SECURITIES REGULATION CODE A. Historical Background on Securities
B. Purpose of Laws on Securities
Securities Regulation Code, Sec 2. Declaration of State Policy. The State shall: a. Establish a socially-conscious, free market that regulates itself
b. Encourage the widest participation of ownership in enterprises c. Enhance the democratization of wealth
d. Promote the development of capital market e. Protect investors
f. Ensure fair and full disclosure about securities and
g. Minimize if not totally eliminate insider trading and other fraudulent and manipulative devices and practices which create distortions in the free market.
1998 Bar: What is the principal purpose of laws and regulations governing securities in the Philippines?
A: The principal purpose of laws and regulations governing securities in the Philippines is to protect the public against the nefarious practices of unscrupulous brokers and salesmen in selling securities.
Case: PSE v CA
Facts: Puerto Azul Land (PALI), a domestic real estate corporation, sought to offer its share in public & was issued permit to sell by SEC. PALI then applied w/ PSE (Phil Stock Exchange) an application to list its shares. Ultimately, PSE denied the application upon receipt of a letter from heirs of late Pres. Marcos claiming beneficial ownership over certain
properties forming part of PALI’s assets. PSE requested PCGG to comment on the dispute between PALI and Marcoses. PCGG informed PSE that a TRO against the Marcoses was issued to enjoin the Marcoses from further interfering with the processing and approval of by PSE of the initial public offering of PALI. PSE then rejected PALI’s application for the listing of shares because of serious claims and circumstances surrounding the ownership of its assets. PALI wrote to SEC regarding PSE’s denial and asked SEC, in the exercise of its supervisory and regulatory powers, to review PSE’s action. SEC reversed PSE. After its MR being denied by SEC, PSE filed with CA petition for review. CA upheld SEC. PSE argues that SEC powers over stock exchange are limited and do not include the power to reverse PSE decisions and when said decisions are made in good faith (business judgment rule). PSE filed petition for review on certiorari with SC.
Issue: Whether SEC has power to reverse PSE’s decision regarding listing of shares. Held: Yes.
The SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC’s mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country. But
notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSE’s decision in matters of application for listing in the market, the SEC may exercise such power only if the PSE’s judgment is attended by bad faith.
SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporate entity, whose business judgments are respected in the absence of bad faith.
The Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this case.
SEC & CA decisions reversed and set aside. PSE affirmed – PALI application denied. C. Definition and General Classification of Securities (Sec 3) – 1988 Bar
SRC Code, 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, instrument, whether written or electronic in character. It includes:
a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities; b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates 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 non-proprietary membership certificates in corporations; and g) Other instruments as may in the future be determined by the Commission.
Two general forms of traditional securities: Equity and Debt securities – they differ in terms of relationship between the issuer and the security holder.
Equity securities, such as shares of stocks, represent ownership right in a corporation, such as right to participate in the management, surplus profits, and upon dissolution to share in those assets that remain after all debts have been paid. Debt securities require the issuer to repay the principal amount loaned to it by fixed maturity date, and at a stated rate of interest.
Shares of stocks – defined as the interest or right which the owner, who is the shareholder or stockholder, has in the management of the corporation, and its surplus profits, and in the dissolution, in all of its assets remaining after the payment of its debts.
Investment contracts – means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily (not solely) from the efforts of others. A presumption that a contract is an investment contract arises whenever a person seeks to use the money of others on the promise of profits. A common enterprise deemed created when two or more investors pool their resources, creating a common enterprise, even if the promoter receives nothing more than a broker’s commission.
What is the Howey Test? Establishes a test to determine whether a transaction falls within the scope of an "investment contract" and traces its root from the from the 1946 United States (US) case of SEC v. W.J. Howey Co.
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
2010 Bar: Andante Realty, a marketing company that promotes and facilitates sales of real property through leverage marketing, solicits investors who are required to be Business Center Owner (BCO) by paying an enrollment fee of S250. The BCO is then entitled to recruit two other investors who pay S250 each. The BCO receives S90 from the S250 paid by each of his recruits and is credited a certain amount for payments made by investors through the initial efforts of his Business Center. Once the accumulated amount reaches S5,000, the same is used as downpayment for the real property chosen by the BCO.
a. Does this multi-level marketing constitute an “investment contract” under the Securities Regulation Code? Define an investment contract.
Yes. The multi-level marketing constitutes an “investment contract” under the SRC. An “investment contract” is a contract, transaction or scheme 1) involving an investment of money, 2) in a common enterprise, 3) with expectation of profits, 4) primarily from efforts of others.
b. What procedure must be followed under the SRC to authorize the sale or offer for sale or distribution of an investment contract? What are legal consequences of failure to follow procedure?
Before the investment contract is sold or offered for sale or distribution to the public in the Philippines, it should be registered with the Securities and Exchange Commission in accordance with Section 8 of the Securities Regulation Code.
The failure to follow the procedure has criminal consequences (i.e., upon conviction, a fine 50,000 to 5 million pesos and / or imprisonment of 7 to 21 years). It carries also civil liabilities in that the purchaser can recover from the seller
(i) the consideration paid with interest thereon, less the amount of any income received on the purchased securities, upon the tender of such securities, or (ii) damages if the purchaser no longer owns such securities (Sections 57 and 73, Securities Regulation Code). Furthermore, the Securities and Exchange Commission (SEC) may issue a cease and desist order (Subsection 64.1, Securities Regulation Code).
Certificates of interest or participation – these are interests in a profit sharing agreement providing for a participation in the profit of a business venture by the participants of the agreement.
