1

G.R. No. L-23004

June 30, 1965

MAKATI STOCK EXCHANGE, INC., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION and MANILA STOCK
EXCHANGE, respondents.
Hermenegildo B. Reyes for petitioner.
Office of the Solicitor General for respondent Securities and Exchange Commission.
Norberto J. Quisumbing and Emma Quisumbing-Fernando for respondent Manila
Stock Exchange.
BENGZON, C.J.:
This is a review of the resolution of the Securities and Exchange Commission which
would deny the Makati Stock Exchange, Inc., permission to operate a stock exchange
unless it agreed not to list for trading on its board, securities already listed in the Manila
Stock Exchange.
Objecting to the requirement, Makati Stock Exchange, Inc. contends that the
Commission has no power to impose it and that, anyway, it is illegal, discriminatory and
unjust.
Under the law, no stock exchange may do business in the Philippines unless it is
previously registered with the Commission by filing a statement containing the
information described in Sec. 17 of the Securities Act (Commonwealth Act 83, as
amended).
It is assumed that the Commission may permit registration if the section is complied
with; if not, it may refuse. And there is now no question that the section has been
complied with, or would be complied with, except that the Makati Stock Exchange, upon
challenging this particular requirement of the Commission (rule against double listing)
may be deemed to have shown inability or refusal to abide by its rules, and thereby to
have given ground for denying registration. [Sec. 17 (a) (1) and (d)].
Such rule provides: "... nor shall a security already listed in any securities exchange be
listed anew in any other securities exchange ... ."
The objection of Makati Stock Exchange, Inc., to this rule is understandable. There is
actually only one securities exchange The Manila Stock Exchange that has been
operating alone for the past 25 years; and all or presumably all available or
worthwhile securities for trading in the market are now listed there. In effect, the
Commission permits the Makati Stock Exchange, Inc., to deal only with other securities.
Which is tantamount to permitting a store to open provided it sells only those goods not
sold in other stores. And if there's only one existing store, 1 the result is a monopoly.

It is not farfetched to assert as petitioner does 2 that for all practical purposes, the
Commission's order or resolution would make it impossible for the Makati Stock
Exchange to operate. So, its "permission" amounted to a "prohibition."
Apparently, the Commission acted "in the public interest." 3 Hence, it is pertinent to
inquire whether the Commission may "in the public interest" prohibit (or make
impossible) the establishment of another stock exchange (besides the Manila Stock
Exchange), on the ground that the operation of two or more exchanges adversely affects
the public interest.
At first glance, the answer should be in the negative, because the law itself
contemplated, and, therefore, tacitly permitted or tolerated at least, the operation of two
or more exchanges.
Wherever two or more exchanges exist, the Commission, by order, shall require and
enforce uniformity of trading regulations in and/or between said exchanges. [Emphasis
Ours] (Sec. 28b-13, Securities Act.)
In fact, as admitted by respondents, there were five stock exchanges in Manila, before
the Pacific War (p. 10, brief), when the Securities Act was approved or amended.
(Respondent Commission even admits that dual listing was practiced then.) So if the
existence of more than one exchange were contrary to public interest, it is strange that
the Congress having from time to time enacted legislation amending the Securities Act, 4
has not barred multiplicity of exchanges.
Forgetting for the moment the monopolistic aspect of the Commission's resolution, let
us examine the authority of the Commission to promulgate and implement the rule in
question.
It is fundamental that an administrative officer has only such powers as are expressly
granted to him by the statute, and those necessarily implied in the exercise thereof.
In its brief and its resolution now subject to review, the Commission cites no provision
expressly supporting its rule. Nevertheless, it suggests that the power is "necessary for
the execution of the functions vested in it"; but it makes no explanation, perhaps relying
on the reasons advanced in support of its position that trading of the same securities in
two or more stock exchanges, fails to give protection to the investors, besides
contravening public interest. (Of this, we shall treat later) .
On the legality of its rule, the Commission's argument is that: (a) it was approved by the
Department Head before the War; and (b) it is not in conflict with the provisions of
the Securities Act. In our opinion, the approval of the Department, 5 by itself, adds no
weight in a judicial litigation; and the test is not whether the Act forbids the
Commission from imposing a prohibition, but whether it empowers the Commission to
prohibit. No specific portion of the statute has been cited to uphold this power. It is not
found in sec. 28 (of the Securities Act), which is entitled "Powers (of the Commission)
with Respect to Exchanges and Securities." 6

According to many court precedents, the general power to "regulate" which the
Commission has (Sec. 33) does not imply authority to prohibit." 7
The Manila Stock Exchange, obviously the beneficiary of the disputed rule, contends
that the power may be inferred from the express power of the Commission to suspend
trading in a security, under said sec. 28 which reads partly:
And if in its opinion, the public interest so requires, summarily to suspend trading in
any registered security on any securities exchange ... . (Sec. 28[3], Securities Act.)
However, the Commission has not acted nor claimed to have acted in pursuance of
such authority, for the simple reason that suspension under it may only be for ten days.
Indeed, this section, if applicable, precisely argues against the position of the
Commission because the "suspension," if it is, and as applied to Makati Stock Exchange,
continues for an indefinite period, if not forever; whereas this Section 28 authorizes
suspension for ten days only. Besides, the suspension of trading in the security should
not be on one exchange only, but on all exchanges; bearing in mind that suspension
should be ordered "for the protection of investors" (first par., sec. 28) in all exchanges,
naturally, and if "the public interest so requires" [sec. 28(3)].
This brings up the Commission's principal conclusions underlying its determination
viz.: (a) that the establishment of another exchange in the environs of Manila would be
inimical to the public interest; and (b) that double or multiple listing of securities should
be prohibited for the "protection of the investors."
(a) Public Interest Having already adverted to this aspect of the matter, and the
emerging monopoly of the Manila Stock Exchange, we may, at this juncture, emphasize
that by restricting free competition in the marketing of stocks, and depriving the public
of the advantages thereof the Commission all but permits what the law punishes as
monopolies as "crimes against public interest." 8
"A stock exchange is essentially monopolistic," the Commission states in its resolution
(p. 14-a, Appendix, Brief for Petitioner). This reveals the basic foundation of the
Commission's process of reasoning. And yet, a few pages afterwards, it recalls the
benefits to be derived "from the existence of two or more exchanges," and the
desirability of "a healthy and fair competition in the securities market," even as it
expresses the belief that "a fair field of competition among stock exchanges should be
encouraged only to resolve, paradoxically enough, that Manila Stock Exchange shall, in
effect, continue to be the only stock exchange in Manila or in the Philippines.
"Double listing of a security," explains the Commission, "divides the sellers and the
buyers, thus destroying the essence of a stock exchange as a two-way auction market for
the securities, where all the buyers and sellers in one geographical area converge in one
defined place, and the bidders compete with each other to purchase the security at the
lowest possible price and those seeking to sell it compete with each other to get the
highest price therefor. In this sense, a stock exchange is essentially monopolistic."

Inconclusive premises, for sure. For it is debatable whether the buyer of stock may get
the lowest price where all the sellers assemble in only one place. The price there, in one
sale, will tend to fix the price for the succeeding, sales, and he has no chance to get a
lower price except at another stock exchange. Therefore, the arrangement desired by
the Commission may, at most, be beneficial to sellers of stock not to buyers
although what applies to buyers should obtain equally as to sellers (looking for higher
prices). Besides, there is the brokerage fee which must be considered. Not to mention
the personality of the broker.
(b) Protection of investors. At any rate, supposing the arrangement contemplated is
beneficial to investors (as the Commission says), it is to be doubted whether it is
"necessary" for their "protection" within the purview of the Securities Act. As the
purpose of the Act is to give adequate and effective protection to the investing public
against fraudulent representations, or false promises and the imposition of worthless
ventures, 9 it is hard to see how the proposed concentration of the market has a
necessary bearing to the prevention of deceptive devices or unlawful practices. For it is
not mere semantics to declare that acts for the protection of investors are necessarily
beneficial to them; but not everything beneficial to them is necessary for their
protection.
And yet, the Commission realizes that if there were two or more exchanges "the same
security may sell for more in one exchange and sell for less in the other. Variance in
price of the same security would be the rule ... ." Needless to add, the brokerage rates
will also differ.
This, precisely, strengthens the objection to the Commission's ruling. Such difference in
prices and rates gives the buyer of shares alternative options, with the opportunity to
invest at lower expense; and the seller, to dispose at higher prices. Consequently, for the
investors' benefit (protection is not the word), quality of listing 10 should be permitted,
nay, encouraged, and other exchanges allowed to operate. The circumstance that some
people "made a lot of money due to the difference in prices of securities traded in the
stock exchanges of Manila before the war" as the Commission noted, furnishes no
sufficient reason to let one exchange corner the market. If there was undue
manipulation or unfair advantage in exchange trading the Commission should have
other means to correct the specific abuses.
Granted that, as the Commission observes, "what the country needs is not another"
market for securities already listed on the Manila Stock Exchange, but "one that would
focus its attention and energies on the listing of new securities and thus effectively help
in raising capital sorely needed by our ... unlisted industries and enterprises."
Nonetheless, we discover no legal authority for it to shore up (and stifle) free enterprise
and individual liberty along channels leading to that economic desideratum. 11
The Legislature has specified the conditions under which a stock exchange may legally
obtain a permit (sec. 17, Securities Act); it is not for the Commission to impose others. If
the existence of two competing exchanges jeopardizes public interest which is

doubtful let the Congress speak. 12 Undoubtedly, the opinion and recommendation of
the Commission will be given weight by the Legislature, in judging whether or not to
restrict individual enterprise and business opportunities. But until otherwise directed by
law, the operation of exchanges should not be so regulated as practically to create a
monopoly by preventing the establishment of other stock exchanges and thereby
contravening:
(a) the organizers' (Makati's) Constitutional right to equality before the law;
(b) their guaranteed civil liberty to pursue any lawful employment or trade; and
(c) the investor's right to choose where to buy or to sell, and his privilege to select the
brokers in his employment. 13
And no extended elucidation is needed to conclude that for a licensing officer to deny
license solely on the basis of what he believes is best for the economy of the country may
amount to regimentation or, in this instance, the exercise of undelegated legislative
powers and discretion.
Thus, it has been held that where the licensing statute does not expressly or impliedly
authorize the officer in charge, he may not refuse to grant a license simply on the
ground that a sufficient number of licenses to serve the needs of the public have already
been issued. (53 C.J.S. p. 636.)
Concerning res judicata. Calling attention to the Commission's order of May 27, 1963,
which Makati Stock did not appeal, the Manila Stock Exchange pleads the doctrine of
res judicata. 14 (The order now reviewed is dated May 7, 1964.)
It appears that when Makati Stock Exchange, Inc. presented its articles of incorporation
to the Commission, the latter, after making some inquiries, issued on May 27, 1963, an
order reading as follows.
Let the certificate of incorporation of the MAKATI STOCK EXCHANGE be issued, and if
the organizers thereof are willing to abide by the foregoing conditions, they may file the
proper application for the registration and licensing of the said Exchange.
In that order, the Commission advanced the opinion that "it would permit the
establishment and operation of the proposed Makati Stock Exchange, provided ... it
shall not list for trading on its board, securities already listed in the Manila Stock
Exchange ... ."
Admittedly, Makati Stock Exchange, Inc. has not appealed from that order of May 27,
1963. Now, Manila Stock insists on res judicata.
Why should Makati have appealed? It got the certificate of incorporation which it
wanted. The condition or proviso mentioned would only apply if and when it
subsequently filed the application for registration as stock exchange. It had not yet

applied. It was not the time to question the condition; 15 Makati was still exploring the
convenience of soliciting the permit to operate subject to that condition. And it could
have logically thought that, since the condition did not affect its articles of
incorporation, it should not appeal the order (of May 27, 1963) which after all, granted
the certificate of incorporation (corporate existence) it wanted at that time.
And when the Makati Stock Exchange finally found that it could not successfully operate
with the condition attached, it took the issue by the horns, and expressing its desire for
registration and license, it requested that the condition (against double listing) be
dispensed with. The order of the Commission denying, such request is dated May 7,
1964, and is now under, review.
Indeed, there can be no valid objection to the discussion of this issue of double listing
now, 16 because even if the Makati Stock Exchange, Inc. may be held to have accepted
the permission to operate with the condition against double listing (for having failed to
appeal the order of May 27, 1963), still it was not precluded from afterwards contesting
17 the validity of such condition or rule:
(1) An agreement (which shall not be construed as a waiver of any constitutional right
or any right to contest the validity of any rule or regulation) to comply and to enforce
so far as is within its powers, compliance by its members, with the provisions of this Act,
and any amendment thereto, and any rule or regulation made or to be made thereunder.
(See. 17-a-1, Securities Act [Emphasis Ours].)
Surely, this petition for review has suitably been coursed. And making reasonable
allowances for the presumption of regularity and validity of administrative action, we
feel constrained to reach the conclusion that the respondent Commission possesses no
power to impose the condition of the rule, which, additionally, results in discrimination
and violation of constitutional rights.
ACCORDINGLY, the license of the petition to operate a stock exchange is approved
without such condition. Costs shall be paid by the Manila Stock Exchange. So ordered.
G.R. No. L-45655

