding equity securities. So even if you’re just buying 1 share if that 1 share will
bring your ownership over the 51% limit, then you are required to do a tender offer.

MECHANICS OF THE TENDER OFFER: (BASIC RULES ON TENDER OFFER)

1. If there are more offers than what you want to acquire then you have to acquire pro rata.
2. If during the course of the tender offer you decide to increase your price, then you have to apply the increase retroactively. Even to
those shares you’ve already accepted.
3. If your acquisition will bring your shares to over 51% of the total equity securities you have to acquire all the shares offered.

CEMCO Holdings vs National Life Insurance

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 UCHC's stocks were owned by BCI with 21.31% and ACC with 29.69%.
Cemco, on the other hand, owned 9% of UCHC stocks.

Union Cement Corporation (UCC)

-publicly listed company

CEMCO (17.03%)
UCHC (60.51%)
-non listed company
-

BCI (21.31%) CEMCO (9%) ACC (29.69%)

CEMCO thereafter acquired the shares of BCI (21.31%) and ACC (29.69%) in UCHC.
 So total shares of CEMCO in UCHC = 60%. UCHC owns 60% of UCC.
 Thus, indirect ownership of CEMCO in UCC = 36%
 Direct ownership of CEMCO in UCC = 17%
 Total ownership of CEMCO in UCC = 53%

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Issue:
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?
Ruling:
Yes. 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".
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.
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.
Discussion:
 Why did National Life contend that CEMCO had to do a tender offer?
 With the acquisition by CEMCO of UCHC shares of BCI and ACC (21.39 + 29.69 + 9 of CEMCO). So CEMCO now owns 60% of UCHC
shares.
 How is that relevant, UCHC is not a publicly listed company? You will only be required to do tender offer if you reach the threshold. And
the threshold limits are 35% for single or creeping transaction and over 51 %. So what threshold applies in this case?
 CEMCO owns 60% of UCHC. UCHC owns 60% of UCC. So this is indirect ownership of 36% by CEMCO of UCC. Not to mention with its
own shares of 17%, so 36% indirect + direct of 17%, CEMCO now owns 53 %.
 NILC was saying that CEMCO had to do a tender offer because it acquired indirectly more than the threshold amount, 36 and 53%.
 CEMCO was saying that there is nothing in the law that says indirect acquisition requires tender offer. And that it was only acquiring
the shares of a non-publicly listed company.
 SC explained in this case the reason behind the tender offer requirement:
 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.
 Based on the deliberations in Congress for the SRC, tender Offer is basically for the protection of the minority shareholders; to prevent
the situation where the minority shareholders will be squeezed out of the public corporation through the manipulations of the majority
shareholders. This Tender Offer Rule allows the minority shareholders to exit the publicly listed company at the same price that the
majority shareholders command. So SC affirmed SEC en Banc and CA that tender offer is required in this case.
 When this comes out in the exam, which it will, what I want you to answer, don’t just say that because the supreme court said that
indirect acquisition are covered by the tender offer rule, you have to state also why the tender offer rule is triggered. And it is triggered
because the thresholds were reached.
 So in the case, the indirect acquisition triggered the mandatory offer threshold. So the issue is, there is a trigger, and this trigger is
reached, but it is an indirect acquisition, so is this covered by the mandatory tender offer rule? So SC said yes, it is covered by the
mandatory tender offer rule.
 TIP from Atty G.: So, be very careful when you’re answering the exam. Make sure you answer properly and that all the elements are
there. Answer questions properly, as if we never discussed the case. Give the complete answer. Don’t just assume. THIS WILL COME OUT
IN OUR FINALS. This has been a Bar Exam question, 2010, 2011, 2012, 2013. So for the past several years this has come out in the Bar. This is
a very interesting case. It’s not even about the validity of the tender offer but if the tender offer will apply in indirect acquisitions. So, SC
said YES, it will apply.
 Open market acquisition is not covered by Tender Offer Rule Because open market is basically a public acquisition. A tender offer situation
is like a private agreement between two parties to buy and sell. So you’re likely to agree on the price. An open market transaction on the
other hand, the price is dictated by the market. The price is already there. Meaning if you buy shares in an Exchange, it’s an Open Market
transaction so anyone who is offering in the exchange will have the same price. So there’s really no need to be protected there. So this
talks about a private sale, a negotiated sale between two parties. So if you’re buying from the PSE there is no need for a tender offer
because you don’t do a private negotiation on the price. You just pay whatever is the listed price of the share. And anyone offering to sell
at that listed price can sell to you. That’s one of the exceptions under the tender offer rule.
 Question: For the first exception, purchases from unissued capital stock provided it will not exceed 50%. How about if its 50 % not 51%?
 That’s really a policy issue of the SEC. So they set their limit for unissued share, actually there is a debate on this exception whether
or not the shares are shares which were previously offered or this is totally unissued shares. Based on the rules, it is UNISSUED
shares. So the limitation is set by the SEC. I am not really sure why they set it at 50 not 51. But you see the difference there class,
when you acquire unissued shares, you’re acquiring directly from the corporation, the issuer itself.
 So as a general rule, there is a pre-emptive right of current stockholders. So their shareholdings has a chance of being not diluted.
Whereas here, you are buying from the holder of a share, so there is a chance that you can get more than the previous shareholdings
of each stockholder. Because they don’t have a pre-emptive right.

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TENDER OFFER ALSO USED FOR BACK DOOR LISTING
BACK DOOR LISTING→ This is when you want to list your shares but you don’t want the expense and the process of doing it because as we
know, it takes a long time and very expensive to list your shares. What some companies usually do is they have this dormant corporations
which are already listed, meaning their shares are not actively traded for a long time, so what they do is acquire control or shareholdings of
these dormant corporations. So in effect by acquiring control of a listed corporation, you also gain a source of capital from that listed
corporation. Because that listed corporation can sell its shares in the Stocks Exchange. You do a back door listing.
 So for back door listing, tender offers are also required.

PROHIBITED ACTIVITIES
FIRST PROHIBITED ACTIVITY
24.1     It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly:
a)         To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading
market (hereafter referred to purposes of this Chapter as “Exchange”):
 Other Trading Markets
 Over the counter markets- a type of market but not available in the Philippines.
 Although this is covered by the SRC and allowed but we have not utilized it.
 Familiar with NASDAC? Its an over the counter trading market in the US. Not in the big board, as in the PSe where you see the
numbers, the price
 All done by brokers but they do it by phone or by email
 So over the counter meaning its “kaliwaan,” they do it personally, not thru a big board exchange
 Most countries have both type of markets, they have the Exchange and they have the Over the counter Market (OTC)
 In the Philippines we only have the Exchange, we have not yet developed the Over the counter market
 Over the counter markets are also regulated, they are also required to be SRO’s as well (self regulatory organization)
 Take Note:
 In this case, if it is really as sale of a security which is not listed in an Exchange or in an OTC market, these violations will NOT apply.
 Prohibitions will only APPLY to securities which are traded in an Exchange or other trading markets
 Trading in an Exchange
 A stock can be sold and purchased several times in one day. They are doing SCRIPLESS Trading. This means that the stock certificates
are deposited with a custodian corporation which is the Philippine Depository Corporation. So all stocks are deposited with the PDC.
Everything is done electronically. The stock certificates remain as is, it will not move. But everything is done electronically so there is
no need to issue stock certificates. And that is what is done in an Exchange. So all done through electronic recording in the broker’s
books.
How? (referring to first prohibited activity)
1. Wash Sale
(i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof;

 So when you effect transaction in such security which involves no change in the beneficial ownership thereof. So you create two
accounts, one account owns the shares, the other account buys it. But in reality only one person owns the account. So there’s no
change in the beneficial ownership of the shares.
 This is done by some people to raise awareness about that particular share or to give an impression that the shares are actively
trading. If people will see that this share is active, they might see that this is a very good investment because it is being actively
traded, the tendency is that they will buy the shares, or they will sell their shares. So if you do this for the purpose of affecting the
market, then that is what you call a Wash Sale, and that is prohibited under this paragraph i.
2. Improper Matched Orders
(ii)        By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of
substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or
different parties;
 This is what we call as improper matched orders (referring to ii above)
 This is basically the same as a wash sale but there is a change in beneficial ownership. There is change in the beneficial ownership it’s
just that the buyer and the seller are colluding with each other. So you have a separate buyer and a separate seller but they are in
collusion with each other. They agreed that for example seller will sell 10 000 shares at 5 pesos per share at 10 am Friday, the buyer
will also put up an order for 1000 shares 5 pesos per share on Friday at 10 am. So they colluded for the purpose of creating an illusion
of active trading.
3. Similar act
(iii)       By performing similar act where there is no change in beneficial ownership.

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SECOND PROHIBITED ACTIVITY
b) To effect, alone or with others, a series of transactions in securities that: 
(i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of a
controlling, controlled, or commonly controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer or of a
controlling, controlled, or commonly controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the
tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.

1. Marking the Close

SRC Rule 24.1 (IRR)
Buying and selling securities at the close of the market in an effort to alter the closing price of the security. (marking the close)
 If you notice in the business news, they flash the prices of the shares. What they publish are the closing prices of each shares. So if
you want to manipulate the published price of the securities, you do your transactions towards the end of the closing date in order
to affect the price of the shares.

2. Painting the Tape

Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a
security. (Painting the tape)
 So basically painting an illusion about the securities in order to give an impression that these securities are being actively traded and
to influence the price.

3. Hype and Dump

Engaging in buying activity at increasingly higher prices and then selling securities in the market at higher prices (hype and dump)
or vice versa (i.e. selling activity at lower prices and then buying at such lower prices)
 For example: I will buy now at Php 5 per share 100 shares, 30 minutes after I will buy at Php 5.50 per share, then another 3 minutes at
Php 6 per share. So you increase the price, you hype up the price of the shares. Such that people become interested because they
can see that the price of the shares are increasing. They will think that these shares are good investments so they will also tend to
buy more of the shares at the higher price. Then at Php 10 you lump it all. So this is what you call hype and dump. So you can just
imagine the gain there because you’ve been buying it at lower prices, so when you sell it at Php 10, you have a gain.
 You can also do it in the reverse class, if you want to acquire shares at lower prices, you start selling your shares at successively low
prices, so Php 5, 4.50, 3, 2.50. People will be scared why are these shares being sold at successively low prices. Something must be
going on. So people will panic and they will sell their investments. And then you come in at 1 peso per share and get it and buy it all.
So hype and dump. It can be done to increase or decrease the price.

4. Squeezing the Float

Taking advantage of the shortage of the securities in the market by controlling the demand side and exploiting market congestion
during such shortages in a way as to create artificial prices
 You know that no one is selling but you keep on making demand, demand, demand. So if there is demand and there is no supply, the
prices will go up.

5. Boiler Room Operations

 So this is basically a fraudulent device used by unscrupulous people. What they will do is they will rent out an apartment, they will
get internet, they will get landline, they will use the internet, the phone to call people to induce then to buy securities which are
inexistent or not registered with the SEC.
 Why do you call it Boiler Room Operations? Because their tactics are pressure tactics. They keep calling every two hours for example
until such person being called will be induced to buy. But take note that such shares being sold are not existing or are not registered
with the SEC.
OTHER MANIPULATIVE DEVICES
c)        To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the
security for the purpose of inducing the purchase or sale of such security.
d)        To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was
so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange.
e)         To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for
the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of the
Commission.

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SHORT SALE, STOP LOSS ORDER
24.2.    No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or
contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any
security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors
SHORT SALE - It is a sale of securities which you do not own.
 Short sale is done when you anticipate that the prices of the securities will go down. You don’t own the share but you sell it already. Let’s
say at Php 120 per share. But you don’t own it yet. Sure enough a few days after, the price went down to Php 100 per share. That’s the
time you bought the share and delivered it to the buyer. So in effect you gained Php 20 in the transaction of the security which you did
not own when you sold it.
 It’s not prohibited. The law says in accordance with such rules and regulations as the Commission may prescribe. The SRC allows it under
Rule 24.2-2. So there is a regulation there.
 General Rule: Short sales are allowed.
Exception: When it is done by the directors, officers, and principal stockholders of the issuing company.
Par.6 (SRC Rule 24.2-2)
No director, officer, or principal stockholder of a corporation shall make a short sale in securities of the corporation in which he is a
director, officer, or principal stockholder.

STOP LOSS ORDER→ also not prohibited

 It is basically when you instruct your broker that if the price now is Php 200 per share, if it goes down to Php 180, you sell because I want
to stop my loss at Php 20.