Fractional undivided interests in oil, gas, or other mineral rights – normally issued certificates of participation or interest in the production thereof
Asset-backed securities – certificates issued by a Special Purpose Entity (SPE), the repayment of which shall be derived from the cash flow of assets in accordance with the plan. An SPE means either a “Special Purpose Corporation”, a juridical person created in accordance with the Corporation Code solely for the purpose of securitization and to which the seller makes a true and absolute sale of assets, or a “Special Purpose Trust”, which means a trust administered by an entity duly licensed to perform trust functions under the General Banking Law, and created solely for the purpose of securitization and to which the seller makes a true and absolute sale of assets.
Investment unit instruments (IUIs) – participation certificates, debt instruments or similar instruments issued by a special purpose vehicle company incorporated pursuant to the provisions of RA 9182 (Special Purpose Vehicle Act of 2002, organized primarily to invest in or acquire non-performing assets of financial institutions.
Derivatives – a financial instrument whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable or underlying factor. It requires no initial or little net investment relative to other types of contracts that have similar
responses to changes in market conditions. It is settled at a future date. The term includes but not limited to:
a. Options. Contracts that give the buyer the right, but not the obligation to buy (call options) or sell (put options) an underlying security at a predetermined price, called the exercise or strike price, on or before a predetermined date, called expiry date, which can only be extended by the SEC upon stockholders’ approval.
b. Warrants. Rights to subscribe or purchase new shares or existing shares in a company on or before a predetermined date, called the expiry date, which can only be extended in accordance with the SEC rules and regulations and/or the Exchange rules. Warrants generally have a longer exercise period than options and are evidenced by warrant certificates.
Proprietary share or certificate – evidence of interest or participation or privilege in a corporation which not only entitles the holder to enjoy the use of a specific property, but also to dividends or earnings of said company, and upon liquidation of the company, a holder of a proprietary share shall have proportionate ownership right over its assets.
Non-proprietary share or certificate - evidence of interest or participation or privilege over a certain property of a corporation in view of the amount paid by the holder for the said share/certificate. While the holder is entitled to the use of the property, he has no right over dividends or of the assets of the company upon liquidation thereof.
Evidences of indebtedness – written representations of debt securities or obligations of corporations, such as but not limited to the ff:
a. Long-term commercial paper – with maturity of more than 365 days. Includes bonds (a long-term debt security supported by a mortgage on corporate property) and notes. Debentures are obligations or notes representing indebtedness, but not ordinarily secured by any specific mortgage, lien or pledge of security.
b. Short-term commercial paper – with maturity of 365 days or less
Bill of exchange – unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person wo whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
Trust certificates – form of obligation issued as security for the repayment of the money or property held by the trustee Certificates of deposit for future subscriptions – evidences of money placed as security for the issuance of future subscriptions
**Section 3, paragraph g (other instruments as may in the future be determined by SEC) gives the SEC the authority to regulate trading of any new instruments by an exchange or other recognized markets. The provision is designed to prevent evasion of promoters or issuers who may adopt ingenious schemes in order to escape regulation or registration. What are the classes of securities? Exempt and non-exempt
1990 Bar: Profit participation certificate
One day Jerry Haw, doing business under the name Starlight Enterprise, a sole proprietorship, finds himself short on cash and unable to pay his debts as they fall due although he has sufficient property to cover such debts. He asks you, as his retained counsel, for advice on the following queries: a) Should he file a petition with the SEC to be declared in a state of suspension of payments in view of the said financial condition he faces? Explain your answer. b) Should he sell profit participation certificates to his 10 brothers and sisters in order to raise cash for his business? Explain.
SA on b: Instead of selling profit participation certificates, I would urge Jerry to enter into a partnership or to incorporate in order to raise cash for his business.
AA on b: Jerry may sell profit participation certificates to his brothers and sisters without registering the same with the SEC because his sale is an exempted transaction being isolated and not a sale to the public.
Answer to a (On SEC’s jurisdiction): I would counsel Jerry to file the Petition for Suspension of Payment with the ordinary courts, rather than the SEC. SEC‘s jurisdiction over such cases is confined only to petitions filed by corporations and partnerships under its regulatory powers.
Cases:
SEC v Santos, 19 March 2014
Facts: This case involves an investment scam wherein Michael Liew, chair of board of directors Performance Investment Products Corporation-BVI (PIPC-BVI) disappeared with all investments and money. PIPC-BVI is a foreign corporation registered in the British Virgin Islands. To do business in the Philippines, PIPC-BVI is incorporated as Philippine International Planning Center Corporation (PIPC). Because of Liew’s disappearance, SEC was flooded with individual complaints by investors of said company for violation of Sec 28 of SRC (Registration of Brokers, Dealers, Salesmen and Associated
Persons. 28.1. 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.)
Oudine Santos, as investment consultant was charged for inducing private complainants Lorenzo and Sy to invest money in PIPC (with minimum investment of $40k w/ income potential of 12 – 18% per annum at relatively low risk investment program).
CA affirmed the dismissal of complaint filed by SEC against Santos for violation of Sec 28 of SRC for allegedly selling or offering for sale unregistered securities. CA also affirmed Sec of Justice’s Resolution dismissing criminal complaint against Santos.
Issue: Whether there was violation of Sec 28 of SRC HELD: Yes.
SC sustained DOJ Panel’s findings that PIPC-BVI was an issuer of securities without the necessary registration or license from the SEC and that it is engaged in the buying and selling of securities.
Individual complainants and the SEC have categorically alleged that Liew and PIPC Corporation and/or PIPC-BVI is not a legitimate investment company but a company which perpetrated a scam on 31 individuals where the president, a foreign national, Liew, ran away with their money. Liew’s absconding with the monies of 31 individuals and that PIPC Corporation and/or PIPC-BVI were not licensed by the SEC to sell securities are uncontroverted facts.
