NOTES ON BUSINESS LAW

Prepared by: Atty. Javier Benjamin M. Tongol, RN

VIII. SECURITIES REGULATION CODE

Securities defined:

Sec. 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:
i. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed
securities;
ii. Investment contracts, certificates of interest or participation in a profit-sharing
agreement, certifies of deposit for a future subscription;
iii. Fractional undivided interests in oil, gas or other mineral rights;
iv. Derivatives like option and warrants;
v. Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments;
vi. Proprietary membership or nonproprietary certificates in corporations; and
vii. Other instruments as may in the future be determined by the Commission

Kinds of Securities

1. Exempt Securities [Sec. 9]

The requirement of registration shall not, as a general rule, apply to any of the following
classes of securities:

1. Any security issued or guaranteed by the Government of the Philippines, its political
subdivision or agency, its instrumentality, or any person controlled or supervised thereby.

a. 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.

b. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the

proper adjudicatory body.

c. 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 Commission, Housing and Land
Use Rule Regulatory Board, or the Bureau of Internal Revenue.

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d. Any security issued by a bank except its own shares of stock. [Sec. 9.1]

e. Any class of security with respect to which the SEC finds that registration is not
necessary in the public interest and for the protection of investors. [Sec. 9.2]

2. Exempt Transactions [Sec. 10]

The requirement of registration shall not apply to the sale of any security in any of the
following transactions:

1. At any judicial sale, or sale by an executor, administrator, guardian or receiver or

trustee in insolvency or bankruptcy.

2. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder
selling or offering for sale or delivery in the ordinary course of business and not for the
purpose of avoiding the provision of this Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt.

3. 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

4. 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

5. 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

6. The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, when the entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale

7. 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 provision 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.

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8. Broker’s transaction, executed upon customer’s orders, on any registered Exchange
or other trading market.

9. Subscriptions for shares of the capitals stock of a corporation prior to the incorporation
thereof or in pursuance of an increase in its authorized capital stocks, when no expense
is incurred, or no 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 subscription 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.

10. The exchange of securities by the issuer with the existing security holders exclusively,
where no commission or other remuneration is paid or given directly or indirectly for
soliciting such exchange.

11. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines
during any twelve-month period.

12. Any transaction with respect to which the SEC finds that registration is not necessary
in the public interest and protection of investors, such as by reason of the small amount
involved or the limited character of the public offering. [Sec. 10.2]

Howey Test

The Howey test is used order to determine if a particular transaction is an investment

contract that requires registration. The SRC 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 personinvests his
money in a common enterprise and is led to expect profits primarily from the efforts of
others. [SEC v. Prosperity.com, Inc, G.R. No. 164197 (2012)]

To be a security subject to regulation by the SEC, an investment contract in our

jurisdiction must be proved to be:
1. An investment of money,
2. In a common enterprise,
3. With expectation of profits,
4. Primarily from efforts of others. [Power Homes Unlimited Corp. v. SEC and Manero,
G.R. No. 164182 (2008)]

A scheme wherein an investor enrolls to be entitled to recruit other investors, and to

receive commissions from the investments of those directly recruited by him, constitutes
an investment contract, which is a security under RA 8799. Under the scheme, the
accumulated amount received by the investor comes primarily from the efforts of his
recruits.[Power Homes Unlimited Corp. v. SEC and Manero, G.R. No. 164182 (2008)]

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3. Non-exempt transactions

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.

Registration

General rule: Securities are prohibited to be sold or offered for sale or distribution within
the Philippines:
a) Without registration statement duly filed with and approved by SEC; and
b) Prior to such sale, information on the securities, in such form and with such substance
as SEC may prescribe, must be made available to each prospective purchaser.

Exceptions
a) Exempt securities [Sec. 9]
b) Exempt transactions [Sec. 10]

Prohibitions on Fraud, Manipulation and Insider Trading

1. Manipulation of security prices [Sec. 24]

a. It shall be unlawful for any person acting for himself or through a dealer or broker,
directly or indirectly:

1) To create a false or misleading appearance of active trading in any listed security

traded in an Exchange or any other trading market ("Exchange"):

Wash sales - By effecting any transaction in such security which involves no change in
the beneficial ownership thereof;

Matched orders - 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

Market rigging or jiggling - By performing similar act where there is no change in beneficial
ownership.

2) To effect, alone or with others, a series of transactions in securities that:

1. Raises their price to induce the purchase of a security, whether of the same or a
different class of the same issuer;

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2. Depresses their price to induce the sale of a security, whether of the same or a different
class of the same issuer; or

3. 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.

3) 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.

4) 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.