June 15, 1938

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
VICENTE T. FERNANDEZ and JOAQUIN TRINIDAD, defendants-appellants.
Feria and La O and Pastor L. de Guzman for appellants.
Office of the Solicitor-General Tuason for appellee.
CONCEPCION, J.:
This case involves the meaning and interpretation of "speculative securities" under the
provisions of Act No. 2581. The defendants were charged with a violation of said statute

and were tried and convicted in the Court of First Instance of Manila from whose
judgment they appealed.
It was established by the prosecution and admitted by the appellants that they, together
with other persons, organized a corporation which was registered in the Bureau of
Commerce on January 7, 1936 under the name of Philippine Mutual Cooperative
Society, Inc. The purposes of this association, according to its articles of incorporation
and by-laws, are to promote the social, moral and economic well-being of its members
by extending to them aid in the form of benefit payments or in any other form allowed
by the laws of the Philippines. An attempt has been made to show that the object is
purely cooperative by relieving and helping the unemployed, the needy, and people of
moderate means in particular and all those who need material aid in general.
In order to carry out these purposes, the corporation has established and admitted two
classes of members, namely, class O and class S. Each member in O must pay a due of
P5 which entitled him to a regular benefit aid of P40. The payment of all and each of
these benefit aids should be made whenever 16 new members had been admitted. The
second member would receive said aid of after 12 new members had been admitted. The
third member and each of those following would receive their respective benefit aids of
P40 after the admission of each group of eleven new members. Those of class S had to
pay a due of P2 each, which was later increased to P2.50, and they would be entitled to a
benefit aid of P12, which was subsequently increased to P20 as soon as sixteen new
members were admitted. The second member and each of those following would receive
their corresponding benefit aids after the admission of every group of ten new members.
The members of both classes, who may have received the benefit aids of the corporation,
were bound to renew their subscriptions by paying every time they received said aid the
amount of p5 or P2.50, according to the class to which they belonged. The corporation
would and did issue to each member a certificate of membership which specified the
class to which he belonged. The benefit aids were due and payable to the members
strictly by turns according to the respective dates of their enrollment. If after two years
from the date of his admission, no benefit aid had been paid a member, the corporation
promised to refund him, on demand, the dues paid by him plus 25 per cent of the same.
In order to obtain more members and carry out its purpose, the corporation offered to
each member, who secured new members, a commission of 10 per cent for each new
member, which was payable from the dues collected from the new members. Said
commission was later reduced to 5 per cent, but an additional 5 per cent for traveling
expenses was allowed.
To prevent a shortage in the funds of the corporation due to its expenditures and the
fact that the benefit aids paid by it were larger than the membership dues, it would hold
public literary contests, etc., and other benefit performances, the net proceeds of which
would be exclusively devoted to the payment of benefit aids. The cost of holding these
performances would be paid from the allotment of the association for expenses in order
not to disturb the reserve funds devoted to the payment of benefit aids.
From November 28, 1935, or prior to its incorporation, up to January 11, 1936, the
corporation, without having previously obtained a license from the Insular Treasurer as

required by law and through the distribution of 20,000 prospectuses, known as Exhibit
V, to the public, secured and admitted 477 members of class O and 278 members of
class S. Of these 32 and 29, respectively, received benefit aids, and from January 12,
1936 to the date of trial, the corporation admitted 18,294 members of class O and 4,351
members of class S, of whom 1,399 and 323, respectively, received benefit aids. Between
November 28, 1935 and May 31, 1936, the corporation received dues from its members
in the amount of P103,514; and after deducting commissions (P4,765), traveling
expenses (P4,765), operating and general expenses (P7,066.66), administrative and
management fees (P4,400), sundry accounts (P1,002.94), and benefit aids (P63,052),
there only remained as cash account the sum of P18,461.45 (Exhibit W-1); and on May
12, 1936, the receipts amounted to P97,780.23, and deducting therefrom the
disbursements amounting to P77,628.25, there was a cash balance of P20,151.98
(Exhibit W).
The lower court having found the certificates of membership issued by the corporation
as speculative securities, convicted Vicente T. Fernandez and Joaquin Trinidad,
president and general manager, respectively, of the Philippine Mutual Cooperative
Society, Inc., of a violation of section 2 of Act No. 2581, and sentenced each to pay a fine
of P5,000, with the corresponding subsidiary imprisonment in case of insolvency, and
the costs.
Appellants assign in their brief five errors which the trial court is alleged to have
committed: First, in declaring that the membership certificates issued by the Philippine
Mutual Cooperative Society, Inc., are securities with the meaning of Act No. 2581;
second, in holding that they are speculative; third, in not holding Act No. 2581
unconstitutional because it is vague and because it confers legislative and judicial
powers upon the Insular Treasurer; fourth and fifth, in not interpreting the law strictly
in favor of the accused and dismissing the charge against them.
Act No. 2581, better known as the Blue Sky Law, is patterned after similar laws enacted
in various states of the Union, one of the oldest of which, if not the oldest, is that of the
State of Kansas, which was amended in 1913 and 1915 (Fletcher, vol. 7 [1919], p. 7714).
The purpose of these laws, as was said by Justice Mckenna, is to protect the public
against the imposition of unsubstantial schemes and the securities based thereon. It is
said that the name given the law indicates the evil against which it is directed, namely,
speculative schemes which have no more basis than a few feet of the blue sky (Fletcher,
supra).
Section 1 of Act No. 2581, as amended by Act No. 2817 (which amendment does not
affect the present case), provides:
SECTION 1. Terms defined. The term "securities" as used in this Act shall be taken to
mean stock certificates, shares, bonds, debentures, certificates of participation,
contracts, contracts or bonds for the sale and conveyance of lands on deferred payments
or on the installment plan, or other instruments in the nature thereof, by whatsoever
name known or called. The term "speculative securities" as used in this Act shall be
deemed to mean and include:

(a) All securities to promote or induce the sale of which profit, gain, or advantage
unusual in the ordinary course of legitimate business is in any way advertized or
promised;
(b) All securities the value of which materially depends upon proposed or promised
future promotion or development rather than on present tangible assets and conditions;
(c) All securities for promoting the sale of which a commission of more than five per
cent is offered or paid;
(d) The securities of any enterprise or corporation which has included, or proposes to
include in its assets as a material part thereof patents, formulae, good-will, promotion or
other intangible assets, or which has issued or proposes to issue a material part of its
securities in payment for patents, formulae, good-will, promotion or other intangible
assets.
The certificates of membership issued by the Philippine Mutual Cooperative Society,
Inc., are truly speculative securities within the meaning of Act No. 2581.
First. In order to encourage and induce their sale, profit unusual in the ordinary course
of business has been advertised or promised, for through the payment of the sum of P5
by a member appertaining to class O, or that of P2.50 by a member belonging to class S,
each will receive profits of P40 and P20, respectively, which represent the fabulous and
extraordinary gain of 800 per cent.
Second. The speculative character of said certificates is also shown by the fact that such
profit or advantage of 800 per cent does not depend upon the actual tangible assets or
conditions of the corporation, but upon its growth and development which would be
attained through the admission of new groups of 16 or 12 members so that each original
member could receive the benefit aids of P40 or P20, as the case may be. Therefore, if
there were no enrollment of 16 or 12 new members, according to the class, a member of
class O or class S would not receive the corresponding benefit aid of P40 or P20,
respectively.
Third. Another proof of their speculative nature is that even if a member of class O or
class S should be able to secure a group of 16 or 12 new members, as the case may be,
this fact would not necessarily entitle him to receive immediately the benefit aid of P40
or P20, respectively, for according to the by-laws of the corporation, he would have to
wait for his turn before he could receive his benefit aid. And it is possible that his turn
may never come because notwithstanding the admission of 16 or 12 members, according
to the class, there may be no funds with which to pay his benefit aid, for before the
coming of his turn, the funds of the corporation might have been exhausted by the
payment of the dues of the old members in accordance with the strict rotation, while no
new members may have been admitted in the meantime.
Fourth. The certificates of membership in question also come within the purview of
paragraph (c) of section 1 of Act No. 2581 because to promote their sale, the corporation

10

has offered and paid a commission of 10 per cent which, though later on reduced to 5
per cent, was in fact more than 5 per cent because the corporation has paid another 5
per cent for traveling expenses.
Fifth. The speculative character of the member certificates issued by the corporation is
also shown by the fact that when a member, whether belonging to class O or to class S,
had not received his benefit aid after two years from the date of his enrollment, he
cannot expect anything more than the refund of the dues paid by him plus 25 per cent of
the same. But it is possible, as they by-laws of the corporation themselves provide, that
there are no funds with which to reimburse the member or members, who have not been
able to collect any benefit aid, the dues paid by them. To avoid such an eventuality, it is
provided that the corporation hold public contests and benefit performances, the net
proceeds of which will be applied to the payment of benefit aids. It may, however,
happen that, even by these means, the corporation will not be able to raise the necessary
funds to pay the members, who ask for reimbursement of their dues, as would
undoubtedly occur should no new members enroll in the corporation.
The following decisions show the various and distinguishing features which may be
found in the membership certificates in question:
In re Lamb ([1923]), 61 Cal. App., 321; 215 Pac., 109), the court said: 'The "securities"
which may not be issued or sold without the permission of the corporation
commissioner are . . . "any instrument issued or offered to the public by any company",
evidencing any right to participate in the profits or earnings or the distributions of
assets of any business carried on for profit by the company . . .
"Certificates" providing "that, in consideration of the certificate holder's promise to
render such assistance and in further consideration of $50 paid by him, defendant will
divide pro rata among all the holders of like certificates who reside at a specified place,
10 per cent of the net price of such tires and tubes as may be sold by defendant's
representative at such place, such division to be made quarterly for the period of twenty
years; that the holder is entitled to a discount of 10 per cent on all its goods which he
may purchase for defendant for his personal use, and that defendant will annually set
aside as a bonus to certificate holders all of its excess earning after paying operating
expenses, fixed charges, and dividends to stockholders, the same to be distributed at its
option in the form of preferred stock," have been held to be security within the meaning
of the Minnesota Blue Sky Law, where the certificates were transferable on notice to the
company, although they contained a clause stating that they were not to be construed to
be certificates of stock, or security or investment contracts. (State vs. Gopher Tire &
Rubber Co. [1920], 146 Minn., 52; 177 N.W., 937.)
Speculative securities include those the value of which materially depends on proposed
or promised future promotion or development, rather than on present tangible assets or
conditions. (Moos vs. Landowners Oil Asso. [1932], 136 Kan., 424; 15 Pac. [2d], 1073.)

11

"Investment contract", within the meaning of the Blue Sky Law, includes certificates
issue in consideration of cash and services entitling the holder to share in the profits of
the business. (State vs. Gopher Tire & Rubber Co., supra.)
Certificate of membership in corporation selling sick and death benefit insurance is a
"security" within the meaning of Blue Sky Law. (Stevens vs. Atlantic & Security Mut.
Ass'ns., 116 N. J. Eq., 584; 174 Atl., 744.)
The appellants contends that the Philippine Mutual Cooperative Society, Inc., is purely a
civic association and does not engage in business. The truth is that the members pay
dues and the association gives them benefit aids which represent a profit of 800 per
cent. Do ut des.
They further point out that the membership certificates issued by the corporation are
not contracts, nor certificates of participation, bonds, debentures, etc. The fact, however,
is that said certificates represent obligations to pay a sum of money or securities of
payment so that they are in reality investment contracts. It is not true that one becomes
a member without any expectation of gain. In fact, the contrary is evident, and the
association itself admits members with a like intention to gain.
The appellants argue that the Blue Sky Law is unconstitutional on two grounds: First,
because it is vague and indefinite: and second, because it delegates legislative and
judicial powers to the Insular Treasurer. The ambiguity of the statute the appellants
insist is shown by the inability of both the City Fiscal's and Insular Treasurer's office
to determine within a reasonable time whether the scheme of the corporation comes
under Act No. 2581. We find no merit in this contention.
The argument that the statute delegates legislative and judicial powers to the Insular
Treasurer is founded on the fact that, according to the appellants, the law vests authority
in the Insular Treasurer to cancel a permit granted a person or corporation to enter into
transactions without establishing any fixed rule or guide in the exercise of such
discretion. In the first place, the question involved herein is whether or not the
Philippine Mutual Cooperative Society, Inc., should have applied for a permit from the
Insular Treasurer to issue and sell certificates of its membership. It is, therefore,
immaterial whether the Insular Treasurer can withdraw a permit which he may have
already given. In the second place, the purpose of the law being to avoid ruinous
speculations, it is obvious that the public interest is and should be the reason on which
the Insular Treasurer should base his decisions.
It has, nevertheless, been proved that Attorney Jose Moreno, on behalf of the Philippine
Mutual Cooperative Society, Inc., consulted the offices of the City Fiscal and the Insular
Treasurer for the purpose of obtaining a statement as to the legality of the schemes of
the association and whether they came within the scope of Act No. 2581. He began his
inquiry in November, 1935, and it was while expecting the decision of said offices that
the information in this case was filed in May, 1936 without any previous notice or
answer to said inquiry. Good faith and lack of intention to violate the law may, in this
case, be considered as mitigating circumstances in the imposition of the penalty; but

12

they do not constitute a valid defense. (People vs. McCalla [1923], 63 Cal. App., 783; 220
Pac., 436.) The same may be said of the argument that the members, who had the right
to the benefit aids of P40 or P20, as the case may be, did receive such aids, and that it
has not been proved that the association has committed any fraud, or is in imminent
danger of insolvency.
Wherefore, the appealed judgment is modified and the accused are sentenced each to
pay a fine of P100 or suffer the corresponding subsidiary imprisonment prescribed by
law, in case of insolvency, and to pay the costs. So ordered.
G.R. No. 164197

January 25, 2012

SECURITIES AND EXCHANGE COMMISSION, Petitioner,

vs.
PROSPERITY.COM, INC., Respondent.
DECISION
ABAD, J.:
This case involves the application of the Howey test in order to determine if a particular
transaction is an investment contract.
The Facts and the Case
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.
Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI), which
company stopped operations after the Securities and Exchange Commission (SEC)
issued a cease and desist order (CDO) against it. As it later on 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,1 the SEC, through
its Compliance and Enforcement unit, issued a CDO against PCI. The SEC ruled that

13

PCIs scheme constitutes an Investment contract and, following the Securities

Regulations Code,2 it should have first registered such contract or securities with the
SEC.
Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of Republic Act
(R.A.) 8799, PCI filed with the Court of Appeals (CA) a petition for certiorari against the
SEC with an application for a temporary restraining order (TRO) and preliminary
injunction in CA-G.R. SP 62890. Because the CA did not act promptly on this
application for TRO, on January 31, 2001 PCI returned to the SEC and filed with it
before the lapse of the five-day period a request to lift the CDO. On the following day,
February 1, 2001, PCI moved to withdraw its petition before the CA to avoid possible
forum shopping violation.
During the pendency of PCIs action before the SEC, however, the CA issued a TRO,
enjoining the enforcement of the CDO.3 In response, the SEC filed with the CA a motion
to dismiss the petition on ground of forum shopping. In a Resolution,4 the CA initially
dismissed the petition, finding PCI guilty of forum shopping. But on PCIs motion, the
CA reversed itself and reinstated the petition.5
In a joint resolution,6 CA-G.R. SP 62890 was consolidated with CA-G.R. SP 64487 that
raised the same issues. On July 31, 2003 the CA rendered a decision, granting PCIs
petition and setting aside the SEC-issued CDO.7 The CA ruled that, following the Howey
test, PCIs scheme did not constitute an investment contract that needs registration
pursuant to R.A. 8799, hence, this petition.
The Issue Presented
The sole issue presented before the Court is whether or not PCIs scheme constitutes an
investment contract that requires registration under R.A. 8799.
The Ruling of the Court
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.8
Apart from the definition, which the Implementing Rules and Regulations provide,
Philippine jurisprudence has so far not done more to add to the same. Of course, the
United States Supreme Court, grappling with the problem, has on several occasions
discussed the nature of investment contracts. That courts rulings, while not binding in
the Philippines, enjoy some degree of persuasiveness insofar as they are logical and
consistent with the countrys best interests.9
The United States Supreme Court held in Securities and Exchange Commission v. W.J.
Howey Co.10 that, for an investment contract to exist, the following elements, referred to
as the Howey test must concur: (1) a contract, transaction, or scheme; (2) an investment

14

of money; (3) investment is made in a common enterprise; (4) expectation of profits;

and (5) profits arising primarily from the efforts of others. 11 Thus, to sustain the SEC
position in this case, PCIs scheme or contract with its buyers must have all these
elements.
An example that comes to mind would be the long-term commercial papers that large
companies, like San Miguel Corporation (SMC), offer to the public for raising funds that
it needs for expansion. When an investor buys these papers or securities, he invests his
money, together with others, in SMC with an expectation of profits arising from the
efforts of those who manage and operate that company. SMC has to register these
commercial papers with the SEC before offering them to investors.1wphi1
Here, 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.
Actually, PCI appears to be engaged in network marketing, a scheme adopted by
companies for getting people to buy their products outside the usual retail system where
products are bought from the stores shelf. Under this scheme, adopted by most health
product distributors, the buyer can become a down-line seller. The latter earns
commissions from purchases made by new buyers whom he refers to the person who
sold the product to him. The network goes down the line where the orders to buy come.
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.
WHEREFORE, the Court DENIES the petition and AFFIRMS the decision dated July
31, 2003 and the resolution dated June 18, 2004 of the Court of Appeals in CA-G.R. SP
62890.
SO ORDERED.
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.

