SRC cases

ARIZALA, KIMBERLY Q. March 9, 2018 Case digests- Corporation Law (friday 5:30-7:00pm) Power Homes Unlimited Corporation vs. Securities and Exchange Commission 546 SCRA 567 , February 26, 2008 FACTS: Petitioner is a domestic corporation duly registered with Public Respondent SEC, and is engaged in the transaction of promoting, acquiring, managing, leasing, obtaining options on, development, and improvement of real estate properties for subdivision and allied purposes, and in the purchase, sale and/or exchange of said subdivision and properties through network marketing. Public Respondent SEC acted on the letters of Respondent Noel Manero and a certain Romulo Munsayac, Jr. Manero alleged that in a seminar he attended, Petitioner claimed that it sells properties that were inexistent and without any broker’s license. Munsayac on the other hand, inquired whether Petitioner’s business is legitimate or not. After investigation, Public Respondent SEC found out that Petitioner is engaged in the sale or offer for sale or distribution of investment contracts, which are considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The Securities Regulation Code), but failed to register them in violation of Sec. 8.1 of the same Act,Public Respondent SEC issued a Cease and Desist Order against Petitioner. Petitioner filed this petition for review after the Court of Appeals denied its petition for lack of merit and affirmed in toto Public Respondent’s Cease and Desist Order. ISSUES: Whether or not Public Respondent SEC followed due process in the issuance of the assailed Cease and Desist Order; Whether or not Petitioner’s business constitutes an investment contract which should be registered with Public Respondent SEC before its sale or offer for sale or distribution to the public. RULING: The Court held that Petitioner was not denied of due process.The records reveal that Public Respondent SEC properly examined petitioners business operations when it (1) called into conference three of petitioners incorporators, (2) requested information from the incorporators regarding the nature of petitioners business operations, (3) asked them to submit documents pertinent thereto, and (4) visited petitioners business premises and gathered information thereat. All these were done before the CDO was issued by the Public Respondent SEC.  The Court ruled that Petitioner’s business constitutes an investment contract, thus, should be registered with Public Respondent SEC before its sale or offer for sale of distribution to the public. To determine whether a transaction falls within the scope of an investment contract, the Court made use of the Howey Test which provides that an investment contract requires a transaction, contract, or scheme 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. Ciiting SEC v. Glenn W. Turner Enterprises, Inc. et al., the Court therefore ruled that the business operation or the scheme of Petitioner constitutes an investment contract that is a security under R.A. No. 8799. Thus, it must be registered with Public Respondent SEC before its sale or offer for sale or distribution to the public. As petitioner failed to register the same, its offering to the public was rightfully enjoined by Public Respondent SEC. The CDO was proper even without a finding of fraud.  PETITION IS DENIED. Reyes vs. Regional Trial Court of Makati, Br. 142 561 SCRA 593 , August 11, 2008 FACTS: Petitioner and private respondent were siblings together with two others, namely Pedro and Anastacia, in a family business established as Zenith Insurance Corporation (Zenith), from which they owned shares of stocks. The Pedro and Anastacia subsequently died. The former had his estate judicially partitioned among his heirs, but the latter had not made the same in her shareholding in Zenith. Zenith and Rodrigo filed a complaint with the Securities and Exchange Commission (SEC) against petitioner (1) a derivative suit to obtain accounting of funds and assets of Zenith, and (2) to determine the shares of stock of deceased Pedro and Anastacia that were arbitrarily and fraudulently appropriated [by Oscar, and were unaccounted for]. In his answer with counterclaim, petitioner denied the illegality of the acquisition of shares of Anastacia and questioned the jurisdiction of SEC to entertain the complaint because it pertains to settlement of [Anastacia’s] estate. The case was transferred to. Petitioner filed Motion to Declare Complaint as Nuisance or Harassment Suit and must be dismissed. RTC denied the motion. The motion was elevated to the Court of Appeals by way of petition for certiorari, prohibition and mandamus, but was again denied. ISSUES: (1) Whether or not Rodrigo may be considered a stockholder of Zenith with respect to the shareholdings originally belonging to Anastacia. (2) Whether or not there is an intra-corporate relationship between the parties that would characterize the case as an intra-corporate dispute? RULINGS: (1) No. Rodrigo must, hurdle two obstacles before he can be considered a stockholder of Zenith with respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of the decedent’s estate. No such proceeding has been commenced to date. Second, he must register the transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that this be done unless and until he has established his specific allotment (and prima facie ownership) of the shares. Without the settlement of Anastacia’s estate, there can be no definite partition and distribution of the estate to the heirs. Without the partition and distribution, there can be no registration of the transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the existence of an intra-corporate relationship as premise for an intra-corporate controversy within the jurisdiction of a special commercial court. The subject shares of stock (i.e., Anastacia’s shares) are concerned – Rodrigo cannot be considered a stockholder of Zenith. (2) No. Court cannot declare that an intra-corporate relationship exists that would serve as basis to bring this case within the special commercial court’s jurisdiction under Section 5(b) of PD 902-A, as amended because Rodrigo’s complaint failed the relationship test above. CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC. GR No. 171815, August 7, 2007 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. In a disclosure letter, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco BCI’sstocks in UCHC equivalent to 21.31% and ACC’s stocks in UCHC equivalent to 29.69%.  