TASK 3: Securities

Regulation Code

MAY 27, 2020

3S 2019-2020
Authored by: Joyce Anne A. Francisco

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 Task 3- Securities Regulation Code (SRC)

1. Corporation X has two principal stockholders – Corpo A, a non-listed company,

with shares amounting to 60.51%, and Corpo B with 17.03%. Majority of Corpo
A’s stocks were owned by Corpo Z with 21.31% and Corpo Y with 29.69%.
Corpo B, on the other hand, owned 9% of Corpo A stocks. In a disclosure letter,
Corpo Z informed the Philippine Stock Exchange (PSE) that it and its subsidiary
Corpo Y had passed resolutions to sell to Corpo B the stocks of Corpo Z in
Corpo A equivalent to 21.31% and Corpo Y’s stocks in Corpo A equivalent to
29.69%. CorpoCute, a minority stockholder of Corporation X, sent a letter to
Corpo B demanding the latter to comply with the rule on mandatory tender
offer. Corpo B, however, refused. CorpoCute filed a complaint with the SEC,
praying that the mandatory tender rule be applied to Corporation X shares.
a. Is the rule on mandatory tender offer applicable to the indirect
acquisition by Corpo B of 36% of Corporation X, a publicly-listed
company, through its purchase of the shares in Corpo A, a non-listed
company?
b. Does SEC have jurisdiction over CorpoCute’s complaint and to require
Corpo B to make a tender offer for Corporation X’s shares?
Suggested answer:
a. Yes, the indirect acquisition by Corpo B of 36% of Corporation X shares
through the acquisition of the non-listed Corpo A shares is covered by
the mandatory tender offer rule. 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.
b. Yes, SEC has jurisdiction. In taking cognizance of CorpoCute’s complaint
against Corpo B and eventually rendering a judgment which ordered the
latter to make a tender offer, the SEC was acting pursuant to Rule19(13)
of the Amended Implementing Rules and Regulations of the Securities
Regulation Code, to wit: “13. Violation. If there shall be violation of this
Rule by pursuing a purchase of equity shares of a public company at

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 threshold amounts without the required tender offer, the Commission,
upon complaint, may nullify the said acquisition and direct the holding
of a tender offer. This shall be without prejudice to the imposition of
other sanctions under the Code.”
The foregoing rule emanates from the SEC’s power and authority to
regulate, investigate or supervise the activities of persons to ensure
compliance with the Securities Regulation Code, more specifically the
provision on mandatory tender offer under Section 19 thereof.

2. South Bay Golf Course (SBGC) was operated by South Bay Metropolitan
Authority (SBMA) under the Bases Conversion Development Authority (BCDA).
United International Group of Japan (UIG), a Japanese corporation, was chosen
to implement the plan to privatize the golf course. SBMA and UIG entered into
a Lease and Development Agreement. Under the agreement, UIG agreed to
"develop, manage and maintain the golf course and other related facilities
within the complex. Later, United International Group Development
Corporation (UIGDC) succeeded to the interests of UIG on the golf course
development. UIGDC executed a Deed of Assignment in favor of South Bay
Golf and Country Club, Inc. (SBGCCI). Complainants informed the SEC that they
had been asking UIGDC for the refund of their payment for their SBGCCI
shares. UIGDC did not act on their requests. The complainants invested in the
golf course because of SBGCCI and UIGDC's representation that a 27-hole,
world-class golf course would be developed. SBGCCI and UIGDC failed to
comply with their commitments and representations as stated in their
prospectus.
a. Does SEC have jurisdiction to order the refund of payments made by the
complainants?
b. What matters can be taken cognizance by the SEC in the instant case?
Suggested answer:
a. No, the issue of refund should be litigated in the appropriate Regional
Trial Court. This issue is both intra-corporate and civil in nature, which is
under the jurisdiction of the designated Regional Trial Courts. It involves
the determination of a shareholder's rights under the Corporation Code
or other intra-corporate rules when the corporation or association fails
to fulfill its obligations.

