SECURITIES

REGULATION CODE
LIBERTAS ET IUSTICIA
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This material is a compilation of notes from the lecture of Dean Nilo T. Divina, cases from his book,
Handbook for Commercial Law and from the book of Timoteo B. Aquino, Philippine Corporate Law
Compendium.

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 LIBERTAS ET IUSTICIA
SECURITIES REGULATION CODE
PRELIMINARY MATTERS
Persons involved in the Issuance and Distribution
1. Issuer is the originator, maker, obligor or
creator of the security.
2. Broker is a person engaged in the business
of buying and selling securities for the
account of others
3. Dealer means any person who buys and
sells securities for his/her own account in
the ordinary course of business.
4. Clearing agency is any person who acts as
intermediary in making deliveries upon
payment to effect settlement in securities
transactions.
5. Exchange1 is the organized marketplace or
facility that brings together buyers and
sellers and executes trades of securities
and/or commodities. It covers only listed
shares.
6. Promoter is a person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefore.
7. Underwriter is a person who guarantees on
a firm commitment and/or declared best
effort basis the distribution and sale of
securities of any kind by another.
Underwriting
It is the process of marketing new issues of securities.
There are three types of underwriting.
1. Firm Commitment
The underwriter agrees to purchase all or
specific amount of the offering for cash,
subject to certain market-outs
2. Stand-by
It is one where a new issue is offered only to
existing shareholders. The underwriter
agrees to ‘stand-by’ and purchase any shares
not purchased by existing shareholders at the
expiration of a specified period.
3. Best Efforts
The underwriter neither purchases the
securities from the issuer nor resells them to
1
In our jurisdiction, it is the Philippine Stock Exchange.
the investing public; he only agrees to act as
an agent of the issuer.
Securities Market
A. Primary Transaction
It involves the issuance of the
unsubscribed portion of the authorized
capital stock of the corporation.
B. Secondary Transaction
It involves the sale of previously
issued and subscribed shares.
C. Over-the-counter Transaction
It refers to transactions done
outside the stock exchange.
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SECURITIES REGULATIONS CODE
It was enacted because of the policy of the state to:
1. Establish a socially conscious, free market
that regulates itself,
2. Encourage the widest participation of
ownership in enterprises,
3. Enhance the democratization of wealth,
4. Promote development of the capital market
5. Protect investors
6. Ensure full and fair disclosure about
securities
7. Minimize if not totally eliminate insider
trading and other fraudulent or manipulative
devices and practices which create
distortions in the free market. (Sec. 2, SRC)
Blue Skies Laws
Laws that regulate securities because they seek to
prevent the public from being victimized into
investing into speculative schemes which have no
more basis than so many feet of the blue skies. (Hall
v. Geiger-Jones Co.)
Securities Regulations Code (SRC) is intended to
protect the public and also to strengthen the capital
markets through regulations.
Manners by which SRC protects the public:
1. By imposing a continuing duty of full
disclosure of information to the public;
2. By requiring registration of securities;
3. By requiring close monitoring of securities;
4. By requiring the registration of and
monitoring the activities of persons involved
to ensure compliance with the law;
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5. By prohibiting and penalizing different
fraudulent practices and transactions; and
6. By providing the SEC with and
strengthening its powers and functions.
(Philippine Stock Exchange v CA, 281 SCRA
232)
Note: Securities are regulated because of their
peculiar nature that they are created rather than
produces. They can be issued in unlimited amounts,
virtually without a cost.
Two Levels of Regulation
1. Regulation by the Securities and Exchange
Commission (SEC)
2. Self-regulation by the stock exchange
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SECURITIES
They 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)
Kinds of Securities
I. Shares of stocks, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities
Asset-backed Securities
Definition here
Caused the financial meltdown…
II. Investment contract, certificates of interest or
participation in a profit sharing agreement,
certificates of deposit for future subscription
Investment contract
It is a contract, transaction or scheme whereby a
person invests his money in a common enterprise
and is led to expect profits primarily from the
efforts of others.
Howey Test
It 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 profit
4. To be derived solely from the efforts of
others. (SEC v W.J. Howey Co, US Case
1946)
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For all that is excellent and eminent is as difficult as it is rare.
The term solely must not be given a strict
interpretation as it would lead to unrealistic
results.
Therefore, to be a security subject to regulation
by SEC, an investment contract in our
jurisdiction must be proved to be:
a. An investment of money
b. In a common enterprise
c. With expectation of profits
d. Primarily from the efforts of others.