The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or participation in a profit sharing agreement that falls within the definition of the law. When the investor is relatively uninformed and turns over his money to others, essentially depending upon their representations and their honesty and skill in managing it, the transaction generally is considered to be an investment contract. The touchstone is the presence of an investment
in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others
Additional Notes:
Bale yung “investors” dito like Lorenzo and Sy, iinvest nila yung pera nila through an investment called “Performance Management Portfolio” then they will sign a Performance Management Portfolio Agreement, which in itself is the investment contract, which in turn is a kind of “security” under the terms of SRC kaya hindi sya pwedeng ibenta o i-offer for sale ng walang SEC registration.
SEC v Prosperity.com, 25 Jan 2012
Facts: Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet service. To make a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently increased to US$294), a buyer could acquire from it an internet website of a 15-Mega Byte (MB) capacity. At the same time, by referring to PCI his own down-line buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States, and insurance coverage worth P50,000.00. To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own down-lines. These second tier of buyers could in turn build up their own down-lines. For each pair of down-lines, the buyer-sponsor received a US$92.00 commission. But referrals in a day by the buyer-sponsor should not exceed 16 since the commissions due from excess referrals inure to PCI, not to the buyer-sponsor.
PCI patterned this scheme from GVI (Golconda Ventures, Inc.), operations of which were stopped by the SEC through a cease and desist order (CDO). As it turned out, the same persons who ran the affairs of GVI directed PCIs actual operations. In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the latter had taken over GVIs operations. After hearing, the SEC, through its Compliance and Enforcement unit, issued a CDO against PCI. The SEC ruled that PCIs scheme constitutes an Investment contract and, following the Securities Regulations Code, it should have first registered such contract or securities with the SEC.
PCI filed petition for certiorari with prayer for issuance of TRO with the CA instead of asking SEC to lift the CDO. Ultimately, CA granted PCI’s petition setting aside the SEC-issued CDO ruling that PCI’s scheme did not constitute an investment contract that needs registration.
Issue: Whether PCI’s scheme constitute an investment contract that requires registration under RA 8799 (SRC). Held: NO
The Securities Regulation Code 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 person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. 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, PCIs scheme or contract with its buyers must have all these elements.
PCIs clients do not make such investments. They buy a product of some value to them: an Internet website of a 15-MB capacity. The client can use this website to enable people to have internet access to what he has to offer to them, say, some skin cream. The buyers of the website do not invest money in PCI that it could use for running some business that would generate profits for the investors. The price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI creates, using its computer facilities and technical skills.
The commissions, interest in real estate, and insurance coverage worth P50,000.00 are incentives to down-line sellers to bring in other customers. These can hardly be regarded as profits from investment of money under the Howey test. The CA is right in ruling that the last requisite in the Howey test is lacking in the marketing scheme that PCI has adopted. Evidently, it is PCI that expects profit from the network marketing of its products. PCI is correct in saying that the US$234 it gets from its clients is merely a consideration for the sale of the websites that it provides.
D. SEC Structure (Sections 4 & 6, SRC Rule 4)
The supervision of SEC was transferred from Office of the President to the Department of Finance.
SEC’s structure (principal departments) are also laid down under SRC IRR Rule 4.
Section 4. Administrative Agency. – 4.1. This Code shall be administered by the Security and Exchange Commission (hereinafter referred to as the "Commission") as a Collegial body, composed of a chairperson and (4) Commissioners, appointed by the President for a term of (7) seven years each and who shall serves as such until their successor shall have been appointed and qualified. A Commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his/her predecessor was appointed, shall serve only for the unexpired portion of their terms under Presidential Decree No. 902-A. Unless the context indicates otherwise, the term "Commissioner" includes the Chairperson.
4.2. 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, of good moral character, or unquestionable integrity, of known probity and patriotism, and with recognized competence in social and economic disciplines: Provided, That the majority of Commissioners, including the Chairperson, shall be members of the Philippine Bar.
4.3. The chairperson is chief executive officer of the Commission. The Chairperson shall execute and administer the policies, decisions, orders and resolutions approved by the Commission and shall have the general executive direction and supervision of the work and operation of the Commission and its members, bodies, boards, offices, personnel and all its administrative business.
4.4. The salary of the Chairperson and the Commissioners shall be fixed by the President of the Philippines based on the objective classification system, at a sum comparable to the members of the Monetary Board and commensurate importance and responsibilities attached to the position.
4.5. The Commission shall hold meetings at least once a week for the conduct of business or as often as may be necessary upon the call of the Chairperson or upon the request of (3) Commissioners. The notice of the meeting shall be given to all Commissioners and the presence of three (3) Commissioners shall
constitute a quorum. In the absence of the Chairperson, the most senior Commissioner shall act as presiding officer of the meeting.
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department of 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.
The commission may review upon its own initiative or upon the petition of any interested party any action of any department or office, individual Commissioner, or staff member of the Commission.
Section 6. Indemnification and Responsibilities of Commissioners.– 6.1. The Commission shall indemnify each Commissioner and other officials of the Commission, including personnel performing supervision and examination functions for all cost and expenses reasonably incurred by such persons in connection with any civil or criminal actions, suits or proceedings to be liable for gross negligence or misconduct. In the event of settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Commission is advised by external counsel that the persons to be indemnified did not commit any gross negligence or misconduct. The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Commission in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Commissioner, officer or employee to repay the amount advanced should it ultimately be determined by the Commission that he/she is not entitled to be indemnified as provided in this subsection.
