Atty.

Aquino

Securities & Regulation Code

To determine whether or not a case involves an intra-corporate dispute, two tests are applied -
the relationship test and the nature of the controversy test.

Under the relationship test, there is an intra-corporate controversy when the conflict is (1)
between the corporation, partnership, or association and the public; (2) between the corporation,
partnership, or association and the State insofar as its franchise, permit, or license to operate is
concerned; (3) between the corporation, partnership, or association and its stockholders, partners,
members, or officers; and (4) among the stockholders, partners, or associates themselves.

(1) CPA : Public

(2) CPA : State
(3) CPA : Stockholders
(4) Stockholders : Stockholders

On the other hand, in accordance with the nature of controversy test, an intra-corporate
controversy arises when the controversy is not only rooted in the existence of an intra-corporate
relationship, but also in the enforcement of the parties' correlative rights and obligations under
the Corporation Code and the internal and intra-corporate regulatory rules of the corporation.
(San Jose v. Ozamiz)

Will a dispute between and among stockholders, directors, officers and the corporation be
deemed an intra-corporate controversy?
No, jurisdiction should be determined by considering not only the status or relationship of the
parties, but also the nature of the question under controversy (Reyes v. RTC of Makati; Belo
Medical Group v. Santos)

NOTE: These two cases abandoned the ruling in Tabang v. NLRC where the Court ruled that
“an intra-corporate controversy is one which arises between a stockholder and the corporation.
There is no distinction, qualification, nor any exemption whatsoever.”

Transferred jurisdiction of the RTCs designated as Special Commercial Courts: (FIRES RIIL)
1. Fraudulent devices and schemes employed by directors detrimental to the public interest
and to other firms
2. Intra-corporate and intra-partnership controversies; and controversies between the
corporation, partnership, or association, on one hand, and the State, on the other, insofar
as it concerns their individual franchise or right to exist as such entity
3. Controversies in the election or appointment of directors, trustees, officers or managers of
such corporations, partnerships or associations
4. Petitions of corporations, partnerships or associations to be declared in a state of
suspension of payments in cases where the corporation, partnership or association is
illiquid, or where it is insolvent but is under the management of a rehabilitation receiver
or management committee (Sec. 5.2)
5. Cases governed by FRIA for:
1) Rehabilitation of sole proprietorships
2) Insolvency and liquidation cases of corporations, partnerships and associations
3) Insolvency and suspension of payments or discharge of individuals
6. Liquidation cases emanating from administrative proceedings (Amendment to A.M. No.
03-03-03-SC)
Guidelines on intra-corporate disputes
1. If a commercial case filed before the proper RTC is wrongly raffled to its regular branch,
the proper courses of action are as follows:
a. If the RTC has only one branch designated as a Special Commercial Court, then
the case shall be referred to the Executive Judge for re-docketing as a commercial
case, and thereafter, assigned to the sole special branch;
b. If the RTC has multiple branches designated as Special Commercial Courts, then
the case shall be referred to the Executive Judge for re-docketing as a commercial
case, and thereafter, raffled off among those special branches; and
c. If the RTC has no internal branch designated as a Special Commercial Court, then
the case shall be referred to the nearest RTC with a designated Special
Commercial Court branch within the judicial region. Upon referral, the RTC to
which the case was referred to should re- docket the case as a commercial case,
and then:
a) If the said RTC has only one branch designated as a Special Commercial
Court, assign the case to the sole special branch; or
b) If the said RTC has multiple branches designated as Special Commercial
Courts, raffle off the case among those special branches.
2. If an ordinary civil case filed before the proper RTC is wrongly raffled to its branch
designated as a Special Commercial Court, then the case shall be referred to the
Executive Judge for re-docketing as an ordinary civil case. Thereafter, it shall be raffled
off to all courts of the same RTC (including its designated special branches which, by
statute, are equally capable of exercising general jurisdiction same as regular branches),
as provided for under existing rules.
 3. All transfer/raffle of cases is subject to the payment of the appropriate docket fees in case
of any difference. On the other hand, all docket fees already paid shall be duly credited,
and any excess, refunded.
4. Finally, to avert any future confusion, the Court requires that all initiatory pleadings state
the action's nature both in its caption and body. Otherwise, the initiatory pleading may,
upon motion or by order of the court motu proprio, be dismissed without prejudice to its
re-filing after due rectification. This last procedural rule is prospective in application.
5. All existing rules inconsistent with the foregoing are deemed superseded. (Gonzales v.
GJH Land, Inc., 2015)