15

THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE

COMMISSION and PUERTO AZUL LAND, INC., respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct
general supervision of the Office of the President, 1 with the immense task of enforcing
the Revised Securities Act, and all other duties assigned to it by pertinent laws. Among
its inumerable functions, and one of the most important, is the supervision of all
corporations, partnerships or associations, who are grantees of primary franchise
and/or a license or permit issued by the government to operate in the Philippines. 2 Just
how far this regulatory authority extends, particularly, with regard to the Petitioner
Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the
respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the
Securities and Exchange Commission ordering the petitioner Philippine Stock
Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its
stock market, thus paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to
offer its shares to the public in order to raise funds allegedly to develop its properties
and pay its loans with several banking institutions. In January, 1995, PALI was issued a
Permit to Sell its shares to the public by the Securities and Exchange Commission (SEC).
To facilitate the trading of its shares among investors, PALI sought to course the trading
of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it
filed with the said stock exchange an application to list its shares, with supporting
documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's
application, recommended to the PSE's Board of Governors the approval of PALI's
listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of
Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming
that the late President Marcos was the legal and beneficial owner of certain properties
forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to
be among its assets and that the Ternate Development Corporation, which is among the
stockholders of PALI, likewise appears to have been held and continue to be held in
trust by one Rebecco Panlilio for then President Marcos and now, effectively for his
estate, and requested PALI's application to be deferred. PALI was requested to comment
upon the said letter.

16

PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel
and Resort Complex were not claimed by PALI as its assets. On the contrary, the resort
is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club,
entities distinct from PALI. Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying
that they are also asserting legal and beneficial ownership of other properties titled
under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
Presidential Commission on Good Government (PCGG) requesting for comments on the
letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same date, enjoining the
Marcoses from, among others, "further impeding, obstructing, delaying or interfering in
any manner by or any means with the consideration, processing and approval by the
PSE of the initial public offering of PALI." The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in
Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE
reached its decision to reject PALI's application, citing the existence of serious claims,
issues and circumstances surrounding PALI's ownership over its assets that adversely
affect the suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting
Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the
PSE in the application of PALI for the listing of its shares with the PSE, and requesting
that the SEC, in the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on PALI's
listing application and institute such measures as are just and proper under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the
letter of PALI and directing the PSE to file its comments thereto within five days from
its receipt and for its authorized representative to appear for an "inquiry" on the matter.
On April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the
April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The
dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and
jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3,
6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors
of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc.,
is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the
PALI shares in the Exchange, without prejudice to its authority to require PALI to

17

disclose such other material information it deems necessary for the protection of the
investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,
however denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in the light of recent developments on the
adverse claim against the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the investing public. In this
regard, PALI is hereby ordered to amend its registration statements filed with the
Commission to incorporate the full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a
Petition for Review (with Application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of the SEC, submitting the
following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
ISSUING THE ASSAILED ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING
FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH
FORM PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED
AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE
DUE PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's
Petition for Review. Hence, this Petition by the PSE.

18

The appellate court had ruled that the SEC had both jurisdiction and authority to look
into the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities
Act in relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the
Revised Securities Act, and for the purpose of ensuring fair administration of the
exchange. Both as a corporation and as a stock exchange, the petitioner is subject to
public respondent's jurisdiction, regulation and control. Accepting the argument that
the public respondent has the authority merely to supervise or regulate, would amount
to serious consequences, considering that the petitioner is a stock exchange whose
business is impressed with public interest. Abuse is not remote if the public respondent
is left without any system of control. If the securities act vested the public respondent
with jurisdiction and control over all corporations; the power to authorize the
establishment of stock exchanges; the right to supervise and regulate the same; and the
power to alter and supplement rules of the exchange in the listing or delisting of
securities, then the law certainly granted to the public respondent the plenary authority
over the petitioner; and the power of review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in
disapproving the application of PALI for listing of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of shares,
PSE has failed to justify why it acted differently on the application of PALI, as compared
to the IPOs of other companies similarly situated that were allowed listing in the
Exchange;
3. It appears that the claims and issues on the title to PALI's properties were even less
serious than the claims against the assets of the other companies in that, the assertions
of the Marcoses that they are owners of the disputed properties were not substantiated
enough to overcome the strength of a title to properties issued under the Torrens System
as evidence of ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify
PALI's ownership over the disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import of PSE's decision in
denying PALI's application is that it would be PALI, not the Marcoses, that must go to
court to prove the legality of its ownership on these properties before its shares can be
listed.
In addition, the argument that the PALI properties belong to the Military/Naval
Reservation does not inspire belief. The point is, the PALI properties are now titled. A
property losses its public character the moment it is covered by a title. As a matter of

19

fact, the titles have long been settled by a final judgment; and the final decree having
been registered, they can no longer be re-opened considering that the one year period
has already passed. Lastly, the determination of what standard to apply in allowing
PALI's application for listing, whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to the Securities Commission, it
being the government agency that exercises both supervisory and regulatory authority
over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition
for Review on Certiorari, taking exception to the rulings of the SEC and the Court of
Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996. On the
same date, the PCGG filed a Motion for Leave to file a Petition for Intervention. This was
followed up by the PCGG's Petition for Intervention on October 21, 1996. A
supplemental Comment was filed by PALI on October 25, 1997. The Office of the
Solicitor General, representing the SEC and the Court of Appeals, likewise filed its
Comment on December 26, 1996. In answer to the PCGG's motion for leave to file
petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas
the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of
respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On
May 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to
order the PSE to list the shares of PALI in the stock exchange. Under presidential decree
No. 902-A, the powers of the SEC over stock exchanges are more limited as compared to
its authority over ordinary corporations. In connection with this, the powers of the SEC
over stock exchanges under the Revised Securities Act are specifically enumerated, and
these do not include the power to reverse the decisions of the stock exchange.
Authorities are in abundance even in the United States, from which the country's
security policies are patterned, to the effect of giving the Securities Commission less
control over stock exchanges, which in turn are given more lee-way in making the
decision whether or not to allow corporations to offer their stock to the public through
the stock exchange. This is in accord with the "business judgment rule" whereby the SEC
and the courts are barred from intruding into business judgments of corporations, when
the same are made in good faith. the said rule precludes the reversal of the decision of
the PSE to deny PALI's listing application, absent a showing of bad faith on the part of
the PSE. Under the listing rules of the PSE, to which PALI had previously agreed to
comply, the PSE retains the discretion to accept or reject applications for listing. Thus,
even if an issuer has complied with the PSE listing rules and requirements, PSE retains
the discretion to accept or reject the issuer's listing application if the PSE determines
that the listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations,
nor with corporations whose properties are under sequestration. A reading of Republic
of the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that
the properties of PALI, which were derived from the Ternate Development Corporation

20

(TDC) and the Monte del Sol Development Corporation (MSDC). are under
sequestration by the PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
This ruling of the Court is the "law of the case" between the Republic and TDC and
MSDC. It categorically declares that the assets of these corporations were sequestered
by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over
its properties can no longer be questioned, since certificates of title have been issued to
PALI and more than one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under the Torrens System is
a conclusive evidence of ownership is not an absolute rule and admits certain
exceptions. It is fundamental that forest lands or military reservations are nonalienable. Thus, when a title covers a forest reserve or a government reservation, such
title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of
"full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a
clear mandate for the effectivity of such policy. As it is, the case records reveal the truth
that PALI did not comply with the listing rules and disclosure requirements. In fact,
PALI's documents supporting its application contained misrepresentations and
misleading statements, and concealed material information. The matter of sequestration
of PALI's properties and the fact that the same form part of military/naval/forest
reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although
it is clothed with the markings of a corporate entity, it functions as the primary channel
through which the vessels of capital trade ply. The PSE's relevance to the continued
operation and filtration of the securities transactions in the country gives it a distinct
color of importance such that government intervention in its affairs becomes justified, if
not necessarily. Indeed, as the only operational stock exchange in the country today, the
PSE enjoys a monopoly of securities transactions, and as such, it yields an immense
influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise
to give special treatment to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of
supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC
the special mandate to be vigilant in the supervision of the affairs of stock exchanges so
that the interests of the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold
the SEC's challenged control authority over the petitioner PSE even as it provides that
"the Commission shall have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to operate in the Philippines. . ."
The SEC's regulatory authority over private corporations encompasses a wide margin of

21

areas, touching nearly all of a corporation's concerns. This authority springs from the
fact that a corporation owes its existence to the concession of its corporate franchise
from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, 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. 7 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 for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of
the PSE to deny the application for listing in the stock exchange of the private
respondent PALI. The SEC's action was affirmed by the Court of Appeals.
We affirm that 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. 9 As the appellate court explains:
Paramount policy also supports the authority of the public respondent to review
petitioner's denial of the listing. Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the economy moves on the basis
of the rise and fall of stocks being traded. By its economic power, the petitioner certainly
can dictate which and how many users are allowed to sell securities thru the facilities of
a stock exchange, if allowed to interpret its own rules liberally as it may please.
Petitioner can either allow or deny the entry to the market of securities. To repeat, the
monopoly, unless accompanied by control, becomes subject to abuse; hence,
considering public interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature,
through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent
laws, has entrusted to it the serious responsibility of enforcing all laws affecting
corporations and other forms of associations not otherwise vested in some other
government office. 10
This is not to say, however, that the PSE's management prerogatives are under the
absolute control of the SEC. The PSE is, alter 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.

22

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 a body.
11 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. 12
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, 13 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 reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the
qualification of PALI to sell its shares to the public through the stock exchange. During
the time for receiving objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the Marcos estate. In time, the PCGG
confirmed this claim. In fact, an order of sequestration has been issued covering the
properties of PALI, and suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively transferred, despite the
sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private
respondent PALI, in only a short span of time, are not yet explained to the Court, but it
is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a
stock issuer. The petitioner was in the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the general public. The purpose of the
Revised Securities Act, after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false promises, and the
imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts
detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was designed not
only to provide investors with adequate information upon which to base their decisions
to buy and sell securities, but also to protect legitimate business seeking to obtain
capital through honest presentation against competition from crooked promoters and to
prevent fraud in the sale of securities. (Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).

23

As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses
and fraudulent transactions, merely by requirement of that their details be revealed; (2)
placing the market during the early stages of the offering of a security a body of
information, which operating indirectly through investment services and expert
investors, will tend to produce a more accurate appraisal of a security, . . . Thus, the
Commission may refuse to permit a registration statement to become effective if it
appears on its face to be incomplete or inaccurate in any material respect, and empower
the Commission to issue a stop order suspending the effectiveness of any registration
statement which is found to include any untrue statement of a material fact or to omit to
state any material fact required to be stated therein or necessary to make the statements
therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and
goodwill, and it has the right to protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to transact through its facilities. It was
reasonable for the PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled upon, and public
welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a
thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer
be assailed is of no moment. At this juncture, there is the claim that the properties were
owned by TDC and MSDC and were transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such
properties belong to the Marcos estate, and were held only in trust by Rebecco Panlilio.
It is also alleged by the petitioner that these properties belong to naval and forest
reserves, and therefore beyond private dominion. If any of these claims is established to
be true, the certificates of title over the subject properties now held by PALI map be
disregarded, as it is an established rule that a registration of a certificate of title does not
confer ownership over the properties described therein to the person named as owner.
The inscription in the registry, to be effective, must be made in good faith. The defense
of indefeasibility of a Torrens Title does not extend to a transferee who takes the
certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be
determined as an absolute fact. What is material is that the uncertainty of the
properties' ownership and alienability exists, and this puts to question the qualification
of PALI's public offering. In sum, the Court finds that the 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 corporation entity, whose business judgments are respected in the absence of
bad faith.

24

The question as to what policy is, or should be relied upon in approving the registration
and sale of securities in the SEC is not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other functions under
pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the
power to promulgate such rules and regulations as it may consider appropriate in the
public interest for the enforcement of the said laws. The second paragraph of Section 4
of the said law, on the other hand, provides that no security, unless exempt by law, shall
be issued, endorsed, sold, transferred or in any other manner conveyed to the public,
unless registered in accordance with the rules and regulations that shall be promulgated
in the public interest and for the protection of investors by the Commission. Presidential
Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over the securities market as a whole,
and as such, is given ample authority in determining appropriate policies. Pursuant to
this regulatory authority, the SEC has manifested that it has adopted the policy of "full
material disclosure" where all companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information about themselves and the
securities they sell, for the protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or purchase of its securities. 15
While the employment of this policy is recognized and sanctioned by the laws,
nonetheless, the Revised Securities Act sets substantial and procedural standards which
a proposed issuer of securities must satisfy. 16 Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the Rejection of the registration of a
security:
The Commission may reject a registration statement and refuse to issue a permit to
sell the securities included in such registration statement if it finds that
(1) The registration statement is on its face incomplete or inaccurate in any material
respect or includes any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein not
misleading; or
(2) The issuer or registrant
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of this Act, or the rules
promulgated pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and conditions that the
Commission may, in the public interest and for the protection of investors, impose
before the security can be registered;
(iv) has been engaged or is engaged or is about to engage in fraudulent transaction;

25

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in a business that
is illegal or contrary to government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to be based
on sound business principles;
(4) An officer, member of the board of directors, or principal stockholder of the issuer is
disqualified to be such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the Commission that
the sale of its security would not work to the prejudice of the public interest or as a
fraud upon the purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of
the securities themselves, and of the issuer, to be determined by the Securities and
Exchange Commission. This measure was meant to protect the interests of the investing
public against fraudulent and worthless securities, and the SEC is mandated by law to
safeguard these interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration of securities is,
therefore, untenable. As it is, the Court finds that the private respondent PALI, on at
least two points (nos. 1 and 5) has failed to support the propriety of the issue of its
shares with unfailing clarity, thereby lending support to the conclusion that the PSE
acted correctly in refusing the listing of PALI in its stock exchange. This does not
discount the effectivity of whatever method the SEC, in the exercise of its vested
authority, chooses in setting the standard for public offerings of corporations wishing to
do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, 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.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the
Petition for Review on Certiorari. The Decisions of the Court of Appeals and the
Securities and Exchange Commission dated July 27, 1996 and April 24, 1996
respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby
ENTERED, affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED.