6.2. The Commissioners, officers and employees of the Commission who willfully violate this Code or who are guilty of negligence, abuse or acts of malfeasance or fail to exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by the Commission or other institutions such as a result of such violation, negligence, abuse, or malfeasance, or failure to exercise extraordinary diligence. Similar responsibility shall apply to the Commissioners, officers and employees of the Commission for (1) the disclosure of any information, discussion or resolution of the Commission of a confidential nature, or about the confidential operations of the Commission unless the disclosure is in connection with the performance of official functions with the Commission or prior authorization of the Commissioners; or (2) the use of such information for personal gain or to the detriment of the government,
the Commission or third parties: Provided, however, That any data or information required to be submitted to the President and/or Congress or its appropriate committee, or to be published under the provisions of this Code shall not be considered confidential.
E. SEC Powers and Jurisdiction (Sec 5)
In interpreting the powers and functions of SEC under Sec 5, one should bear in mind the objective of SRC which is to make SEC a more effective law enforcement and regulatory body, not an adjudicatory agency. While administrative bodies, like SEC, do not really exercise judicial power, they have the incidental power to conduct administrative hearings and make decisions in the course of the performance of their regulatory and law enforcement functions. Otherwise, it cannot properly regulate and enforce the law.
Judicial courts cannot act on their own, unless cases are first brought before them by party litigants. Essentially, judicial courts are passive agencies and judicial process is set only by the positive action of the litigants. Whereas, a regulatory body, like SEC, motu propio, can conduct hearings in the exercise of its regulatory power. Thus, if the case requires decision or resolution of a violation or conflict brought about in connection with the performance of a regulatory function, then it is one for the SEC to decide for the best interest of the public. But if the case is adversarial in nature which calls for adjudication of private rights and obligations, then the question is one for the regular court to entertain.
Appointment rehabilitation receiver – 1995, 1984 Bar Inspection of books – 1976 Bar
Section 5. Powers and Functions of the Commission.– 5.1. The commission shall act with
transparency and shall have the powers and functions provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or a permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspect of the securities market and propose legislation and
amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;
(f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulation and orders;
(h) Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the
implementation of its powers and function under its Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.
5.2. The Commission’s jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed.
Cases:
PSE v CA (regulatory power of SEC over PSE)
Facts: Puerto Azul Land (PALI) sought to offer its share in public & was issued permit to sell by SEC. PALI then applied w/ PSE (Phil Stock Exchange) an application to list its shares. Ultimately, PSE denied the application upon receipt of a letter from heirs of late Pres. Marcos claiming beneficial ownership over certain properties forming part of PALI’s assets. PSE requested PCGG to comment on the dispute between PALI and Marcoses. PCGG informed PSE that a TRO against the Marcoses was issued to enjoin the Marcoses from further interfering with the processing and approval of by PSE of the initial public offering of PALI. PSE then rejected PALI’s application for the listing of shares because of serious claims and circumstances surrounding ownership of its assets. PALI wrote to SEC regarding PSE’s denial and asked SEC, in the exercise of its supervisory and regulatory powers, to review PSE’s action. SEC reversed PSE. After its MR being denied by SEC, PSE filed with CA petition for review. CA upheld SEC. PSE argues that SEC powers over stock exchange are limited and do not include the power to reverse PSE decisions and when said decisions are made in good faith (business judgment rule).
Issue: Whether SEC has power to reverse PSE’s decision regarding listing of shares. Held:
The SEC’s power to look into the subject ruling of the PSE may be implied from or be considered as necessary or
incidental to the carrying out of the SEC’s express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange. It is, likewise, observed that the principal function of the SEC is the supervision and control over corporations, partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities pursued for the promotion of economic development. PSE’s management prerogatives are NOT under the absolute control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSE’s main concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal acts within its allocated express or implied powers. A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such body. As to its corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSE’s decision in matters of application for listing in the market, the SEC may exercise such power only if the PSE’s
judgment is attended by bad faith. In board of Liquidators vs. Kalaw, it was held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.
In resumé, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the circumstances attendant to this case.
{In short, although SEC undeniably has authority to reverse PSE’s decisions, it can only do so if such decisions are attended by bad faith.}
Cemco Holdings v National Life Insurance, 7 Aug 2007 (power of SEC to nullify acquisitions violating the law) {Tungkol talaga ‘to sa Mandatory Offer Rule pero i-focus lang muna natin sa power ng SEC ha}
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 UCHCs stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks.
BCI informed Phil Stock Exchange (PSE) that it and its subsidiary ACC passed resolutions to sell BCI’s and ACC’s stocks in UCHC to petitioner CEMCO. Because of this acquisition, CEMCO’s total beneficial ownership in UCC amounted to at least 53% of UCC shares (bale majority owner na ang Cemco). So PSE asked SEC if applicable ang mandatory tender offer (MTO) rule under Rule 19 of SRC. Sabi ng SEC en banc yung transaction, meaning the acquisition, hindi daw covered ng MTO rule. Mandatory tender offer rule simply means na kelangan mo i-announce publicly ang intention mo bago bumili ng stocks, sa stockholders nung kumpanya na bibilhan mo ng shares tapos publication. Tapos yung mga conditions kung kelan mandatory dapat ang tender offer, nasa Sec 19.1, SRC. Ok? Background lang. Baka nakalimutan na natin ang Spec Comm.)
Feeling aggrieved by the transaction, respondent National Life Insurance Company, minority stockholder of UCC, demanded Cemco to comply with the MTO rule.
The transaction (acquisition) was later on consummated and closed. So National Life Insurance filed complaint with SEC praying that the purchase agreement be declared void and that the MTO rule be applied to its UCC shares. SEC ruled in favor of National Life and directed Cemco to make tender offer for UCC shares. Petitioner Cemco filed a petition with the Court of Appeals challenging the SECs jurisdiction to take cognizance of respondent’s complaint and its authority to require Cemco to make a tender offer for UCC share. CA affirmed SEC’s ruling.