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 b. The Securities and Exchange Commission may take cognizance of it to
determine if SBGCCI and UIGDC committed administrative violations and
were liable under the Securities Regulation Code.

3. X, a major shareholder in Corpo M, was distressed over the proxy validation

proceedings and the resulting certification of proxies in favor of the M
Management. The proceedings were presided over by M’s assistant corporate
secretary and chief legal counsel instead of the person duly designated by M’s
Board of Directors. Thus, X moved before the SEC to declare certain proxies,
those issued to M Management, as invalid. A ceased and desist order (CDO),
citing Sections 5(i), 53.3, and 64 of the SRC, was signed by SEC Commissioner
Martinez was issued on the same day the complaint was filed by X.
a. Is the proxy challenge an election contest cognizable by the regular
courts?
b. Is the CDO issued by one commissioner valid?
Suggested answer:
a. Yes. The power of the SEC to investigate violations of its rules on proxy
solicitation is unquestioned when proxies are obtained to vote on
matters unrelated to the cases enumerated under Section 5 of
Presidential Decree No. 902-A. However, when proxies are solicited in
relation to the election of corporate directors, the resulting controversy,
even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within
the original and exclusive jurisdiction of the trial courts by virtue of
Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree
No. 902-A. That the proxy challenge raised by X relates to the election of
the directors of M is undisputed. The controversy was engendered by
the looming annual meeting, during which the stockholders of M were
to elect the directors of the corporation. X very well knew of that fact.
b. No. The fact that the CDO was signed, much less apparently deliberated
upon, by only by one commissioner renders the order fatally infirm. The
SEC is a collegial body composed of a Chairperson and four (4)
Commissioners. In order to constitute a quorum to conduct business, the
presence of at least three (3) Commissioners is required. The power to
issue a CDO cannot, under the SRC, be delegated to an individual
commissioner.
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 Alternative answer:
b. The citation in the CDO of Section 5.1, Section 53.3 and Section 64
together may leave the impression that it is grounded on all three
provisions, and that may very well have been the intention of the SEC.
Assuming that is so, it is legally impermissible for the SEC to have utilized
both Section 53.3 and Section 64 as basis for the CDO at the same time.
This lack of clarity is to the obvious prejudice of the X, and is in clear
defiance of the constitutional right to due process of law.

4. Corporation X offers investment contract to the public. Corporation X filed a

sworn registration statement with respect to the said contract. Y invests on the
investment contact offered by Corporation X.
a. Is the sale of the investment contract by Corporation X valid?
b. What action shall be taken by the Commission upon the filing of
registration statement?
Suggested answer:
a. No. Section 8.1 provides: 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. Thus, mere filing of the
registration statement is not sufficient. The approval of the SEC must be
obtained.
b. 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
(Section 12.6 of the SRC).

5. Corporation X, a public company, filed a petition for corporate rehabilitation.

Thereafter, the appointed receiver issued certificates of assignments in favour
of Z after obtaining the approval of the court. The acquisition resulted in
ownership of over fifty percent (50%) of the total outstanding equity securities
of Corporation X.
a. Is registration of the security required in the instant case?
b. Is Z required to make a tender offer?
Suggested answer:
a. No. The requirement of registration shall not as a general rule apply to
certificates issued by a receiver or by a trustee in bankruptcy duly
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 approved by the proper adjudicatory body (Section 9.1 The Securities
Regulation Code, Republic Act No. 8799, [July 19, 2000]).
b. No. Purchases in connection with corporate rehabilitation under court
supervision are exempt from mandatory tender offer rule (2015
Implementing Rules and Regulations of the Securities Regulation Code,
IRR of RA 8799, [August 4, 2015]).