26

CEMCO HOLDINGS, INC., Petitioner,

vs.
NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC.,
Respondent.
DECISION
CHICO-NAZARIO, J.:
This Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set
aside the 24 October 2005 Decision1 and the 6 March 2006 Resolution2 of the Court of
Appeals in CA-G.R. SP No. 88758 which affirmed the judgment3 dated 14 February
2005 of the Securities and Exchange Commission (SEC) finding that the acquisition of
petitioner Cemco Holdings, Inc. (Cemco) of the shares of stock of Bacnotan
Consolidated Industries, Inc. (BCI) and Atlas Cement Corporation (ACC) in Union
Cement Holdings Corporation (UCHC) was covered by the Mandatory Offer Rule under
Section 19 of Republic Act No. 8799, otherwise known as the Securities Regulation
Code.
The 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.
In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange
(PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco BCIs stocks
in UCHC equivalent to 21.31% and ACCs stocks in UCHC equivalent to 29.69%.
In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a
result of petitioner Cemcos acquisition of BCI and ACCs shares in UCHC, petitioners
total beneficial ownership, direct and indirect, in UCC has increased by 36% and
amounted to at least 53% of the shares of UCC, to wit4 :
Particulars

Percentage

Existing shares of Cemco in UCHC

9%

Acquisition by Cemco of BCIs and ACCs shares in

UCHC

51%

Total stocks of Cemco in UCHC

60%

Percentage of UCHC ownership in UCC

60%

Indirect ownership of Cemco in UCC

36%

Direct ownership of Cemco in UCC

17%

27

Total ownership of Cemco in UCC

53%

As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004,
inquired as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules
of the Securities Regulation Code is not applicable to the purchase by petitioner of the
majority of shares of UCC.
In a letter dated 16 July 2004, Director Justina Callangan of the SECs Corporate
Finance Department responded to the query of the PSE that while it was the stance of
the department that the tender offer rule was not applicable, the matter must still have
to be confirmed by the SEC en banc.
Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan confirmed
that the SEC en banc had resolved that the Cemco transaction was not covered by the
tender offer rule.
On 28 July 2004, feeling aggrieved by the transaction, respondent National Life
Insurance Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter
to Cemco demanding the latter to comply with the rule on mandatory tender offer.
Cemco, however, refused.
On 5 August 2004, a Share Purchase Agreement was executed by ACC and BCI, as
sellers, and Cemco, as buyer.
On 12 August 2004, the transaction was consummated and closed.
On 19 August 2004, respondent National Life Insurance Company of the Philippines,
Inc. filed a complaint with the SEC asking it to reverse its 27 July 2004 Resolution and
to declare the purchase agreement of Cemco void and praying that the mandatory
tender offer rule be applied to its UCC shares. Impleaded in the complaint were Cemco,
UCC, UCHC, BCI and ACC, which were then required by the SEC to file their respective
comment on the complaint. In their comments, they were uniform in arguing that the
tender offer rule applied only to a direct acquisition of the shares of the listed company
and did not extend to an indirect acquisition arising from the purchase of the shares of a
holding company of the listed firm.
In a Decision dated 14 February 2005, the SEC ruled in favor of the respondent by
reversing and setting aside its 27 July 2004 Resolution and directed petitioner Cemco to
make a tender offer for UCC shares to respondent and other holders of UCC shares
similar to the class held by UCHC in accordance with Section 9(E), Rule 19 of the
Securities Regulation Code.
Petitioner filed a petition with the Court of Appeals challenging the SECs jurisdiction to
take cognizance of respondents complaint and its authority to require Cemco to make a
tender offer for UCC shares, and arguing that the tender offer rule does not apply, or

28

that the SECs re-interpretation of the rule could not be made to retroactively apply to
Cemcos purchase of UCHC shares.
The Court of Appeals rendered a decision affirming the ruling of the SEC. It ruled that
the SEC has jurisdiction to render the questioned decision and, in any event, Cemco was
barred by estoppel from questioning the SECs jurisdiction. It, likewise, held that the
tender offer requirement under the Securities Regulation Code and its Implementing
Rules applies to Cemcos purchase of UCHC stocks. The decretal portion of the said
Decision reads:
IN VIEW OF THE FOREGOING, the assailed decision of the SEC is AFFIRMED, and
the preliminary injunction issued by the Court LIFTED.5
Cemco filed a motion for reconsideration which was denied by the Court of Appeals.
Hence, the instant petition.
In its memorandum, petitioner Cemco raises the following issues:
I.
ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER NATIONAL
LIFES COMPLAINT AND THAT THE SECS RE-INTERPRETATION OF THE
TENDER OFFER RULE IS CORRECT, WHETHER OR NOT THAT
REINTERPRETATION CAN BE APPLIED RETROACTIVELY TO CEMCOS
PREJUDICE.
II.
WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE DISPUTE
BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT REQUIRING CEMCO
TO MAKE A TENDER OFFER FOR UCC SHARES.
III.
WHETHER OR NOT CEMCOS PURCHASE OF UCHC SHARES IS SUBJECT TO THE
TENDER OFFER REQUIREMENT.
IV.
WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA DECISION, IS
AN INCOMPLETE JUDGMENT WHICH PRODUCED NO EFFECT.6
Simply stated, the following are the issues:
1. Whether or not the SEC has jurisdiction over respondents complaint and to require
Cemco to make a tender offer for respondents UCC shares.

29

2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition
of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of
UCC, a publicly-listed company, through its purchase of the shares in UCHC, a nonlisted company.
3. Whether or not the questioned ruling of the SEC can be applied retroactively to
Cemcos transaction which was consummated under the authority of the SECs prior
resolution.
On the first issue, 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.
Petitioner further contends that in the absence of any specific grant of jurisdiction by
Congress, the SEC cannot, by mere administrative regulation, confer on itself that
jurisdiction.
Petitioners stance fails to persuade.
In taking cognizance of respondents complaint against petitioner and eventually
rendering a judgment which ordered the latter to make a tender offer, the SEC was
acting pursuant to Rule 19(13) of the Amended Implementing Rules and Regulations of
the Securities Regulation Code, to wit:
13. Violation
If there shall be violation of this Rule by pursuing a purchase of equity shares of a public
company at threshold amounts without the required tender offer, the Commission, upon
complaint, may nullify the said acquisition and direct the holding of a tender offer. This
shall be without prejudice to the imposition of other sanctions under the Code.
The foregoing rule emanates from the SECs power and authority to regulate, investigate
or supervise the activities of persons to ensure compliance with the Securities
Regulation Code, more specifically the provision on mandatory tender offer under
Section 19 thereof.7

30

Another provision of the statute, which provides the basis of Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Regulation Code, is Section
5.1(n), viz:
[T]he Commission shall have, among others, the following powers and functions:
xxxx
(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.
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. As correctly held by the Court of Appeals:
We are nonetheless convinced that the SEC has the competence to render the particular
decision it made in this case. A definite inference may be drawn from the provisions of
the SRC that the SEC has the authority not only to investigate complaints of violations of
the tender offer rule, but to adjudicate certain rights and obligations of the contending
parties and grant appropriate reliefs in the exercise of its regulatory functions under the
SRC. Section 5.1 of the SRC allows a general grant of adjudicative powers to the SEC
which may be implied from or are necessary or incidental to the carrying out of its
express powers to achieve the objectives and purposes of the SRC. We must bear in
mind in interpreting the powers and functions of the SEC that the law has made the SEC
primarily a regulatory body with the incidental power to conduct administrative
hearings and make decisions. A regulatory body like the SEC may conduct hearings in
the exercise of its regulatory powers, and if the case involves violations or conflicts in
connection with the performance of its regulatory functions, it will have the duty and
authority to resolve the dispute for the best interests of the public.8
For sure, the 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. Thus, Subsection 5.1(g) of the law provides:
Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders.
Also, Section 72 of the Securities Regulation Code reads:

31

72.1. x x x To effect the provisions and purposes of this Code, the Commission may issue,
amend, and rescind such rules and regulations and orders necessary or appropriate, x x
x.
72.2. The Commission shall promulgate rules and regulations providing for reporting,
disclosure and the prevention of fraudulent, deceptive or manipulative practices in
connection with the purchase by an issuer, by tender offer or otherwise, of and equity
security of a class issued by it that satisfies the requirements of Subsection 17.2. Such
rules and regulations may require such issuer to provide holders of equity securities of
such dates with such information relating to the reasons for such purchase, the source of
funds, the number of shares to be purchased, the price to be paid for such securities, the
method of purchase and such additional information as the Commission deems
necessary or appropriate in the public interest or for the protection of investors, or
which the Commission deems to be material to a determination by holders whether such
security should be sold.
The power conferred upon the SEC to promulgate rules and regulations is a legislative
recognition of the complexity and the constantly-fluctuating nature of the market and
the impossibility of foreseeing all the possible contingencies that cannot be addressed in
advance. As enunciated in Victorias Milling Co., Inc. v. Social Security Commission9 :
Rules and regulations when promulgated in pursuance of the procedure or authority
conferred upon the administrative agency by law, partake of the nature of a statute, and
compliance therewith may be enforced by a penal sanction provided in the law. This is
so because statutes are usually couched in general terms, after expressing the policy,
purposes, objectives, remedies and sanctions intended by the legislature. The details
and the manner of carrying out the law are often times left to the administrative agency
entrusted with its enforcement. In this sense, it has been said that rules and regulations
are the product of a delegated power to create new or additional legal provisions that
have the effect of law.
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be
pointed out that petitioner had participated in all the proceedings before the SEC and
had prayed for affirmative relief. In fact, petitioner defended the jurisdiction of the SEC
in its Comment dated 15 September 2004, filed with the SEC wherein it asserted:
This Honorable Commission is a highly specialized body created for the purpose of
administering, overseeing, and managing the corporate industry, share investment and
securities market in the Philippines. By the very nature of its functions, it dedicated to
the study and administration of the corporate and securities laws and has necessarily
developed an expertise on the subject. Based on said functions, the Honorable
Commission is necessarily tasked to issue rulings with respect to matters involving
corporate matters and share acquisitions. Verily when this Honorable Commission
rendered the Ruling that " the acquisition of Cemco Holdings of the majority shares of
Union Cement Holdings, Inc., a substantial stockholder of a listed company, Union
Cement Corporation, is not covered by the mandatory tender offer requirement of the

32

SRC Rule 19," it was well within its powers and expertise to do so. Such ruling shall be
respected, unless there has been an abuse or improvident exercise of authority.10
Petitioner did not question the jurisdiction of the SEC when it rendered an opinion
favorable to it, such as the 27 July 2004 Resolution, where the SEC opined that the
Cemco transaction was not covered by the mandatory tender offer rule. It was only when
the case was before the Court of Appeals and after the SEC rendered an unfavorable
judgment against it that petitioner challenged the SECs competence. As articulated in
Ceroferr Realty Corporation v. Court of Appeals11 :
While the lack of jurisdiction of a court may be raised at any stage of an action,
nevertheless, the party raising such question may be estopped if he has actively taken
part in the very proceedings which he questions and he only objects to the courts
jurisdiction because the judgment or the order subsequently rendered is adverse to him.
On the second issue, petitioner asserts that the mandatory tender offer rule applies only
to direct acquisition of shares in the public company.
This contention is not meritorious.
Tender offer is a publicly announced intention by a person acting alone or in concert
with other persons to acquire equity securities of a public company.12 A public company
is defined as a corporation which is listed on an exchange, or a corporation with assets
exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them
holding not less than 100 shares of such company.13 Stated differently, a tender offer is
an offer by the acquiring person to stockholders of a public company for them to tender
their shares therein on the terms specified in the offer.14 Tender offer is in place to
protect minority shareholders against any scheme that dilutes the share value of their
investments. It gives the minority shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell their shares at the same price as
those of the majority shareholders.15
Under Section 19 of Republic Act No. 8799, it is stated:
Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to
acquire at least fifteen percent (15%) of any class of any equity security of a listed
corporation or of any class of any equity security of a corporation with assets of at least
Fifty million pesos (P50,000,000.00) and having two hundred (200) or more
stockholders with at least one hundred (100) shares each or who intends to acquire at
least thirty percent (30%) of such equity over a period of twelve (12) months shall make
a tender offer to stockholders by filing with the Commission a declaration to that effect;
and furnish the issuer, a statement containing such of the information required in
Section 17 of this Code as the Commission may prescribe. Such person or group of
persons shall publish all requests or invitations for tender, or materials making a tender
offer or requesting or inviting letters of such a security. Copies of any additional
material soliciting or requesting such tender offers subsequent to the initial solicitation
or request shall contain such information as the Commission may prescribe, and shall

33

be filed with the Commission and sent to the issuer not later than the time copies of
such materials are first published or sent or given to security holders.
Under existing SEC Rules,16 the 15% and 30% threshold acquisition of shares under the
foregoing provision was increased to thirty-five percent (35%). It is further provided
therein that mandatory tender offer is still applicable even if the acquisition is less than
35% when the purchase would result in ownership of over 51% of the total outstanding
equity securities of the public company.17
The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of
36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by
the mandatory tender offer rule.
This interpretation given by the SEC and the Court of Appeals must be sustained.
The rule in this jurisdiction is that the construction given to a statute by an
administrative agency charged with the interpretation and application of that statute is
entitled to great weight by the courts, unless such construction is clearly shown to be in
sharp contrast with the governing law or statute.18 The rationale for this rule relates not
only to the emergence of the multifarious needs of a modern or modernizing society and
the establishment of diverse administrative agencies for addressing and satisfying those
needs; it also relates to accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular
statute.19
The SEC and the Court of Appeals accurately pointed out that the coverage of the
mandatory tender offer rule covers not only direct acquisition but also indirect
acquisition or "any type of acquisition." This is clear from the discussions of the
Bicameral Conference Committee on the Securities Act of 2000, on 17 July 2000.
SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody controls 67% of the
Company. Of course, he will pay a premium for the first 67%. Control yan, eh. Eh,
kawawa yung mga maiiwan, ang 33% because the value of the stock market could go
down, could go down after that, because there will (p. 41) be no more market. Wala nang
gustong bumenta. Wala nang I mean maraming gustong bumenta, walang gustong
bumili kung hindi yung majority owner. And they will not buy. They already have 67%.
They already have control. And this protects the minority. And we have had a case in
Cebu wherein Ayala A who already owned 40% of Ayala B made an offer for another
40% of Ayala B without offering the 20%. Kawawa naman yung nakahawak ngayon ng
20%. Ang baba ng share sa market. But we did not have a law protecting them at that
time.
CHAIRMAN ROCO. So what is it that you want to achieve?
SEN. S. OSMEA. That if a certain group achieves a certain amount of ownership in a
corporation, yeah, he is obligated to buy anybody who wants to sell.