FRAUDULENT TRANSACTIONS
SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any
securities to:
26.1.    Employ any device, scheme, or artifice to defraud;
26.2.    Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
26.3.    Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any
person.

INSIDER TRADING
3.8.      “Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the
issuer; (c) 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; (d) a government employee, or director, or officer of an exchange,
clearing agency and/or self-regulatoryorganization who has access to material information about an issuer or a security that is not
generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders.
 So even if you’re not any of the four, you’re not an officer, not the issuer, not a government employee, you’re not an officer of an
exchange, but you have been tipped by an insider that there is a particular material information, so you become a tippee because you
were tipped by the insider. So in that case, you also become an insider. So you are covered by the prohibition under Section 27.

 Material information that makes you an insider:

SRC Rule 3
Material Information means any fact or information that could result in a change in the market price or value of any of the issuer’s
securities, or would potentially affect the investment decision of an investor.

 If there is a material non-public information, does this mean that the information has not been given out to the public?
 For example: The president of a publicly listed corporation dies. It’s in the front page of the newspaper this morning, if I sell my
securities this afternoon, does that mean that I’m not an insider anymore because the information has become public already?
 Public information does not mean that the information is not available to the public. There must be a sufficient time in order for the
public to digest that information and to know the consequences of that information with respect to the securities involved. So it’s
not that the information has not been made public, even if the information has been made public but no sufficient time has lapsed
for the public to digest the information because the tendency class is if you are not really interested or you are not a seasoned
investor, the tendency is that you would not know how certain news would affect the value of your securities. It takes time before
the meaning of that information will sink in. So even if the information has gone public, it is still considered non-public if no sufficient
time has lapsed yet.

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 So an insider who is in possession of a material non-public information is presumed to be in violation of Section 27 of the SRC if he
transacts while in possession of that material non-public information. The moment you transact, you’re presumed to be in violation of
Section 27.
SEC. 27. Insider’s Duty to Disclose When Trading. -
27.1.    It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to
the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained
from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i)
that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in
possession of the information. A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such
insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-public information if transacted after such information came into existence but
prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such
information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not
aware of the material non-public information at the time of the purchase or sale.

27.2.  For purposes of this Section, information is “material non-public” if: (a) It has not been generally disclosed to the public and
would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the
market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.

27.3.    It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person
who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating the
information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such
information.

27.4.    a)         It shall be unlawful where a tender offer has commenced or is about to commence for:
(i)        Any person (other than the tender offeror) who is in possession of material non-public information relating to such tender offer,
to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to
believe that the information is non-public and has been acquired directly or indirectly from the tender offeror, those acting on its
behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and
(ii)        Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any
insider of such issuer to communicate material non-public information relating to the tender offer to any other person where such
communication is likely to result in a violation of Subsection 27.4 (a)(i).
(b)       For purposes of this subsection the term “securities of the issuer sought or to be sought by such tender offer” shall include any
securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.

 Possible defenses also under Sec. 27:

1. If the insider proves that the information was not gained from such relationship
 So if he proves that he did not get the information because he was an insider, then that is a possible acquittal under Sec. 27.
2. Or he can prove that he disclosed the information to the other party or that he had reason to believe that the other party already
knew or was in possession of the information.
 Take Note: The presumption is if there is a material non-public information and you are an insider as defined under the SRC, you are
presumed to have violated Sec. 27.
 Question: It says there that if you are able to show that such information was not gained from such relationship, so even if you are in
possession of that material information as long as you will show that you acquired it some other way, that’s still perfectly valid?
 Yes. It’s a defense. If you prove sufficiently that you did not get that information thru your insider connections then that is a defense
against Sec. 27.
 Question: As regards the other one, even if you acquired material information by virtue of your being an insider, you can sell your shares
provided you disclose it to the other party?
 Still valid. As long as you disclose the information to the other party. In other words, as long as he makes an informed decision. The
law considers both of you to be at par already because the other party was informed and was in possession of information the same
as you.
 So It’s basically selling with material non-public information when the other party did not know.
 Question: Is it not a violation, that you are not supposed to disclose?
 What is prohibited is when you disclose it and that person uses that information to do an insider trading himself. But if you do
disclose it because you are going to transact with that person, then that is a defense against sec. 27.
 Under Sec. 27, the person, the tipper is not the one who is liable. Remember, it is the tippee who is liable. The person who was tipped
by the insider and the person who transacts. So it’s basically the act of transacting with the knowledge of that material non-public
information that you violate Sec. 27.
 So the insider, in case of violation of Sec. 27, the insider who gave the information is not really liable here. But the person he tipped
can be held liable. Because he was the one who transacted with the material non-public information. The consequence here class is
that it’s not fair to the other party if you transact with him and he does not possess all the necessary information. Any information
that can affect his willingness to buy or sell the securities or even to buy and sell at a particular price.

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 Example: President of the issuer company died, and you wanted to sell your shares. And the other party did not know that the
president died. Or even if he knew but he does not realize that in case of the death of the president there can be possible problems
with the issuer company because now the directors will have to choose another president and that it may be that the president was
so good that he was the one who made billions for that issuer company. So knowing that information and you knew the
consequences, you would be in doubt if you would buy the shares. Or even if you buy the shares, you will be in doubt if you are
willing to pay so much for them. But because you did not know, you bought them and you paid so much. So in favor of the insider
who kept the information. But if you knew and the insider gave you that information and you knew of the possible consequences
and you made an informed decision, then there is no violation of Sec.27. Take note however that the presumption is that you have
already violated Sec.27, so the exceptions are now a matter of defense.

TRANSACTIONS OF DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS

SEC. 23. Transactions of Directors, Officers and Principal Stockholders.
23.1.   Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any class of any equity security
which satisfies the requirements of Subsection 17.2, or who is a director or an officer of the issuer of such security, shall file, at the time
either such requirement is first satisfied or within ten days after he becomes such a beneficial owner, director, or officer, a statement with
the Commission and, if such security is listed for trading on an Exchange, also with the Exchange, of the amount of all equity securities of
such issuer of which he is the beneficial owner, and within ten (10) days after the close of each calendar month thereafter, if there has
been a change in such ownership during such month, shall file with the Commission, and if such security is listed for trading on an
Exchange, shall also file with the Exchange, a statement indicating his ownership at the close of the calendar month and such changes in
his ownership as have occurred during such calendar month.
23.2.    For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or
officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any
equity security of such issuer within any period of less than six (6) months, unless such security was acquired in good faith in connection
with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such profit may be instituted
before the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the
issuer shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but
no such suit shall be brought more than two (2) years after the date such profit was realized. This subsection shall not be construed to
cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of
the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.
23.3.    It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer
if the person selling the security or his principal: (a) Does not own the security sold; or (b) If owning the security, does not deliver it
against such sale within twenty (20) days thereafter, or does not within five (5) days after such sale deposit it in the mails or other usual
channels of transportation; but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise
of good faith he was unable to make such delivery or deposit within such time, or that to do so would cause undue inconvenience or
expense.
23.4.   The provisions of Subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and the provisions of Subsection
23.3 shall not apply to any sale, of an equity security not then or thereafter held by him in an investment account, by a dealer in the
ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise
than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the
public interest, define and prescribe terms and conditions with respect to securities held in an investment account and transactions made
in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market.
 Deals with the two instances where the stockholders are required to report to the SEC. The other one is Sec. 18 of the SRC when your
stockholdings will reach 5% of the total outstanding shares.
 Sec. 23 is when your shareholdings are each more than 10% of any class of equity securities. In this case class when you are a holder of
more than 10% of the equity securities of an issuer company you are considered a principal stockholder. So all reference under sec. 23 to
the beneficial owner actually refers to the principal stockholder who owns more than 10 % of the outstanding equity securities of the
issuer company.
 Obligations of the principal stockholder under Sec. 23
1. Required to report to the SEC his ownership
2. Required to report to the Exchange his ownership of more than 10% of the equity securities
 Sec. 23.2 tells you that if the principal stockholder, director or officer acquires any profit in a purchase and a sale transaction or a
sale and purchase transaction of the equity securities of the issuer corporation within a period of less than 6 months, so it’s a
combination, two transactions within a 6-month period, you purchase and then you sell, all done within 6 months or you sell and
then you buy it back, all within 6 months this is what we call as a Short Swing Profit.
 Short swing profits
 They are valid, but if you do this, any profit that you gain will belong to the issuer company. If the issuer company will not file the
case to recover the profit, any stockholder of that issuer company can file the case on behalf of the issuer company.

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 The profit gained belongs to the company because the law tries to prevent a danger where the principal stockholder, director or
officer who are intimately familiar with the operations of the corporation will take advantage of their familiarity of the operations of
the company. So any short swing profit that they gain will belong to the issuer company.
 For example: As a principal stockholder or a director of the issuer company you predict that in 3 months’ time the company’s income
will go up because of a certain export contract that the company is negotiating with. So it’s not yet there, but there is a possibility
that in 3 months’ time the company’s sales will go up because of that contract. So what you do is you buy the shares now, let’s say at
Php 100 per share. And then when the price went up, you sold the shares at Php 120. So you have a gain there of Php 20. If the
transaction, the buying and selling occurs within 6 months, that is considered as short swing profit, and as such because of Sec. 23.2,
such profit goes to the issuer company.
 Or the other way around you predict that the shares will go down. So you sell your shares now while the prices are still high, and in 3
months’ time when the prices went down, you bought them back. So again, you made a gain of Php 20. So Php 120 when you sold
them and when you bought them back only Php 100. Again the profit there is called a short swing profit.
 So its any series of buying and selling or selling and buying within a 6 month period that secures profit for the principal stockholder,
director or officer, the profit goes to the issuer corporation.
 Question: A president of a corporation exercises stock option to buy shares of the company at a time that prices are high then such
president sells such shares within a 6 month period, is it covered by the provision on short swing profits?
 I think the purchase and sale here is purchase and sale to the public, not with respect to the issuer company. Because there is a
sense of taking advantage of the public. Making use of your familiar or intimate knowledge about the issuer company and you take
advantage of the public with that information.
 There has been no case interpreting that. That is my own interpretation. Because the issuer company does not really need to be
protected because in any case, your option allows you to buy at a certain price, it affects the price. Because when you have an
option if affects the price. I don’t think that will be covered by this prohibition. But if you transact, buy and sell with the public, that
is the time that the limitation will come in.
 Short Sale
 The transaction under Sec. 23.3 (a)?
 GR: Short Sales are allowed
Exception: If the person transacting is the director, officer, or principal stockholder.
 So it’s not just in the IRR but also under SRC itself.
 Sales against the box
 Referring to 23.3 (b) → You own the security but you don’t deliver it within 20 days thereafter. Here, you make paper profit. You only
deliver it when the stock prices have gone low.
 This is what we call Sales against the Box. As opposed to short sale where you did not own it, here, you owned it but you did not
deliver it immediately. It’s prohibited.
 Take note SRC also requires that brokers and dealers should be registered with the SEC.
 Broker - transacts not for his own account
 Dealer - transacts for his own account
 Both have to be registered with SEC.
 If you also want to put up an exchange, you have to register that also with the SEC. It would be a self-regulating organization.
Meaning it can put up its own rules and regulations, which the PSE does.
 Except that as I told you the PSE is in violation of the ceiling for broker ownership holdings. Under the SRC if you check the
ownership of an exchange not more than 20% of the voting stock should be owned by brokers. But currently, PSE brokers own
around 80% of the shares of PSE. They are being penalized daily by the SEC. The regulatory organization is itself being penalized by
the SEC.

MARGIN TRADING
MARGIN TRADING→ is when you borrowed money to buy shares and you borrow the money from your broker. So the broker supplies the
funds used to buy the shares of his principal. Basically it is buying shares on credit from the broker.
 It is allowed but there is a limitation as to how much the broker can lend to his principal.
 The total borrowings of the principal is being limited
 In margin trading it is to the advantage of the broker to lend money to the principal. Because every time he transacts, he earns
commission. So even if it’s not advantageous to the principal already, he keeps advising his principal to buy the shares because he earns
commissions. So what the law seeks to prohibit is the over borrowing of the principal. So there’s a limit to the allowable margin trading.
Q&A side discussion:
 Prosecutor’s Office files the case for insider trading because it’s a criminal case.
 Question: If for example you were taken advantage of through insider trading, can you ask to void the sale?
 If there are grounds to void the contract like fraud, mistake, but not on the ground of insider trading because it is not a ground.
 It’s really not a personal protection but a public protection. What you are trying to prevent here are people who are taking
advantage of their intimate knowledge of the operations of the company.
 If you will not protect the public no one will want to invest in securities anymore. Public interest requires that this people be
criminally prosecuted. But of course, if there is criminal prosecution, you can ask for damages.