6. Corporation X and Corporation Y entered into a merger agreement.

Corporation X will be the surviving corporation and will acquire all the assets
as well as the liabilities of Corporation Y.
a. Is the tender offer rule applicable?
b. Should Corporation X comply with the disclosure rules?
Suggested answer:
a. No. Unless the acquisition of equity securities is intended to circumvent
or defeat the objectives of the tender offer rules, the mandatory tender
offer requirement shall not apply to merger or consolidation (2015
Implementing Rules and Regulations of the Securities Regulation Code,
IRR of RA 8799, [August 4, 2015]).
b. Yes. Purchasers of securities in the exempt transactions shall, however,
comply with the disclosure and other obligations under SRC Rules 18.1
and 23.

7. X and Y are offering for sale investment contracts on "leaseback"

arrangements without registration. SEC conducted its own investigation of the
operations of X and Y. It determined that the contracts are securities, so SEC En
Banc issued a Cease and Desist Order. X and Y filed an appeal with the CA.
a. Assuming no prior hearing is made, is the issuance of CDO valid?
b. Is the filing of appeal with the CA proper?
Suggested answer:
a. Yes. Section 64.1 of SRC provides: The Commission, after proper
investigation or verification, motu proprio, or upon verified complaint by
any aggrieved party, may issue a cease and desist order without the
necessity of a prior hearing if in its judgment the act or practice, unless
restrained, will operate as a fraud on investors or is otherwise likely to
cause grave or irreparable injury or prejudice to the investing public. The
law is clear on the point that a cease and desist order may be issued by
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 the SEC motu proprio, it being unnecessary that it results from a verified
complaint from an aggrieved party. A prior hearing is also not required
whenever the Commission finds it appropriate to issue a cease and
desist order that aims to curtail fraud or grave or irreparable injury to
investors.
b. No. Section 64.3 of the SRC provides, thus: 64.3 Any person against
whom a cease and desist order was issued may, within five (5) days from
receipt of the order, file a formal request for a lifting thereof. Said
request shall be set for hearing by the Commission not later than fifteen
(15) days from its filing and the resolution thereof shall be made not
later than ten (10) days from the termination of the hearing. If the
Commission fails to resolve the request within the time herein
prescribed, the cease and desist order shall automatically be lifted.
Hence, as cited above, instead of filing an appeal with the CA, X and Y
should have filed a motion to lift the assailed CDO.

8. X met with Corpo Z’s official, who induced him into signing a subscription
agreement for the purchase of securities of A. Upon verification with the SEC, X
learned that the securities were not duly registered securities. X also learned
that A and Corpo Z, are not duly-registered security issuers, brokers, dealers or
agents. X filed with the SEC a complaint for violation of the SRC against Corpo Z
and its officials.  7 years since X invested his funds, and 3 years since X's
discovery of the alleged offenses had already lapsed at the time of the filing of
the complaint.
a. Is the complaint barred by prescription?
b. Did Corpo Z commit violations of the SRC?
Suggested answer:
a. Section 54 of the SRC provides for the administrative sanctions to be
imposed against persons or entities violating the Code, its rules or SEC
orders. The SRC did not provide a prescriptive period for the filing of
criminal actions. It likewise omitted to provide for the period until when
complaints for administrative liability under the law should be initiated.
On this score, it is a well-settled principle of law that laches is a recourse
in equity, which is, applied only in the absence of statutory law.
Considering the interval between the discovery and the filing of the
complaint, laches does not lie in this case.
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 b. Yes. Section 28 provides: No person shall engage in the business of
buying or selling securities in the Philippines as a broker or dealer, or act
as a salesman, or an associated person of any broker or dealer unless
registered as such with the Commission. Section 8.1 provides: 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.

