2020 BAR REVIEW COMMERCIAL LAW

Handout No. 2
SECURITIES REGULATION CODE

Any fraud or misrepresentation in the issuance of securities injures the public. The Securities
and Exchange Commission’s power to suspend or revoke registrations and to impose fines and
other penalties provides the public with a certain level of assurance that the securities contain
representations that are true, and that misrepresentations if later found, would be detrimental
to the erring corporation.

It creates risks to corporations that issue securities and adds cost to errors, misrepresentations,
and violations related to the issuance of those securities. This protects the public who will rely
on representations of corporations and partnerships regarding financial instruments that they
issue. The Securities and Exchange Commission’s regulatory power over securities-related
activities is tied to the government’s duty to protect the investing public from illegal and
fraudulent instruments. Securities and Exchange Commission vs. Subic Bay Golf and Country
Club, Inc., 752 SCRA 481, G.R. No. 179047 March 11, 2015

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, preemptive 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.
Securities and Exchange Commission vs. Subic Bay Golf and Country Club, Inc., 752 SCRA 481,
G.R. No. 179047 March 11, 2015

Villareal and Filart’s right to a refund of the value of their shares was based on SBGCCI and
UIGDC’s alleged failure to abide by their representations in their prospectus.

Specifically, Villareal and Filart alleged in their letter-complaint that the world-class golf course
that was promised to them when they purchased shares did not materialize. This is an intra-
corporate matter that is under the designated Regional Trial Court’s jurisdiction. 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. Securities and Exchange
Commission vs. Subic Bay Golf and Country Club, Inc., 752 SCRA 481, G.R. No. 179047 March 11,
2015

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 2020 BAR REVIEW COMMERCIAL LAW
Handout No. 2
SECURITIES REGULATION CODE

SEC power to impose fines

The SEC was never dispossessed of the power to assume jurisdiction over complaints, even if
these are riddled with intra-corporate allegations, if their invocation of authority is confined only
to the extent of ensuring compliance with the law and the rules, as well as to impose fines and
penalties for violation thereof; and to investigate even motu proprio whether corporations
comply with the Corporation Code, the SRC and the implementing rules and regulations. Roman,
Jr. vs. Securities and Exchange Commission, 791 SCRA 638, G.R. No. 196329, 1 June 2016

An existing intra-corporate dispute, which does not constitute a continuation of corporate

business, is not affected by the subsequent dissolution of the corporation.

To be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate or
partnership relations, and (b) the nature of the question subject of the controversy must be such
that it is intrinsically connected with the regulation of the corporation or the enforcement of the
parties’ rights and obligations under the Corporation Code and the internal regulatory rules of
the corporation. So long as these two criteria are satisfied, the dispute is intra-corporate and the
RTC, acting as a special commercial court, has jurisdiction over it.

Here, the Complaint did not pray to continue the corporate business of FQB+7. The Complaint
does not seek to enter into contracts, issue new stocks, acquire properties, execute business
transactions, etc. Its aim is to determine who the rightful directors are and a corporation’s right
to remove usurpers and strangers from its affairs. Resolution of these issues do not involve
continuation of business of FQB+7. Also, the determination of which group is the bona fide or
rightful board of the FQB+7 will still provide practical relief to the parties involved. Aguirre II vs.
FQB+7, Inc., 688 SCRA 242, G.R. No. 170770, 9 January 2013

The power of the SEC to regulate proxies remains in place in instances when stockholders vote
on matters other than the election of directors.

The test is whether the controversy relates to such election. All matters affecting the manner and
conduct of the election of directors are properly cognizable by the regular courts. Otherwise,
these matters may be brought before the SEC for resolution based on the regulatory powers it
exercises over corporations, partnerships, and associations. Securities and Exchange
Commission vs. Court of Appeals, 739 SCRA 99, G.R. Nos. 187702 and 189014, 22 October 2014

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 2020 BAR REVIEW COMMERCIAL LAW
Handout No. 2
SECURITIES REGULATION CODE

Securities

“Securities” are shares, participation or interests in a corporation or in a commercial enterprise

or profit-making venture and evidenced by a certificate, contract, instrument, whether written
or electronic in character. Sec. 3.1, SRC

An investment house is defined under Presidential Decree No. 129 as an entity engaged in
underwriting of securities of other corporations.

In turn, “underwriting” is defined as the act or process of guaranteeing the distribution and sale
of securities of any kind issued by another corporation; while “securities” is therein defined as
written evidences of ownership, interest, or participation, in an enterprise, or written evidences
of indebtedness of a person or enterprise.

Republic Act No. 8799 or the Securities Regulation Code defines securities as 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: (a) Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed
securities; (b) Investment contracts, certificates of interest or participation in a profit sharing
agreement, certifies of deposit for a future subscription; (c) Fractional undivided interests in oil,
gas or other mineral rights; (d) Derivatives like option and warrants; (e) Certificates of
assignments, certificates of participation, trust certificates, voting trust certificates or similar
instruments; (f) Proprietary or nonproprietary membership certificates in corporations; and (g)
Other instruments as may in the future be determined by the Commission. Abacus Capital and
Investment Corporation vs. Tabujara, 872 SCRA 318, G.R. No. 197624 July 23, 2018

The fundamental function of the money market device in its operation is to match and bring
together in a most impersonal manner both the “fund users” and the “fund suppliers.”