As a consequence of this disclosure, the PSE inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC. The SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule. Feeling aggrieved by the transaction, respondent National Life Insurance Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter toCemco demanding the latter to comply with the rule on mandatory tender offer.  Cemco, however, refused.  Respondent National Life Insurance Company of the Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. The SEC ruled in favor of the respondent by reversing and setting aside its 27 July 2004 Resolution and directed petitioner Cemco to make a tender offer for UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in accordance with Section 9(E), Rule 19 of the Securities Regulation Code.  On petition to the Court of Appeals, the CA rendered a decision affirming the ruling of the SEC.  It ruled that the SEC has jurisdiction to render the questioned decision and, in any event, Cemcowas barred by estoppel from questioning the SEC’s jurisdiction.  It, likewise, held that the tender offer requirement under the Securities Regulation Code and its Implementing Rules applies to Cemco’s purchase of UCHC stocks. Cemco’s motion for reconsideration was likewise denied. ISSUES:  Whether or not the SEC has jurisdiction over respondent’s complaint and to require Cemco to make a tender offer for respondent’s UCC shares. 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. HELD: YES. In taking cognizance of respondent’s complaint against petitioner and eventually rendering a judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to Rule 19(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 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. Moreover, petitioner is barred from questioning the jurisdiction of the SEC.  It must be pointed out that petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. YES. 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.[12]  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.[13]  Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer.[14]  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. The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC 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.  As appropriately held by the Court of Appeals: “What is decisive is the determination of the power of control.  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.xxx” Securities and Exchange Commission vs. Interport Resources Corporation 567 SCRA 354 , October 06, 2008 Nature: Petition for review on certiorari, under Rule 45 of the Rules of Court, of a decision of the Court of Appeals Doctrines: No implementing rules were needed to render effective Sections 8, 30, and 36 of the Revised Securities Act; nor was the PED Rules of Practice and Procedure invalid, prior to the enactment of the Securities Regulations Code, for failure to provide parties with the right to cross-examine the witnesses presented against them. Thus, the respondents maybe investigated by the appropriate authority under the proper rules of procedure of the Securities Regulations Code for violations of Sections 8, 30, and 36 of the Revised Securities Act. Facts: 6 Aug 1994 – Board of Directors of IRC approved a Memorandum of Agreement (MoA) with Ganda Holdings Berhad (GHB). Under the MoA, IRC acquired 100% or the entire capital stock of Ganda Energy Holdings, Inc. (GEHI), which would own and operate a 102 megawatt gas turbine power-generating barge. Also stipulated is that GEHI would assume a five-year power purchase contract with National Power Corp. At that time, GEHI’s power-generating barge was 97% complete and would go on-line by mid-Sept 1994. In exchange, IRC will issue to GHB 55% of the expanded capital stock of IRC (amounting to 40.88 billion shares – total par value of P488.44 million) On the side, IRC would acquire 67% of the entire capital stock of Philippine Racing Club, Inc. (PRCI). PRCI owns 25.724 hectares of real estate property in Makati. Under the Agreement, GHB, a member of the Westmont Group of Companies in Malaysia, shall extend or arrange a loan required to pay for the proposed acquisition by IRC of PRCI. 8 Aug 1994 – IRC alleged that a press release announcing the approval of the agreement was sent through fax to Philippine Stock Exchange (PSE) and the SEC, but that the fax machine of SEC could not receive it. Upon the advice of SEC, IRC sent the press release on the morning of 9 Aug 1994. SEC averred that it received reports that IRC failed to make timely public disclosures of its negotiations with GHB and that some of its directors heavily traded IRC shares utilizing this material insider information. 16 Aug 1994 – SEC Chairman issued a directive requiring IRC to submit to SEC a copy of its aforesaid MoA with GHB and further directed all principal officers of IRC to appear at a hearing before the Brokers and Exchanges Dept (BED) of SEC to explain IRC’s failure to immediately disclose the information as required by the Rules on Disclosure of Material Facts by Corporations Whose Securities are Listed in Any Stock Exchange or Registered/Licensed Under the Securities Act IRC sent a letter to SEC, attaching copies of MoA and its directors appeared to explain IRC’s alleged failure to immediately disclose material information as required under the Rules on Disclosure of Material Facts. 