9. Corpo Z failed to timely file its Annual Report and Quarterly Reports pursuant
to Section 17.3 of the SRC. SEC issued an Order revoking Corpo Z’s Registration
of Securities and Permit to Sell Securities to the Public. Corpo Z sought for
reconsideration. SEC granted the motion to lift the revocation order filed by
Corpo Z. Thereafter, Corpo Z failed again to comply with the same reportorial
requirements.
a. May the SEC revoke the registration of securities of Corpo Z?
b. Assuming no notice of revocation is given as required by the SRC, is the
revocation of the registration still proper?
Suggested answer:
a. Yes. The Commission may revoke the effectivity of a registration
statement and the registration of the security thereunder after due
notice and hearing by issuing an order to such effect, setting forth its
findings in respect thereto, if it finds that: the issuer has violated any of
the provisions of SRC.
b. Yes. While the SRC requires notice, Corpo Z was already heard. The
essence of due process is simply an opportunity to be heard, or as
applied to administrative proceedings, an opportunity to explain one's
side or an opportunity to seek a reconsideration of the action or ruling
complained of. Any seeming defect in its observance is cured by the
filing of a motion for reconsideration, and denial of due process cannot
be successfully invoked by a party who has had the opportunity to be
heard on such motion. What the law prohibits is not the absence of
previous notice, but the absolute absence thereof and the lack of
opportunity to be heard.|

10. X Golden Care is a stock corporation engaged in the offering of health care
plan which provides for the payment of future monetary considerations at the
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 time of hospitalization, for which plan holders pay in cash. The plan is effective
for 10 years. The holders are called X Golden Care Card Holders or, simply,
Golden Care Members.
a. What is the nature of the security offered by X Golden Care?
b. What is the requisite for the offering of health care plan by X Golden
Care?
Suggested answer:
a. The security is a pre-neeed plan. Under Section 3.9 of SRC, "Pre-need
plans" are contracts which provide for the performance of future
services or the payment of future monetary considerations at the time
of actual need, for which planholders pay in cash or installment at stated
prices, with or without interest or insurance coverage and includes life,
pension, education, interment, and other plans which the Commission
may from time to time approve.
b. Section 16 of the SRC provides: No person shall sell or offer for sale to
the public any pre-need plan except in accordance with rules and
regulations which the Commission shall prescribe. Such rules shall
regulate the sale of pre-need plans by, among other things, requiring the
registration of pre-need plans, licensing persons involved in the sale of
pre-need plans, requiring disclosures to prospective plan holders,
prescribing advertising guidelines, providing for uniform accounting
system, reports and record keeping with respect to such plans, imposing
capital, bonding and other financial responsibility, and establishing trust
funds for the payment of benefits under such plans.

11. Corpo Z is a corporation engaged in the business of manufacturing wearing

apparel. Sometime, one of its main factories was gutted by fire, thereby
destroying all its machineries and equipment used for the business. Before this
information could be disclosed to the public, Dutz, the President of Corpo Z,
sold his 20,000 shares. He also mentioned the fire incident to his friend, X, also
a stockholder of Corpo Z. X likewise sold his shares.
a. Is X an insider?
b. Should Dutz and X be held liable for insider trading?
Suggested answer:
a. Yes. "Insider" means: (a) the issuer; (b) a director or officer (or person
performing similar functions) of, or a person controlling the issuer; (c) a
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 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-
regulatory organization 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. Here, X falls under letter e of the definition,
considering that he acquires the information from an officer-insider.
b. Yes. 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. The
exceptions are not present in the instant case.

12.Corpo Z sells securities to not more than fifteen (15) persons in one year. The
securities, however, were not registered with the SEC.
a. Is registration of the securities sold by Corpo Z required?
b. What should Corpo Z do to dispense with the registration of the
securities?
Suggested answer:
a. No. The requirement of registration under shall not apply to the sale of
securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period. Considering that the public
is not affected, the transaction is deemed exempt from registration.
b. Any person applying for an exemption 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.

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13. X is a stock corporation listed on an exchange. It has assets of P100 000 000.00
and 150 stockholders, 70 of them holding not less than 100 shares of such
company.
a. Is X a public company?
b. What corporate documents shall be filed by X?