Thus, a corporation allowing a principal investor
to enrol in its program by paying a certain
amount, which in turn entitles him to be paid in a
certain amount if recruit was able to get a
minimum recruitment of 4 investors. (Power
Homes Unlimited Corporation v. SEC)
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.
III. Fractional undivided interest in oil, gas, or
other mineral rights
They are included because they are notorious
subjects of speculation and fraud. The law
prohibits the forms of splitting mineral interest
which had been mostly utilized for speculative
purposes.
Interest included are those regarded as giving
ownership of oil or gas in place as well as to
interests which merely afford the owner the right
to produce oil or gas. There is no fractional
undivided interest if the whole landowner’s
royalty is transferred, even though under the
terms of the lease holder may be entitled to only
a fraction of the production.
IV. Derivatives like options and warrants
Derivative means a financial instrument whose
value depends on the interest in or performance
of an underlying security, but which does not
require any investment of principal in the
underlying security.
Options are contracts that give the buyer the
right to buy or sell an underlying security at a
predetermined price (exercise/ strike price) on or
before the expiry date which can only be
extended in accordance with the Exchange rules.
1. Call options are rights to buy. It is a
transferrable option to buy a specified
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SECURITIES REGULATION CODE
number of shares at a stated price. It
entitles the holder to buy securities at a
predetermined price within a specified
period of time.
An option that in consideration of
premium paid entitles buyer the right to
compel seller to deliver to him a certain
number of share of named stock within
a given time at a stipulated price which
is usually higher than the prevailing
market price at the time the “call” is
bought
2. Put options are rights to sell. It is a
transferrable option or offer to deliver a
given number of shares of stock at a
stated price at any given time during a
stated period
An option that, in consideration of
premium paid, gives the purchaser the
right to make the seller take from him a
given number of shares of a named
stock between a given time at a
stipulated price, which is usually below
a prevailing market price of the stock at
the time the “put” is purchased.
3. Straddle option is a double privilege of
a “put” and a “call”, and secures to
holder the right to demand of seller at a
certain price within a certain time a
certain number of shares of specified
stock, or to require him to take, at the
price within the time, the same shares of
stock.
Regulation of Option Trading (Sec 25)
The SRC prohibits members of an Exchange
from directly or indirectly endorsing or
guaranteeing the performance of a put, call,
or staddle.
Warrants are rights to subscribe or purchase
new or existing shares in a company before the
expiry date which can only be extended in
accordance with the Exchange rules. Generally,
they have longer exercise periods than options.
1. Warrant Certificate represents the
right to a Warrant
a. Detachable warrant may be
sold, transferred or assigned to
any person by the
warrantholder separate from
and independent of, the
corresponding Beneficiary
Securities2.
b. Nondetachable warrant may
not be sold, transferred or
assigned to any person by the
warrantholder separate from
and independent of, the
corresponding Beneficiary
Securities.
2. Warrant Instrument is a written
document containing the terms and
conditions of the issue and exercise of a
Warrant, which include
a. A maximum underlying
shares3 that can be purchased
upon the exercise
b. The exercise period
c. Other provisions required by
the Commission.
V. Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments
VI. Proprietary or non-proprietary membership
certificates in corporations
VII. Other instruments as may in the future be
determined by the SEC.
The enumeration can be broadly classified into:
1. Equity securities (shares of stocks,
investment contract, etc.)
2. Debt securities (bonds, debentures, notes,
etc.)
a. Long term commercial paper
means an evidence of indebtedness
of any person with a maturity of
more than 365 days.
b. Short term commercial paper
means an evidence of indebtedness
2
Beneficiary Securities means the shares of stocks and other
securities of the Issuer which form the basis of the entitlement in a
Warrant. (Rule 12.1 (7) Amended IRR of SRC)
3
Underlying Shares means the unissued shares of a corporation
which may be purchased by the Warrantholder upon the exercise
of the right granted under the warrant. (ibid)
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of any person with a maturity of
365 days or less.
Registration of Securities
Securities shall not be sold or offered for sale or
distribution within the Philippines, without a
registration statement duly filed and approved by the
SEC.
The SEC is concerned with the requirement of full
disclosure of information to the public, prior to and
after the certificates are registered with the SEC, and
the merits of the securities themselves and the issuer.
Mere registration as a corporation does not
automatically authorize it to deal with unregistered
timeshares. Corporate registration is just one of
several requirements before they may deal with time
shares. (Timeshare Realty Corporation v Lao and
Cortez, 544 SCRA 254)
Disclosure
Initially, information is disclosed in Registration
Statement and the Prospectus. Thereafter, there are
periodic and other reports submitted to the SEC.