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RA 7042 (AS AMENDED) FOREIGN INVESTMENTS ACT
March 5, 2015
 FIA has not been present in the BAR exams until recently because of the Gamboa and Bayantel Cases
 One of the most important laws a lawyer needs to know for future practice
 Situation: where foreign client comes to you saying that they have been advised they needed 60-40 in their corporation and since they did
not know any other Filipino, they gave their 60% to their, driver, gardener, etc. You ask what’s their business?And the business under the
FIA does not even require a 60-40 ownership, and now they don’t know where their gardener or driver has gone taking with them their
60% ownership certificate. So you see it’s really a big problem because the perception of most lawyers that when foreigners invest in the
Philippines automatically that foreigner can only invest up to 40% and whatever corporation that foreigner will put up will have to be
owned by Filipinos up to 60%, that is the most common understanding of most lawyers. But that is not the case.

WHO ARE CONSIDERED PHILIPPINE NATIONALS

1. Filipino citizens (natural person)
2. partnerships or associations wholly owned by Filipino citizens
3. domestic corporation where at least 60% of the outstanding capital stock entitled to voteis owned by Filipino citizens
4. foreign corporations wholly owned by Filipino citizens
5. trustee of funds for pension or other employee retirement benefits where the trustee is a Phil. National and at least 60% of the fund
will accrue to the benefit of Phil. nationals
Section 3. Definitions.- As used in this Act:
a) The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned
by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall be considered a Philippine national.

 The importance of knowing who are Philippine nationals

1. It is important to know the entities who are considered as Philippine nationals because there are activities under the Constitution,
under the law, under administrative regulations which are only reserved for Philippine nationals and we call these types of activities
as nationalized activities.
2. Any activity where there is a limitation in the allowable shareholding of a foreign company or foreign entity, or foreigner are what we
call as nationalized activities.

NATIONALIZED ACTIVITIES
 These are found in the Foreign Investment Negative List. (FINL)
 The latest is No. 9, issued last 2012. Reissued every 2-3 years.
 Description of the contents of the FINL:
 There are two kinds of lists in the FINL. List A and List B.
 List A provides for nationalized activities provided for in the constitution and specific statutes or laws.
 List B contains defense-related activities, those which will have implications on public health and morals
 In sum: It is important to know who are Philippine nationals because there are certain activities where foreign participation is limited and
the complete list of these nationalized activities you can find it in the FINL. FINL is issued pursuant to the FIA.
 As stated in Sec. 8 of the FIA, FINL contains 2 lists. List A which describes or outlines the activities limited under the constitution and
special laws. And you also have List B which are defense or moral or public policy related activities.

Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative List).- The Foreign Investment
Negative List shall have three (2) component lists: A and B:
a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws.
b) List B shall contain the areas of activities and enterprises regulated pursuant to law:
1) Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to
engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military
ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a
substantial export component, to a non-Philippine national by the Secretary of National Defense; or
2) Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics.

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 In general, the types of businesses which a foreigner can own 100% are those relating to any activity which is not in the FINL
 Under the FIA there are generally 2KINDS OF ENTERPRISES
1. EXPORT MARKET ENTERPRISE
Section 3. Definitions.- As used in this Act: (e) The term "export enterprise” shall mean an enterprise wherein a manufacturer,
processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a trader
purchases products domestically and exports sixty percent (60%) or more of such purchases
 Take note that this is any type of enterprise including service, tourism oriented enterprise which exports at least 60% of its
output.

2. DOMESTIC MARKET ENTERPRISE?

The term “Domestic Market Enterprise” shall mean an enterprise which produces goods for sale, or renders services to the
domestic market entirely or if exporting a portion of its output fails to consistency export at least sixty percent (60%) thereof
 Services to the domestic market entirely or exports less than 60% of its output

 GENERAL RULE: For both types of enterprises (Export Market Enterprise and Domestic Market Enterprise) foreign ownership is
allowed up to 100% unless the activity it wants to engage in is considered a nationalized activity
Section 7. Foreign Investments in Domestic Market Enterprises. - Non-Philippine nationals may own up to one hundred percent
(100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by the Constitution and existing
law or the Foreign Investment Negative List under Section 8 hereof. (As amended by Republic Act No. 8179)
 EXCEPTION: If it is a Small and Medium sized Domestic Enterprise
a. Small or Medium sized Domestic Enterprise
 If it has a paid in capital of less than two hundred thousand dollars ($200 000) → can only be owned by Philippine nationals
 So foreigners can only undertake domestic market enterprise if it is not a small and medium domestic market enterprise
 Only Large Scale Domestic Market Enterprise can be allowed 100% foreign ownership
b. Large scale domestic market enterprise?
 If the paid in capital is two hundred thousand US dollars or more
 EXCEPTION TO THE EXCEPTION:
 Small and Medium Domestic Market Enterprise that:
1. Involve advanced technology as determined by the Department of Science and Technology
2. Employ at least 50 direct employees
(1 &2 above) With a paid in capital of one hundred thousand US dollars ($100 000) → shall be allowed to non-Philippine nationals
Sec.8. par.6. Small and medium-sized domestic market enterprise with paid in equity capital less than the equivalent of two
hundred thousand US dollars (US $ 200 000) are reserved to Philippine nationals: Provided, That if: (1) they involve advanced
technology as determined by the Department of Science and Technology; or (2) they employ at least fifty (50) direct employees,
then a minimum paid in capital of one hundred thousand US Dollars (US $ 100 000) shall be allowed to non-Philippine nationals.

 Simpler version: if it’s an export market enterprise, as long as it is not under the FINL, 100 % foreign ownership is ok.
 For domestic market enterprise you have to ask is it large or small or medium. How much is the paid in capital?
 If the paid in capital is 200 000 US dollars or more, 100% foreign ownership is allowed.
 If the paid in capital is less than 200 000 USD then it has to be a Philippine national.
 Exception is if that small and medium domestic enterprise makes investment in advanced technology or has at least 50 direct
employees, then it can have a paid up capital of 100 000 USD and still be 100% foreign owned

 Situation: Foreigner approaches you and asks if he can own a business here in the Philippines 100%, what will you say?
Atty: What business do you intend to go into?
Client: Manufacturing Business
Atty: Manufacturing of what? Because certain manufacturing areas are covered by nationalized activities.
Client: Manufacturing of buttons
Atty: What is your market? Is it export or domestic?
Client: Export
Atty: Then yes, you are allowed to own 100% of your business.
Atty: If client says the market is domestic, the next question is how much do you intend to pay up?
Client: Php 50 000 Paid Up capital
Atty: If you are going into wholesale you can own up to 40 % because that is considered a domestic market enterprise. And a domestic
market enterprise requires Philippine nationals. And Philippine nationals only require 60% Filipino ownership. The 40 % can be owned by
foreigners.
Client: If I go into retail can I still own a portion of my business?

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Atty: Nothing at all because Retail Trade Law provides 100% Filipino ownership unless your paid in capital is 2.5 Million USD. That is in the
FINL.
(FINL) No Foreign Equity No. 3 Retail Trade Enterprises with paid up capital of less than US $ 2 500 000.

 Service Export-100% foreign ownership is allowed. If domestic market enterprise that is the time you ask how much is your paid up capital?
 For Button manufacturing example for domestic market enterprise, then let’s say I put in US$ 500 000 but I want to engage in retail, still
the foreigner cannot own because for retail the paid in capital is US $ 2.5 Million. So those are the things you have to take note, what is
the activity, is it export or domestic, how much is the paid up capital?
 Atty. G.: So class if I ask you in the finals to identify whether a certain activity can be foreign owned you have to be able to at least
identify.
 If you have here X corporation, 60% of which is owned by Filipino citizens (FC), and the other 40 % is owned by foreign or alien
nationals (A). In this case class, obviously, X corporation is a Philippine national.

 But what if X corporation is also a shareholder of A corporation? X corporation is a Philippine national. But how would you classify A
corporation? When would it be considered a Philippine national? Or a non-Philippine national?

 The basis is still in the Foreign Investments Act specifically in the definition of what is a Philippine National because the 2 nd
paragraph of such definition outlines what we call as corporate layering.

Corporate layering is when a corporation owns shares in another corporation. So you have layers of corporations. And how
much is the ownership of a Philippine national in another corporation for that other investee corporation to be considered
as a Philippine national? It should be at least 60% of the stocks outstanding and entitled to vote. So if in this case, X
corporation owns 60% or more of A corporation then the latter will be considered as a Philippine national. And A
corporation can still be owned by 40% aliens and will still be considered as a Philippine national.

 What do you call that test embodied in the 2nd paragraph under the definition of a Philippine national? Section 3(i) of the FIA?

It is the Control test which says that if the corporation is at least 60% Filipino owned, then it is considered to be 100%
Philippine national. The alien ownership disappears. Such that the 60% ownership of X corporation in A corporation shall be
considered as the share of a 100% Philippine national.

We call it the control test because we only look at the controlling stockholders. Control- by definition of the FIA, is 60% of
the outstanding capital stock entitled to vote. So 60% of the outstanding capital stock of X corporation is owned by
Filipinos, and 40% by aliens. X corporation owns 60% of A corporation, and by definition to be considered a Philippine
national, 60% of the outstanding capital stock has to be held by a Philippine national also. So X corporation is considered a
Philippine national by virtue of having 60% of Filipino citizens. This Philippine nationality of X corporation is considered as
100% Philippine national without distinction that its capital is 40% owned by aliens. This total shareholding is actually
considered as holdings of a Filipino citizen or Philippine national. SO the alien shareholdings basically disappears, you only
consider the 60% outstanding capital entitled to vote.

The important thing to remember here, that under the control test normally the test will only be required if you undergo
corporate layering. Because if there’s no layering, if these are owned by individuals, no problem at all. Only when there is
corporate layering- when one corporation owns another corporation.

 How do you determine that nationality of the investee corporation?

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You only take a look at the controlling shareholdings of the investor corporation. If the investor corporation is owned by
60% Filipino citizens, then this shareholding of the investor corporation is considered as shareholding of a Filipino citizen
such that the investee corporation if it is 60% owned by Filipino citizen, is also a Philippine national.

So the fact that there is alien ownership does not matter if the shareholding of the alien is not the controlling shareholding.
X corporation is 100% Filipino citizen.

 But there is also this other test- the grandfather rule. What does this mean?

The grandfather rule is in order to determine the nationality of the investee corporation, you NOT ONLY take a look at the
nationality of the investor corporation, but also the shareholders of that investor corporation. So you ‘grandfathered’ it.
Three layers- you consider the layers.

Under this rule, you trace back the nationality of an investee corporation up to the nationality of the shareholders of the
investor corporation. So in this case, your investor corporation has 40% foreign shareholdings, now this 40% alien
shareholdings owns 60% of A corporation, so alien shareholders owns 40% of 60% = (0.4 x 0.6) = 24%. So basically and
indirectly, the alien shareholdings own 24% of A corporation. So if it’s 24% INDIRECT alien shareholding, PLUS 40% DIRECT
alien shareholdings, is A corporation a Philippine national? NO, because more than 40% of its shares are owned by aliens.

So you see class, under the CONTROL TEST, the layer disappears completely- you DON’T look at the shareholdings of the
investor, you only take a look at the investor if it is controlled by Filipinos then it is already considered as 100% Filipino
owned, so that a 60% is complete Filipino ownership.

But under the GRANDFATHER RULE, you TAKE A LOOK at the citizenship of the grandfather, which isthe investor of the
investor corporation and you take that into account in determining the nationality.

 The FIA uses the CONTROL TEST. So does this mean that the grandfather rule is NO longer applicable?
NO. As stated in the case of Narra Nickel Mining and Dev. Corp. vs Redmont

CASE: NARRA NICKEL MINING AND DEV. CORP. vs REDMONT

Facts:
Respondent Redmont took interest in mining and exploring areas in Palawan and after inquiring, it learned that areas were already
covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro & McArther. Petitioner McArthur through
its predecessor-in-interest Sara Marie Mining, Inc (SMMI) applied and was issued MPSA & Exploration Permit (EP). These were later on
transferred to Madridejos Mining Corp (MMC) and assigned to McArthur. Petitioner Narra acquired its MPSA from Alpha Resources & Devt
Corp and PLMDC which previously filed an application. Subsequently, PLMDC assigned its rights and interests over the MPSA application in
favour of Narra. Another application of SMMI was filed and assigned such to Tesoro.
Thereafter, Redmont filed before POA 3 separate petitions for denial of applications alleging that at least 60% of the capital stock of
McArthur, Narra & Tesoro are owned by MBMI- a 100% Canadian corporation. Thus, they were disqualified from engaging in mining through
MPSAs which are reserved only for Filipinos. For the petitioners, they averred that they were qualified pursuant to RA 7942 (Philippine Mining
Act of 1995). Respondent Redmont invoked the grandfather rule while the petioners Narra, Tesoro & McArthur invoked the control test.