Suggested answer:
a. Yes. A public company is defined as a corporation which is listed on an
exchange, or a corporation with assets exceeding P50, 000, 000.00 and
with 200 or more stockholders, at least 200 of them holding not less
than 100 shares of such company. Considering that X was already listed
on an exchange, it is no longer necessary to determine the value of its
assets nor the number of stockholders and their respective shares.
b. Within one hundred thirty-five (135) days, after the end of the issuer's
fiscal year, or such other time as the Commission may prescribe, an
annual report which shall include, among others, a balance sheet, profit
and loss statement and statement of cash flows, for such last fiscal year,
certified by an independent certified public accountant, and a
management discussion and analysis of results of operations.

14. X is a non-listed company with assets of P100 000 000.00. It has more than 300
stockholders, 226 of them are holding at least 100 shares.
a. Is X required to comply with the reportorial requirements?
b. What happens if the number of its holders holding at least one hundred
(100) shares is reduced to less than one hundred (100)?
Suggested answer:
a. Yes. Section 17.2 provides: The reportorial requirements of Subsection
17.1 shall apply to the following: (c) An issuer with assets of at least
Fifty million pesos (P50,000,000.00) or such other amount as the
Commission shall prescribe, and having two hundred (200) or more
holders each holding at least one hundred (100) shares of a class of its
equity securities. Section 17.1 provides: Every issuer satisfying the
requirements in Subsection 17.2 hereof shall file with the Commission:
(a) Within one hundred thirty-five (135) days, after the end of the
issuer's fiscal year, or such other time as the Commission may prescribe,

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 an annual report which shall include, among others, a balance sheet,
profit and loss statement and statement of cash flows, for such last fiscal
year, certified by an independent certified public accountant, and a
management discussion and analysis of results of operations; and (b)
Such other periodical reports for interim fiscal periods and current
reports on significant developments of the issuer as the Commission
may prescribe as necessary to keep current information on the operation
of the business and financial condition of the issuer.
b. The obligation of such issuer to file reports shall be terminated ninety
(90) days after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100) shares is
reduced to less than one hundred (100).

15. X, a Filipino citizen, is 30 years of age. He is a member of the Philippine Bar. He

was appointed by the President to serve as one of the commissioners of the
Securities Exchange Commission.
a. Is X qualified to serve as Commissioner?
b. Assuming he is qualified to serve as Commissioner, may the Commission
delegate its review or appellate authority to X alone?
Suggested answer:
a. No. X is not qualified to serve as Commissioner. The Commissioners
must be natural-born citizens of the Philippines, at least forty (40) years
of age for the Chairperson and at least thirty-five (35) years of age for
the Commissioners
b. No. Section 4.6 of SRC provides: The Commission may, for purposes of
efficiency, delegate any of its functions to any department or office of
the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its power to
adopt, alter and supplement any rule or regulation.

16. The registration statement of Corpo X was approved by the SEC. However,
Corpo X was enjoined by the SEC for engaging in manipulative devices and
practices which create distortions in the free market.
a. May the Commission revoke the effectivity of Corpo X’s registration
statement and the registration of the security?

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 b. Assuming it was a foreign court which restrained Corpo X from further
committing fraudulent practices, may the SEC revoke the effectivity of
Corpo X’s registration statement?
Suggested answer:
a. Yes. The Commission may reject a registration statement and refuse
registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder
after due notice and hearing by issuing an order to such effect, setting
forth its findings in respect thereto, if it finds that: (c) The issuer, any
officer, director or controlling person of the issuer, or person performing
similar functions, or any underwriter has been convicted, by a
competent judicial or administrative body, upon plea of guilty, or
otherwise, of an offense involving moral turpitude and/or fraud or is
enjoined or restrained by the Commission or other competent judicial or
administrative body for violations of securities, commodities, and other
related laws (Section 13 (c), SRC).
b. Yes. For purposes of this subsection (Sec. 13 (c) above), the term
"competent judicial or administrative body" shall include a foreign court
of competent jurisdiction as provided for under the Rules of Court.