Periods for Disclosure
1. Pre-filing period
2. The period between the filing of registration
statement and the effective date
3. Post-effective period.
Thus, disclosure is a continuing requirement
Procedure for Registration of Securities
A. All securities required to be registered shall be
registered through the filing by the issuer in the
main office of the Commission, of a:
 Sworn registration statement with respect to
such securities
 In such form and containing information and
documents as prescribed
 It shall include any prospectus required or
permitted to be delivered.
Registration Statement
It is the application for registration of securities
required to be filled with SEC which contains all
information about the issuer and the securities it will
issue. It shall contain among others the:
 Name of the corporation
 Directors
 Officers
 Nature of business
 Income for the past 5 years
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For all that is excellent and eminent is as difficult as it is rare.
 Income projection for the next 5 years
 Assets
 Actual or contingent liabilities
The registration statement shall be signed by the
issuers:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
f. Corporate secretary
g. Persons performing similar functions
accompanied by a duly verified resolution.
B. The issuer shall pay to the Commission a fee of
not more than 1/10 of one percent of the
maximum aggregate price at which such
securities are proposed to be offered.
C. Notice of filing of the registration statement shall
be immediately published in two (2) newspapers
of general circulation in the Philippines, once a
week for two consecutive weeks or in such other
manner as the Commission by rule shall
prescribe.
D. Within 45 days after the filing or any later date
to which the issuer consented, the commission
shall declare it effective or rejected, unless the
applicant is allowed to amend the registration
statement.
E. If approved, the commission shall enter an order
declaring such effective.
F. Upon effectivity of registration, the issuer shall
state under oath in every prospectus that all
registration requirements have been met and all
the information are true and correct.
Prospectus
It is a document made by or on behalf of an issuer,
underwriter or dealer to sell or offer securities for the
sale to the public through a registration statement
filed with the SEC.
Gun Jumping
It is the prohibited practice of selling or offering to
sell securities before the effective date of registration.
Types of Securities
1. Exempt – can be sold even without the
requisite registration
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SECURITIES REGULATION CODE
2. Not exempt – cannot be sold within the
Philippines unless registered
3. Sold on exempt transactions – need not be
registered; must pay a fee equivalent to 1/10
of 1% of the minimum aggregate price or
issued value of the securities
Exempt Securities
The requirement of registration does not apply to the
following classes of securities:
a. Any securities issued or guaranteed by the
government of the Philippines or any or its
political subdivision or agency or by any
person controlled or supervised by, and
acting as an instrumentality in said
government
b. Any securities issued or guaranteed by any
country with which Philippines maintain a
diplomatic relations, or by any state,
province, or political subdivision thereof on
the basis of reciprocity: provided that the
Commission may require compliance with
the prescribed form and content of
disclosures
c. Certificates issued by a receiver or trustee in
bankruptcy duly approved by the proper
adjudicatory body
d. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau
of Internal Revenue
e. Any security issued by a bank, except its
own shares.
While the law exempts from registration the
securities issued by banks, it does not mean
that it is exempted from complying with the
reports or reportorial requirements. The
exemption enjoyed by banks is confined
merely to the initial requirement of
registration of securities for public offering
and not to the subsequent filing of various
periodic reports. (Union Bank of the
Philippines v SEC, 358 SCRA 479)
The SEC, after public hearing, may add exempt
securities if it finds that the enforcement of the Code
with respect to such securities is not necessary in
public interest and for the protection of the investors.
They are exempt securities because they are already
under the supervision of another government agency.
Exempt Transactions
The requirement of registration shall not apply to the
sale of any security in any of the following
transactions:
1. Judicial sale by executor, administrator,
guardian/receiver in insolvency or
bankruptcy;
2. Sale of pledged or foreclosed property to
liquidate debts;
3. Sale on isolated transactions by owner;
4. Distribution of stock dividends;
5. Sale of capital stock to stockholders where
no commission is paid;
6. The issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, where the entire mortgage
together with all the bonds or notes secured
thereby are sold to a single purchaser at a
single sale;
7. Issuance of security in exchange of any
security from same issuer pursuant to right
of conversion;
8. Broker’s transactions, executed upon
customer’s orders on any registered
Exchange or other trading market;
9. Pre-incorporation subscription;
10. Exchange of securities by issuer with
securities holders exclusively;
11. Sale to less than 20 persons during any 12
month period;
12. Sale of securities to any number of the
following qualified buyers:
a. banks;
b. registered investment houses;
c. insurance company;
d. pension fund or retirement plan
maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko
Sentral to engage in trust functions;
e. investment company;
f. such other person as the Commission
may rule determine
The SEC may add exempt transactions if it finds that
the requirements of registration under this Code is
not necessary in public interest and for the protection
of the investors.