Cemco’s contention: petitioner Cemco contends that while the SEC can take cognizance of respondents complaint on the alleged violation by petitioner Cemco of the mandatory tender offer requirement under Section 19 of Republic Act No. 8799, the same statute does not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties since, under the same statute, the SECs authority is purely administrative. Having been vested with purely administrative authority, the SEC can only impose administrative sanctions such as the imposition of administrative fines, the suspension or revocation of registrations with the SEC, and the like. Petitioner stresses that there is nothing in the statute which authorizes the SEC to issue orders granting affirmative reliefs. Since the SECs order commanding it to make a tender offer is an affirmative relief fixing the respective rights and obligations of parties, such order is void. Issue: Whether SEC has jurisdiction over respondent’s complaint and to require Cemco to make a tender offer for respondents UCC shares.
Held: YES
First: SEC has 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 and this power emanates from the Amended Implementing Rules and Regulations of the Securities Regulation Code (na merong authority ang SEC, upon complaint, to nullify acquisitions and direct the holding of a tender offer in case of violations of SRC.
Second: Another provision is Sec 5.1(n) see above yung “exercise such other powers…” Supreme Court explained: The foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers of the Commission or which is incidental to, or reasonably necessary to carry out, the performance of the administrative duties entrusted to it. As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power would render the agency inutile, because it would become powerless to regulate and implement the law.
Third: Sec 5.1(g) see above - SEC has the authority to promulgate rules and regulations, subject to the limitation that the same are consistent with the declared policy of the Code. Among them is the protection of the investors and the
minimization, if not total elimination, of fraudulent and manipulative devises.
Fourth: Sec 72, which gives SEC the power to promulgate rules and regulations in connection with purchases, by tender offer or otherwise, in order to prevent fraudulent and manipulative practices.
Philippine Association of Stock Transfer and Registry Agencies v CA, 15 Oct 2007 (power to regulate fees) Facts: Petitioner Phil Association of Stock Transfer is engaged in the registration of stock transfers in the stock-and-transfer book of corporations. To sustain its financial viability and upgrade its facilities and services, petitioner increased its transfer processing fee from P45 to to P75 to P100 per certificate and P20 cancellation fee since it was over five years since the old rates were fixed. SEC allowed the P75 increase but advised petitioner to hold in abeyance the P100 increase due to the objection by Philippine Association of Securities Brokers and Dealers, Inc. Petitioner nevertheless implemented the increased fees (P100). SEC sent petitioner 2 letters reiterating its directive to hold in abeyance the P100 fee increase. Petitioner replied that it could no longer hold in abeyance the implementation of the new fees because its members had already put in place the procedures necessary for their implementation and argued that the imposition of the processing fee was a management prerogative, which was beyond the SECs authority to regulate absent an express rule or regulation. SEC then issued an order enjoining petitioner from imposing the increased fee and fined it for
continuing violation of SEC’s order. Petitioner went to CA on a certiorari proceeding. CA dismissed the petition. Issue: Whether SEC has power to regulate/restrict petitioner’s fees.
Held: YES
As a securities-related organization under the jurisdiction of SEC, petitioner is under the obligation to comply with SEC’s order (yung order na to hold in abeyance imposing new fees). Under the Revised Securities Act, SEC has power, motu propio or upon complaint, to issue cease and desist order without prior hearing if the act or practice, unless restrained, may cause grave or irreparable injury or prejudice to the investing public or may amount to fraud or violation of the disclosure requirements under the Act. This power is broad enough to include SEC’s power to regulate petitioner’s fees. Hence, petition for certiorari denied for lack of merit.
Additional Notes: In Philippine Stock Exchange, Inc. v. Court of Appeals,the Court held that the SEC is without authority to substitute its judgment for that of the corporation’s board of directors on business matters so long as the board of directors acts in good faith. This Court notes, however, that this case involves, not whether petitioners actions pertained to
management prerogatives or whether petitioner acted in good faith. Rather, this case involves the question of whether the SEC had the power to enjoin petitioners planned increase in fees after the SEC had determined that said act if pursued may cause grave or irreparable injury or prejudice to the investing public. Petitioner was fined for violating the SECs cease-and-desist order which the SEC had issued to protect the interest of the investing public, and not simply for exercising its judgment in the manner it deems appropriate for its business.
Pua v Citibank, 16 Sept 2013 (Civil vs Criminal Case >if civil, RTC; if criminal, SEC)
Facts: Petitioners (2 sila parehong Pua) are depositors of Citibank – Binondo Branch. After being introduced with VP Yau of Citibank Hongkong, they bought numerous securities issued by various public limited companies in Channel Islands (san yun??) which were offered to them by Yau. Later on, petitioners discovered that the securities sold to them were not registered with the SEC and that the terms and conditions covering the subscription were not likewise submitted to the SEC for evaluation, approval, and registration. They filed a complaint filed with RTC for declaration of nullity of contract and sums of money with damages against respondent bank. Respondent Citibank filed MTD for violating the doctrine of primary jurisdiction stating that the case should have been filed with the SEC since the merits of the case would largely depend on the issue of whether or not there was a violation of the SRC, in particular, whether or not there was a sale of unregistered securities. RTC denied respondent’s MTD. CA reversed and set aside RTC order for violation of doctrine of primary jurisdiction.
Issue: Whether or not petitioners’ action falls within the primary jurisdiction of the SEC. Held: NO, not w/in SEC’s primary jurisdiction
A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it must first be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts will not determine a controversy involving a question within the jurisdiction of the administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the specialized knowledge and expertise of said administrative tribunal to determine technical and intricate matters of fact. The Securities Regulation Code is a special law. Its enforcement is particularly vested in the SEC. Hence, all complaints for any violation of the Code and its implementing rules and regulations should be filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the complaint to the DOJ for preliminary investigation and prosecution.
