Securities Regulation
issuing corporation, is also considered an ―insider.‖ 2) In
Insider (2004)
Ms. OB was employed in MAS Investment Bank. WIC, a medical
drug company, retained the Bank to assess whether it is desirable
to make a tender offer for DOP company, a drug manufacturer. OB
overheard in the Page 91 of 103 course of her work the plans of
WIC. By herself and thru associates, she purchased DOP stocks
available at the stock exchange priced at P20 per share. When
WIC's tender offer was announced, DOP stocks jumped to P30 per
share. Thus OB earned a sizable profit. Is OB liable for breach and
misuse of confidential or insider information gained from her
employment? Is she also liable for damages to sellers or buyers
with whom she traded? If so, what is the measure of such
damages? Explain briefly. (5%)
SUGGESTED ANSWER: OB is an insider (as defined in
Subsection 3.8(3) of the Securities Regulation Code) since she is
an employee of the Bank, the financial adviser of DOP, and this
relationship gives her access to material information about the
issuer (DOP) and the latter's securities (shares), which information
is not generally available to the public. Accordingly, OB is guilty
of insider trading under Section 27 of the Securities Regulation
Code, which requires disclosure when trading in securities.
OB is also liable for damages to sellers or buyers with whom she
traded. Under Subsection 63.1 of the Securities Regulation Code,
the damages awarded could be an amount not exceeding triple the
amount of the transaction plus actual damages. Exemplary
damages may also be awarded in case of bad faith, fraud,
malevolence or wantonness in the violation of the Securities
Regulation Code or its implementing rules. The court is also
authorized to award attorney's fees not exceeding 30% of the
award.
Insider Trading (1995)
Under the Revised Securities Act, it is unlawful for an insider to
sell or buy a security of the issuer if he knows a fact of special
significance with respect to the issuer or the security that is not
generally available, without disclosing such fact to the other party.
3.a) What does the term ―insider‖ mean as used in the Revised
Securities act? 3.b) When is a fact considered to be ―of special
significance‖ under the same Act? 3.c) What are the liabilities of a
person who violates the pertinent provisions of the Revised
Securities Act regarding the unfair use of inside information?
SUGGESTED ANSWER:
3a. ―Insider‖ means 1) the issuer, 2) a director or officer of, or a
person controlling, controlled by, or under common control with,
the issuer, 3) a person whose relationship or former relationship to
the issuer gives or gave him access to a fact of special significance
about the issuer or the security that is not generally available, or 4)
a person who learns such a fact from any of the foregoing insiders
with knowledge that the person from whom he learns the fact is
such an insider (Sec 30b, RSA)
3b. It is one which, in addition to being material, would be likely
to affect the market price of a security to a significant extent on
being made generally available, or one which a reasonable person
would consider especially Mercantile Law Bar Examination Q & A
(1990-2006) important under the circumstances in determining his
course of action in the light of such factors as the degree of its
specificity, the extent of its difference from information generally
available previously, and its nature and reliability. (Sec. 30c, RSA)
3c. The person may be liable to 1) a fine of not less than P5th nor
more than P500th or 2) imprisonment of not less than 7 years nor
more than 21 years, 3) or both such fine and imprisonment in the
discretion of the court. If the person is a corporation, partnership,
association or other juridical entity, the penalty shall be imposed
upon the officers of the corporation, etc. responsible for the
violation. And if such an officer is an alien, he shall, in addition to
the penalties prescribed, be deported without further proceedings
after service of sentence. (Sec 56 RSA)
Insider Trading; Manipulative Practices (1994)
1) Give a case where a person who is not an issuing
corporation, director or officer thereof, or a person
controlling, controlled by or under common control with the
Securities Law, what is a ―shortswing‖ transaction. 3) In
―insider trading,‖ what is a ―fact of special significance‖?
SUGGESTED ANSWER:
1) It may be a case where a person, whose relationship or
former relationship to the issuer gives or gave him access to
a fact of special significance about the issuer or the security
that is not generally available, or a person, who learns such a
fact from any of the insiders, with knowledge that the person
from whom he learns the fact, is such an insider (Sec 30, par
(b) Rev Securities Act)
2.A ―shortswing‖ is a transaction where a person buys
securities and sells or disposes of the same within a period
of six (6) months.