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These transactions are exempt because of the
following reasons:
 it involves small amount
 limited character of the offering
 it does not involve the public.
A person applying for an exemptions shall file with
the Commission a notice identifying the exemption
relied upon on such form and at such time as the
Commission by rule may prescribe and with such
notice shall pay the commission a fee equivalent to
1/10 of one percent of the maximum aggregate price
or issued value of the securities.
The issuance by a corporation of previously
authorized but unissued capital stock to existing
stockholders is not automatically exempt from
registration and requires an application for
exemption. (Nestle Philippines, Inc. v CA, 203 SCRA
504) However, under the IRR, notice of confirmation
of exemption and payment of the fee are sufficient.
Revocation/ Rejection of Registration
The SEC may reject a registration statement and
refuse registration of the security thereunder, or
revoke the effectivity of the registration statement
and registration of the security thereunder after due
notice and hearing by issuing an order to such effect
if it finds that:
1. The issuer
a. Has been judicially declared
insolvent
b. Has violated any provisions of law
c. Has been or is engaged or is about
to engage in fraudulent transaction
d. Has made any false or misleading
representation of material facts in
any prospectus
e. Has failed to comply with any
requirement imposed as a 2. The sale or offering for sale of the security
condition for registration
2. The registration statement on its face is
incomplete or inaccurate in any material
respect
3. The issuer4 has been convicted of an
offense involving moral turpitude and/or
fraud and is enjoined or restrained for
violations of laws.
4
Issuer, any officer, director or controlling person of the issuer, or
person performing similar functions or any underwriter.
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For all that is excellent and eminent is as difficult as it is rare.
Omission of a material fact may result not only in the
revocation of registration but also in criminal
liability.
If a person committed fraudulent acts like non-
liquidation of cash advances which constitute the
offense of estafa under RPC, the criminal case may
be prosecuted independently and simultaneously with
the corporate/ civil case for such violation. The
doctrine of primary jurisdiction no longer precludes
filing of the criminal case with the corporate/ civil
case (Fabia v CA, 388 SCRA 574)
It is one thing for a corporation to issue checks to
satisfy isolated individual obligations, and another for
the corporation to execute an elaborate scheme where
it would comport itself to the public as pseudo-
investment house and issue postdated checks instead
of stocks or traditional securities to evidence the
investments of its patrons. (Gabioza v CA, 565 SCRA
38)
Grounds for Suspension or Cancellation of
Certificate of Registration (Sec. 6 [L])
1. fraud in procuring registration;
2. serious misrepresentation as to objectives of
corporation;
3. refusal to comply with lawful order of SEC;
4. continuous inoperation for at least 5 years;
5. failure to file by-laws within required
period;
6. failure to file reports; and
7. other similar grounds.
Suspension of Registration (Sec. 15):
1. If any time, the information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or
incomplete in any material respect; or
registration there under may work or tend to
work a fraud;
3. Pending investigation of the security
registered to ascertain whether the
registration of such security should be
revoked on any ground specified in this
Code; and
4. Refusal to furnish information required by
the Commission.
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SECURITIES REGULATION CODE
UNLAWFUL ACTS
I. In Connection with Manipulation of Security
Prices (Sec 24)
A. The SRC prohibits schemes or practices to create
a falls or misleading appearance of active trading
in any listed security.
1. Wash Sale
By effecting any transaction in
such security which involves no
change in the beneficial ownership
thereof
2. Matched Orders
By entering an order/s for the
purchase of sale of such security
with knowledge that a simultaneous
orders or orders substantially the
same size, time and price, for the
sale or purchase of any such
securities, has or will be entered by
or for the same or different
colluding parties
3. Market rigging or jiggling
By performing similar acts where
there is no change of beneficial
ownership
B. Practices to effect, alone or with others a series of
transactions that:
1. Raises their price to induce the purchase of
securities
2. Depresses their price to induce the sale of
securities
3. Creates active trading to induce a purchase
or sale through manipulative devices such as
a. marking the close
 Buying or selling at the
last minute of the trading.
b. painting the tape,
 painting a rosy picture
about the security to
induce buying.
c. squeezing the float,
 limits the supply of
securities.
d. hype and dump,
 hype the shares so that the
price will increase and
then dump it.
e. boiler room operations and such
other similar devices
C. To circulate and disseminate information that the
price of any security listed will or is likely to rise and
fall because of manipulative market operations of any
person conducted for the purpose of raising or
depressing the price for the purpose of inducing the
purchase or sale of such security.