17. In 2014, the certification of proxies was made in favour of Corpo Z

management. The proxy was validated for purposes of removing the directors
of Corpo Z. During the same year, Corpo Z’s stockholders’ special meeting was
held for the election of directors.
a. May the proxy vote for the election of directors of Corpo Z?
b. May the proxy vote for the removal of Corpo Z’s director come 2020?
c. What happens if the name of the proxy is left in blank?
Suggested answer:
a. No. Unless otherwise provided in the proxy, it shall be valid only for the
meeting for which it is intended. Here, the proxy was validated for
purposes of removal, not election, of the directors of Corpo Z.
b. No. No proxy shall be valid and effective for a period longer than five (5)
years at one time.
c. If the name of the proxy is left in blank, the person to whom it is given or
the issuer corporation receiving the proxy is at liberty to fill in any name

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 he/it chooses (2015 Implementing Rules and Regulations of the
Securities Regulation Code, IRR of RA 8799, [August 4, 2015]).

18. X, a broker, buys and sells securities for customer Y. X gave Ana a proxy in
respect of the security carried for the account of customer Y. This is without
the express authorization of customer Y.
a. Is the proxy valid?
b. Assuming X acquires the proxy for at least ten per centum (10%) of the
outstanding share of the issuer, what is his obligation?
Suggested answer:
a. No. Under the SRC, no broker or dealer shall give any proxy, consent or
authorization, in respect of any security carried for the account of a
customer, to a person other than the customer, without the express
written authorization of such customer.
b. A broker or dealer who holds or acquires the proxy for at least ten per
centum (10%) or such percentage as the Commission may prescribe of
the outstanding share of the issuer, shall submit a report identifying the
beneficial owner within ten (10) days after such acquisition, for its own
account or customer, to the issuer of the security, to the Exchange
where the security is traded and to the Commission.

19. Corpo Z is a corporation with a class of equity securities listed for trading on
an Exchange. X is an officer of Corpo Y, a parent corporation of Corpo Z.
a. Is Corpo Z required to have independent directors?
b. May X qualify as an independent director?
Suggested answer:
a. Yes. Under Section 38 of the SRC, a corporation with a class of equity
securities listed for trading 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 of two hundred (200) of which are holding at least
one hundred (100) shares of a class of its equity securities or which has
sold a class of equity securities to the public pursuant to an effective
registration statement shall have at least two (2) independent directors
or such independent directors shall constitute at least twenty percent
(20%) of the members of such board, whichever is the lesser.

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 b. No. For this purpose, an "independent director" shall mean a person
other than an officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with the
corporation, which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.

20. Broker X, sells for the account of customers, securities listed on an Exchange
issued by Corporation Z. Director D, the director of Broker X is likewise the
director of Corpo Z, the issuer corporation.
a. Did Corpo X violate the SRC?
b. Assuming D is not holding office in Corpo Z, but D’s brother is a director
of Corpo Z, will your answer be the same?
Suggested answer:
a. Yes. Under Section 30, SRC: No broker or dealer shall deal in or
otherwise buy or sell, for its own account or for the account of
customers, securities listed on an Exchange issued by any corporation
where any stockholder, director, associated person or salesman, or
authorized clerk of said broker or dealer and all the relatives of the
foregoing within the fourth civil degree of consanguinity or affinity, is at
the time holding office in said issuer corporation as a director, president,
vice-president, manager, treasurer, comptroller, secretary or any office
of trust and responsibility, or is a controlling person of the issuer.
b. Yes. Section 30 also applies where the relatives of the director of said
broker within the fourth civil degree of consanguinity or affinity, is at the
time holding office in said issuer corporation as a director, president,
vice-president, manager, treasurer, comptroller, secretary or any office
of trust and responsibility, or is a controlling person of the issuer.

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