Ruling:
The "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of
the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40
Filipino-equity ownership in the corporation, then it may apply the "grandfather rule. Petitioners McArthur, Tesoro and Narra are not Filipino

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since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering
petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
Discussion:
 The owner of 60% of McArthur was MMC = 5,997 shares; paid up P 825, 000
 The owner of 40% of McArthur was MBMI = 3,998 shares; paid up P1,878,000
 The owner of 40% of MMC was MBMI = 3,331 shares ; paid up P2,803,000
 The owner of 60% of MMC was Olympic =6,663 shares; zero paid up
 Mc Arthur, the holder of MPSA which under the law needs to be a Philippine national or 60% of the capital stock must belong to
Philippine nationals also. So owner of 40% of McArthur (MBMI) has a greater paid-up of P1,878,000 compared to the 60% (MMC) with
paid up paid up of P825, 000.
 In turn, MMC (Filipino) was owned by 60% Olympic Mines- another Filipino corporation with zero paid-up and 40% MBMI with paid up
of P2,803,000. So basically, the paid up of MMC came also from MBMI since Olympic did not contribute anything. And this is the
structure of McArthur which basically has the same structure as Narra & Tesoro.
 Redmont want to nullify because the 3 corporations were disqualified and since it (Redmont) wants to get the MPSAs for itself.
 The defense of Narra, Tesoro and McArthur was based on the Control Test which only looks at the shareholding – if their
shareholding is owned by 60% Philippine national. So the shareholding of Olympic mines is 60%, thus should consider MMC as 100%
Philippine national. Since MMC is a Philippine national, and it has 60% of McArthur then McArthur as well is a Philippine national. So
take a look at our shareholdings- all 60%, the corporate layering is 60% and that is allowed by FIA. Further, they said that with FIA
advocating the Control test, the grandfather rule is no longer applicable.
 The rulings previous to this –there was no SC ruling on what test to use. It was only SEC and DOJ opinion which mostly states that
use the control test unless there is ‘doubt’ in the equity ownership of Filipinos in which case use the grandfather rule. Now, when can
there be “doubt”? The 3 corporations allege that the ‘doubt’ happens when the Filipino shareholding is less than 60% so in this case,
and according to the 3 corporations (Narra, Tesoro and McArthur), there is no doubt.
 But the Supreme Court said that the interpretation given by the 3 is absurd. Because, the moment the Filipino’s shareholding goes
below 60% , automatically you are NOT allowed to engage in a nationalized activity. There is NO doubt at all in that situation because
you are disallowed. It’s black and white. So there can only be ‘doubt’ if you have 60% but there are facts and circumstances which
tend to show that even if Filipinos own 60%, it is still the foreigners controlling the legal and the beneficial ownership of the
Philippine corporation.
 There’s a doubt when there is an intention to circumvent the 60-40 ownership.
 In this case, one of the circumstances is that their common investor, the 100% Canadian corporation- MBMI funded them. The
Filipinos have no financial contribution. So this situation puts the 60-40 ownership in ‘doubt’.
 According to the SC, the foreigners owned more than 60% -specifically 64% because we grandfathered. 40% DIRECT Foreign
ownership and 24% INDIRECT Foreign ownership.
 There is also an old DOJ case (because as mentioned there is just this SEC & DOJ ruling), wherein the shares were divided to high par
and low par. Same rights, it is only that the foreigners have high par shares because they really have the financial resources to put up
a corporation. But the DOJ said that you violated the Anti-Dummy law since the greater financing from the foreigner shows that
there is doubt in the 60% shareholding of the Filipinos. So you see, even to the extent of using high par and low par. But again, this is
just a DOJ ruling. While the present case is more concrete- there’s total funding by the foreigners.

Now, we have been talking about capital. Capital owned by 60% Filipino citizens. But then what is the meaning of capital? This is then the
subject in the case of Gamboa vs Teves.

CASE: GAMBOA vs TEVES

Facts:
Facts according to Gamboa
The Philippine Legislature granted PLDT the franchise and right to engage in telecommunications business. The American company,
General Telephone Electronics Corporation (GTE) which is a major stockholder of PLDT, sold 26% of its common shares to Philippine
Telecommunications Investment Corporation (PTIC). Prime Holdings, Inc. (PHI) became the owner of 111,415 shares of stock of PTIC. In turn,
such 111,415 shares of PTIC held by PHI were sequestered by the PCGG which represent 46.125% of the outstanding capital stock of PTIC that
were later declared to be owned by the Republic of the Philippines. First Pacific which is a Bermuda-registered & HK-based firm acquired the
remaining 54% of PTIC. Subsequently, Interagency Privatization Council announced selling the 111,415 shares or 46.125% of PTIC through a public
bidding. Parallax won the bid. Thereafter, First Pacific as PTIC stockholder announced to match the bid of Parallax to buy the 111,415 shares.
However, it failed to do so. Through its subsidiary MPAH, First Pacific entered into a Conditional Sale & Purchase Agreement with the
government. With the completed sale, First Pacific common shareholdings in PLDT increased to 37%, thereby increasing the shares of
foreigners to about 81.47% and thus violating the constitutional limitation of foreign ownership of the capital of a public utility.
Facts according to Teves
PTIC held 13.847% of PLDT’s outstanding common shares. PHI on the other hand, became the owner of 111,415 or 46.125% of the
outstanding capital stock of PTIC. PTIC shares held by PHI were sequestered by the PCGG. The government decided to sell the 111,415 PTIC
shares and Parallax emerged as the highest bidder. First Pacific announced its intention to match the bid. The HR Committee on Good
Government conducted a public hearing of the impending sale and concluded that First Pacific’s intended acquisition of the government’s

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111,415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the constitutional limit since PTIC holds only 13.847% of the
total outstanding common shares of PLDT.
Petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of 111,415 shares and
averred that the sale would result in an increase in First Pacific’s common shareholdings in PLDT and this, combined with Japanese NTT
DoCoMo’s common shareholdings in PLDT would result to 51.56% foreign shareholdings which is over the 40% constitutional limit.
Ruling:
We PARTLY GRANT the petition and rule that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case ONLY to common shares, and NOT to the total
outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the SEC is directed to apply this definition
of the term “capital” in determining the extent of allowable foreign ownership in respondent PLDT Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.
Discussion:
 So PTIC shares which were sequestered by the Philippine Government (46% of its shares) and PTIC owned 26% of PLDT.PTIC was
already owned up to 54% by First Pacific. So when Parallax won, there was a swiss challenge- the right to match by First Pacific. So
with the right to match, they were able to buy the 46%. Now, PTIC became 100% foreign owned which means that the 26%
shareholdings of PTIC in PLDT is now considered as 100% foreign owned. This 26% will now go to the foreign side.
 When we say capital, we are talking about total outstanding capital stocks without regard to the kind of stock.
 Take note in this case that the SC did not really rule on the validity of the sale, it did not even rule on whether the structure or the
stockholding of PLDT was in violation of the law. It just made a discussion on what capital is and remanded the case back to the SEC.
 The contention of the Government side- the PLDT side is that we take a look at only the TOTAL outstanding to determine capital
because of you take a look at it- preferred is 77.85% Filipino. So definitely more than 60% of the total outstanding is Filipino. And less
than 40% of the total is considered as foreign. By taking a look at TOTAL Outstanding, we have a compliance with the Philippine
National requirement.
 On the other hand, the contention of Gamboa and the other petitioners is that capital should be based NOT on the TOTAL
outstanding but look at the shares entitled to vote. And the SC interpreted that as the shares entitled to vote in the election of
directors. In the PLDT case, the preferred shares were non-voting shares so they could not vote in the election of directors.
 So basically, the SC said that to be considered as Philippine national, Filipinos must control 60% - not just legal ownership but
beneficial ownership. And such beneficial ownership includes the capacity or power to control the operations of the corporation
which you can only do when you are allowed to vote in the election of directors.
 So for purposes of determining compliance with capital requirement under the constitution, the 60% of the shares entitled to vote
in the election of the directors must be held by Filipino citizens.
 The dispositive portion, under the wherefore (see ruling above), do you agree with this ruling? (Nathan: NO. Because the law does
not distinguish. So technically speaking, there’s no violation)
 Take note class that in the FIA, it says ‘total outstanding capital stock entitled to vote’. That was the interpretation of Congress of the
capital requirement under the constitution. So basically, the ruling in this case is in line with FIA.
 However, as stated by Mr Garcia, not everyone agreed. PLDT, the Government officials, the Secretary, the President of the PSE
including their lawyers, ACCRA (lawyers for PLDT) defended that it should be based on the total outstanding capital because, as Mr
Garcia said, the constitution only said outstanding capital without distinction. So they filed a motion for reconsideration.
 A year later, the decision came out. So now, in the motion for reconsideration, not only did the SC say “No, you’re wrong. It’s still
NOT total outstanding capital stock, It IS BASED ON CAPITAL OUTSTANDING AND ENTITLED TO VOTE BUT THIS TIME, THEY TOOK
OUT THE TERM ‘IN THE ELECTION OF DIRECTORS’.”
 NOW, the SC said that “Oh, we realized that preferred stocks can never be completely not entitled to vote because under the
corporation code, there are instances where even non-voting shares are required to vote- amendment of articles, sale of all or
substantially all the assets of the corporation, dissolution, increase or decrease of authorized capital stock, merger or consolidation,
investment in other activities.”
 The more substantial changes in the corporation, even the nonvoting shares are required to vote.
 So under Philippine law, no share of stock is COMPLETELY a nonvoting stock. You cannot deprive any stock completely with the right
to vote. You can only deprive a stock of its right to vote in the election of directors. But in other matters, even non-voting stocks are
required to vote.
 So this time, the SC said it has to be 60-40 NOT on TOTAL Outstanding but based on EACH class of shares- voting or non-voting.
 If the corporation has a common stock of Class A, Class B, and Class C, it has to be 60-40 in EACH CLASS. In other words, Class A must
be 60-40, Class B must be 60-40, Class C must be 60-40, etc. Because TOTAL Outsanding can be easily manipulated. So this is a
stricter requirement.
 Do you know how PLDT got so much preferred stock? Because under the Marcos rule, there was a time that PLDT was in trouble so
they needed foreign investments but they realized that they cannot have the foreign investments because it is a public utility and so
Marcos devised a way so that Filipino ownership was increased and the way was everytime you subscribe to a PLDT line, you got 1
share of preferred stock. Also, PLDT was one of those listed in the New York Stock Exchange.
 As I mentioned, this case law (Gamboa) came out in the 2012 & 2013 Bar but did not came out last 2014.
 But this is not settled yet, SEC came out with its own rules on how to determine Philippine nationality, the SEC share was an ACCRA
partner, so ACCRA was lawyering for PLDT so it issued a memorandum circular which states that to be considered a Philippine
national, 60 of the voting and the total outstanding shares must be owned by Filipino citizens and now, the ACCRA partner is being

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sued since the heirs of Gamboa contended that this does not follow the 2 nd Gamboa ruling so there’s this pending case right now. So
everything is held in abeyance. Next year, maybe you will have a new case. PLDT tried to maneuver it to the SEC but still failed

 If you ever remember any SCL case, please REMEMBER these 2 cases because these are the landmark cases and such landmark cases
normally come out in the bar
 By the way, you learned in you Corporation code that if a foreign corporation will do business in the Philippines it needs to be licensed.
But the corporation code does not define what ‘doing business’ is. The definition of doing business is in the FIA
Section 3. Definitions. - As used in this Act:
d) The phase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided,
however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account;
 How do you license a foreign corporation that wants to do business in the Philippines? What license?
A foreign corporation has 3 modes of doing business in the Philippines
1. You can incorporate a Subsidiary
So you do a domestic corporation. You register your own corporation here. If your activity is NOT in the FINL, you can
be 100% foreign-owned subject to the requirement that there must be at least 5 natural persons who will act as your
incorporators and directors. But they don’t need to own 60% of your total shares, they only need to own 1 share each
(because that’s how other people would interpret wrongly that the 5 would divide the 60% but in truth, they only need 1
each).
2. You can do a Branch office
If you want to earn income and you want to get license to do business here, and you don’t want to put up another
corporation, put up a branch office. So get a license to do business in the Philippines by applying a license to put up a
branch office so this office is a foreign corporation doing business in the Philippines since the branch is considered part of
the principal which is foreign.
3. Representative office
The problem with this is you are NOT allowed to earn income in the Philippines. So if your activity does NOT involve
earning income in the Philippines, merely logistics or you’re doing studies for your for principal, you can do a representative
office. You will be considered doing business in the Philippines