SEC v. Subic Bay Golf and Country Club, Inc., 2015, J. Leonen
 Even though the Complaint filed before the Securities and Exchange Commission
contains allegations that are intra-corporate in nature [over which the RTC has original
exclusive jurisdiction by virtue of Section 5, PD 902-a], it does not necessarily oust the
Securities and Exchange Commission of its regulatory and administrative jurisdiction to
determine and act if there were administrative violations committed. The Securities and
Exchange Commission is given regulatory powers and absolute jurisdiction,
supervision and control over all corporations, partnerships or associations. In relation to
securities, the Securities and Exchange Commission's regulatory power pertains to the
approval and rejection, and suspension or revocation, of applications for registration of
securities for, among others, violations of the law, fraud, and misrepresentations. To
ensure compliance with the law and the rules, the Securities and Exchange Commission
is also given the power to impose fines and penalties. It may also investigate motu
proprio whether corporations comply with the Corporation Code, Securities Regulation
Code, and rules implemented by the Securities and Exchange Commission.
 Thus, when Villareal and Filart alleged in their letter-complaint that SBGCCI and
UIGDC committed misrepresentations in the sale of their shares, nothing prevented the
Securities and Exchange Commission from taking cognizance of it to determine if
SBGCCI and UIGDC committed administrative violations and were liable under the
Securities Regulation Code. The Securities and Exchange Commission may investigate
activities of corporations under its jurisdiction to ensure compliance with the law.
 However, the Securities and Exchange Commission's regulatory power does not include
the authority to order the refund of the purchase price of Villareal's and Filart's shares in
the golf club. The issue of refund is intra-corporate or civil in nature. Similar to issues
such as the existence or inexistence of appraisal rights, pre-emptive rights, and the right
to inspect books and corporate records, the issue of refund is an intra-corporate dispute
that requires the court to determine and adjudicate the parties' rights based on law or
contract. Injuries, rights, and obligations involved in intra-corporate disputes are specific
to the parties involved. They do not affect the Securities and Exchange Commission or
the public directly.
Howey Test
It is a test to determine an investment contract: “contract where a person invests his money in a
common enterprise and is led to expect profits solely from the efforts of others.” In the
Philippines, we follow a flexible or modified Howey Test which replaces the word “solely” with
“primarily.” Hence, investment contracts are defined under the Implementing Rules and
Regulations of the SRC as “contract, transaction, or scheme whereby a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of
others.”

Elements of investment contract: (CIIPP)

1. A contract, transaction, or scheme;
2. An investment of money;
3. Investment is made in a common enterprise;
4. Expectation of profits; and
5. Profits arising primarily from the efforts of others. (SEC v. Prosperity.Com citing SEC v.
W.J. Howey Co.)
Under the SRC, Special Commercial Courts have exclusive original jurisdiction over
controversies between the corporation, partnership or association, on one hand, and the
State, on the other, regarding franchise. Does this include the ABS-CBS controversy
before?
Yes, the SEC, as special commercial court, has jurisdiction.

Exempt securities Exempt transactions

 a. Government issued or guaranteed a. Judicial and insolvency sale
securities. Includes foreign b. Liquidation of security by lien holder
government c. Isolated transaction by owner
b. Receiver or trustee in bankruptcy d. Stock dividend
issued certificate e. Exclusive stockholders’ purchase
c. Securities supervised and regulated by f. Mortgage-backed securities sold to
Insurance Commission, HLURB and single purchaser at single sale
BIR g. Conversion of security (same issuer)
d. Bank securities except bank’s own h. Broker’s transactions
shares (Sec. 9.1) i. Subscription (pre-incorporation or
increase of authorized capital stock)
j. Exchange of securities by issuer with
stockholders exclusively
k. Private placement (sale to fewer than
20 in any 12-month period)
l. Qualified buyers (Sec. 10.1)

These securities are exempt from registration requirement under the SRC

Debt securities can be issued by the bank but an exempt security except if its own shares of stock

In exempt transactions, the securities are not exempt but the transaction is exempted from
registration transaction

Once exempt, there is no need for a declaration from SEC that the transaction is exempted.
However, nothing prevents a person from obtaining such declaration.
Requisites of insider trading: (TIM)
1. There must be trading
2. There must be an insider
3. Material non-public information

Material non-public information (MNI)

Material information about the security or the issuer that is not generally available to the public.
Information is material when it will affect the price of the security or would influence a person
in deciding whether to buy, sell, or hold a security.