As aptly observed by the CA, the transaction herein involved is akin to money market placements.
Perez v. CA, et al., 127 SCRA 636 (1984), explains the nature of a money market transaction as
follows: As defined by Lawrence Smith, “the money market is a market dealing in standardized
short-term credit instruments (involving large amounts) where lenders and borrowers do not
deal directly with each other but through a middleman or dealer in the open market.” It involves
“commercial papers” which are instruments “evidencing indebtedness of any person or entity. .
. which are issued, endorsed, sold or transferred or in any manner conveyed to another person
or entity, with or without recourse.” The fundamental function of the money market device in its

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 2020 BAR REVIEW COMMERCIAL LAW
Handout No. 2
SECURITIES REGULATION CODE

operation is to match and bring together in a most impersonal manner both the “fund users” and
the “fund suppliers.” The money market is an “impersonal market,” free from personal
considerations. “The market mechanism is intended to provide quick mobility of money and
securities.” The impersonal character of the money market device overlooks the individuals or
entities concerned. The issuer of a commercial paper in the money market necessarily knows in
advance that it would be expeditiously transacted and transferred to any investor/lender without
need of notice to said issuer. In practice, no notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor. Abacus Capital and Investment
Corporation vs. Tabujara, 872 SCRA 318, G.R. No. 197624 July 23, 2018

Stating that a money market placement partakes of the nature of loan, Sesbreño v. CA, 240
SCRA 606 (1995), elucidates: In money market placement, the investor is a lender who loans his
money to a borrower through a middleman or dealer.

Petitioner here loaned his money to a borrower through Philfinance. When the latter failed to
deliver back petitioner’s placement with the corresponding interest earned at the maturity date,
the liability incurred by Philfinance was a civil one. As such, petitioner could have instituted
against Philfinance before the ordinary courts a simple action for recovery of the amount he had
invested and he could have prayed therein for damages. x x x. In this case, Tabujara as the
investor is the lender or the “funder” who loaned his P3,000,000.00 to IFSC through Abacus. Thus,
when the loaned amount was not paid together with the contracted interest, Tabajura may
recover from Abacus the amount so invested together with damages. Abacus Capital and
Investment Corporation vs. Tabujara, 872 SCRA 318, G.R. No. 197624 July 23, 2018

Investment Contract (Howey Test)

The United States Supreme Court held in Securities and Exchange Commission vs. W.J. Howey
Co., that, for an investment contract to exist, the following elements, referred to as the Howey
test must concur: (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. Thus, to sustain the SEC position in this case, PCI’s scheme
or contract with its buyers must have all these elements.

Sale of internet website does not fall under investment contract as the buyers do not invest
money in the company that it could use for running some business that would generate profits
for the investors. Securities and Exchange Commission v. Prosperity.Com Inc., G.R. No. 164197,
January 25, 2012

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 2020 BAR REVIEW COMMERCIAL LAW
Handout No. 2
SECURITIES REGULATION CODE

Public Company

A "public company" as "any corporation with a class of equity securities listed on an Exchange or
with assets in excess of Fifty Million Pesos (₱50,000,000.00) and having two hundred (200) or
more holders, at least two hundred (200) of which are holding at least one hundred (100)
shares of a class of its equity securities." Sec. 17.2, SRC; Rule 3.1.16 of the 2015 Implementing
Rules and Regulations of the SRC

A "public company," as contemplated by the SRC, is not limited to a company whose shares of
stock are publicly listed; even companies like the Bank, whose shares are offered only to a
specific group of people, are considered a public company, provided they meet the
requirements enumerated above.

The records establish, and the Bank does not dispute, that the Bank has assets exceeding
₱50,000,000.00 and has 395,998 shareholders. It is thus considered a public company that must
comply with the reportorial requirements set forth in Section 17.1 of the SRC. Philippine
Veterans Bank vs. Justina Callangan, G.R. No. 191995, August 3, 2011

Fraudulent Transactions

It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale
of any securities to:

a) Employ any device, scheme, or artifice to defraud;

b) Obtain money or property by means of any untrue statement of a material fact of 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; or
c) 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, SRC

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 2020 BAR REVIEW COMMERCIAL LAW
Handout No. 2
SECURITIES REGULATION CODE

When Tender Offer Mandatory

A person is required to make a tender offer for equity shares of a public company in an amount
equal to the number of shares that the person intends to acquire in the following circumstances:

a) Any person or a group of persons acting in concert, who intends to acquire 35% or more
of equity shares of a public company pursuant to an agreement made between or among
the person and one or more sellers;
b) Any person or a group of persons acting in concert, intends to acquire 35% or more of the
equity shares of a public company in one or more transactions within a period of 12
months;
c) If any acquisition of even less than 35% would result in ownership of 51% of the total
outstanding equity securities of a public company. Rule 19, SRC Rules

Insider Trading

It shall be unlawful for any insider to communicate material non-public information about the
issuer or the security to any person who, by virtue of the communication, becomes an insider
xxx, where the insider communicating the information knows or has reason to believe that such
person will likely buy or sell a security of the issuer while in possession of such information. Sec.
27.3, SRC

Material Non-Public Information

The information is “material non-public” if: (a) 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 (b) 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, SRC

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 2020 BAR REVIEW COMMERCIAL LAW
Handout No. 2
SECURITIES REGULATION CODE

Rules on Proxy Solicitations

1) Proxies must be issued and proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission;
2) Proxies must be in writing, signed by the stockholder or his duly authorized representative
and filed before the scheduled meeting with the corporate secretary.
3) Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a period longer than five (5) years at
one time.
4) No broker or dealer shall give any proxy, consent or any authorization, in respect of any
security carried for the account of the customer, to a person other than the customer,
without written authorization of such customer.
5) A broker or dealer who holds or acquire the proxy for at least ten percent (10%) or such
percentage as the commission may prescribe of the outstanding share of such 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 security, to the Exchange
where the security is traded and to the Commission. Sec. 20, SRC

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