D. To make false or misleading statements with
respect to material fact, which he knew or had
reasonable ground to believe that was false or
misleading, for the purpose of inducing the purchase
or sale of any security listed.
E. To effect any series of transactions for the
purchase and sale of any security listed and traded for
the purpose of pegging, fixing or stabilizing the price
of such security, unless otherwise allowed by this
code or by the rules of the Commission.(Active
Trading through a manipulative device or
scheme)
F. To use or employ, in connection with the purchase
or sale, any manipulative or deceptive device or
contrivance. Short sale and Stop-loss order5 cannot be
effected except in accordance with the rules of the
Commission
II. In Connection with the Sale of Securities
A. Short Selling Transaction
It is the selling of securities that the seller
does not own or those securities that the
seller owns but he cannot deliver within 20
days from the transaction.
B. Short Swing Transaction
It is the buying and selling or selling and
buying of securities within a period of six
months.
Any profit realized by the owner of more
than 10% of any class of equity security of a
corporation with assets of at least P50
Million and with at least 200 stockholders
each holding 100 shares of a class of its
security, director, or officer of such
corporation, from any purchase and sale or
any sale and purchase of any equity security
of the corporation in less than 6 months shall
inure to the benefit of the corporation, unless
the security was acquired in good faith in
5
Stop-loss order is an order to broker to sell or buy stock as soon
as the market price reaches a designated figure.
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connection with a debt previously c. relatives by affinity or

contracted.
The prescriptive period to file an action to
recover shall be two years.
C. Over the Counter Transactions
It is the buying and selling of securities
outside the facilities of the accredited Stock
Exchange. It also refers to creating your own
market place.
D. Insider Trading
It is the buying or selling or securities by an
insider while in possession of material
information with respect to the issuer or the
security that is not generally available to the
public, unless:
a. The insider proves that the
information was not gained from
such relationship; or
b. If the other party selling to or
buying from the insider is
identified, the insider proves:
- That he disclosed the
information to the other
party, or
- That he had reason to
believe that the other party
otherwise is also in
possession of the
information.
The insider can raise as a defense that the
information is “generally available.”
Requisites
1. There must be buying and selling
of securities
2. It must be done by an insider
3. It must be done while in the
possession of a material non-public
information.
Presumptions
A purchase or sale of security by the
following persons shall be presumed to have
been effected while in possession of material
non-public information if transacted after
such information came into existence but
prior to dissemination to the public and the
lapse of reasonable time for the market to
absorb such:
a. an insider
b. spouse of an insider
consanguinity within the second
degree of an insider
d. common law spouse of an insider
Insider6 means:
a) The issuer
b) A director or officer (or person
performing similar functions) of,
or a person controlling the issuer
c) A person whose relationship or
former relationship to the issuer
gives or gave him access to
material information about the
issuer or the security that is not
generally available to the public
d) A government employee, or
director, or officer of an exchange,
clearing agency and/or self-
regulatory organization who has
access to material information
about an issuer or a security that is
not generally available to the
public, or
e) A person who learns such
information by a communication
from any of the foregoing insiders
(Sec. 3.8)
The duty to disclose or abstain is based on
two factors: first, the 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; and second, the inherent unfairness
involved when a party takes advantage of
such information knowing it is unavailable
to those with whom he is dealing.
Material Non-Public
1. 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
2. It would be considered by a
reasonable person important under
the circumstances in determining
6
The insiders enumerated from letters a to e are considered actual
insiders while those insiders which fall under letter e is considered
as a constructive insider.

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 LIBERTAS ET IUSTICIA
SECURITIES REGULATION CODE
the course of action whether to buy,
sell or hold a security.
It shall be unlawful for any insider to
communicate it to any person, who by virtue
of the communication, becomes an insider
where the insider communicating knows or
has reason to believe that such person will
likely buy or sell a security while in
possession of such information.
Test of Materiality
The materiality concept is judgmental in
nature and is not possible to translate into a
numerical formula. A fact is material if it
induces or tends to induce or otherwise
affect the sale or purchase of securities. If
the facts of a certain nature and reliability
can influence a reasonable person’s decision
to retain, sell or buy securities.