Who are insiders? (TRIGoD)

a. Person who learns material non-public information by a communication from any of the
RIGoD. This person is called the “tippee.”
b. Person whose relationship or former relationship to the issuer gives or gave him access to
material non-public information
c. Issuer
d. Government employee, director or officer of an exchange, clearing agency, and/or self-
regulatory organization who has access to material non-public information
e. Director or officer of the issuer or a person controlling the issuer
Mr. P, the President of JKL, Inc. which shares are listed in the Philippine Stock Exchange,
was notified that the corporation has just been awarded a ₱5,000,000,000.00 construction
contract by a reputable private company. Before this information could be disclosed to the
public, Mr. P called his stockbroker to purchase 20,000 shares of JKL, Inc. He also
mentioned the transaction to his brother, Mr. B. Mr. B, who was not involved at all in the
business of JKL, Inc., also bought 50,000 shares of JKL, Inc. because of the tip disclosed to
him by Mr. P.

a. Is the information disclosed by Mr. P to Mr. B considered as material nonpublic

information for purposes of insider trading? Explain.
Yes, the information disclosed by Mr. P to Mr. B is considered as material non-public
information for purposes of insider trading.

Information is considered as material non-public information if such information would

likely affect the market price of the security if it is disseminated to the public and
reasonable time is allowed for the market to absorb the information.

The award in favor of JKL, Inc. would likely affect the market price of its securities
should the information regarding the said award has been disseminated to the public and
reasonable time is allowed for the market to absorb the information.

b. Should Mr. P and Mr. B be held liable for insider trading? Explain. (2019 Bar)
The directors, officers, any stockholder controlling the issuer, any person, by reason of
relationship, gains or gives him access to material non-public information like lawyers,
 accountants, advisers, managers; employee or official of the stock exchange who, by
reason of their position, gives their material non-public information; another person who
learns any of these information from an insider.

Mr. P., as a corporate officer of JKL is liable for insider trading. Mr. B, as a person who
learns material non-public information from Mr. P, an insider, is likewise liable for
insider trading.

c. If Mr. B also informed Mr. C about the transaction which Mr. A disclosed, is Mr. C
liable for insider trading?
No, because Mr. C is not considered an insider. He did not learn about the transaction
from RIGoD (e.g. Mr. A) but from Mr. B, a tipee.
Mandatory tender offer rule
It requires the offeror to make a tender offer not just to those with sizable stockholdings but to all
stockholders, including minority stockholders. The purpose of the tender offer rule is to protect
the minority stockholders against the dilution of the value of their shares. The rule applies if the
target is a:
a. Listed corporation;
b. Corporations with assets of at least P50 Million and having at least 200 stockholders with
at least 100 shares each; or
c. Acquisition is less than 35% but the ownership would result to over 50% of the total
outstanding equity securities of the public company (Cemco Holding, Inc. v. National
Life Insurance Co.)
A person or group of persons who intends to acquire at least 15% of the shares of such
corporation or who intends to acquire at least 30% of the shares over a period of 12 months shall
make a tender offer. (The SRC increased the threshold percentage from 15% and 30% to
35%)

ABC Corp. is a company which shares are listed in the Philippine Stock Exchange. In 2015,
25% of ABC Corp.’s shareholdings were acquired by XYZ, Inc., while 40% of the same
were acquired by RST, Inc., both of which are non-listed private corporations. Meanwhile,
the remaining 35% of ABC Corp.’s shareholdings are held by the public.

In 2018, or three years (3) after it acquired its 25% stake in ABC Corp., XYZ, Inc. sought
to obtain an additional 12% shareholding in ABC Corp. by purchasing some of the shares
owned by RST, Inc. therein. The new acquisition will not, however, result in XYZ, Inc.
gaining majority control of ABC Corp.’s Board.

Is XYZ, Inc. required to conduct a tender offer? Explain. (2019 Bar)

No, XYZ, Inc. is not required to conduct a tender offer.

According to the law, a tender offer is required when any person or group of persons acting in
concert, who intends to acquire 35% or more of the outstanding voting share 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 equity shares in a public company. (See
Sundiang and Aquino, 2017, p. 307)

While XYZ, Inc. was able to acquire 35% of the outstanding voting share of ABC Corp., a
public company, it did not do so within a 12-month period as required by law, but rather in a 3-
year period. Hence, the tender offer rule does not apply in this case.
Take note of merger as an exception
Wash sale
Any transaction in a security which involves
no change in the beneficial ownership thereof
Illegal, if used as a means to create a false or
misleading appearance of active trading in the
security concerned; otherwise, it is legal
Short sale
Selling of security which the vendor does not
own because he merely borrowed it
Legal, if done in accordance with the rules
and regulations of the SEC; otherwise, it is
illegal