19 Sept 1994 – SEC Chairman issued an Order finding that IRC violated the Rules on Disclosure when it failed to make timely disclosure, and that some of the officers and directors of IRC entered into transactions involving IRC shares in violation of Sec 30, in relation to Sec 36 of the Revised Securities Act. IRC filed an Omnibus Motion (later an Amended Omnibus Motion) alleging that SEC had no authority to investigate the subject matter, since under Sec 8 of PD 902-A, as amended by PD 1758, jurisdiction was conferred upon the Prosecution and Enforcement Dept (PED) of SEC IRC also claimed that SEC violated their right to due process when it ordered that the respondents appear before SEC and show cause why no administrative, civil or criminal sanctions should be imposed on them, and thus, shifted the burden of proof to the respondents. They filed a Motion for Continuance of Proceedings. No formal hearings were conducted in connection with the Motions. 25 Jan 1995 – SEC issued an Omnibus Order: creating a special investigating panel to hear and decide the case in accordance with Rules of Practice and Procedure before the PED, SEC; to recall the show cause orders; and to deny the Motion for Continuance for lack of merit. Respondents filed a petition before the CA questioning the Omnibus Orders and filed a Supplemental Motion wherein they prayed for the issuance of a writ of preliminary injunction. 5 May 1995 – CA granted their motion and issued a writ of preliminary injunction, which effectively enjoined SEC from filing any criminal, civil or administrative case against the respondents. 20 Aug 1998 – CA promulgated a Decision Determined that there were no implementing rules and regulations regarding disclosure, insider trading, or any of the provisions of the Revised Securities Acts which respondents allegedly violated. It found no statutory authority for SEC to initiate and file any suit for civil liability under Sec 8, 30 and 36 of the Revised Securities Act, thus, it ruled that no civil, criminal or administrative proceedings may possibly be held against the respondents without violating their rights to due process and equal protection. It further resolved that absent any implementing rules, the SEC cannot be allowed to quash the assailed Omnibus Orders Further decided that the Rules of Practice and Procedure before the PED did not comply with the statutory requirements contained in the Administrative Code of 1997. Section 9, Rule V of the Rules of Practice and Procedure before the PED affords a party the right to be present but without the right to cross-examine witnesses presented against him, in violation of Sec 12(3), Chap 3, Book VII of the Administrative Code. Issues: 1. Do sections 8, 30, and 36 of the Revised Securities Act require the enactment of implementing rules to make them binding and effective? No. 2. Does the right to cross-examination be demanded during investigative proceedings before the PED? No. 3. May a criminal case still be filed against the respondents despite the repeal of Sections 8, 30, and 36 of the Revised Securities Act? Yes. 4. Did SEC retain the jurisdiction to investigate violations of the Revised Securities Act, re-enacted in the Securities Regulations Code, despite the abolition of the PED? Yes. 5. Does the instant case prescribed already? No. 6. Is CA justified in denying SEC’s Motion for Leave to Quash SEC Omnibus Orders? Yes. Ruling: The petition is impressed with merit. * It should be noted that while the case was pending in SC, RA 8799 (Securities Regulation Code) took effect on 8 August 2000. Section 8 of PD 902-A, as amended, which created the PED, was already repealed as provided for in Sec 76 of Securities Regulation Code. Thus, under the new law, the PED has been abolished, and the Securities Regulation Code has taken the place of the Revised Securities Act. On the merits: Sections 8, 30, and 36 of the Revised Securities Act (RSA) do not require the enactment of implementing rules to make them binding and effective. The mere absence of implementing rules cannot effectively invalidate provisions of law, where a reasonable construction that will support the law may be given. Absence of any constitutional or statutory infirmity, which may concern Secs 30 and 36 of RSA, the provisions are legal and binding. Every law has in its favour the presumption of validity. Unless and until a specific provision of the law is declared invalid and unconstitutional, the same is valid and binding for all intents and purposes. The Court does not discern any vagueness or ambiguity in Sec 30 and 36 of RSA Sec 30 – Insider’s duty to disclose when trading Insiders are obligated to disclose material information to the other party or abstain from trading the shares of his corporation. This duty to disclose or abstain is based on two factors: the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone the inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing. The intent of the law is the protection of investors against fraud, committed when an insider, using secret information, takes advantage of an uninformed investor. In some cases, however, there may be valid corporate reasons for nondisclosure of material information. Where such reasons exist, an issuer’s decision not to make any public disclosures is not ordinarily considered as a violation of insider trading. At the same time, the undisclosed information should not be improperly used for non-corporate purposes, particularly to disadvantage other persons with whom an insider might transact, and therefore the insider must abstain from entering into transactions involving such securities. Sec 36 – Directors, officers and principal stockholders A straightforward provision that imposes upon: a beneficial owner of more than 10 percent of any class of any equity security or a director or any officer of the issuer of such security the obligation to submit a statement indicating his or her ownership of the issuer’s securities and such changes in his or her ownership. Sections 30 and 36 of the RSA were enacted to promote full disclosure in the securities market