34

CHAIRMAN ROCO. Pro-rata lang. (p. 42).

xxxx
REP. TEODORO. As long as it reaches 30, ayan na. Any type of acquisition just as long
as it will result in 30 (p.50) reaches 30, ayan na. Any type of acquisition just as long
as it will result in 30, general tender, pro-rata.20 (Emphasis supplied.)
Petitioner counters that the legislators reference to "any type of acquisition" during the
deliberations on the Securities Regulation Code does not indicate that congress meant to
include the "indirect" acquisition of shares of a public corporation to be covered by the
tender offer rule. Petitioner also avers that it did not directly acquire the shares in UCC
and the incidental benefit of having acquired the control of the said public company
must not be taken against it.
These arguments are not convincing. The legislative intent of Section 19 of the Code is to
regulate activities relating to acquisition of control of the listed company and for the
purpose of protecting the minority stockholders of a listed corporation. Whatever may
be the method by which control of a public company is obtained, either through the
direct purchase of its stocks or through an indirect means, mandatory tender offer
applies. As appropriately held by the Court of Appeals:
The petitioner posits that what it acquired were stocks of UCHC and not UCC. By
happenstance, as a result of the transaction, it became an indirect owner of UCC. We are
constrained, however, to construe ownership acquisition to mean both direct and
indirect. What is decisive is the determination of the power of control. The legislative
intent behind the tender offer rule makes clear that the type of activity intended to be
regulated is the acquisition of control of the listed company through the purchase of
shares. Control may [be] effected through a direct and indirect acquisition of stock, and
when this takes place, irrespective of the means, a tender offer must occur. The
bottomline of the law is to give the shareholder of the listed company the opportunity to
decide whether or not to sell in connection with a transfer of control. x x x.21
As to the third issue, petitioner stresses that the ruling on mandatory tender offer rule
by the SEC and the Court of Appeals should not have retroactive effect or be made to
apply to its purchase of the UCHC shares as it relied in good faith on the letter dated 27
July 2004 of the SEC which opined that the proposed acquisition of the UCHC shares
was not covered by the mandatory offer rule.
The argument is not persuasive.
The action of the SEC on the PSE request for opinion on the Cemco transaction cannot
be construed as passing merits or giving approval to the questioned transaction. As aptly
pointed out by the respondent, the letter dated 27 July 2004 of the SEC was nothing but
an approval of the draft letter prepared by Director Callanga. There was no public
hearing where interested parties could have been heard. Hence, it was not issued upon a
definite and concrete controversy affecting the legal relations of parties thereby making

35

it a judgment conclusive on all the parties. Said letter was merely advisory.
Jurisprudence has it that an advisory opinion of an agency may be stricken down if it
deviates from the provision of the statute.22 Since the letter dated 27 July 2004 runs
counter to the Securities Regulation Code, the same may be disregarded as what the SEC
has done in its decision dated 14 February 2005.
Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling, the same
cannot be utilized to determine the rights of the parties. What is to be applied in the
present case is the subsequent ruling of the SEC dated 14 February 2005 abandoning
the opinion embodied in the letter dated 27 July 2004. In Serrano v. National Labor
Relations Commission,23 an argument was raised similar to the case under
consideration. Private respondent therein argued that the new doctrine pronounced by
the Court should only be applied prospectively. Said postulation was ignored by the
Court when it ruled:
While a judicial interpretation becomes a part of the law as of the date that law was
originally passed, this is subject to the qualification that when a doctrine of this Court is
overruled and a different view is adopted, and more so when there is a reversal thereof,
the new doctrine should be applied prospectively and should not apply to parties who
relied on the old doctrine and acted in good faith. To hold otherwise would be to deprive
the law of its quality of fairness and justice then, if there is no recognition of what had
transpired prior to such adjudication.
It is apparent that private respondent misconceived the import of the ruling. The
decision in Columbia Pictures does not mean that if a new rule is laid down in a case, it
should not be applied in that case but that said rule should apply prospectively to cases
arising afterwards. Private respondents view of the principle of prospective application
of new judicial doctrines would turn the judicial function into a mere academic exercise
with the result that the doctrine laid down would be no more than a dictum and would
deprive the holding in the case of any force.
Indeed, when the Court formulated the Wenphil doctrine, which we reversed in this
case, the Court did not defer application of the rule laid down imposing a fine on the
employer for failure to give notice in a case of dismissal for cause. To the contrary, the
new rule was applied right then and there. x x x.
Lastly, petitioner alleges that the decision of the SEC dated 14 February 2005 is
"incomplete and produces no effect."
This contention is baseless.
The decretal portion of the SEC decision states:
In view of the foregoing, the letter of the Commission, signed by Director Justina F.
Callangan, dated July 27, 2004, addressed to the Philippine Stock Exchange is hereby
REVERSED and SET ASIDE. Respondent Cemco is hereby directed to make a tender
offer for UCC shares to complainant and other holders of UCC shares similar to the class

36

held by respondent UCHC, at the highest price it paid for the beneficial ownership in
respondent UCC, strictly in accordance with SRC Rule 19, Section 9(E).24
A reading of the above ruling of the SEC reveals that the same is complete. It orders the
conduct of a mandatory tender offer pursuant to the procedure provided for under Rule
19(E) of the Amended Implementing Rules and Regulations of the Securities Regulation
Code for the highest price paid for the beneficial ownership of UCC shares. The price, on
the basis of the SEC decision, is determinable. Moreover, the implementing rules and
regulations of the Code are sufficient to inform and guide the parties on how to proceed
with the mandatory tender offer.
WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24 October
2005 and 6 March 2006, respectively, affirming the Decision dated 14 February 2005 of
the Securities and Exchange Commission En Banc, are hereby AFFIRMED. Costs
against petitioner.
SO ORDERED.

G.R. No. 137321

October 15, 2007

PHILIPPINE ASSOCIATION OF STOCK TRANSFER AND REGISTRY

AGENCIES, INC., Petitioner,
vs.
THE HONORABLE COURT OF APPEALS; THE HONORABLE SECURITIES
AND EXCHANGE COMMISSION; AND SEC CHAIRMAN PERFECTO R.
YASAY, JR., Respondents.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari seeking to reverse the Decision1 dated June 17,
1998 of the Court of Appeals in CA-G.R. SP No. 41320, as well as its Resolution2 dated
January 13, 1999, denying the motion for reconsideration.
The facts are as follows.
Petitioner Philippine Association of Stock Transfer and Registry Agencies, Inc. is an
association of stock transfer agents principally engaged in the registration of stock
transfers in the stock-and-transfer book of corporations.
On May 10, 1996, petitioners Board of Directors unanimously approved a resolution
allowing its members to increase the transfer processing fee they charge their clients
from P45 per certificate to P75 per certificate, effective July 1, 1996; and eventually to
P100 per certificate, effective October 1, 1996. The resolution also authorized the

37

imposition of a processing fee for the cancellation of stock certificates at P20 per
certificate effective July 1, 1996. According to petitioner, the rates had to be increased
since it had been over five years since the old rates were fixed and an increase of its fees
was needed to sustain the financial viability of the association and upgrade facilities and
services.
After a dialogue with petitioner, public respondent Securities and Exchange
Commission (SEC) allowed petitioner to impose the P75 per certificate transfer fee and
P20 per certificate cancellation fee effective July 1, 1996. But, approval of the additional
increase of the transfer fees to P100 per certificate effective October 1, 1996, was
withheld until after a public hearing. The SEC issued a letter-authorization to this effect
on June 20, 1996.
Thereafter, on June 24, 1996, the Philippine Association of Securities Brokers and
Dealers, Inc. registered its objection to the measure advanced by petitioner and
requested the SEC to defer its implementation. On June 27, 1996, the SEC advised
petitioner to hold in abeyance the implementation of the increases until the matter was
cleared with all the parties concerned. The SEC stated that it was reconsidering its
earlier approval in light of the opposition and required petitioner to file comment.
Petitioner nonetheless proceeded with the implementation of the increased fees.
The SEC wrote petitioner on July 1, 1996, reiterating the directive of June 27, 1996. On
July 2, 1996, following a complaint from the Philippine Stock Exchange, the SEC again
sent petitioner a second letter strongly urging petitioner to desist from implementing
the new rates in the interest of all participants in the security market.
Petitioner replied on July 3, 1996 that it had no intention of defying the orders but
stated 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. Petitioner also 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.
On July 8, 1996, the SEC issued Order No. 104, series of 1996, enjoining petitioner from
imposing the new fees:
WHEREFORE, pursuant to the powers vested in the Commission under Sec. 40 of the
Revised Securities Act, PASTRA is hereby enjoined to defer the implementation of the
new rates. Further, the members of its Board of Directors and officers are hereby
directed to appear before the Commission on Thursday, July 11, 1996 at 2:00 oclock in
the afternoon at the Commission Room, 5th Flr., SEC Bldg., EDSA, Mandaluyong City to
show cause why no administrative sanctions should be imposed upon them.3
During the hearing, petitioner admitted that it had started imposing the fees. It further
admitted that aside from the questioned fees, it had likewise started imposing fees
ranging from P50 to P500 for report of shareholdings or list of certificates; certification
of shareholdings or other stockholder information requested by external auditors and

38

validation of status of certificates, all without prior approval of the Commission. Thus,
for violating its orders, the SEC ordered petitioner to pay a basic fine of P5,000 and a
daily fine of P500 for continuing violations:
In view of the foregoing, PASTRA is hereby declared as having defied a lawful Order of
the Commission for which it is imposed a basic fine of P5,000.00 plus a daily fine of
P500.00 for continuing violations payable to the Commission within five days from
actual receipt of this Order and it is hereby ordered to immediately cease and desist
from imposing the new rates for issuance and cancellation of stock certificates, until
further orders from this Commission.
SO ORDERED.4
Aggrieved, petitioner went to the Court of Appeals on certiorari contending that the SEC
acted with grave abuse of discretion or lack or excess of jurisdiction in issuing the above
orders. The appellate court issued a temporary restraining order on July 26, 1996, and a
writ of preliminary injunction on August 26, 1996.
On June 17, 1998, the appellate court dismissed the petition. It ruled that the power to
regulate petitioners fees was included in the general power given to the SEC under
Section 405 of The Revised Securities Act to regulate, supervise, examine, suspend or
otherwise discontinue, the operation of securities-related organizations like petitioner.
The appellate court likewise denied petitioners motion for reconsideration. Hence, this
appeal.
While this case was pending, The Revised Securities Act by authority of which the
assailed orders were issued was repealed by Republic Act No. 8799 or The Securities
Regulation Code,6 which became effective on August 8, 2000. Nonetheless, we find it
pertinent to rule on the parties submissions considering that the effects of the July 11,
1996 Order had not been obliterated by the repeal of The Revised Securities Act and
there is still present a need to rule on whether petitioner was liable for the fees imposed
upon it.
Petitioner submits that the Court of Appeals committed reversible error:
I.
WHEN [IT] FAILED TO RULE THAT THE SEC AND CHAIRMAN YASAY, IN ISSUING
THE COMMISSIONS CONTROVERTED ORDERS DATED JULY 8 AND JULY 11,
1996, VIOLATED PASTRAS CONSTITUTIONAL RIGHT TO DUE PROCESS OF LAW;
II.
WHEN [IT] FAILED TO RULE THAT THE SEC AND CHAIRMAN YASAY
COMMITTED GRAVE ABUSE OF DISCRETION AND IN EXCESS OF THEIR

39

JURISDICTION WHEN THEY ISSUED THE COMMISSIONS CONTROVERTED

ORDERS DATED JULY 8 AND JULY 11, 1996; AND,
III.
WHEN [IT] RULED THAT THE SEC AND CHAIRMAN YASAY HAVE LEGAL BASIS IN
ISSUING THE COMMISSIONS CONTROVERTED ORDERS DATED JULY 8 AND
JULY 11, 1996.7
Essentially, the issue for our resolution is whether the SEC acted with grave abuse of
discretion or lack or excess of jurisdiction in issuing the controverted Orders of July 8
and 11, 1996.
Petitioner argues that the SEC violated petitioners right to due process because it issued
the July 8, 1996 cease-and-desist order without first conducting a hearing. Petitioner
likewise laments that while said order required petitioners board of directors to appear
before the SEC to show cause why no administrative sanctions should be imposed on
them, petitioners board of directors attended the hearing without the assistance of
counsel because the Director of the SEC Brokers and Exchanges Department had
allegedly assured them that the order was only a standard order and nothing to worry
about. Petitioner also contends that even if its board did attend with counsel or present
evidence, its evidence would not have been considered anyway because the Order of July
11, 1996 had allegedly been prepared as early as July 8, 1996. In support of this
suspicion, petitioner points out that the date "July 8, 1996" was replaced with the date
"July 11, 1996" before it was signed by Chairman Perfecto R. Yasay, Jr., who did not
attend the meeting.
Petitioner adds that the SEC cannot restrict petitioners members from increasing the
transfer and processing fees they charge their clients because there is no specific law,
rule or regulation authorizing it. Section 40 of the then Revised Securities Act, according
to petitioner, only lays down the general powers of the SEC to regulate and supervise the
corporate activities of organizations related to or connected with the securities market
like petitioner. It could not be interpreted to justify the SECs unjustified interference
with petitioners decision to increase its transfer fees and impose processing fees,
especially since the decision involved a management prerogative and was intended to
protect the viability of petitioners members.8
For its part, the Office of the Solicitor General (OSG) counters that petitioners
allegations of denial of due process are baseless. The OSG cites that petitioner was given
ample opportunity to present its case at the July 11, 1996 hearing and was adequately
heard through the series of letters it sent to the SEC to explain its refusal to obey the
latters directives. Also, there is no evidence to support its allegation that the July 11,
1996 Order was prepared in advance or that it was issued without considering the
evidence for the parties.
As regards the SECs power over petitioners stock transfer fees, the OSG argues that the
power to determine said fees was necessarily implied in the SECs general power under