LETTERS OF CREDIT
March 12, 2015
Purpose of a Letter of Credit
 Imagine a situation where you have buyer and a seller who are in the same place, there is no problem there. The buyer will only be
required to pay upon the delivery of the goods and the seller is also only required to deliver upon the payment of the goods. And since
they are in the same place, they can do that simultaneously.
 If the buyer and the seller are not within the same country. The buyer is in Cebu and the seller is in China. What if the goods are not the
kind that was agreed by the parties or the buyer refuses to pay? Will they have recourse against each other? It would be difficult because
they are not under the same jurisdiction. So there will be an issue on enforcing the agreement. Ordinarily, it is recognized that the interest
of the buyer and the seller are so conflicting, such that in an ordinary situation, the seller does not want to deliver the goods unless he
gets the money at the same time the buyer does not want to pay until he actually sees the goods or the goods are there. How is this
situation addressed? That is why we have here a LETTER OF CREDIT.
 In a Letter of Credit (LC), what we have here is that the buyer will go to a bank, ask the bank to issue a letter of credit in favor of a seller to
the effect that if the seller can present the documents agreed upon in the LC, the bank will honor the draft drawn by the seller. In effect,
the bank will pay the draft.
 So, the seller ships the goods upon knowing that there is a LC in his favor. It will collect the documents agreed upon the LC, present
those documents to the issuing bank and also present the draft.
 So upon doing that, the issuing bank will now pay the seller. Then, the issuing bank turns around, tells the buyer, “Hey, buyer! I have
your shipping documents, warehouse documents, bill of lading in other words the documents of title, with me. (I think this pertains to
documents of title ->) Allow me whoever is holding that document, the right to possess or to own the goods covered by those
documents of title.”

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 Now, the issuing bank will present the documents of title to the buyer and upon seeing that the documents are in order, the buyer
will now reimburse the issuing bank. The buyer will receive the goods because the bank will now release the documents of title to
the buyer and so the buyer can now collect the goods from the shipper.
 Upon payment by the buyer with the issuing bank, that terminates the LC transaction.
 There is no direct payment by the buyer to the seller. Everything is done through an issuing bank. So the bank is the intermediary, the
bridge between the conflicting interests of the seller and the buyer.
 Ordinarily also, the buyer has no money to buy the goods. What will happen is that, the issuing bank will just require the buyer to sign a
trust receipt, basically saying that the bank as the trustor is releasing the goods to the buyer as the entrustee in trust for the bank. In
order to the following things:
 Normally, to sell the goods and upon sale, to remit to the bank the proceeds covered by the trust receipts.
 Letters of Credit and Trust Receipts Transactions are inter-connected.

3 CONTRACTS IN AN LC TRANSACTION
1. Contract of Sale between the buyer and the seller.
2. Contract between the issuing bank and the buyer
 It is an undertaking by the buyer to reimburse the issuing bank for the amount paid by it to the seller.
3. Letter of Credit Proper
 It is the contract between the seller and the issuing bank. It is an undertaking by the issuing bank to pay the seller upon
presentation of all the required documents and presentation of the draft.

3RD CONTRACT Seller 1ST CONTRACT

 Documents agreed
 Draft
Bank

2ND CONTRACT Buyer (Receives the goods)

The most fundamental principle in a LC transaction is that each of these contracts is independent of each other; such that a defect in one
contract will not affect the others. A defect in one contract cannot be raised as a ground not to comply with the other terms or other contracts
in a LC transaction.

PRUDENTIAL BANK vs IAC:

Facts:
 This involves a contract of sale between a domestic corporation, Phil. Rayon Mills (buyer) and foreign corp based in Japan, Nissho Co.
(seller). Rayon Mills purchased textile machineries and executed a LC through Prudential Bank and the latter paid Nissho because the
machines arrived.
 The buyer refused to pay the bank according to Rayon Mills the drafts should have been presented for payment but the bank did not
present it for payment.
Issue No. 1: Whether or not acceptance is necessary or indispensable to make the buyer liable to pay the bank.
 A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the
bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the
bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.
 Atty’s discussion: The issuing bank substitutes its own promise to pay with the promise to pay of the seller. The issuing bank
undertakes the obligation of the buyer to the seller.
 Not necessary. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL).
SECTION 143.When presentment for acceptance must be made. — Presentment for acceptance must be made:
(a)Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b)Where the bill expressly stipulates that it shall be presented for acceptance; or

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(c)Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable."
The issuing bank is considered to be the drawee because it is the one who undertook to pay. Because a LC is an undertaking by the
issuing bank to pay on behalf of the buyer. It substitutes its promise to pay with the promise to pay of the buyer, so now the issuing
bank actually becomes a drawee of the draft.
 A draft is a bill of exchange. In a bill of exchange, the drawer would be the seller; it drew on the issuing bank because it is the issuing
bank that has the obligation to pay and under the NIL, SC said that you will only present the draft or bill of exchange to the drawee.
In this case, the drawee is the bank. The buyer is not a party to the instrument because the indorsement was made by the bank to
the seller. That’s why presentment was not necessary.
 Atty’s discussion: The buyer is not a party to the draft because the draft was issued through to a LC and in a LC it is the contract
between the issuing bank and the seller. So the draft is the undertaking by the issuing bank to pay the seller such that it stops with
the issuing bank as the drawee and now the obligation of the buyer to pay the issuing bank is a primary obligation which is separate
from the transaction between the issuing bank and the seller. There is no more need to present. The buyer whether or not
presentment was made is required to reimburse the issuing bank for whatever that is has paid to the seller.
 Atty’s discussion:The important thing in this case is that the issuing bank in a LC would substitute its promise to pay such that when
the seller issues a bill of exchange or a draft, it is the issuing bank that is the drawee in a bill of exchange.
Provisions on LC are found in Code of Commerce which has no substance, because of this, the SC has recognized that the LC transactions are
also governed by Uniform Custom and Practice (UCP).

PARTIES TO AN LC TRANSACTION
BANK OF AMERICA vs. CA, Inter-Resin Industrial Corp
Facts:
 Bank of America received an irrevocable letter of credit allegedly issued by Bank of Ayudhya for the account of General Chemicals of
Thailand for the purchase of plastic ropes and agricultural files with the petitioner as advising bank and Inter-Resin as the beneficiary.
 Buyer – Gen Chem; Seller – Inter Resin; Issuing Bank – Bank of Ayudhya;
 After being informed of the LC, Inter Resin sent Atty. Tanay to the Bank of America for confirmation of the LC but the person in
charge of the LC of Bank of America said that there was no need for confirmation because the LC would not have been transmitted if
it were not genuine. After that, Inter Resin delivered the goods to Gen Chem and then presented the proof of deliveries, bill of lading
to the Bank of America for partial payment because of partial compliance.
 For the first partial compliance, the Bank of America being satisfied with the documents presented by Inter Resin, paid Inter Resin.
Bank of America paid the first draft to Inter Resin.
 After receiving the payment, Bank of America asked for reimbursement from Bank of Ayudhya. In the meantime, Inter Resin wanted
to fulfill or to complete the delivery of the goods, however Bank of America received information that Bank of Ayudhya the LCs are
fraudulent. Because actually, Bank of Ayudhya did not send a mail about the LC to Bank of America. The LC was a forgery.
 Bank of America then issued a stop payment order to the second draft filed by Inter Resin and sued Inter Resin for the
reimbursement of the amount paid on the first draft.
 Sensing that there was a fraud, Bank of America sought help from NBA and with the Help of Ph Embassy at Bangkok, and then
discovered that the vans exported by Inter Resin did not contain the goods agreed to be delivered by the Inter Resin but instead it
contained waste materials. Bank of America wanted reimbursement for payments it made to Inter Resin.
 On the second draft, there is a claim that Bank of America should pay because they were made to know that Bank of America
confirmed the LC, meaning Bank of America is a confirming bank therefore making the Bank liable also to the second draft.
Gen Chem (Buyer)

Correspondent Bank: Issuing Bank: Inter Resin (Seller)

Bank of America Bank Ayudyha

Bank of America

Same Jurisdiction with Inter Resin

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Ruling:
 There would at least be three (3) INDESPENSABLE parties:
(a) The buyer, 12 who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents
of title;
(b) The bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper documents of
titles and to surrender the documents to the buyer upon reimbursement; and,
(c) The seller, 14 who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
 Atty’s Discussion: Ordinarily in a LC, there are three indispensable parties. (abovementioned) But there are situations as in this case,
where the issuing bank will be in the same jurisdiction as the buyer. So, how can it honor the draft presented by the seller? What
normally happens there is that the bank, will take the services of correspondent banks. You have the issuing bank and then issuing
bank will have a correspondent bank. Such as the Bank of America, it is a bank which is located in the same jurisdiction as the seller.
The obligations of a corresponding bank will depend on the role that it undertakes to play in the transaction.
 The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services
of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a confirming bank which will
lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank which undertakes to encash the
drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank, to have the draft discounted.
 Types of correspondent banks or Four Roles of Correspondent Banks (They are not indispensable parties to the LC transaction
however their obligations depend on the role that it undertakes to play.):
1. Confirming Bank – to confirm the LC; incurs a liability because it confirms a LC; it basically undertakes to pay on the LC in place
of the issuing bank. Confirming bank is normally required when the issuing bank is a lesser known bank. When the seller does
not trust the issuing bank so much, it will normally require a confirming bank that will undertake the obligation of the issuing
bank.
2. Advising Bank – relay the information that there is a LC opened by an issuing bank. The obligation is just to inform so there is no
liability. It just notifies the seller as to the availability of the LC.
3. Negotiating Bank – is an independent bank, from the LC. The negotiating bank comes into play when the seller will negotiate
the bill of exchange or the draft; will have the draft discounted and the negotiating bank accepts it. This bank is a bank to which
the draft has been negotiated to. Prior to the discounting, there is no relationship between the negotiating bank and the seller.
Meaning you cannot compel the bank to become a negotiating bank. But the bank that it consents to accept your draft then it
becomes a negotiating bank.
4. Paying Bank – It has the obligation from the issuing bank to make payments to the seller.
Difference between the Confirming Bank and the Paying Bank:
 The paying bank is the bank that has been requested by the issuing bank to make the payment to the seller. The confirming bank will
acknowledge the liability of its own volition. The liability of confirming bank is voluntary on its part while the paying bank is required
by the issuing bank to make the payment.
Procedure of a LC Transaction (Atty, “Read these two paragraphs from the Bank of America case.”Here in an enumerated form):
1. A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying.
2. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue
of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit.
3. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.
4. Once the credit is established, the seller ships the goods to the buyer and inthe process secures the required shipping documents or
documents of title.
5. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank.
6. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with
what the letter of credit requires.
7. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses
the issuing bank and acquires the documents entitling him to the goods.
8. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the
said documents and control over the goods only after reimbursing the bank.
Back to Bank of America Case discussed by Atty:

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 The SC said that the role of Bank of America is a negotiating bank. As a negotiating bank, their relationships are governed by the
Negotiable Instruments Law. The drawer is the Inter Resin. The drawee bank is the issuing bank. The Bank of America is the endorser
or the holder of that negotiable instrument. The right of the holder is the right to paid from the drawee. The Bank of America’s right
to get the payment from the drawee from issuing bank, Bank of Ayudhya but the latter did not pay because the LC was a forgery.
The drawee refused payment. As an ordinary endorsee or a holder of a negotiable instrument, your recourse if the drawee refuses to
pay is to go back to the person who negotiated the draft to you and in this case, the one who negotiated the draft is the drawer,
Inter Resin.
 For the draft that was accepted and paid by the Bank of America, the Bank can still get reimbursement from Inter Resin because the
role of Bank of America in this case is merely a negotiating bank. It purchased the draft. As the purchaser of the draft, if the drawee
refuses to pay, it has a right of recourse against the person who sold the draft to it. In which case, the person who sold the draft was
the drawer, Inter Resin. Inter Resin can be made to reimburse Bank of America for the first draft.
 For the second draft, Inter Resin is claiming, “Hey you, Bank of America pay me now because I presented all the correct documents!”
Bank of America is not liable to the second draft because the Bank of America is considered as an advising bank. In fact when Inter
Resin expressly asked the bank to confirm, it refused; it sent a letter refusing to confirm the LC. The SC said clearly, it did not want to
act as a confirming bank. Rather, it is only a notifying or advising bank. A notifying or advising bank does not an obligation to the
seller. Inter Resin cannot proceed against Bank of America in relation to the second draft.