5) 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. [Sec. 24.1]

c. No person shall use or employ, in connection with the purchase or sale of any security
any manipulative or deceptive device or contrivance. [Sec. 24.2]

2. Short sales [Rule 24.2-2, 2015 SRC IRR]

No short sale shall 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 for
the protection of investors. [Sec. 24.2]

3. Option trading [Sec. 25]

Prohibition on Option Trading under 2015 SRC-IRR 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.

Options – contracts that give the buyer the right, but not the obligation to buy or sell an
underlying security at a predetermined price on or before a predetermined date. [Rule
3.1.9.1]

4. Fraudulent transactions [Sec. 26]

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Fraudulent Transactions It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of any securities to employ any device, scheme, or
artifice to defraud; [Sec. 26.1]

i. Obtain money or property by means of any untrue statement of a material fact or 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 [Sec. 26.2]

ii. Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person [Sec. 26.3]
‘Material fact or information’ means: Any fact or information that may result in a change
in the market price or value of any of the issuer’s securities, or may potentially affect the
investment decision of an investor. [Sec. 3.1.12., 2015 SRC-IRR]

5. Insider trading [Sec. 61]

An ‘Insider’ means:
a. The issuer;
b. A director or officer (or any person performing similar functions) 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, 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. [Sec. 3.8]

‘Material non-public information’ means: 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 it
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. [Sec. 27.2]

Protection of Shareholder Interests

1. Tender offer rule

Definition Tender Offer is a publicly announced intention by a person acting alone or in

concert with other persons to acquire:
a. Outstanding equity securities of a public company, or
b. Outstanding equity securities of an associate or related company of such public
company which controls the said public company.

A public company means any corporation:

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1) With a class of equity securities listed on an Exchange, or
2) With assets in excess of Fifty million pesos and having 200 or more holders each
holding at least 100 shares of a class of its equity securities. [Sec. 3.1, 2015 SRC-IRR]

Purpose of Tender Offer

Tender offer is in place to protect minority shareholders against any scheme that dilutes
the share value of their investments by:
i. Giving them the chance to exit the company under reasonable terms,
ii. Giving them the opportunity to sell their shares at the same price as those of the
majority shareholders. [Cemco Holdings, Inc. v. National Life Insurance Company of the
Philippines, G.R. No. 171815 (2007)]

The rules aim to protect minority owners who may be left out, if the buyers extend the
offer only to strategic partners or majority owners of a company.

MANDATORY TENDER OFFER [Rule 19.2, 2015 SRC-IRR] Tender offer is mandatory
whenever any person or group of persons acting in concert intends to:

a. Acquire fifteen percent (15%) of equity securities in a public company in one or more
transactions within a period of 12 months.

b. Acquire thirty five percent (35%) or more of the outstanding voting shares or such
outstanding voting shares that are sufficient to gain control of the board in a public
company in one or more transactions within a period of 12 months;

c. Acquire thirty five percent (35%) or more of the outstanding voting shares or such
outstanding voting shares that are sufficient to gain control of the board in a public
company directly from one or more stockholders;

d. Acquire any number of shares that would result in ownership of over fifty percent (50%)
of the total outstanding equity securities of a public company.

2. Proxy Solicitation

Proxy Solicitation involves the securing and submission of proxies. It is where the
corporation obtains proxies of the stockholders to vote on corporate matters. [GSIS v.
CA, G.R. No. 183905 (2009)]

Requirements

Proxies must be:

a. Issued and solicited in accordance with SEC rules and regulations [Sec. 20.1]
b. In writing [Sec. 20.2]
c. Signed by the stockholder or his duly authorized representative [Sec. 20.2]
d. Filed before the scheduled meeting with the corporate secretary [Sec. 20.2]

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e. Valid only for the meeting for which it is intended unless otherwise provided in the proxy
[Sec. 20.3]

Note: No proxy shall be valid and effective for a period longer than five (5) years at one
time. [Sec. 20.3]

3. Disclosure rule

Issuers, equity holders, and insiders are subject to certain reportorial requirements under
the SRC.

(A) Disclosure by The Issuer [Sec. 17]

To the SEC
1. Annual Report filed 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;
2. 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.
[Sec. 17.1]

(B) Disclosure by Equity Holders [Sec. 18]

Reports by Five per centum Holders of Equity Securities [Sec. 18]

In every case in which an issuer is subject to the reportorial requirements, any person
who acquires directly or indirectly the beneficial ownership of more than five of per centum
(5%) of such class or in excess of such lesser per centum as the Commission by rule may
prescribe, shall, within 10 days after such acquisition or such reasonable time as fixed by
the Commission.

(C) Disclosure by Insider

An insider has the duty to disclose material information with respect to the issuer or the
security that is not generally available to the public when selling or buying securities of
the issuer. [Sec. 27.1]

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