40

Section 40 of The Revised Securities Act to regulate and supervise the operations of
transfer agents such as petitioners member-corporations. The OSG adds that
petitioners discretion to increase its fees was not purely a management prerogative and
was properly the subject of regulation considering that it significantly affects the market
for securities.9
We find the instant petition bereft of merit. The Court notes that before its repeal,
Section 47 of The Revised Securities Act clearly gave the SEC the power to enjoin the
acts or practices of securities-related organizations even without first conducting a
hearing if, upon proper investigation or verification, the SEC is of the opinion that there
exists the possibility that the act or practice may cause grave or irreparable injury to the
investing public, if left unrestrained. Section 47 clearly provided,
SEC. 47. Cease and desist order.The Commission, after proper investigation or
verification, motu proprio, or upon verified complaint by any aggrieved party, may issue
a cease and desist order without the necessity of a prior hearing if in its judgment 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 of this Act and the rules and regulations of the Commission. (Emphasis
supplied.)
xxxx
Said section enforces the power of general supervision of the SEC under Section 40 of
the then Revised Securities Act.
As a securities-related organization under the jurisdiction and supervision of the SEC by
virtue of Section 40 of The Revised Securities Act and Section 3 of Presidential Decree
No. 902-A,10 petitioner was under the obligation to comply with the July 8, 1996 Order.
Defiance of the order was subject to administrative sanctions provided in Section 4611 of
The Revised Securities Act.
Petitioner failed to show that the SEC, which undoubtedly possessed the necessary
expertise in matters relating to the regulation of the securities market, gravely abused its
discretion in finding that there was a possibility that the increase in fees and imposition
of cancellation fees will cause grave or irreparable injury or prejudice to the investing
public. Indeed, petitioner did not advance any argument to counter the SECs finding.
Thus, there appears to be no substantial reason to nullify the July 8, 1996 Order. This is
true, especially considering that, as pointed out by the OSG, petitioners fee increases
have far-reaching effects on the capital market. Charging exorbitant processing fees
could discourage many small prospective investors and curtail the infusion of money
into the capital market and hamper its growth.
Furthermore, there is no merit in petitioners contention that even if it had appeared at
the hearing of July 11, 1996 with counsel and presented its evidence, the SEC would not
have considered it because the Order of July 11, 1996 was in fact prepared earlier on July
8, 1996. It is clear from the order itself that the July 11, 1996 Order was edited from the

41

computer file of the July 8, 1996 Order, and that the error in the date was merely an
oversight in editing the softcopy before it was printed.
Similarly, there is no merit to petitioners claim that it was misled into attending the
July 11, 1996 hearing without counsel. Whether the Director of the SEC Brokers and
Exchanges Department assured petitioners board that the July 8, 1996 Order was only a
standard order and nothing to worry about, is a question of fact which this Court cannot
entertain considering that this Court is not a trier of facts.12 Needless to stress, the
assurance could not be interpreted as outright prohibition to bring in petitioners
counsel.
Moreover, it devolved upon petitioner to protect its interests adequately considering the
clear implications of the Order of July 8, 1996. Petitioner had only itself to blame for its
failure to present its evidence during the July 11, 1996 hearing.1wphi1
In Philippine Stock Exchange, Inc. v. Court of Appeals,13 the Court held that the SEC is
without authority to substitute its judgment for that of the corporations 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.
The regulatory and supervisory powers of the Commission under Section 40 of the then
Revised Securities Act, in our view, were broad enough to include the power to regulate
petitioners fees. Indeed, Section 47 gave the Commission the power to enjoin motu
proprio any act or practice of petitioner which could cause grave or irreparable injury or
prejudice to the investing public. The intentional omission in the law of any qualification
as to what acts or practices are subject to the control and supervision of the SEC under
Section 47 confirms the broad extent of the SECs regulatory powers over the operations
of securities-related organizations like petitioner.
The SECs authority to issue the cease-and-desist order being indubitable under Section
47 in relation to Section 40 of the then Revised Securities Act, and there being no
showing that the SEC committed grave abuse of discretion in finding basis to issue said
order, we rule that the Court of Appeals committed no reversible error in affirming the
assailed orders. For its open and admitted defiance of a lawful cease-and-desist order,
petitioner was held appropriately liable for the payment of the penalty imposed on it in
the SECs July 11, 1996 Order.
WHEREFORE, the instant petition for review on certiorari is DENIED for lack of
merit. The Decision dated June 17, 1998 and Resolution dated January 13, 1999, of the
Court of Appeals in CA-G.R. SP No. 41320 are affirmed. Costs against petitioner.

42

SO ORDERED.
G.R. No. 180064

September 16, 2013

JOSE U. PUA and BENJAMIN HANBEN U. PUA, Petitioners,

vs.
CITIBANK, N. A., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 21, 2007
and Resolution3 dated October 16, 2007 of the Court of Appeals (CA) in CA-G.R. SP No.
79297, which reversed and set aside the Orders dated May 14, 20034 and July 16, 20035
of the Regional Trial Court of Cauayan City, Isabela, Branch 19 (RTC), dismissing
petitioners Jose(Jose) and Benjamin Hanben U. Pua's (petitioners) complaint against
respondent Citibank, N. A. (respondent).
The Facts
On December 2, 2002, petitioners filed before the RTC a Complaint6 for declaration of
nullity of contract and sums of money with damages against respondent,7 docketed as
Civil Case No. 19-1159.8 In their complaint, petitioners alleged that they had been
depositors of Citibank Binondo Branch (Citibank Binondo) since 1996. Sometime in
1999, Guada Ang, Citibank Binondos Branch Manager, invited Jose to a dinner party at
the Manila Hotel where he was introduced to several officers and employees of Citibank
Hongkong Branch (Citibank Hongkong).9 A few months after, Chingyee Yau (Yau), VicePresident of Citibank Hongkong, came to the Philippines to sell securities to Jose. They
averred that Yau required Jose to open an account with Citibank Hongkong as it is one
of the conditions for the sale of the aforementioned securities.10 After opening such
account, Yau offered and sold to petitioners numerous securities11 issued by various
public limited companies established in Jersey, Channel I sands. The offer, sale, and
signing of the subscription agreements of said securities were all made and perfected at
Citibank Binondo in the presence of its officers and employees.12 Later on, petitioners
discovered that the securities sold to them were not registered with the Securities and
Exchange Commission (SEC)and that the terms and conditions covering the
subscription were not likewise submitted to the SEC for evaluation, approval, and
registration.13 Asserting that respondents actions are in violation of Republic Act
No.8799, entitled the "Securities Regulation Code" (SRC), they assailed the validity of
the subscription agreements and the terms and conditions thereof for being contrary to
law and/or public policy.14
For its part, respondent filed a motion to dismiss15 alleging, inter alia, that petitioners
complaint should be dismissed outright for violation of the doctrine of primary
jurisdiction. It pointed out that 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

43

was a sale of unregistered securities. In this regard, respondent contended that the SRC
conferred upon the SEC jurisdiction to investigate compliance with its provisions and
thus, petitioners complaint should be first filed with the SEC and not directly before the
RTC.16
Petitioners opposed17 respondents motion to dismiss, maintaining that the RTC has
jurisdiction over their complaint. They asserted that Section 63of the SRC expressly
provides that the RTC has exclusive jurisdiction to hear and decide all suits to recover
damages pursuant to Sections 56 to 61 of the same law.18
The RTC Ruling
In an Order19 dated May 14, 2003, the RTC denied respondents motion to dismiss. It
noted that petitioners complaint is for declaration of nullity of contract and sums of
money with damages and, as such, it has jurisdiction to hear and decide upon the case
even if it involves the alleged sale of securities. It ratiocinated that the legal questions or
issues arising from petitioners causes of action against respondent are more
appropriate for the judiciary than for an administrative agency to resolve.20
Respondent filed an omnibus motion21 praying, among others, for there consideration of
the aforesaid ruling, which petitioners, in turn, opposed.22 In an Order23 dated July 16,
2003, the RTC denied respondents omnibus motion with respect to its prayer for
reconsideration. Dissatisfied, respondent filed a petition for certiorari before the CA.24
The CA Ruling
In a Decision25 dated May 21, 2007, the CA reversed and set aside the RTCs Orders and
dismissed petitioners complaint for violation of the doctrine of primary jurisdiction.
The CA agreed with respondents contention that since the case would largely depend on
the issue of whether or not the latter violated the provisions of the SRC, the matter is
within the special competence or knowledge of the SEC. Citing the case of Baviera v.
Paglinawan26 (Baviera), the CA opined that all complaints involving violations of the
SRC should be first filed before the SEC.27
Aggrieved, petitioners moved for reconsideration,28 which was, however, denied by the
CA in a Resolution29 dated October 16, 2007.Hence, this petition.
The Issue Before the Court
The essential issue in this case is whether or not petitioners action falls within the
primary jurisdiction of the SEC.
Petitioners reiterate their original position that the SRC itself provides that civil cases
for damages arising from violations of the same law fall within the exclusive jurisdiction
of the regional trial courts.30

44

On the contrary, respondent maintains that since petitioners complaint would

necessarily touch on the issue of whether or not the former violated certain provisions of
the SRC, then the said complaint should have been first filed with the SEC which has the
technical competence to resolve such dispute.31
The Courts Ruling
The petition is meritorious.
At the outset, the Court observes that respondent erroneously relied on the Baviera
ruling to support its position that all complaints involving purported violations of the
SRC should be first referred to the SEC. A careful reading of the Baviera case would
reveal that the same involves a criminal prosecution of a purported violator of the SRC,
and not a civil suit such as the case at bar. The pertinent portions of the Baviera ruling
thus read:
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 as provided in Section 53.1 earlier quoted.
We thus agree with the Court of Appeals that petitioner committed a fatal procedural
lapse when he filed his criminal complaint directly with the DOJ. Verily, no grave abuse
of discretion can be ascribed to the DOJ in dismissing petitioners complaint.32
(Emphases and underscoring supplied)
Records show that petitioners complaint constitutes a civil suit for declaration of nullity
of contract and sums of money with damages, which stemmed from respondents
alleged sale of unregistered securities, in violation of the various provisions of the SRC
and not a criminal case such as that involved in Baviera.
In this light, when the Court ruled in Baviera that "all complaints for any violation of the
[SRC] x x x should be filed with the SEC,"33 it should be construed as to apply only to
criminal and not to civil suits such as petitioners complaint.
Moreover, it is a fundamental rule in procedural law that jurisdiction is conferred by
law;34 it cannot be inferred but must be explicitly stated therein. Thus, when Congress
confers exclusive jurisdiction to a judicial or quasi-judicial entity over certain matters by

45

law, this, absent any other indication to the contrary, evinces its intent to exclude other
bodies from exercising the same.
It is apparent that the SRC provisions governing criminal suits are separate and distinct
from those which pertain to civil suits. On the one hand, Section 53 of the SRC governs
criminal suits involving violations of the said law, viz.:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses.
53.1. The Commission may, in its discretion, make such investigations as it deems
necessary to determine whether any person has violated or is about to violate any
provision of this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency, other self-regulatory
organization, and may require or permit any person to file with it a statement in writing,
under oath or otherwise, as the Commission shall determine, as to all facts and
circumstances concerning the matter to be investigated. The Commission may publish
information concerning any such violations, and to investigate any fact, condition,
practice or matter which it may deem necessary or proper to aid in the enforcement of
the provisions of this Code, in the prescribing of rules and regulations thereunder, or in
securing information to serve as a basis for recommending further legislation
concerning the matters to which this Code relates: Provided, however, That any person
requested or subpoenaed to produce documents or testify in any investigation shall
simultaneously be notified in writing of the purpose of such investigation: Provided,
further, That all criminal complaints for violations of this Code, and the implementing
rules and regulations enforced or administered by the Commission shall be referred to
the Department of Justice for preliminary investigation and prosecution before the
proper court:
Provided, furthermore, That in instances where the law allows independent civil or
criminal proceedings of violations arising from the same act, the Commission shall take
appropriate action to implement the same: Provided, finally, That the investigation,
prosecution, and trial of such cases shall be given priority.
On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the SRC pertain to civil
suits involving violations of the same law. Among these, the applicable provisions to this
case are Sections 57.1 and 63.1 of the SRC which provide:
SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and
Reports.
57.1. Any person who:
(a) Offers to sell or sells a security in violation of Chapter III;
or

46

(b) Offers to sell or sells a security, whether or not exempted by the provisions of this
Code, by the use of any means or instruments of transportation or communication, by
means of a prospectus or other written or oral communication, which includes an
untrue statement of a material fact or omits to state a material fact necessary in order to
make the statements, in the light of the circumstances under which they were made, not
misleading (the purchaser not knowing of such untruth or omission), and who shall fail
in the burden of proof that he did not know, and in the exercise of reasonable care could
not have known, of such untruth or omission, shall be liable to the person purchasing
such security from him, who may sue to recover the consideration paid for such security
with interest thereon, less the amount of any income received thereon, upon the tender
of such security, or for damages if he no longer owns the security.
xxxx
SEC. 63. Amount of Damages to be Awarded. 63.1. All suits to recover damages
pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial
Court which shall have exclusive jurisdiction to hear and decide such suits. The Court is
hereby authorized to award damages in an amount not exceeding triple the amount of
the transaction plus actual damages.
x x x x (Emphases and underscoring supplied)
Based on the foregoing, it is clear that 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. It is a well-settled
rule in statutory construction that the term "shall" is a word of command, and one
which has always or which must be given a compulsory meaning, and it is generally
imperative or mandatory.35 Likewise, it is equally revelatory that no SRC provision of
similar import is found in its sections governing criminal suits; quite the contrary, the
SRC states that criminal cases arising from violations of its provisions should be first
referred to the SEC.1wphi1
Therefore, based on these considerations, it stands to reason that 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.
All told, petitioners' filing of a civil suit against respondent for purported violations of
the SRC was properly filed directly before the RTC.
WHEREFORE, the petition is GRANTED. Accordingly, the Court of Appeals' Decision
dated May 21, 2007 and Resolution dated October 16,2007 in CA-G.R. SP No. 79297 are
hereby REVERSED and SET ASIDE. Let Civil Case No. 19-1159 be REINSTATED and
REMANDED to the Regional Trial Court of Cauayan City, Isabela, Branch 19 for further
proceedings.