 SUMMARY:
In the first draft, Bank of America paid. It did not know yet of the fraudulent transaction. When it went back to Bank of Ayudhya for
payment, the latter refused to pay because the LC was a forged. After that, when Inter Resin presented the second draft, Bank of
America refused to pay because of the knowledge of the forge LCs. So there are two drafts in question in this case. The first draft,
Bank of America wanted reimbursement. Inter Resin that it is not liable because it presented the correct documents. Second draft,
Inter Resin wanted to be paid but Inter Resin refused claiming that it is not liable.
To determine whether the parties had obligations or rights with each other on the said drafts, you have to know the role of Bank of
America in each of these drafts.
 For the first draft which is paid, the SC said, the draft was only negotiated to the Bank of America, it only acted as a
negotiating bank. Therefore it had a right as an endorsee of a negotiable instrument which it went to the drawee which did
not honor the LC then it had to go back to the person who sold the draft, in which in this case, is the Inter Resin. It had a
right of recourse. Inter Resin here can be made to reimburse.
 On the second draft, the contention is that the Bank of America already confirmed the LC because its officers confirmed
Inter Resin that those LCs were genuine. The SC chose to believe contention of the Bank of America where it expressly said
that it will not confirm and as result, the Bank of America cannot be a confirming bank. It is only an advising or notifying
bank and the role of an advising bank is merely to let the seller know that there is this LC. It does not mean that the
advising bank undertakes to pay the LC. Its obligation is just to inform. The Bank of America cannot be held liable on the
second draft because when it informed Inter Resin about the existence of the draft, there was no corresponding
undertaking on its part to pay the LC.

BPI vs DE RENY FABRIC INDUSTRIES

Facts:
 The issuing bank is BPI and the seller, JB Distributing Company and the buyer is the De Reny Fabric. On four (4) different occasions in 1961,
the De Reny Fabric Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora Carcereny, alias Aurora C.
Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of
various colors" from its American supplier, the J.B. Distributing Company.
 The Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the
latter's sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable
clean "on board" ocean bills of lading, covering the merchandise appearing in the L/Cs, that is, dyestuffs of various colors. Consequently,
the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the
merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the
amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the Philippine
Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter,
endorsed and forwarded all documents to the Bank of the Philippine Islands.
 De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90, 000. Further payments were,
however, subsequently discontinued by the corporation when it became established, as a result of a chemical test conducted by the
National Science Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs.

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 It is the submission of De Reny Fabric that it was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take
the necessary precaution to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein, and,
that the foregoing banks having failed to perform this duty, no claim for recoupment against them, arising from the losses incurred for
the non-delivery or defective delivery of the articles ordered, could accrue. (The goods sent must be in accordance with the agreed goods
to be delivered in the contract of sale and the items listed in the shipping documents.)
Ruling:
 Banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in evidence a provision
contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International
Chamber of Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides: "In documentary credit operations, all
parties concerned deal in documents and not in goods.—Payment, negotiation or acceptance against documents in accordance with the
terms and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to take up the documents and
reimburse the Bank making the payment, negotiation or acceptance."
 The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what
has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been
positively proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who tapped the facilities
afforded by the Bank in order to engage in international business.
 Atty’s discussion: This rule, “dealing with documents only” is what we call STRICT COMPLIANCE RULE. If a LC will list down the documents
required in order for the seller get paid. The issuing bank will have to strictly comply with all of those documents required because the
issuing bank and the seller deal only with documents. They will not concern themselves with the goods. This rule is an off shoot of the
INDEPENDENCE PRINCIPLE. Under the independence principle, the issuing bank is actually not concerned with the contract of sale
between the buyer and the seller. It is independent of contract of sale between the buyer and the seller. So that if there is any breach in
that contract of sale, the obligation of the bank is not affected as long as the seller can present can present the correct documents, the
issuing bank will have to pay. And if the issuing bank paid in accordance with the instructions of the buyer, then the buyer will have to
reimburse the issuing bank regardless of any defect or violation or breach committed in the actual contract sale between the buyer and
the seller.
 The SC said that the bank has no obligation to inspect the goods because the banks only deal with documents. As long as the
documents are in order, the bank has to pay.
 As for the allegation of the buyer that there was a breach, it does not matter because under the independence principle, the bank is not
affected by the breach. The buyer has to reimburse the bank for the payments it made to the seller.

FEATI BANK vs. CA

Facts:
Villaluz agreed to sell to Christiansen lauan logs. Security Pacific National Bank of Los Angeles issued irrevocable letter of credit in
favor of Villaluz for the lauan logs. The LC was mailed to Feati Bank with the instruction that it “forward the enclosed letter of credit to the
beneficiary”. The logs were then shipped for Christiansento Korea however, the latter refused to issue the certification as required by the LC.
Because of the absence of the certification, Feati Bank refused to advance the payment. While the case was pending, Christiansen left the
Philippines without informing the Court. Thus, VIllaluz filed an amended complaint to make Feati Bank solidarily liable with Christiansen.
Issue 1:Was it justified in refusing the payment?
The bank was justified in not paying Villaluz. The bank may only negotiate, accept or pay, if the documents tendered to it are on their
face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally
deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank
to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness
of the documents tendered by the beneficiary.
Discussion:
 Under the rule of STRICT COMPLIANCE, Feati Bank has to strictly comply with the documents required under the LC. In fact, the essence
of an LC is the seller gets paid upon presentation of documents stated in the LC together with presentation of the draft
 In this case, the buyer refused to issue the certification that he approved the goods. Because of this missing certification, the bank
refused to pay. SC said it was justified because we follow the rule of strict compliance. It has to make sure it strictly conforms with the
terms of the LC in respect to the documents to be presented.
Issue 2: Tender of documents, what did the SC say about the documents to be presented?
Ruling:
It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the
terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A
correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its

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own risks and it may not thereafter be able to recover from the buyer or the issuing bank , as the case may be, the money thus paid to the
beneficiary. Thus the rule of strict compliance.
Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of
credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital
importance to the buyer.
Discussion:
 It’s a rule of strict compliance that the tender of documents by the seller/beneficiary must include all the documents required in the LC. if
the correspondent bank deviates from these documents, he bears the risk of not getting paid by the buyer or by the issuing bank.
 There was no certification issued, the buyer was missing in action. He left the country so the seller was holding the bill with no one to pay.
He went after the bank but the bank said I’m not liable. SC said it is indeed not liable under the doctrine of strict compliance, otherwise it
bears the risk since banks only deal with documents
 Also, it’s not up to the bank to determine whether or not this document is needed or not. As long as it is in the list, it is required
 Reconcile this with BPI vs De Reny . In that case, all the documents were there but the goods were not correct. Was the bank justified in
paying the seller? YES because all the correct documents were there. In this case, the bank refused to pay the seller. All the goods were
correct, but the bank refused to pay. Was it justified? YES because the documents were incomplete. This is the application of strict
compliance
Issue 3: Lower courts ruled, and also according to the seller, the fact that the LC is an irrevocable LC means that the correspondent bank is
already liable
Ruling:
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. An irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit
may be an irrevocable credit and at the same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the
consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the
right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent
bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as
its own according to the terms and conditions of the credit. Hence, the mere fact that a letter of credit is irrevocable does not necessarily
imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit.
Discussion:
 An Irrevocable letter of credit is not based on a fixed period. It is based on the consent of the beneficiary. You call it irrevocable because
the bank cannot revoke it unilaterally. As long as the beneficiary does not consent to the revocation of the credit, the LC will stand. What
will terminate it is not the passage of a fixed period of time, but the consent of the beneficiary. The duration only means that as long as
beneficiary has not consented, it is not terminated
 A confirmed letter of credit is one wherein the confirming bank has acknowledged the obligation and undertook to pay the obligation in
lieu of the issuing bank. There is another bank which is willing to pay the obligation under the LC. So you can have an irrevocable LC which
is confirmed; you can also have an irrevocable LC and unconfirmed.
 In this case, it was an irrevocable LC. The issue was whether or not by the fact that it was irrevocable it was also confirmed. IT IS NOT.
Confirming is another act from the irrevocability of the LC
 The role of Feati bank was only a notifying bank, not a confirming bank. Similar to the Bank of America case, a notifying bank has no
obligation at all even if the LC is irrevocable. It only means it cannot be revoked; it doesn’t mean the correspondent bank is liable
 Distinguished from a revolving letter of credit: It is open, then you pay it so it closes, then it opens again without you having to open
another LC. It’s like a revolving door. When you open the revolving LC, the bank will use that to pay your seller. Then it goes to the buyer,
hey pay me the money. The moment you pay it, it is open again. So you can use it for another supplier. Normally, LC is opened for 1
transaction only.
Atty: Do you understand? Or you don’t care? You look like you don’t care (HEHE). When you’re already lawyers, I hope you won’t forget these
differences.

TRANSFIELD PHILIPPINES INC. vs. LUZON HYDRO CORP.

Facts:
Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey contract whereby Transfield as turnkey contractor undertook
to construct hydro-electric power station (the project). To secure the performance of Transfield’s obligation, Transfield opened 2 standby
letters of credit with ANZ Bank and SBC. Transfield sought various extensions, which gave rise to a series of legal actions. The issue under
arbitration was whether or not Transfield was in breach of its contract by delay. Transfield, while arbitration was pending, contacted its banks
and warned them against paying LHC.
LHC asserted that Transfield was in default and demanded payment of liquidated damages for the delay from the securities put up by
Transfield. It contended that the securities are independent of the main contract between them as shown by the face of the 2 LC which both
provide that the banks have no responsibility to investigate the authenticity or accuracy of the declarant’s capacity.
Issue 1:Whether or not LHC can claim under the independence principle
Ruling:

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As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of
the credit are complied with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the
parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument — that it is only the issuing bank that may invoke the independence
principle on letters of credit — does not impress this Court. To say that the independence principle may only be invoked by the issuing banks
would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine
works to the benefit of both the issuing bank and the beneficiary.
Discussion:
 Involved here was a TURNKEY CONTRACT which referred to a readily operating power plant so that the principal will just have to “turn
the key” and it will go. It’s a contract where one is asked to construct something that can be readily operated so that all the principal has
to do is to turn the key and everything goes
 In the other cases, everyone who claimed the independence principle were only the banks. In this case, it was the beneficiary saying that
he has the right to claim under the LC regardless of what happens in the contract because my claim under the LC is independent of what
happens to our arbitration, WON Transfield was really in delay
 SC said it is not only the issuing bank that can recover under the independence principle. The beneficiary is only entitled
Issue 2: Whether the fraudulent exception rule is applicable
Ruling:
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which
would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey Contract. 55 Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default.
The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there
was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the
Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.
Discussion:
 So far, we’ve been discussing commercial letter of credit. Differentiate this with standby letter of credit.
 COMMERCIAL LETTER OF CREDIT - used for sales or transactions such as importation and exportation. To prove you are entitled to
payment, you prove compliance or present documents required
 STANDBY LETTER OF CREDIT – serves as a guarantee; prove non-compliance with the contract so you can claim under the standby
letter of credit
 Here, what was issued was a standby LC. The proof shown by LHC that there was a violation was that they presented a certificate of non-
compliance by Transfield. They stated that Transfield was already in delay because it failed to complete the project on time. Transfield
said that the certificate was fraudulent because it said we are not yet sure if there is really a delay because we are still undergoing
arbitration. So you, LHC, you lied! You misstated the information in the certificate. So that is a fraudulent certification
 Under the FRAUD EXCEPTION RULE, if your basis, or the document that you issue to claim under the standby LC is fraudulent, that is an
exception to the independence principle. The courts can enjoin the payment by the issuing banks because the proof is fraudulent.
 The fraud exception principle is an exception to the independence principle but it is only for the courts to enjoin the banks from paying. It
is not up to the bank to determine the authenticity of the proof given. It is merely a ground to seek an injunction against the payment
under the LC
 SC said that technically, the certificate issued by LHC was not misstated because under the Turnkey contract, you did not define delay to
be after the final determination from arbitration. You just stated a particular date. This is not fraudulent.