ALTERNATIVE ANSWER:
2) It is a purchase by any person for the issuer or any person
controlling, controlled by, or under common control with the
issuer, or a purchase subject to the control of the issuer or
any such person, resulting in beneficial ownership of more
than 10% of any class of shares (Sec 32 R Sec Act) 3)
In ―insider trading,‖ a ―fact of special significance‖ is, in
addition to being material, such fact as would likely, on
being made generally available, to affect the market price of
a security to a significant extent, or which a reasonable
person would consider as especially important under the
circumstances in determining his course of action in the light
of such factors as the degree of its specificity, the extent of
its difference from information generally available
previously, and its nature and reliability (Sec 30 par c
RSecAct)
Manipulative Practices (2001)
Suppose A is the owner of several inactive securities. To
create an appearance of active trading for such securities,
Page 92 of 103 A connives with B by which A will offer for
sale some of his securities and B will buy them at a certain
fixed price, with the understanding that although there
would be an apparent sale, A will retain the beneficial
ownership thereof. a) Is the arrangement lawful? (3%) b) If
the sale materializes, what is it called? (2%)
SUGGESTED ANSWER:
a) No. The arrangement is not lawful. It is an artificial
manipulation of the price of securities. This is
prohibited by the Securities Regulation Code. b) If the
sale materializes, it is called a wash sale or simulated
sale.
Securities Regulation Code; Purpose (1998)
What is the principal purpose of laws and regulations
governing securities in the Philippines? (2%)
SUGGESTED ANSWER:
The principal purpose of laws and regulations
governing securities in the Philippines is to protect the
public against the nefarious practices of unscrupulous
brokers and salesmen in selling securities.
Securities;
Definition (1996)
Define securities
SUGGESTED ANSWER:
Stocks, bonds notes, convertible debentures, warrants
or other documents that represent a share in a
company or a debt owned by a company or
government entity. Evidences of obligations to pay
money or of rights to participate in earnings and
distribution of corporate assets. Instruments giving to
their legal holders rights to money or other property;
they are therefore instruments which have intrinsic
value and are recognized and used as such in the
regular channels of commerce. (Note: Sec 2a of the
Revised Securities Act does not really define the term
„securities.‟)
Securities;
Selling of Securities; Meaning (2002) 2002
(18) Equity Online Corporation (EOL), a New York
corporation, has a securities brokerage service on the
Internet after obtaining all requisite U.S. licenses and
permits to do so. EOL‘s website (www.eonline..com),
which is hosted by a server in Florida, enables Internet
users to trade on-line in securities listed in the various
stock exchanges in the U.S. EOL buys and sells U.S.
listed securities for the accounts of its clients all over
the world, who convey their buy and sell instructions
to EOL through the Internet. EOL has no offices,
employees or representatives outside the U.S. The
website has icons for many countries, including an
icon ―For Filipino Traders‖ containing the day‘s
prices of U.S. listed securities expressed in U.S.
dollars and their Philippine peso equivalent. Grace
Gonzales, a resident of Makati, is a regular customer
of the website and has been purchasing and selling
securities through EOL with the use of her American
Express credit card. Grace has never traveled outside
the Philippines. After a series of erroneous stock
picks, she had incurred a net indebtedness of
US$30,000. with EOL, at which time she cancelled
her American Express credit card. After a Mercantile
Law Bar Examination Q & A (1990-2006) number of
demand letters sent to Grace, all of them unanswered,
EOL, through a Makati law firm, filed a complaint for
collection against Grace with the Regional Trial Court
of Makati. Grace, through her lawyer, filed a motion
to dismiss on the ground that EOL (a) was doing
business in the Philippines without a license and was
therefore barred from bringing suit and (b) violated
the Securities Regulation Code by selling or offering
to sell securities within the Philippines without
registering the securities with the Philippine SEC and
thus came to court ―with unclean hands.‖ EOL
opposed the motion to dismiss, contending that it had
never established a physical presence in the
Philippines, and that all of the activities related to
plaintiffs trading in U.S. securities all transpired
outside the Philippines. If you are the judge, decide
the motion to dismiss by ruling on the respective
contentions of the parties on the basis of the facts
presented above. (10%)
SUGGESTED ANSWER:
The grounds of the motion to dismiss are both
untenable. EOL is not doing business in the
Philippines, and it did not violate the Securites Act,
because it was not selling securities in the country.
The contention of EOL is correct, because it never did
any business in the Philippines. All its transactions in
question were consummated outside the Philippines.
Tender Offer (2002) 2002 (6)
A. What is a tender offer?
B. In what instances is a tender offer required to be
made?
SUGGESTED ANSWER:
A. Tender offer is a publicly announced intention of a
person acting alone or in concert with other persons to
acquire equity securities of a public company. It may
also be defined as a method of taking over a company
by asking stockholders to sell their shares at a price
higher than the current market price and on a
particular date.
B. Instances where tender offer is required to be made:
a) The person intends to acquire 15% or more of the
equity share of a public company pursuant to an
agreement made between or among the person and
one or more sellers.
b) The person intends to acquire 30% or more of the
equity shares of a public company within a period of
12 months.
c) The person intends to acquire equity shares of a
public company that would result in ownership of
more than 50% of the said shares.