47

SO ORDERED.
G.R. No. 168380

February 8, 2007

MANUEL V. BAVIERA, Petitioner,

vs.
ESPERANZA PAGLINAWAN, in her capacity as Department of Justice State
Prosecutor; LEAH C. TANODRA-ARMAMENTO, In her capacity as Assistant
Chief State Prosecutor and Chairwoman of Task Force on Business Scam;
JOVENCITO R. ZUNO, in his capacity as Department of Justice Chief State
Prosecutor; STANDARD CHARTERED BANK, PAUL SIMON MORRIS, AJAY
KANWAL, SRIDHAR RAMAN, MARIVEL GONZALES, CHONA REYES,
MARIA ELLEN VICTOR, and ZENAIDA IGLESIAS, Respondents.
x-----------------------------x
G.R. No. 170602

February 8, 2007

MANUEL V. BAVIERA, Petitioner,

vs.
STANDARD CHARTERED BANK, BRYAN K. SANDERSON, THE RIGHT
HONORABLE LORD STEWARTBY, EVAN MERVYN DAVIES, MICHAEL
BERNARD DENOMA, CHRISTOPHER AVEDIS KELJIK, RICHARD HENRY
MEDDINGS, KAI NARGOLWALA, PETER ALEXANDER SANDS, RONNIE
CHI CHUNG CHAN, SIR CK CHOW, BARRY CLARE, HO KWON PING,
RUDOLPH HAROLD PETER ARKHAM, DAVID GEORGE MOIR, HIGH
EDWARD NORTON, SIR RALPH HARRY ROBINS, ANTHONY WILLIAM
PAUL STENHAM (Standard Chartered Bank Chairman, Deputy Chairman,
and Members of the Board), SHERAZAM MAZARI (Group Regional Head
for Consumer Banking), PAUL SIMON MORRIS, AJAY KANWAL, SRIDHAR
RAMAN, MARIVEL GONZALES, CHONA REYES, ELLEN VICTOR, RAMONA
H. BERNAD, DOMINGO CARBONELL, JR., and ZENAIDA IGLESIAS
(Standard Chartered Bank-Philippines Branch Heads/Officers),
Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us are two consolidated Petitions for Review on Certiorari assailing the Decisions
of the Court of Appeals in CA-G.R. SP No. 873281 and in CA-G.R. SP No. 85078.2
The common factual antecedents of these cases as shown by the records are:
Manuel Baviera, petitioner in these cases, was the former head of the HR Service
Delivery and Industrial Relations of Standard Chartered Bank-Philippines (SCB), one of
herein respondents. SCB is a foreign banking corporation duly licensed to engage in

48

banking, trust, and other fiduciary business in the Philippines. Pursuant to Resolution
No. 1142 dated December 3, 1992 of the Monetary Board of the Bangko Sentral ng
Pilipinas (BSP), the conduct of SCBs business in this jurisdiction is subject to the
following conditions:
1. At the end of a one-year period from the date the SCB starts its trust functions, at least
25% of its trust accounts must be for the account of non-residents of the Philippines and
that actual foreign exchange had been remitted into the Philippines to fund such
accounts or that the establishment of such accounts had reduced the indebtedness of
residents (individuals or corporations or government agencies) of the Philippines to
non-residents. At the end of the second year, the above ratio shall be 50%, which ratio
must be observed continuously thereafter;
2. The trust operations of SCB shall be subject to all existing laws, rules and regulations
applicable to trust services, particularly the creation of a Trust Committee; and
3. The bank shall inform the appropriate supervising and examining department of the
BSP at the start of its operations.
Apparently, SCB did not comply with the above conditions. Instead, as early as 1996, it
acted as a stock broker, soliciting from local residents foreign securities called "GLOBAL
THIRD PARTY MUTUAL FUNDS" (GTPMF), denominated in US dollars. These
securities were not registered with the Securities and Exchange Commission (SEC).
These were then remitted outwardly to SCB-Hong Kong and SCB-Singapore.
SCBs counsel, Romulo Mabanta Buenaventura Sayoc and Delos Angeles Law Office,
advised the bank to proceed with the selling of the foreign securities although
unregistered with the SEC, under the guise of a "custodianship agreement;" and should
it be questioned, it shall invoke Section 723 of the General Banking Act (Republic Act
No.337).4 In sum, SCB was able to sell GTPMF securities worth around P6 billion to
some 645 investors.
However, SCBs operations did not remain unchallenged. On July 18, 1997, the
Investment Capital Association of the Philippines (ICAP) filed with the SEC a complaint
alleging that SCB violated the Revised Securities Act,5 particularly the provision
prohibiting the selling of securities without prior registration with the SEC; and that its
actions are potentially damaging to the local mutual fund industry.
In its answer, SCB denied offering and selling securities, contending that it has been
performing a "purely informational function" without solicitations for any of its
investment outlets abroad; that it has a trust license and the services it renders under
the "Custodianship Agreement" for offshore investments are authorized by Section 726
of the General Banking Act; that its clients were the ones who took the initiative to
invest in securities; and it has been acting merely as an agent or "passive order taker" for
them.

49

On September 2, 1997, the SEC issued a Cease and Desist Order against SCB, holding
that its services violated Sections 4(a)7 and 198 of the Revised Securities Act.
Meantime, the SEC indorsed ICAPs complaint and its supporting documents to the
BSP.
On October 31, 1997, the SEC informed the Secretary of Finance that it withdrew
GTPMF securities from the market and that it will not sell the same without the
necessary clearances from the regulatory authorities.
Meanwhile, on August 17, 1998, the BSP directed SCB not to include investments in
global mutual funds issued abroad in its trust investments portfolio without prior
registration with the SEC.
On August 31, 1998, SCB sent a letter to the BSP confirming that it will withdraw thirdparty fund products which could be directly purchased by investors.
However, notwithstanding its commitment and the BSP directive, SCB continued to
offer and sell GTPMF securities in this country. This prompted petitioner to enter into
an Investment Trust Agreement with SCB wherein he purchased US$8,000.00 worth of
securities upon the banks promise of 40% return on his investment and a guarantee
that his money is safe. After six (6) months, however, petitioner learned that the value of
his investment went down to US$7,000.00. He tried to withdraw his investment but
was persuaded by Antonette de los Reyes of SCB to hold on to it for another six (6)
months in view of the possibility that the market would pick up.
Meanwhile, on November 27, 2000, the BSP found that SCB failed to comply with its
directive of August 17, 1998. Consequently, it was fined in the amount of P30,000.00.
The trend in the securities market, however, was bearish and the worth of petitioners
investment went down further to only US$3,000.00.
On October 26, 2001, petitioner learned from Marivel Gonzales, head of the SCB Legal
and Compliance Department, that the latter had been prohibited by the BSP to sell
GPTMF securities. Petitioner then filed with the BSP a letter-complaint demanding
compensation for his lost investment. But SCB denied his demand on the ground that
his investment is "regular."
On July 15, 2003, petitioner filed with the Department of Justice (DOJ), represented
herein by its prosecutors, public respondents, a complaint charging the above-named
officers and members of the SCB Board of Directors and other SCB officials, private
respondents, with syndicated estafa, docketed as I.S. No. 2003-1059.
For their part, private respondents filed the following as counter-charges against
petitioner: (1) blackmail and extortion, docketed as I.S. No. 2003-1059-A; and blackmail
and perjury, docketed as I.S. No. 2003-1278.

50

On September 29, 2003, petitioner also filed a complaint for perjury against private
respondents Paul Simon Morris and Marivel Gonzales, docketed as I.S. No. 2003-1278A.
On December 4, 2003, the SEC issued a Cease and Desist Order against SCB restraining
it from further offering, soliciting, or otherwise selling its securities to the public until
these have been registered with the SEC.
Subsequently, the SEC and SCB reached an amicable settlement.1awphi1.net
On January 20, 2004, the SEC lifted its Cease and Desist Order and approved the P7
million settlement offered by SCB. Thereupon, SCB made a commitment not to offer or
sell securities without prior compliance with the requirements of the SEC.
On February 7, 2004, petitioner filed with the DOJ a complaint for violation of Section
8.19 of the Securities Regulation Code against private respondents, docketed as I.S. No.
2004-229.
On February 23, 2004, the DOJ rendered its Joint Resolution10 dismissing petitioners
complaint for syndicated estafa in I.S. No. 2003-1059; private respondents complaint
for blackmail and extortion in I.S. No. 2003-1059-A; private respondents complaint for
blackmail and perjury in I.S. No. 2003-1278; and petitioners complaint for perjury
against private respondents Morris and Gonzales in I.S. No. 2003-1278-A.
Meanwhile, in a Resolution11 dated April 4, 2004, the DOJ dismissed petitioners
complaint in I.S. No. 2004-229 (violation of Securities Regulation Code), holding that it
should have been filed with the SEC.
Petitioners motions to dismiss his complaints were denied by the DOJ. Thus, he filed
with the Court of Appeals a petition for certiorari, docketed as CA-G.R. SP No. 85078.
He alleged that the DOJ acted with grave abuse of discretion amounting to lack or
excess of jurisdiction in dismissing his complaint for syndicated estafa.
He also filed with the Court of Appeals a separate petition for certiorari assailing the
DOJ Resolution dismissing I.S. No. 2004-229 for violation of the Securities Regulation
Code. This petition was docketed as CA-G.R. SP No. 87328. Petitioner claimed that the
DOJ acted with grave abuse of discretion tantamount to lack or excess of jurisdiction in
holding that the complaint should have been filed with the SEC.
On January 7, 2005, the Court of Appeals promulgated its Decision dismissing the
petition.1avvphi1.net It sustained the ruling of the DOJ that the case should have been
filed initially with the SEC.
Petitioner filed a motion for reconsideration but it was denied in a Resolution dated
May 27, 2005.

51

Meanwhile, on February 21, 2005, the Court of Appeals rendered its Decision in CAG.R. SP No. 85078 (involving petitioners charges and respondents counter charges)
dismissing the petition on the ground that the purpose of a petition for certiorari is not
to evaluate and weigh the parties evidence but to determine whether the assailed
Resolution of the DOJ was issued with grave abuse of discretion tantamount to lack of
jurisdiction. Again, petitioner moved for a reconsideration but it was denied in a
Resolution of November 22, 2005.
Hence, the instant petitions for review on certiorari.
For our resolution is the fundamental issue of whether the Court of Appeals erred in
concluding that the DOJ did not commit grave abuse of discretion in dismissing
petitioners complaint in I.S. 2004-229 for violation of Securities Regulation Code and
his complaint in I.S. No. 2003-1059 for syndicated estafa.
G.R. No 168380
Re: I.S. No. 2004-229
For violation of the Securities Regulation Code
Section 53.1 of the Securities Regulation Code provides:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses.
53. 1. The Commission may, in its discretion, make such investigation as it deems
necessary to determine whether any person has violated or is about to violate any
provision of this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency, other self-regulatory
organization, and may require or permit any person to file with it a statement in writing,
under oath or otherwise, as the Commission shall determine, as to all facts and
circumstances concerning the matter to be investigated. The Commission may publish
information concerning any such violations and to investigate any fact, condition,
practice or matter which it may deem necessary or proper to aid in the enforcement of
the provisions of this Code, in the prescribing of rules and regulations thereunder, or in
securing information to serve as a basis for recommending further legislation
concerning the matters to which this Code relates: Provided, however, That any person
requested or subpoenaed to produce documents or testify in any investigation shall
simultaneously be notified in writing of the purpose of such investigation: Provided,
further, That all criminal complaints for violations of this Code and the
implementing rules and regulations enforced or administered by the
Commission shall be referred to the Department of Justice for preliminary
investigation and prosecution before the proper court: Provided, furthermore,
That in instances where the law allows independent civil or criminal proceedings of
violations arising from the act, the Commission shall take appropriate action to
implement the same: Provided, finally; That the investigation, prosecution, and trial of
such cases shall be given priority.

52

The Court of Appeals held that under the above provision, a criminal complaint for
violation of any law or rule administered by the SEC must first be filed with the latter. If
the Commission finds that there is probable cause, then it should refer the case to the
DOJ. Since petitioner failed to comply with the foregoing procedural requirement, the
DOJ did not gravely abuse its discretion in dismissing his complaint in I.S. No. 2004229.
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.12 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 as provided in Section 53.1 earlier
quoted.
We thus agree with the Court of Appeals that petitioner committed a fatal procedural
lapse when he filed his criminal complaint directly with the DOJ. Verily, no grave abuse
of discretion can be ascribed to the DOJ in dismissing petitioners complaint.
G.R. No. 170602
Re: I.S. No. 2003-1059 for
Syndicated Estafa
Section 5, Rule 110 of the 2000 Rules of Criminal Procedure, as amended, provides that
all criminal actions, commenced by either a complaint or an information, shall be
prosecuted under the direction and control of a public prosecutor. This mandate is
founded on the theory that a crime is a breach of the security and peace of the people at
large, an outrage against the very sovereignty of the State. It follows that a
representative of the State shall direct and control the prosecution of the offense.13 This
representative of the State is the public prosecutor, whom this Court described in the old
case of Suarez v. Platon,14 as:
[T]he representative not of an ordinary party to a controversy, but of a sovereignty
whose obligation to govern impartially is as compelling as its obligation to govern at all;
and whose interest, therefore, in a criminal prosecution is not that it shall win a case,
but that justice shall be done. As such, he is in a peculiar and very definite sense a
servant of the law, the twofold aim of which is that guilt shall not escape or innocence
suffers.

53

Concomitant with his authority and power to control the prosecution of criminal
offenses, the public prosecutor is vested with the discretionary power to determine
whether a prima facie case exists or not.15 This is done through a preliminary
investigation designed to secure the respondent from hasty, malicious and oppressive
prosecution. A preliminary investigation is essentially an inquiry to determine whether
(a) a crime has been committed; and (b) whether there is probable cause that the
accused is guilty thereof.16 In Pontejos v. Office of the Ombudsman,17 probable cause is
defined as such facts and circumstances that would engender a well-founded belief that
a crime has been committed and that the respondent is probably guilty thereof and
should be held for trial. It is the public prosecutor who determines during the
preliminary investigation whether probable cause exists. Thus, the decision whether or
not to dismiss the criminal complaint against the accused depends on the sound
discretion of the prosecutor.
Given this latitude and authority granted by law to the investigating prosecutor, the
rule in this jurisdiction is that courts will not interfere with the conduct of
preliminary investigations or reinvestigations or in the determination of
what constitutes sufficient probable cause for the filing of the
corresponding information against an offender.18 Courts are not empowered to
substitute their own judgment for that of the executive branch.19 Differently stated, as
the matter of whether to prosecute or not is purely discretionary on his part, courts
cannot compel a public prosecutor to file the corresponding information, upon a
complaint, where he finds the evidence before him insufficient to warrant the filing of an
action in court. In sum, the prosecutors findings on the existence of probable
cause are not subject to review by the courts, unless these are patently
shown to have been made with grave abuse of discretion.20
Grave abuse of discretion is such capricious and whimsical exercise of judgment on the
part of the public officer concerned which is equivalent to an excess or lack of
jurisdiction. The abuse of discretion must be as patent and gross as to amount to an
evasion of a positive duty or a virtual refusal to perform a duty enjoined by law, or to act
at all in contemplation of law, as where the power is exercised in an arbitrary and
despotic manner by reason of passion or hostility.21
In determining whether the DOJ committed grave abuse of discretion, it is expedient to
know if the findings of fact of herein public prosecutors were reached in an arbitrary
or despotic manner.
The Court of Appeals held that petitioners evidence is insufficient to establish probable
cause for syndicated estafa. There is no showing from the record that private
respondents herein did induce petitioner by false representations to invest in the
GTPMF securities. Nor did they act as a syndicate to misappropriate his money for their
own benefit. Rather, they invested it in accordance with his written instructions. That he
lost his investment is not their fault since it was highly speculative.
Records show that public respondents examined petitioners evidence with care, well
aware of their duty to prevent material damage to his constitutional right to liberty and

54

fair play. In Suarez previously cited, this Court made it clear that a public prosecutors
duty is two-fold. On one hand, he is bound by his oath of office to prosecute persons
where the complainants evidence is ample and sufficient to show prima facie guilt of a
crime. Yet, on the other hand, he is likewise duty-bound to protect innocent persons
from groundless, false, or malicious prosecution.22
Hence, we hold that the Court of Appeals was correct in dismissing the petition for
review against private respondents and in concluding that the DOJ did not act with
grave abuse of discretion tantamount to lack or excess of jurisdiction.
On petitioners complaint for violation of the Securities Regulation Code, suffice it to
state that, as aptly declared by the Court of Appeals, he should have filed it with the
SEC, not the DOJ. Again, there is no indication here that in dismissing petitioners
complaint, the DOJ acted capriciously or arbitrarily.
WHEREFORE, we DENY the petitions and AFFIRM the assailed Decisions of the
Court of Appeals in CA-G.R. SP No. 87328 and in CA-G.R. SP No. 85078.
Costs against petitioner.
SO ORDERED.
G.R. No. 112872

April 19, 2001

THE INTESTATE ESTATE OF ALEXANDER T. TY, represented by the

Administratrix, SYLVIA S. TY, petitioner,
vs.
COURT OF APPEALS, HON. ILDEFONSO E.GASCON, and ALEJANDRO B.
TY, respondents.