MWSS vs. DAWAY

Facts:
MWSS granted Maynilad under a concession agreement a 20-year period to manage and refurbish the existing MWSS water delivery
and sewerage services, for which Maynilad undertook to pay the corresponding concession fees. To secure the concessionaire’s performance
of its obligations, Maynilad was required to put up securities. It was issued an irrevocable standby letter of credit in favor or MWSS. Maynilad
served upon MWSS a notice of event of termination claiming that MWSS failed to comply with its obligations.
Prior to the instant case, Maynilad had filed a petition for rehabilitation which resulted in the issuance of a stay order.
Issue:
Did the rehabilitation court act in excess of its authority/jurisdiction when it enjoined MWSS from seeking payment of the concession
fees from the banks that issued the irrevocable standby LC
Ruling:
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating

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banks' obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtor's assets. These are the same characteristics of a surety or solidary obligor. Being solidary,
the claims against them can be pursued separately from and independently of the rehabilitation case.
Discussion:
 Under the rehabilitation laws, if a company or corporation is put unde rehabilitation, the Court will also issue a stop payment order. The
corporation will stop paying any of its creditors. It cannot pay anyone.
 The SC said the bank is required to pay under the LC because the obligation under the LC is different from the Maynilad’s obligation to
pay. The latter’s obligation is under the stop payment order but not the bank because the bank’s obligation is primary and solidary. So
you can claim under the standby LC even if the person who asked that the LC be issued is under rehabilitation
 MWSS can claim under the LC but when the bank seeks reimbursement from Maynilad, it cannot be paid because Maynilad is under a stop
payment order
 Most important here is that the nature of the obligation is primary and solidary

TRUST RECEIPTS
March 19, 2015
Whereas clause of PD 115
WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve their financing
problems, had gained popular acceptance in international and domestic business practices, particularly in commercial banking
transactions;

Trust Receipt Transaction – Definition in Sec 4

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by
and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves
if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the
purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with
them in a manner preliminary or necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery to a depository or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at
the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the
same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of this Decree.

 A trust receipt (TR) transaction presupposes an existence of a letter of credit agreement or transaction. The said goods would be
entrustee, here the buyer, to be sold and the proceeds of the said goods will be given to the bank in payment of their obligation. With
the maturity of the trust agreement and there is no payment, then the goods will be returned to the bank and the bank will sell it to the
public through a public auction. If the proceeds of the public auction are insufficient to cover the amounts of the LC and TR or the
obligation of the entrustee, the bank can ask the entrustee to pay the remaining balance. If there are excess amounts from the proceeds
of the public auction, the entrustee is entitled to the excess.
 There is no form required for a Trust Receipt contract.
 In Prundential Bank case, it made a discussion on a TR transaction because after the goods were received by Prudential Bank, they were
turned over to Phil Rayon through a TR transaction. Phil Rayon executed a TR for the goods. In that case, you will see there a description
on how a TR transaction works vis-à-vis a LC (letter of credit) transaction. The LC is basically that can be done outside the jurisdiction of
the issuing bank and the buyer. Once the LC is fulfilled and the goods arrived, there is now the bank that turns around, tells the buyer,
“Hey, the goods are here. You pay me the amount that I paid to the seller.” If the buyer cannot pay yet, the bank will not hold on to the
goods. The bank will turn over the goods under a TR transaction.

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 An important aspect of which is that the bank will retain title or ownership over the goods. So that the buyer will only act as an
entrustee of the bank. Only for the specific purpose to sell. Generally, to sell the goods and turn over the proceeds of the sale
corresponding to the amount covered by the trust receipts.

OBLIGATIONS OF THE ENTRUSTEE

 To deliver to the entruster the price of the sale
 If the merchandise is not sold, to return the merchandise to the entruster.
 More specific obligations from a case:The entrustee is obliged to:
(1) Hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms
and conditions of the trust receipt;
(2) Receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owed to the
entruster or as appears on the trust receipt;
(3) Insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
(4) Keep said goods or the proceeds therefrom whether in money or whatever form, separate and capable of identification as property
of the entruster;
(5) Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
(6) Observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.

RIGHTS OF AN ENTRUSTER:

Sec. 7. Rights of the entruster. — The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the
trust receipt provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds
realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt
or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or
sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become
a purchaser.
The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment
of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee’s
indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale
shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the
entrustee's last known business address.
 The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owed to the entruster or as appears in the trust receipt;
 To the return of the goods, documents or instruments in case of non-sale; and
 To the enforcement of all other rights conferred on him in the trust receipt, provided these are not contrary to the provisions of the
document.
In case of breach of a TR contract:
 The entruster can demand for a return of the goods.
 The entruster can also goods in a public or private sale and apply the proceeds to the amount covered by the TR.
 If the proceeds are still insufficient, the entruster can still demand for the deficiency from the entrustee.
Proceeds of the Sale Application:
 The proceeds of the sale will be applied in accordance with Section 7 of PD 115:
 The proceeds of any such sale, whether public or private, shall be applied:
(a) to the payment of the expenses thereof;
(b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of
the entrustee’s indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any
deficiency.
 If there is an excess from the sale, the entrustee shall be entitled to the surplus of the sale.
When can the entrustee be liable for Estafa?
 There are only two instances where the entrustee can be held liable for estafa:
 Failure to remit the proceeds of the sale by the entrustee, in case the goods are sold.
 Failure to return the goods to the entruster covered by the TR in case that the goods remain unsold.
 Estafa is not a remedy but a criminal penalty, in case of two specific violations of the entrustee.
 For any other breach of the trust agreement, your recourse is not a case of estafa, rather to cancel the TR agreement as provided in
Section 7 of PD 115.
 Under Section 13, there are only two instances for criminal liability of estafa:

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Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or
offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall
be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.

 Outside of these two instances, there is no liability for estafa.

Purpose of the Trust Receipt Law:
 To aid importers and merchants in purchasing goods, materials for the purpose of selling and manufacturing.
 In other words, to aid importers and retailers in solving their financing problems in case of the procurement of their supplies and the
importation of the goods and supplies.

CASES DISCUSSED
NG VS PEOPLE OF THE PHILIPPINES
Facts:
 Petitioner Anthony Ng, then engaged in the business of building and fabricating telecommunication towers under the trade name
"Capitol Blacksmith and Builders," applied for a credit line of PhP3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust).
 On May 30, 1997, Asiatrust approved petitioner's loan application. Petitioner was then required to sign several documents, among
which are the Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt Agreements, 4 and Promissory
Notes. Though the Promissory Notes matured on September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not
bear any maturity dates as they were left unfilled or in blank by Asiatrust.
 As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust. Asiatrust then conducted a
surprise ocular inspection of petitioner's business through Villarva S. Linga, Asiatrust's representative appraiser. Linga thereafter
reported to Asiatrust that he found that approximately 97% of the subject goods of the Trust Receipts were "sold-out and that only
3% of the goods pertaining to PN No. 1963 remained."
 Ng sourced his goods, locally. Ng is not an importer.
 Ng purchased the goods for the fabrication and construction of cell towers.
 Ng was sued for estafa:
Issue: Whether or not Ng is liable for Estafa.
Ruling:
 The transaction between Ng and Asiatrust is not a TR transaction but one of simple loan. Transactions discussed in relation to Trust
Receipts mainly involved sales. Transactions covered by PD 115 are sales, manufacturing or processing for the purposes of sale,
loading, unloading, shipment or transshipment of goods.
 PD 115 does not apply. It must be remembered that petitioner was transparent to Asiatrust from the very beginning that the subject
goods were not being held for sale but were to be used for the fabrication of steel communication towers in accordance with his
contracts with Islacom, Smart, and Infocom. In these contracts, he was commissioned to build, out of the materials received, steel
communication towers, not to sell them.
 To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased." Since Asiatrust knew that petitioner was neither an
importer nor retail dealer, it should have known that the said agreement could not possibly apply to petitioner.
 Ng is not liable for estafa.
 Goods Were Not Received in Trust. The first element of Estafa under Art. 315, par. 1 (b) of the RPC requires that the money, goods or
other personal property must be received by the offender in trust or on commission, or for administration, or under any other
obligation involving the duty to make delivery of, or to return it. But as we already discussed, the goods received by petitioner were
not held in trust. They were also not intended for sale and neither did petitioner have the duty to return them. They were only
intended for use in the fabrication of steel communication towers.
 No misappropriation of goods or proceeds. Assuming arguendo that the provisions of PD 115 apply, petitioner is not liable for Estafa
because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to turn over the proceeds of the sale of
the goods . . . covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt . . . in
accordance with the terms of the trust receipt."
 Petitioner was only obligated to turn over the proceeds as soon as he received payment. However, the evidence reveals that
petitioner experienced difficulties in collecting payments from his clients for the communication towers. Thus, absent proof that the
proceeds have been actually and fully received by petitioner, his obligation to turn over the same to Asiatrust never arose. What is
more, under the Trust Receipt Agreement itself, no date of maturity was stipulated.

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 Furthermore, Asiatrust was informed at the time of petitioner's application for the loan that the payment for the loan would be
derived from the collectibles of his clients. Petitioner informed Asiatrust that he was having extreme difficulties in collecting from
Islacom the full contracted price of the towers. Thus, the duty of petitioner to remit the proceeds of the goods has not yet arisen
since he has yet to receive proceeds of the goods. Again, petitioner could not be said to have misappropriated or converted the
proceeds of the transaction since he has not yet received the proceeds from his client, Islacom.
Discussion:
 The SC in this case made a ruling whether or not PD 115 will apply to Ng’s transaction.
 Trust Receipts Law (TRL) was created to aid in financing importers and retailers who do not have sufficient funds to finance the
importation or purchase or merchandise and who may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. Since Asiatrust knew that Ng was neither importer nor retailer dealer. It should have known that
the said agreement would not possibly be applied to petitioner.
 PD 115 will not apply because Ng was neither an importer nor a dealer. The SC here made a delineation that if you’re not an importer or
retailer and you execute a TR agreement, in general, the provisions of the TRL will not apply.
 The SC is limiting the application of the TRL to importers and retailers.
 Ng is in the business of construction. The goods here are not held for sale but were used for construction business. No application of the
TRL.

METROPOLITAN BANK & TRUST COMPANY vs HON. SEC. GONZALES

Facts:
Respondents as duly authorized representatives of Visaland Inc. and in order to finance the operations of its sister company, Titan
Ikeda Construction & Devt Corp (TICDC), applied with petitioner MBTC 24 letters of credit with aggregate amount of P68, 749,487.96.
Respondents signed trust receipts simultaneously with the issuance of letters of credit in favour of petitioner, and have bound themselves to
sell good covered by such letters and to remit the proceeds to petitioner, if sold, or to return the goods, if not sold, on or before their agreed
maturity dates.
When the trust receipts matured, respondents failed to return goods to petitioner or return the value despite demand. Thus,
petitioner filed a criminal complaint for estafa. Private respondents denied having entered into trust receipt transactions and claimed that the
contract entered was a Contract of Loan secured by real estate mortgage. The Secretary of Justice, as well as the appellate court found no
probable cause and ruled that the transaction was a contract of loan.
Ruling:
The fact of existence or non-existence of a trust receipt transaction is evidentiary in nature, the veracity of which can best be passed
upon after trial on the merits, for it is virtually impossible to ascertain the real nature of the transaction involved based solely on the self-
serving allegations contained in the opposing parties’ pleadings. Trust receipt transactions are governed by the provisions of Presidential
Decree No. 115 andthe following pieces of evidence adduced from the affidavits and documents submitted before the Prosecutor are sufficient
to establish the existence of probable cause, to wit: 1 st, the trust receipts bearing the genuine signatures of private respondents; 2 nd, the
demand letterof petitioner addressed to respondents; and 3 rd, the initial admission by private respondents of the receipt of the imported
goods from petitioner.Prescinding from the foregoing, we conclude that there is ample evidence on record to warrant a finding that there is a
probable cause. It is highly improbable to mistake trust receipt documents for a contract of loan when the heading thereon printed in bold and
legible letters read: “Trust Receipts”.
Discussion:
 One of the contention was that this is not a trust receipt transaction because the goods were not held for sale but rather, they were only
allowed to be used by the sister company of Visaland. Visaland itself did not acquire the goods for sale.
 If you remember the Ng vs Pp case- if the goods are not for sale, then it may not fall under a trust receipt transaction
 So what’s the difference between the Ng vs Pp and this case? Why did SC apply PD 115 in this MBTC case?
 Remember that under the Ng case, the SC said 2 transactions protected under PD 115 –(1) the importation &(2) the purchase of
merchandise by the retailer dealers.
 Here, this was NOT a purchase of merchandise by a retailer dealer. Here, the goods are not for sale. But it was an IMPORTATION. And
here lies the difference between the 2cases.
 So the MBTC case falls within the purview of PD 115. Because again, there was an importation of goods.
 It is NOT THE FACT of the goods not being held for sale NOR THE FACT that it will just be used in the construction business but rather, it
was also the FACT THAT Ng was NOT AN IMPORTER.
 Here, Visaland may not be a retailer-dealer but IT IS AN IMPORTER that’s why SC applied PD 115