Cases falling under Section 57of the SRC, which pertain to civil liabilities arising from violations of the requirements for offers to sell or the sale of securities, as well as other civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be exclusively brought before the regional trial courts.
Civil suits falling under the SRC are under the exclusive original jurisdiction of the regional trial courts and hence, need not be first filed before the SEC, unlike criminal cases wherein the latter body exercises primary jurisdiction.
Petition granted, CA reversed.
F. Amendments introduced by Sec 5.2 to Sec.5 of PD 902-A Sec 5, PD 902-A
In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving.
a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations.
Sec 5.2, SRC (ito na yung amendment)
The Commission’s jurisdiction over all cases enumerated under Sec. 5 of PD 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate RTC; Provided, that the Supreme Court in the exercise of its authority may designate the RTC branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.
The objective of the SRC is to make SEC a more effective law enforcement and regulatory body, not an adjudication agency. While administrative bodies, like the SEC, do not really exercise judicial power, they have the incidental power to conduct administrative hearings and make decisions in the course of the performance of their regulatory and law
enforcement functions. Otherwise, it cannot properly regulate and enforce the law.
The adjudicatory functions of a judicial body can easily distinguished from that of the regulatory body. Judicial courts cannot act on their own, unless cases are first brought before them by party litigants. Essentially, judicial courts are passive agencies and judicial process is set only by the positive action of the litigants; whereas, a regulatory body, like the SEC, motu proprio, can conduct hearings in the exercise of tits regulatory power. Thus, if the case requires decision or resolution of a violation or conflict brought about in connection with the performance of a regulatory function, then it is one for the SEC to decide for the best interest of the public. But if the case is adversarial in nature which calls for adjudication of private rights and obligations, then the question is one for the regular court to entertain.
The exercise of regulatory power of the SEC continues to be the same as before. If there is any change, it is only in the sense that the quasi-judicial function of the SEC pertaining to the regular courts has been removed, so it can devote to its regulatory responsibility. Thus, if the matter calls for the exercise of the regulatory responsibilities of the SEC, which includes, among others, the imposition of fines and penalties for violations of the Corporation Code, SRC, and other laws implemented by it, as well as its rules and regulations, then the SEC may take cognizance of the complaint and the proceedings therein partaking of the nature of an administrative determination, but it cannot award damages, nor grant recovery of investments. At most, the SEC can impose administrative sanctions, such as suspension or revocation of its license, issuance of a cease and desist order, and implead its officers for criminal violations of securities laws before the DOJ.
Under Sec 70, SRC, orders of the SEC through adjudication, such as rulings whether to impose sanctions, enter injunctions for violations, or grant exemptions, may be appealed to the CA.
1. Devices or schemes amounting to fraud
Sumndad v Harrigan and Boracay Beach Club Hotel, Inc. (BBCHI), 12 April 2002
Facts: Petitioner Mila Yap-Sumndad and Respondent John William Harrigan entered into a joint venture agreement to develop a first class tourist resort on a land owned by Sumndad. Yung lupa na yun naka-assign kay BBCHI. To finance said project, Harrigan invested Php1M for 8,000 BBCHI shares corresponding to 40% of its authorized capital stock. Harrigan continued to give advances (in the character of loan, utang) na umabot na ng 8 million, and despite written demand for payments, hindi nagbayad si BBCHI. So Harrigan filed a collection of sum of money case with a prayer for preliminary attachment against BBCHI and later on impleading its management committee through acting chairman (Corazon Tirol).
Nakialam si Sumndad (thru motion for leave to intervene) but was later on declared in default. Nagkaron ng judgment by default and RTC ruled in favor of Harrigan. Sumndad filed petition for CPM with CA, w/c was denied. Then certiorari petition w/ SC mainly contending that under PD 902-A SEC has jurisdiction over the case (remember sa RTC na-file ang kaso) because the complaint alludes to fraud committed by respondent corporation, and the complainant is a stockholder of the respondent corporation.
Issue: Whether jurisdiction is lodged with RTC or SEC. HELD: RTC
Harrigan seeks to collect from BBCHI his advances or loans in the amount of at least P8 million, which are demandable in character pursuant to their agreement, The cause of action of the suit is, clearly, for the collection of a sum of money. From the totality of the complaint filed by Harrigan, the main issue is whether or not he is entitled to collect the loan and not whether or not he was defrauded by BBCHI. The mere use of the phrase in fraud of creditors does not, ipso facto, throw the case within SECs jurisdiction. The amended complaint filed by Harrigan does not sufficiently allege acts amounting to fraud and misrepresentation committed by respondent corporation.
In Alleje vs. CA,fraud is defined as a generic term embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to secure an advantage over another by false suggestions or by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated. Within the context of the complaint as quoted above, the phrase in fraud of creditors can only mean, to the prejudice of creditors and not to the use of devises or schemes tantamount to fraud and misrepresentation employed by the Board of Directors, business associates or its officers and partners to divert corporate funds and assets for personal use, as contemplated in Section 5 of PD 902-A.
Equally unavailing is petitioner’s contention that the case involves an intra-corporate controversy, or one between the corporation and its stockholder transposing it within the domain of the SEC. It should be noted that the issue has become moot and academic because with Republic Act No. 8799, Securities Regulation Code, it is now the Regional Trial Court and no longer the SEC that has jurisdiction. Under Section 5.2 of Republic Act No. 8799, original and exclusive
jurisdiction to hear and decide cases involving intra-corporate controversies have been transferred to a court of general jurisdiction or the appropriate Regional Trial Court.