G.R. No. 114672

April 19, 2001

SYLVIA S. TY, in her capacity as Administratrix of the Intestate Estate of

Alexander T. Ty, petitioner,
vs.
COURT OF APPEALS and ALEJANDRO B. TY, respondents.
MELO, J.:
Before the Court are two separate petitions for certiorari, G.R. 112872 under Rule 65
alleging grave abuse of discretion amounting to lack or excess of jurisdiction, and G.R.
No.114672 under Rule 45 on purely questions of law. As these two cases involved the
same parties and basically the same issues, including the main question of jurisdiction,
the Court resolved to consolidate them.

55

On February 27, 2001, the Court issued its resolution in A.M. 00-9-03 directing the redistribution of old cases such as the ones on hand. Thus, the present ponencia.
The antecedent facts are as follows:lawphil.net
Petitioner Sylvia S. Ty was married to Alexander T. Ty, son of private respondent
Alejandro B. Ty, on January 11, 1981. Alexander died of leukemia on May 19, 1988 and
was survived by his wife, petitioner Sylvia, and only child, Krizia Katrina. In the
settlement of his estate, petitioner was appointed administratrix of her late husbands
intestate estate.
On November 4, 1992, petitioner filed a motion for leave to sell or mortgage estate
property in order to generate funds for the payment of deficiency estate taxes in the sum
of P4,714,560.00. Included in the inventory of property were the following:
1) 142,285 shares of stock in ABT Enterprises valued at P14,228,500.00;itc-alf
2) 5,000 shares of stock in Intercontinental Paper Industries valued at P500,000.00;
3) 15,873 shares of stock in Philippine Crystal Manufacturing, Inc. valued at
P1,587,300.00;
4) 800 shares of stock in Polymart Paper Industries, Inc. valued at P80,000.00;itc-alf
5) 1,800 shares of stock in A.T. Car Care Center, Inc. valued at P188,000.00;
6) 360 shares of stock in Union Emporium, Inc. valued at P36,000.00;lawphil.net
7) 380 shares of stock in Lexty, Inc. valued at P38,000.00; and
8) a parcel of land in Biak-na-Bato, Matalahib, Sta. Mesa, with an area of 823 square
meters and covered by Transfer Certificate of Title Number 214087.
Private respondent Alejandro Ty then filed two complaints for the recovery of the abovementioned property, which was docketed as Civil Case Q-91-10833 in Branch 105
Regional Trial Court of Quezon City (now herein G.R. No. 112872), praying for the
declaration of nullity of the deed of absolute sale of the shares of stock executed by
private respondent in favor of the deceased Alexander, and Civil Case Q-92-14352 in
Branch 90 Regional Trial Court of Quezon City (now G.R. No. 114672), praying for the
recovery of the pieces of property that were placed in the name of deceased Alexander by
private respondent, the same property being sought to be sold out, mortgaged, or
disposed of by petitioner. Private respondent claimed in both cases that even if said
property were placed in the name of deceased Alexander, they were acquired through
private respondents money, without any cause or consideration from deceased
Alexander.

56

Motions to dismiss were filed by petitioner. Both motions alleged lack of jurisdiction of
the trial court, claiming that the cases involved intra-corporate dispute cognizable by the
Securities and Exchange Commission (SEC). Other grounds raised in G.R. No. 114672
were:
1) An express trust between private respondent Alejandro and his deceased son
Alexander:itc-alf
2) Bar by the statute of limitations;
3) Private respondents violation of Supreme Court Circular 28-91 for failure to include
a certification of non-forum shopping in his complaints; and
4) Bar by laches.lawphil.net
The motions to dismiss were denied. Petitioner then filed petitions for certiorari in the
Court of Appeals, which were also dismissed for lack of merit. Thus, the present
petitions now before the Court.
Petitioner raises the issue of jurisdiction of the trial court. She alleges that an intracorporate dispute is involved. Hence, under Section 5(b) of Presidential Decree 902-A,
the SEC has jurisdiction over the case. The Court cannot agree with petitioner.
Jurisdiction over the subject matter is conferred by law (Union Bank of the Philippines
vs. Court of Appeals, 290 SCRA 198 [1998]). The nature of an action, as well as which
court or body has jurisdiction over it, is determined based on the allegations contained
in the complaint of the plaintiff (Serdoncillo vs. Benolirao, 297 SCRA 448 [1998];
Tamano vs. Ortiz, 291 SCRA 584 [1998]), irrespective of whether or not plaintiff is
entitled to recover upon all or some of the claims asserted therein (Citibank, N.A. vs.
Court of Appeals, 299 SCRA 390 [1998]). Jurisdiction cannot depend on the defenses
set forth in the answer, in a motion to dismiss, or in a motion for reconsideration by the
defendant (Dio vs. Conception, 296 SCRA 579 [1998]).
Petitioner argues that the present case involves a suit between two stockholders of the
same corporation which thus places it beyond the jurisdictional periphery of regular
trial courts and more within the exclusive competence of the SEC by reason of Section
5(b) of Presidential Decree 902-A, since repealed. However, it does not necessarily
follow that when both parties of a dispute are stockholders of a corporation, the dispute
is automatically considered intra-corporate in nature and jurisdiction consequently falls
with the SEC. Presidential Decree 902-A did not confer upon the SEC absolute
jurisdiction and control over all matters affecting corporations, regardless of the nature
of the transaction which gave rise to such disputes (Jose Peneyra, et. al. vs.
Intermediate Appellate Court, et. al., 181 SCRA 245 [1990] citing DMRC Enterprises vs.
Este del Sol Mountain Reserve, Inc., 132 SCRA 293 [1984]). The better policy in
determining which body has jurisdiction over this case would be to consider, not merely
the status of the parties involved, but likewise the nature of the question that is the
subject of the controversy (Viray vs. Court of Appeals, 191 SCRA 309 [1990]). When the

57

nature of the controversy involves matters that are purely civil in character, it is beyond
the ambit of the limited jurisdiction of the SEC (Saura vs. Saura, Jr., 313 SCRA 465
[1999]).
In the cases at bar, the relationship of private respondent when he sold his shares of
stock to his son was one of vendor and vendee, nothing else. The question raised in the
complaints is whether or not there was indeed a sale in the absence of cause or
consideration. The proper forum for such a dispute is a regular trial court. The Court
agrees with the ruling of the Court of Appeals that no special corporate skill is necessary
in resolving the issue of the validity of the transfer of shares from one stockholder to
another of the same corporation. Both actions, although involving different property,
sought to declare the nullity of the transfers of said property to the decedent on the
ground that they were not supported by any cause or consideration, and thus, are
considered void ab initio for being absolutely simulated or fictitious. The determination
whether a contract is simulated or not is an issue that could be resolved by applying
pertinent provisions of the Civil Code, particularly those relative to obligations and
contracts. Disputes concerning the application of the Civil Code are properly cognizable
by courts of general jurisdiction. No special skill is necessary that would require the
technical expertise of the SEC.
It should also be noted that under the newly enacted Securities Regulation Code
(Republic Act No. 8799), this issue is now moot and academic because whether or not
the issue is intra-corporate, it is the regional trial court and not longer the SEC that
takes cognizance of the controversy. 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 courts of general jurisdiction or the appropriate
regional trial court.
Other issues raised by the petitioner in G.R. No. 114672 are equally not impressed with
merit.
Petitioner contends that private respondent is attempting to enforce an unenforceable
express trust over the disputed real property. Petitioner is in error when she contends
that an express trust was created by private respondent when he transferred the
property to his son. Judge Abraham P. Vera, in his order dated March 31, 1993 in Civil
Case No. Q-92-14352, declared:
[e]xpress trusts are those that are created by the direct and positive acts of the parties,
by some writing or deed or will or by words evidencing an intention to create a trust. On
the other hand, implied trusts are those which, without being expressed, are deducible
from the nature of the transaction by operation of law as matters of equity,
independently of the particular intention of the parties. Thus, if the intention to
establish a trust is clear, the trust is express; if the intent to establish a trust is to be
taken from circumstances or other matters indicative of such intent, then the trust is
implied (Cuaycong vs. Cuaycong, 21 SCRA 1191 [1967].

58

In the cases at hand, private respondent contends that the pieces of property were
transferred in the name of the deceased Alexander for the purpose of taking care of the
property for him and his siblings. Such transfer having been effected without cause of
consideration, a resulting trust was created.
A resulting trust arises in favor of one who pays the purchase money of an estate and
places the title in the name of another, because of the presumption that he who pays for
a thing intends a beneficial interest therein for himself. The trust is said to result in law
from the acts of the parties. Such a trust is implied in fact (Tolentino, Civil Code of the
Philippines, Vol. 4, p. 678).
If a trust was then created, it was an implied, not an express trust, which may be proven
by oral evidence (Article 1457, Civil Code), and it matters not whether property is real or
personal (Paras, Civil Code of the Philippines, Annotated, Vol. 4, p. 814).
Petitioners assertion that private respondents action is barred by the statute of
limitations is erroneous. The statute of limitations cannot apply in this case. Resulting
trusts generally do not prescribe (Caladiao vs. Vda. de Blas, 10 SCRA 691 [1964]),
except when the trustee repudiates the trust. Further, an action to reconvey will not
prescribe so long as the property stands in the name of the trustee (Manalang, et. al. vs.
Canlas, et. al., 94 Phil. 776 [1954]). To allow prescription would be to permit a trustee to
acquire title against his principal and the true owner.
Petitioner is also mistaken in her contention that private respondent violated Supreme
Court Circular 28-91, dated September 17, 1991 and transfer having been effected
without cause of consideration, a resulting trust was created.
A resulting trust arises in favor of one who pays the purchase money of an estate and
places the title in the name of another, because of the presumption that he who pays for
a thing intends a beneficial interest therein for himself. The trust is said to result in law
from the acts of the parties. Such a trust is implied in fact (Tolentino, Civil Code of the
Philippines, Vol. 4, p. 678).
If a trust was then created, it was an implied, not an express trust, which may be proven
by oral evidence (Article 1457, Civil Code), and it matters not whether property is real or
personal (Paras, Civil Code of the Philippines, Annotated, Vol. 4, p. 814).1wphi1.nt
Petitioners assertion that private respondents action is barred by the statute of
limitations is erroneous. The statute of limitations cannot apply in this case. Resulting
trusts generally do not prescribe (Caladiao vs. Vda. de Blas, 10 SCRA 691 [1964]),
except when the trustee repudiates the trust. Further, an action to reconvey will not
prescribe so long as the property stands in the name of the trustee (Manalang, et. al. vs.
Canlas, et. al., 94 Phil. 776 [1954]). To allow prescription would be to permit a trustee to
acquire title against his principal and the true owner.

59

Petitioner is also mistaken in her contention that private respondent violated Supreme
Court Circular 28-91, dated September 17, 1991 and transfer having been affected
without cause of consideration, a resulting trust was created.
A resulting trust arises in favor of one who pays the purchase money of an estate and
places the title in the name of another, because of the presumption that he who pays for
a thing intends a beneficial interest therein for himself. The trust is said to result in law
from the acts of the parties. Such a trust is implied in fact (Tolentino, Civil Code of the
Philippines, Vol. 4, p. 678).
If a trust was then created, it was an implied, not an express trust, which may be proven
by oral evidence (Article 1457, Civil Code), and it matters not whether property is real or
personal (Paras, Civil Code of the Philippines, Annotated, Vol. 4, p. 814).
Petitioners assertion that private respondents action is barred by the statute of
limitations is erroneous. The statute of limitations cannot apply in this case. Resulting
trusts generally do not prescribe (Caladiao vs. Vda. de Blas, 10 SCRA 691 [1964]),
except when the trustee repudiates the trust. Further, an action to reconvey will not
prescribe so long as the property stands in the name of the trustee (Manalang, et. al. vs.
Canlas, et. al., 94 Phil. 776 [1954]). To allow prescription would be to permit a trustee to
acquire title against his principal and the true owner.
Petitioner is also mistaken in her contention that private respondent violated Supreme
Court Circular 28-91, dated September 17, 1991 and which took effect on January 1,
1992. Although Section 5, Rule 7 of the 1997 Rules on Civil Procedure makes the
requirement of filing a verification and certificate of non-forum-shopping applicable to
all courts, this cannot be applied in the case at bar. At the time the original complaint
was first filed on December 10 (for G.R. 112872) and 28 (for G.R. 114672), 1992, such
certification requirement only pertained to cases in the Court of Appeals and the
Supreme Court. The Revised Circular 28-91, which covered the certification
requirement against non-forum shopping in all courts, only took effect April 1, 1994.
Further, the subject heading of the original circular alone informs us of its topic: that of
additional requisites for petitions filed with the Supreme Court and the Court of Appeals
to prevent forum shopping or multiple filing of petitions and complaints. Section 1 of the
Circular makes it mandatory to include the docket number of the case in the lower court
or quasi-judicial agency whose order or judgment is sought to be reviewed. Such a
requirement clearly indicates that the Circular only applies to actions filed with the
Court of Appeals and the Supreme Court.
Contrary to what petitioner contends, there could be no laches in this case. Private
respondent filed his complaint in G.R. No. 112872 on December 10, 1992 (later amended
on December 23, 1992) and in G.R. No. 114672 on December 28, 1992, only over a
month after petitioner filed in the probate proceedings a petition to mortgage or sell the
property in dispute. Private respondents actions were in fact very timely. As stated in
the complaints, private respondent instituted the above actions as the property were in
danger of being sold to a third party. If there were no pending cases to stop their sale, he
would no longer be able to recover the same from an innocent purchaser for value.

60

Withal, the Court need not go into any further discussion on whether the trial court
erred in issuing a writ of preliminary injunction.1wphi1.nt
WHEREFORE, the petition for certiorari in G.R. No. 112872 is DISMISSED, having
failed to show that grave abuse of discretion was committed in declaring that the
regional trial court had jurisdiction over the case. The petition for review on certiorari in
G.R. 114672 is DENIED, having found no reversible error was committed.
SO ORDERED.lawphil.net