and prevent unscrupulous individuals, who by their positions obtain non-public information, from taking advantage of an uninformed public. Sec 30 prevented the unfair use of non-public information in securities transactions, while Sec 36 allowed the Sec to monitor the transactions entered into by corporate officers and directors as regards the securities of their companies. The lack of implementing rules cannot suspend the effectivity of these provisions. The right to cross-examination is not absolute and cannot be demanded during investigative proceedings before the PED. Sec 4, Rule 1 of the PED Rules of Practice and Procedure, categorically stated that the proceedings before the PED are summary in nature, not necessarily adhering to or following the technical rules of evidence obtaining in the courts of law Rule V – Submission of documents, determination of necessity of hearing and disposition of case. A formal hearing was not mandatory, it was within the discretion of the Hearing Officer whether there was a need for a formal hearing Since the holding of a hearing before the PED is discretionary, then the right to cross-examination could not have been demanded by either party. Chapter 3, Book VII of the Administrative Code refers to “Adjudication” and does not affect the investigatory functions of the agencies. The law creating PED empowers it to investigate violations of the rules and regulations promulgated by the SEC and to file and prosecute such cases. It fails to mention any adjudicatory functions insofar as the PED is concerned. Thus, PED Rules of Practice need not comply with the provisions of the Administrative Code on adjudication. The only powers which the PED was likely to exercise over the respondents were investigative in nature In proceedings before administrative or quasi-judicial bodies, such as NLRC and POEA, created under laws which authorize summary proceedings, decisions may be reached on the basis of position papers or other documentary evidence only. They are not bound by technical rules of procedure and evidence. It is enough that every litigant be given reasonable opportunity to appear and defend his right and to introduce relevant evidence in his favour, to comply with the due process requirements. The Securities Regulation Code (SRC) did not repeal Sections 8, 30, and 36 of the Revised Securities Act since said provisions were re-enacted in the new law. when the repealing law punishes the act previously penalized under the old law, the act committed before the re-enactment continues to be an offense and pending cases are not affected. Sec 8 of RSA, which previously provided for the registration of securities and the information that needs to be included in the registration statements, was expanded under Sec 12 of the Securities Regulations Code. Further details of the information required to be disclosed by the registrant are explained. Sec 30 of RSA has been re-enacted as Sec 27 of SRC, still penalizing an insider’s misuse of material and non-public information about the issuer, for the purpose of protecting public investors Sec 23 of SRC was practically lifted from Sec 36 of RSA. The legislature had not intended to deprive the courts of their authority to punish a person charged with violation of the old law that was repealed The SEC retained the jurisdiction to investigate violations of the Revised Securities Act, re-enacted in the Securities Regulations Code, despite the abolition of the PED. Sec 53 of SRC clearly provides that criminal complaints for violations of rules and regulations enforced or administered by SEC shall be referred to the DOJ for preliminary investigation, while the SEC nevertheless retains limited investigatory powers. SEC may still impose the appropriate administrative sanctions under Sec 54. The instant case has not yet prescribed. Respondents point out that the prescription period applicable to offenses punished under special laws is 12 years. Since the offense was committed in 1994, they reasoned that prescription set in as early as 2006 and rendered this case moot. It is an established doctrine that a preliminary investigation interrupts the prescription period. A preliminary investigation is essentially a determination whether an offense has been committed, and whether there is probable cause for the accused to have committed as offense. The CA was justified in denying SEC’s Motion for Leave to Quash SEC Omnibus Orders dated 23 October 1995. Since it found other issues that were more important than whether or not the PED was the proper body to investigate the matter, CA denied SEC’s motion for leave to quash SEC Omnibus Orders. In all, the SC rules that no implementing rules were needed to render effective Sections 8, 30, and 36 of the Revised Securities Act; nor was the PED Rules of Practice and Procedure invalid, prior to the enactment of the Securities Regulations Code, for failure to provide parties with the right to cross-examine the witnesses presented against them. Thus, the respondents maybe investigated by the appropriate authority under the proper rules of procedure of the Securities Regulations Code for violations of Secs 8, 30, and 36 of the Revised Securities Act. SC – petition granted J. Tinga – concurring opinion Manipulative devices and deceptive practices, including insider trading, throw a monkey wrench right into the heart of the securities industry – when someone trades in the market with unfair advantage in the form of highly valuable secret inside information, all other participants are defrauded. J. Carpio – dissenting opinion Proceedings referred to in Sec 2 of Act No. 3326 are judicial proceedings and not administrative proceedings. Contrary to the majority opinion’s claim that “a preliminary investigation interrupts the prescriptive period,“ only the institution of judicial proceedings can interrupt the running of the prescriptive period. The criminal charges may proceed separately and independently of the administrative proceedings. 13