Foregoing given, Harrigan’s complaint against petitioner to recoup his financial exposure with BBCHI was properly lodged with the regular court and not with the SEC. This view is in accord with the rudimentary principle that administrative agencies, like the SEC, are tribunals of limited jurisdiction and, as such, could wield only such powers as are specifically granted to them by their enabling statutes
2. Intra-corporate controversies Definition and Jurisdiction
2006 Bar: What is an intra-corporate controversy?
An intra-corporate controversy is a conflict between stockholders, members or partners and the corporation, association or partnership regarding the regulation of the corporation. The controversy must arise out of intra-corporate or partnership relations of the parties; or between such corporation, partnership or association and the State insofar as it concerns their individual franchises. It is further required that the dispute be intrinsically connected with the regulation of the corporation (Speed
Distributing Corp., et al. v. Court of Appeals, et al, G.R. No. 149351, March 17, 2004; Intestate Estate of Alexander T.Ty v. Court of Appeals, G.R. No. 112872, April 19, 2001).
No, pursuant to Subsection 5.2 of the Securities Regulation Code, the quasi-judicial jurisdiction of the Securities and Exchange Commission to hear corporate cases, including intra-corporate controversies, under Section 5 of Pres. Decree No. 902-A, has been expressly transferred to the designated Regional Trial Court. Pursuant to a memorandum circular issued by the Supreme Court, only particularly designated RTC special commercial courts in each judicial region have original and exclusive jurisdiction over such cases (See Intestate Estate of Alexander T. Ty v. Court of Appeals, G.R. No. 112872, April 19, 2001).
Yujuico v. Quiambao, G.R. No. 168639
An intra-corporate controversy is one which "pertains to any of the following relationships: (1) between the corporation, partnership or association and the public;
(2) between the corporation, partnership or association and the State in so far 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."
2009 Bar Q: Atlantis Realty Corporation (ARC), a local firm engaged in real estate development, plans to sell one of its prime assets—a three-hectare land valued at about P100-million. For this purpose, the board of directors of ARC unanimously passed a resolution approving the sale of the property for P75-million to Shangrila Real Estate Ventures (SREV) a rival realty firm. The resolution also called for a special stockholders meeting at which the proposed sale would be up for ratification. Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop the sale. He then commences a derivative suit for and in behalf of the corporation, to enjoin the board of directors and the stockholders from approving the sale.
(A) Can Atty. Edric, who owns only one share in the company, initiate a derivative suit? Why or why not?
Yes, Atty. Edric can initiate a derivative suit, otherwise known as the minority stockholders’ suit. It is allowed by law to enable the minority stockholder/s to protect the interest of the corporation against illegal or
disadvantageous act/s of its officers or directors, the people who are supposed to protect the corporation (Pascual v. Del Zaz Orozco, 19 Phil. 82 (1991)).
(B) If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why and where would such a suit be filed? If not, why not?
Yes, such suit would constitute an intra-corporate dispute as it is a suit initiated by a stockholder against other stockholders who are officers and directors of the same corporation (P.D. No. 902-A, Sec. 5(b)). Such suit should be filed in the Regional Trial Court designated by the Supreme Court as a corporate or commercial court.
(C) Will the suit prosper? Why or why not?
No. The suit will not prosper. There is no requisite demand on the officers and directors concerned. There is, therefore, no exhaustion of administrative remedies.
1996 Bar – RTC not divested of jurisdiction if a person is no longer a stockholder
Jennifer and Gabriel owned the controlling stocks in MFF Co and CLO Inc, both family corporations. Due to serious disagreements, Jennifer assigned all her shares in MFF to Gabriel, while Gabriel assigned all his shares in CLO to Jennifer. Subsequently, Jennifer and CLO filed a complaint against Gabriel and MFF in the SEC seeking to recover the corporate records and funds of CLO which Gabriel allegedly refused to turn over, and which remained in the offices of MFF. Is there an intra-corporate controversy in this case?
Yes, there is an intra-corporate controversy in this case. The fact that, when the complaint against Gabriel and MFF was filed with the SEC (per 2006, RTC‘s Jurisdiction), Jennifer and CLO were no longer stockholders of MFF did not divest the SEC (per 2006, RTC‘s Jurisdiction) of its jurisdiction over the case inasmuch as Jennifer was a former stockholder of MFF and the controversy arose out of this relation. (SEC v CA GR 93832)
Corporate officer’s dismissal intra-corporate
Matling Industrial v Coros, 13 Oct 2010 (Matling teaches us how to determine whether a position/office is considered “corporate” or not. If corporate officer, then it is an intra-corporate controversy and jurisdiction is with RTC. Otherwise, labor arbiter)
Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy falls under the jurisdiction of the Securities and Exchange Commission (SEC), because the controversy arises out of intra-corporate or partnership relations between and among stockholders, members, or associates, or between any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; and between such corporation, partnership, or association and the State insofar as the controversy concerns their individual franchise or right
to exist as such entity; or because the controversy involves the election or appointment of a director, trustee, officer, or manager of such corporation, partnership, or association. Such controversy, among others, is known as an intra-corporate dispute.
Effective on August 8, 2000, upon the passage of Republic Act No. 8799,15 otherwise known as The Securities
Regulation Code, the SEC’s jurisdiction over all intra-corporate disputes was transferred to the RTC, pursuant to Section 5.2 of RA No. 8799.