Section 23 imposes an obligation to submit a
statement indicating ownership of the
issuer’s securities and such changes to his or
her ownership upon:
a. A beneficial owner of more than
10% of any class of an equity
security, or
b. A director or any officer of the
issuer
E. Tender Offer
The take-over movement in the United
States gave birth to this rule to protect the
investing public against misleading
statements made in the course of a struggle
for corporate control. This led to the
regulations on “take-over bid.” It includes
regulations for the protection of
shareholders’ interests of proxy solicitation7
and tender offers.
It means a publicly announced intention by a
person acting alone or in convert with other
persons to acquire equity securities of a
public company. It is otherwise known as
take-over bids.
It is intended to protect the minority
shareholders against any scheme that dilutes
the share value of their investments. It also
gives the minority shareholders the chance
to exit the company under reasonable terms,
7
See Sec 20, SRC
giving them the opportunity to sell their
shares at the same price as those of the
majority shareholders.
Public Company
The following are considered public:
1. Those listed in the Philippine Stock
Exchange
2. Those not listed in the Philippine Stock
Exchange where the asset of the
corporation is at least P50,000,000 with
at least 200 stockholders each owning at
least 100 shares.
Mandatory Tender Offer
Tender offer is mandatory when:
1. any person or groups of persons acting
in concert, who
a. intends to acquire 35% or more
of equity shares of public
company
b. intends to acquire 35% or more
of equity shares in a public
company in one or more
transactions within a period of
12 months.
2. If any acquisition of even less than 35%
would result in ownership of over 51%
of the total outstanding equity securities
of a public company8.
Mandatory tender offer shall not apply in
the following cases:
1. Any purchase of shares from:
a. The unissued capital stock
provided that the acquisition
does not result to a 50% or
more ownership of shares by
the purchaser
b. an increase in the authorized
capital stock
2. Purchase in connection with:
a. foreclosure proceedings
involving a duly constituted
pledge or security arrangement
when the acquisition is made
by the debtor or creditor
b. privatization undertaken by the
government of the Philippines
c. corporate rehabilitation under
court supervision
8
The tender offer shall be at a price supported by a fairness option
provided by an independent financial advisor or equivalent third
party.
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Nationalism • Egalitarianism • Scholasticism
 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
3. Purchase through an open market at the
prevailing market price; and
4. Merger or consolidation.
Procedure
A person who is making a tender offer is
required to make an announcement of his
intention in a newspaper of general
circulation, prior to the commencement of
the offer. At least 2 business day prior to the
date of the commencement of the tender
offer, he must:
a. File with the SEC a required form
for the tender offer, including all
exhibits, with the prescribed filing
fees.
b. Hand deliver a copy thereof to the
target company at its principal
executive office and to each
exchange where such class of the
target company’s securities are
listed for trading; and
c. Report the results thereof, by filing
with the SEC, not later than 10
calendar days after the termination
of the tender offer, copies of final
amendment to the form.
Ownership acquisition covers both direct
and indirect acquisition. The determination
of the power of control is the decisive factor.
The rules apply even if one will acquire the
shares in a corporation that owns the shares
of a public company, including subsidiary.
(CEMCO Holdings, Inc. V National Life
Insurance Company, Inc., August 7, 2007)
Tender offer can be avoided by lending
money instead of buying the shares with an
option to buy the same after one year.
Option contract with the right to vote should
be executed in the meantime.
Penalty
The court, at its discretion, may impose a
penalty of 7 years to 21 years of
imprisonment and/ or P50,000 to 1,000,000
fine.
III. Other Unlawful Acts
It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale of
any securities to:
1. Employ any device, scheme or artifice to
defraud;
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For all that is excellent and eminent is as difficult as it is rare.
2. Obtain money or property by means of any
untrue statement of a material fact or any
omission to state a material fact necessary in
order to make the statements made, in the
light of the circumstances under which they
were made, not misleading; or
3. Engage in any act, transaction, practice or
course of business which operates or would
operate as a fraud or deceit upon any person.
— oOo —
Margin Trading
It happens when a customer purchases stocks by
advising only a portion of the purchase price with the
broker extending credit or making loan for the
balance due. It allows investors to buy more
securities than their cash position would normally
allow. Investors pay only a portion of the purchase
price; their broker advances for them the balance of
the purchase price and keeps the securities as
collateral for the advance or loan.