CASE: METROPOLITAN BANK & TRUST COMPANY vs JIMMY GO

Facts:
Metrobank executed a Credit Line Agreement in favour of its client, BGB Industrial Textile Mills, Inc. in the total amount of
P10,000,000.00. As security, private respondent Benjamin Go (now deceased) executed a Continuing Surety Agreement in favour of
Metrobank. Thereafter, respondent Jimmy Go applied for 11 commercial letters of credit to cover the shipments to which shipments were
delivered to and accepted by BGB. Consequently, 11 trust receipts were executed by Jimmy & Benjamin thru BGB, as entrustees in favour of
Metrobank entruster. BGB agreed by the terms to hold the goods in trust for Metrobank and, in case of sale of goods, to hand the proceeds to

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the bank to be applied against the total obligation object of the trust receipts. On maturity date, they failed to satisfy obligationbecause the
goods remain unsold prompting Metrobank to file 3 complaints of sum of money and later instituted 11 criminal charges for violation of PD115.
Ruling:
In order that respondents Jimmy and Benjamin Go may be validly prosecuted for estafa under Art 315, par 1(b) of the RPC, in relation
to Sec 13 of the Trust Receipts Law, the following elements must be established: (a) they received the subject goods in trust or under the
obligation to sell the same and to remit the proceeds thereof to Metrobank, or to return the goods if not sold; (b) they misappropriated or
converted the goods and/or the proceeds of the sale; (c) they performed such acts with abuse of confidence to the damage and prejudice of
Metrobank; and (d) demand was made on them by Metrobank for the remittance of the proceeds or the return of the unsold goods.
Prosecution for estafa cannot prosper because the 2 nd (misappropriation/conversion) and 4 th (demand) elements of the offense are not
present.
The trust receipts subject of this case partake of the nature of contracts of adhesion. Being contracts of adhesion, are not per se
invalid and inefficacious. But should there be ambiguities therein, such ambiguities are to be strictly construed against Metrobank, the party
that prepared them
Discussion:
 The acts that would make an entrustee liable for estafa under the Trust Receipts law are: 1. Failure to remit the proceeds of the goods – in
here, the SC clarified that if there is NO sale, then there is NO failure to remit
 Second, failure to return the goods covered by the letters of credit – SC said there was no failure to return since they actually offered to
inventory and return it but Metrobank did not listen to their offer because Metrobank contended that all the goods were sold but infact,
the gods are just there in the warehouse and all intact.
 So the SC quoted the prosecutors in saying that there was no violation of PD 115 since there are only 2 violations namely: (1) when the
goods are sold and you fail to remit the proceeds, and (2) failure to return the goods
 What about the contention that a Trust receipt transaction or agreement is a contract of adhesion? Will that serve to invalidate an
agreement? NO.
 There was a contention as to when should the Gos offer to return the goods. When does their obligation arise? Is it on the date of the
maturity of the agreement or is it upon demand by Metrobank? The SC pointed out that the Trust Receipt Agreement was vague as it
does not specify when.
 SC said that this Trust Receipt Agreement is a contract of adhesion but it does NOT mean that the contract is void.
 The effect of a contract of adhesion is that it will be strictly construed against the person who caused the ambiguity which in this case is
the one who prepared the contract- Metrobank.
 So the most onerous provision against Metrobank was made as the interpretation. So it is NOT on the date of the maturity of the
agreement but rather, on the DATE OF DEMAND by the Metrobank for the Gos to return the goods.
 But remember, Metrobank never demanded because it was always their position that the goods were sold. So even if at the point when
the ruling of the SC was made, the goods were not yet returned the court said that it does not matter because their obligation to return
did not arise because Metrobank did not make a demand.
 For you to be held liable for estafa, you do not turn over the goods. Here, the Gos did not turn it over, they only offered. But the SC said it
does not matter because Metrobank never made a demand. No crime of estafa was committed

LANDL & CO. PHIL. INC. vs. MBTC

Facts:
LANDL is engaged in business of selling imported welding rods and alloys. It opened a commercial letter of credit with Metrobank. To
secure the indebtedness, Metrobank required the execution of a trust receipt on the condition that LANDL would hold the goods in trust for
Metrobank, with the right to sell the goods and the obligation to turn over the proceeds of the sale, if any. If the goods remained unsold,
corporation had to return them.
On the maturity date, LANDL defaulted in the payment of its obligation. The goods were sold at public auction, and the proceeds
were insufficient to completely satisfy the obligation. After LANDL failed to pay the balance, Metrobank instituted the instant case to collect
said deficiency.
Ruling:
Respondent bank’s repossession of the properties and subsequent sale of the goods were completely in accordance with its
statutory and contractual rights upon default of petitioner corporation.
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any deficiency after the
proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments, and the satisfaction of the entrustee’s indebtedness to the entruster.
In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporation’s indebtedness to the
respondent bank. Respondent bank was thus well within its rights to institute the instant case to collect the deficiency.

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Discussion:
 There are 2 instances under PD 115 where the entruster will take possession of the goods
1. If the goods are unsold, entrustee is liable to return the goods
2. Entruster may cancel the trust and take possession of the goods, sell them at a private or public auction. If there is deficiency,
entrustee is liable to pay the deficiency
 In this case, the repossession was under the first instance. So the contention of the buyer was that it is only in the 2 nd instance where the
provision on deficiency will apply. In the 1st instance, it does not apply because I’m just returning the goods, you are the owner, so I’m
clean, no need for me to pay. My obligation is extinguished. In the 2 nd instance, I’m in default, so I will have to pay the deficiency. The
entrustee sought to differentiate the two instances. Entrustee argued that the availment of one remedy is distinct.
 SC said the contention is incorrect. In the 1 st instance, it does not mean you are just returning the goods to the owner because the
ownership of the entruster is just a legal fiction. It is just there because the entruster holds a security interst over the goods. Regardless
of the nature, this is really a security arrangement. The fiction is created to protect the entruster
 Thus, you cannot use the legal fiction to say you will not pay because this is just a security arrangement. As a security arrangement, the
proceeds of the sale not sufficient, pay the deficiency
 In the 2 instances (under sec 7), deficiency judgment can be availed of
 SC cited another case in this case of LANDL, saying: “Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner of
the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a lender and creditor.”
 So even if it owned the goods under the trust receipt, that is legal fiction than fact
 When you return the goods, bank will sell it because of deficiency, you will still be liable because at the bottom of it, a trust
receipt is just a security agreement

DBP vs PRUDENTIAL BANK

Facts:
Litex opened an irrevocable commercial letter of credit with Prudential Bank in connection with its importation of spindles. These were
released to Litex under trust receipts. Litex installed and used the items in its textile mill in Rizal. DBP granted a foreign currency loan, and this
was secured by mortgages. Among the machineries mortgaged were the articles covered by the trust receipts.
DBP foreclosed the mortgages and acquired the properties. Prudential Bank wrote a letter asserting its claim. Without knowledge of
Prudential Bank, DBP sold the Litex textile Mill as well as the machineries to Lyon Textile Mills. Prudential Bank filed a complaint for sum of
money with damages against DBP.
Ruling:
Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor
should be the absolute owner of the thing pledged or mortgaged and that he must have the free disposal of his property.
Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Their inclusion in the mortgage
was voidand had no legal effect.There being no valid mortgage, there could also be no valid foreclosure or valid auction sale.Thus, DBP could
not be considered either as a mortgagee or as a purchaser in good faith.DBP merely stepped into the shoes of Litex as trustee of the imported
articles with an obligation to pay their value or to return them on Prudential Bank's demand. By its failure to pay or return them despite
Prudential Bank's repeated demands and by selling them to Lyon without Prudential Bank's knowledge and conformity, DBP became a trustee
ex maleficio.
Discussion:
 DBP contended that it was not a trust receipt transaction because the articles were not released to Litex to be sold. The imported articles
were released to Litex to be installed in the textile mill and to be used in its business. It follows that the transaction was not goverened by
the Trust Receipts Law.
 SC said, so what if PD 115 does not apply? There is still a valid trust receipt contract. Even if PD 115 does not apply. It is still valid
because it not contrary to law, morals, public policy, good custom, public order. That contract said Prudential was the owner of the
goods, not Litex
 So when it comes to enforcement of criminal provisions under PD 115, the SC is very strict about it. There are only two instances, only if
you are an importer or retailer
 In enforcing the civil aspect, it is more favorable to the entruster. So the thing here is that it may be you have a trust receipt transaction
that is a valid contract but not a trust receipt transaction under PD 115 that will render the entrustee liable for estafa. If it’s just a contract
between the parties, the liability is only civil in nature. To be held liable under PD 115, the trust receipt has to be one that complies with PD
115.

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 In this case, we are talking about the essence of a trust receipt agreement where entruster remains the owner, therefore you cannot sell
it to another person. SC did not say if PD 115 will apply, but they said the trust receipt agreement was valid. Under that, the owner was
Prudential; therefore you Litex, you had no right to mortgage it
 What if I am the lawyer of DBP and I will argue that under Sec 11 of PD 115 ----
“Section 11. Rights of purchaser for value and in good faith. – Any purchaser of goods from an entrustee with right to sell, or of documents
or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith
from the entrustee, acquires said goods, documents or instruments free from the entruster’s security interest.
--- the buyer (DBP) has better rights than the entruster. Can DBP validly use Sec 11?
 In order to avail of Sec 11, you have to be a purchaser in good faith. SC said in this case that DBP was not
 More importantly, Sec 11 talks about an entrustee who is a retailer who takes the goods with an obligation to sell them. In this case,
Litex was not a retailer for selling the goods. It took the goods so it can use them on the factory. Sec 11 will not apply
 Thus, Sec 11 only applies when the entrustee will sell the goods in the ordinary course of his business where he takes the goods in
such terms that he is supposed to sell the goods to 3rd parties
 This is just a side discussion because it was not taken up in the case

ROSARIO TEXTILE MILLS CORP. vs. HOME BANKERS SAVINGS AND TRUST COMPANY
Facts:
The bank granted RTMC a credit line of 10M. RTMC availed of this by making numerous drawdowns, each being covered by a
separate promissory note and trust receipt. RTMC failed to pay its loans, thus the bank filed a complaint for sum of money.
Petitioners theorize that when petitioner RTMC imported the raw materials needed for its manufacture, using the credit line, it was
merely acting on behalf of the bank, the true owner of the goods by virtue of the trust receipts. Hence, under the doctrine of res perit domino,
the bank took the risk of the loss of said raw materials when RTMC’s premises was destroyed by a fire.
Ruling:
It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. The Trust receipts were
mere securities. A trust receipt is a security arrangement which secures indebtedness. There can be no such thing as security interest that
secures no obligation. Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.
Discussion:
 This case is just a reiteration of the principle that a trust receipt transaction is just a security agreement. Even if the bank is made the
owner, in reality, it is really the buyer who is the beneficial owner. Thus, the buyer bears the risk of loss.
 So even if the goods are lost, the buyer is still liable to pay the loan obligation
 In essence, the ownership of the bank is a mere security interest. It is a legal fiction.

 There is a new motion for reconsideration ruling of the Narra case; Jan. 28, 2015. It’s the same, no change. It’s just a better ruling, more
detailed. But it’s still the same rule: That the 1 st test to apply is always the control test. It’s only when you pass the control test, and there
is still doubt of the control and beneficial ownership of Filipinos, you apply the grandfather rule. You don’t apply the grandfather rule
separate from the control test. If you pass the control test, then that’s okay. If you don’t pass it, don’t apply any test because it’s useless.

- END –
“And will you succeed? Yes! You will indeed! (98 and ¾ percent guaranteed).” – Dr. Seuss

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