*****
Conformably with Section 25 (Corporation Code), a position must be expressly mentioned in the By-Laws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama the first ruling on the matter, held that the only officers of a corporation were those given that character either by the Corporation Code or by the by-laws; the rest of the corporate officers could be considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:
An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.
x x x x
This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states that the corporate officers are the President, Secretary, Treasurer and such other officers as may be provided for in the by-laws. Accordingly, the corporate officers in the context of PD No. 902-A are exclusively those who are given that character either by the Corporation Code or by the corporations by-laws. (Review Matling case)
A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the by-laws of an enabling clause on the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated November 25, 1993, to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no power to create other Offices without amending first the corporate by-laws. However, the Board may create appointive positions other than the positions of corporate Officers, but the persons occupying such positions are not considered as corporate officers within the meaning of Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate Officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board of Directors/Trustees
Buying out shares considered intra-corporate
1991 Bar: On December 6, 1988, A, an incorporator and the General Manager of the Paje Multi Farms Co, resigned as GM and sold to the corporation his shares of stocks in the corporation for P300th, the book value thereof, payable as follows: a) P100th as down payment; b) P100th on or before 31 July1989; and c) the remaining balance of P100th on or before 30 Sep 1989. A promissory note, with an acceleration clause, was executed by the corporation for the unpaid balance. The corporation failed to pay the first installment on due date. A then sued Paje on the promissory note in the RTC.
a) Does the court have jurisdiction over the case?
The RTC has jurisdiction over the case. The SC said that a corporation may only buy its own shares of stock if it has enough surplus profits therefore.
b) Would your answer be the same if A instead sold his shares to his friend Mabel and the latter filed a case with the RTC against the corporation to compel it to register the sale and to issue new certificates of stock in her name?
My answer would be the same. An action to compel a corporation to register a sale and to issue new certificates of stock is itself an intra-corporate matter that exclusively lies with the RTC.
Stockholder vs stockholder dispute considered intra-corporate
Saavedra v SEC (wala sa course outline ‘to, nilagay ko lang as an example of stockholder vs another stockholder dispute)
Facts: Private respondents sold all their shares, rights and interests in Philippine, Inc. to petitioners. As agreed upon by the parties through a Memorandum of Agreement and Deed of Assignment, the sale agreement would automatically be considered rescinded upon failure of petitioners to pay any amount due. Because petitioners failed to pay the last sum due on the schedules date, private respondents filed case praying for the rescission of instrument and for issuance of TRO. Respondent SEC issued TRO. Petitioners filed motion to dismiss alleging lack of jurisdiction of SEC.
Issue: Whether the dispute between petitioners and private respondents is an intra-corporate dispute as to bring the matter within SEC’s jurisdiction.
Held: Yes (pero as the law stands now, SEC’s jurisdiction here is transferred to RTC being an intra-corp dispute; ang focus lang dito ay yung stockholder-stockholder dispute being an intra-corp controversy)
The dispute at bar is an intra-corporate dispute that has arisen between and among the principal stockholders of the corporation due to the refusal of the petitioners to fully comply with what has been covenanted by the parties. Such dispute involves a controversy "between and among stockholders,' specifically as to plaintiffs' right, as stockholders, over unpaid assignment of shares and the validity of defendants' acquisition of the same. In other words, the present case involves an intra-corporate dispute as to who has the right to remain and act as owners-stockholders of the corporation. An intra-corporate controversy is one which arises between stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations.
Cases:
Speed v CA, 17 March 2004 (Elements for intra-corporate controversy)
Facts: Si Pastor Lim (deceased) and Rufina Lim (private respondent) ay mag-asawa, mayaman, nagtayo ng mga korporasyon, using their conjugal funds. Yung mag-asawa parehong incorporators and major stockholders ng mga korporasyon na yun. Wala silang anak so nag-adopt ng 2 bata na anak ng mga mahihirap nilang kamag-anak. Anyway, later on nag-away ang mag-asawa. Lumala ang pag-aaway hanggang sa nag-file ng legal separation si Rufina.
Meanwhile, take note of these corporations – Skyline Sales Corp, Speed Distributing Corp and Leslim Corporation. Lahat yan ang major stockholder ay si Pastor Lim, ang iba pang stockholders, yung mga in-adopt at asawa nung isa sa mga adopted child nung mag-asawa.
So papasok na sa eksena si petitioner Speed. Si Leslim Corp nag-execute ng deed of sale in favor of Speed (lupain sa Diliman, QC).
Namatay si Pastor Lim, survived by his wife syempre nag-file ng petition for administration of estate with motion praying for annotation of notice of lis pendens sa lahat ng properties ng asawa niya. Nag-reklamo ngayon ang mga korporasyon – Skyline, Speed and Lesllim – claiming na sa kanila yung properties at hindi kay Pastor. Na-cancel pero in the end na-reinstate din ang lis pendens notice.
So eto naman ang nangyari, nag-file si Rufina ng separate complaint sa RTC against Speed and petitioners (petitioners dito ay yung alleged president, VP at corp secretary ng Leslim Corp). Rufina sought to nullify the deed of absolute sale executed by Leslim in favor of Speed (remember yung lupa na binenta ni Leslim kay Speed). Rufina is claiming na lahat ng property nung mga korporasyon ay part of their conjugal property so as intestate heir meron syang share sa mga property na yun, since dummies lang naman yung ibang stockholders for purposes of SEC registration. Si petitioners naman sabi jurisdiction is with SEC and not RTC since the case involved intra-corp controversy and at the time na ma-transfer yung jurisdiction over intra-corp controversies from SEC to RTC pending na sa CA yung appeal so no
retroactivity. (Bale in-appeal sya sa CA kasi si RTC dismissed the complaint saying that Rufina cannot sue the corporation since hindi naman sya privy dun sa sale between the 2 corps. Si CA naman ni-nullify yung RTC order at ni-remand yung case sa RTC since intra-corp controversy daw yung dispute and under the amendment (RA 8799, yung SRC as we now know) RTC ang may jurisdiction pag intra-corp dispute.
Issue: Whether the dispute is considered as an intra-corporate controversy. Held: NO