The law requires payment of traded shares within
specified period in order to protect and stabilize the
economy from excessive stock market speculations
and are thus mandatory. The main purpose for such
regulation is to give a government credit agency an
effective method of reducing the aggregate amount of
the nation’s credit resources which can be directed by
speculation into the stock market and out of other
more desirable uses of commerce and industry.
The Broker Dealer shall not extend credit to a
customer in an amount that exceeds 50% of the
current market value of the security at the time of the
transaction. In no event shall new or additional credit
be extended in to an account in which the equity is
less than P50,000.00.9
The margin maintained is a margin account of a
customer shall be no less than:
a. 25% of the current market value of all
securities ‘long’ in the account; and
b. 30% of the current market value of all
securities ‘short’ in the account
9
From Aquino. Please verify according to 2006 Libertas corpo
notes and Marx Notes: Credit extended must not be greater than
whichever is higher of: 65% of current market price of the security
100% of lowest market price of security during preceding 36
calendar months but not greater than 75% of the current market
price. Although hindi ata ito diniscuss ni dean sa atin.
 LIBERTAS ET IUSTICIA
SECURITIES REGULATION CODE
Mandatory Close-out Rule
- A call for additional margin shall be issued
by the broker to the customer when there is
an insufficiency of margin.
- A call for initial margin must be satisfied
within 5 business days from the date of
insufficiency created.
- A call for maintenance of margin shall be
satisfied within 24 hours after the call is
issued.
If parties violate the limitations on margin trading,
they may be considered in pari delicto. The broker
violated the law at his own peril. Hence, he cannot
complain for failing to obtain full amount of its claim
for other transactions.
— oOo —
REMEDIES
A. Administrative
The SEC may impose administrative sanctions
like:
 Imposition of fine or penalty
 Revocation of license of any stock
broker
 Revocation of the corporate
registration
 Disqualification from holding any
position from any corporation
 Revocation of a stock and transfer
book erroneously issued.
B. Civil
The SEC may issue a Cease and Desist Order
(CDO). The order must specify the provision of
law as basis for such issuance. It may be issued
ex parte or without necessity of hearing. It must
also be signed by majority on the commissioner.
There are three bases for the issuance of such.
1. Section 5(i) – predicated on the necessity to
“prevent fraud or injury to the investing public.”
No other requisite or detailed is tied to this CDO.
2. Section 53.3 – any person has engaged or is
about to engage in any act constituting the
violation of the code and that there is a
reasonable likelihood of continuing further or
future violations. Maximum duration of CDO
issued under his section is 10 days.
3. Section 64 – an act will operate as fraud or
is otherwise likely to cause grave or irreparable
injury to the investing public. No lifetime is
expressly specified, a respondent may file a
formal request for the lifting thereof. The SEC
must hear within 15 days from filing and
The following are the instances where CDO
under this provision may be issued:
a) After proper investigation or
verification
b) Motu proprio
c) Upon verified complaint by an
aggrieved party
It is an error on part of the SEC in granting a
CDO without stating which kind of CDO as it is
an act that contravenes due process. Also, the
fact that the CDO was signed by only one
commissioner likewise renders the order totally
infirm. (GSIS v CA, 585 SCRA 679)
There are two essential requisites before the SEC
may issue CDO. First, it must conduct proper
investigation and second there must be a finding
that the act or practice, unless restrained, will
operate as fraud on investors or is otherwise
likely to cause grave or irreparable injury to the
investing public. The act of SEC in referring to
the BSP whether or not the business activities
amount to foreign exchange trading is an
essential part of verification process. (SEC v
Performance Foreign Exchange Corporation,
495 SCRA 579)
C. Criminal
A criminal complaint for any violation of the
code and its implementing rules and regulations
must first be filed with the SEC and if
commission finds that there is probable cause,
then it should refer the case to the Department of
Justice. A criminal charge for violation of SRC
is a specialized dispute. Hence, it must first be
referred to an administrative agency of special
competence. (Baveria v Standard Chartered
Bank, et. al, 515 SCRA 170)
The filing of civil/ intra-corporate case with the
SEC does not preclude the simultaneous and
concomitant filing of criminal actions before the
regular courts.
— oOo —
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Nationalism • Egalitarianism • Scholasticism
 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
INTRACORPORATE 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 (2006 Bar Question).
TESTS:
1. Relationship Test
The controversy must pertain to any of the
following relationships between:
a. The corporation, partnership, or
association and the public;
b. The corporation, partnership, or
association and its stockholders,
partners, members or officers
c. The corporation, partnership, or
association and the state in so far as
its franchise, permit or license to
operate is concerned; and
d. Among the stockholders, partners
or associates themselves. (Union
Glass & Container Corporation v
SEC, 126 SCRA 21)
2. Nature of the Controversy Test
It is not the mere existence of relationship
that gives rise to an intra-corporate
controversy. Under this test, the incidents of
that relationship must also be considered.
The controversy must not only be rooted in
the existence of the relationship, but must as
well pertain to enforcement of correlative
rights and obligations under the Corporation
Code. (DRMC Enterprises v Esta del Sol
Mountain Reserve Inc, 1984)
Jurisdiction
The enactment of RA 8799 transferred the
jurisdiction of the SEC over intra-corporate
controversies and other cases enumerated in Section
5 of PD 902-A has been transferred to RTC acting as
a special commercial court.
RTC, not designated as a special commercial court,
hearing on an intra-corporate dispute has only one
action to take. It has to dismiss the petition for lack of
jurisdiction. (Calleja v Panday, 483 SCRA 60)
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For all that is excellent and eminent is as difficult as it is rare.
Concomitant to the power of the RTC to hear and
decide intra-corporate controversies is the authority
to issue orders necessary or incidental to the carrying
out of the powers expressly granted to it, including in
appropriate cases, the holding of a special
stockholders meeting. (Yujuico v Quiambao, 513
SCRA 243)
Thus, a case is not considered intra-corporate even if
dispute is among stockholders if the issue is
determination and distribution of successional rights
to the shareholdings or of a deceased shareholder.
(Reyes v RTC of Makati, 561 SCRA 593)
Before a dismissal or removal of an employee could
properly fall within the jurisdiction of RTC acting as
special commercial court, it has to be first established
that the persons removed or dismissed was a
corporate officer. Corporate officers are those
officers of the corporation who are given that
character by the Corporation Code or by the
corporation’s by-laws. (Garcia v Eastern
Telecommunications Philippines, Inc. 585 SCRA 450)
— oOo —
REGULATORY JURISDICTION
The regulator and supervisory powers of the
Commission were broad enough to include the power
to regulate securities-related organization’s fee.
Charging exorbitant processing fee could discourage
many small prospective investors and curtail the
infusion of money into the capital market and hamper
its growth. (Philippine Association of Stock Transfer
and Registry Agencies, Inc. v CA, 539 SCRA 61)
The SEC can only reverse the decision of PSE in
matters of application for listing in the market when
it the decision is attended by bad faith. The stock
exchange cannot be compelled by the SEC to allow
the share of sales of a corporation where there are
serious questions regarding the ownership of the
shares and that properties of the corporation belong
to naval and forest reserves. (PSE v SEC, 281 SCRA
232)
SEC has jurisdiction over corporations organized
pursuant to Corporation Code even if the majority or
controlling shares are owned by the government.
While SEC may not have authority over government
corporations with original charters or those created
by special law, it does have jurisdiction over
 LIBERTAS ET IUSTICIA
SECURITIES REGULATION CODE

acquired asset corporation10. (PNCC v Pabion, 320

SCRA 188)

There is no requirement that a stockholder of a

corporation must be a registered one in order for the
SEC to take cognizance of a suit seeking to enforce a
right of a stockholder. Needless to say, any problem
encountered in securing the certificates of stocks
must be expeditiously dealt with through
administrative madamus proceedings with SEC,
rather than through the usual tedious court procedure.
(TCL Sales Corporation v CA, 349 SCRA 35)

The SEC has jurisdiction to entertain a complaint

when an ultra vires act of a corporation is the thrust
of the complaint. When a corporation engaged in
pawnbroking, even though its articles does not allow
it, the complaint should be treated as violation of the
corporate franchise. (Pilipinas Loan Company, Inc v
SEC, 356 SCRA 193)

SEC is the administrative agency responsible for the

registration and monitoring of stock and transfer
book (STB). Considering that SEC, after due notice
and hearing, has the regulatory power to revoke
corporate franchise, the SEC must likewise have the
lesser power of merely recalling and cancelling a
STB that was erroneously registered. (Provident
International Resources, Corp. v Venus, 544 SCRA
540)

10
It is a corporation which is under private ownership, the voting
or outstanding shares of which were conveyed to the government
in satisfaction of debts whether foreclosure or otherwise.

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Nationalism • Egalitarianism • Scholasticism