Documente Academic
Documente Profesional
Documente Cultură
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 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,
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing
the PSE's Petition for Review. Hence, this Petition by the PSE.
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
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 (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
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 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
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).
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
VILLARAMA, JR.,*
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 under Rule 45 of the
Rules of Court filed by petitioner Union Bank of the Philippines (Union Bank),
assailing the decision dated October 28, 20092 of the Court of Appeals (CA)
in CA-G.R. SP No. 107772.
THE FACTS
Union Bank is the owner of a commercial complex located in Malolos,
Bulacan, known as the Maunlad Shopping Mall.
Sometime in August 2002, Union Bank, as seller, and respondent Maunlad
Homes, Inc. (Maunlad Homes), as buyer, entered into a contract to
sell3 involving the Maunlad Shopping Mall. The contract set the purchase
price atP 151 million, P 2.4 million of which was to be paid by Maunlad
Homes as down payment payable on or before July 5, 2002, with the balance
to be amortized over the succeeding 180-month period.4 Under the contract,
Union Bank authorized Maunlad Homes to take possession of the property
and to build or introduce improvements thereon. The parties also agreed that
if Maunlad Homes violates any of the provisions of the contract, all payments
made will be applied as rentals for the use and possession of the property,
and all improvements introduced on the land will accrue in favor of Union
Bank.5 In the event of rescission due to failure to pay or to comply with the
terms of the contract, Maunlad Homes will be required to immediately vacate
the property and must voluntarily turn possession over to Union Bank. 6
When Maunlad Homes failed to pay the monthly amortization, Union Bank
sent the former a Notice of Rescission of Contract7 dated February 5, 2003,
demanding payment of the installments due within 30 days from receipt;
otherwise, it shall consider the contract automatically rescinded. Maunlad
Homes failed to comply. Hence, on November 19, 2003, Union Bank sent
Maunlad Homes a letter demanding payment of the rentals due and requiring
that the subject property be vacated and its possession turned over to the
bank. When Maunlad Homes continued to refuse, Union Bank instituted an
ejectment suit before the Metropolitan Trial Court (MeTC) of Makati City,
Branch 64, on February 19, 2004. Maunlad Homes resisted the suit by
claiming, among others, that it is the owner of the property as Union Bank
did not reserve ownership of the property under the terms of the contract.8By
virtue of its ownership, Maunlad Homes claimed that it has the right to
possess the property.
On May 18, 2005, the MeTC dismissed Union Banks ejectment complaint.9 It
found that Union Banks cause of action was based on a breach of contract
and that both parties are claiming a better right to possess the property
based on their respective claims of ownership of the property.
The MeTC ruled that the appropriate action to resolve these conflicting
claims was an accion reivindicatoria, over which it had no jurisdiction.
On appeal, the Regional Trial Court (RTC) of Makati City, Branch 139, affirmed
the MeTC in its decision dated July 17, 2008;10 it agreed with the MeTC that
the issues raised in the complaint extend beyond those commonly involved
in an unlawful detainer suit. The RTC declared that the case involved a
determination of the rights of the parties under the contract. Additionally,
the RTC noted that the property is located in Malolos, Bulacan, but the
ejectment suit was filed by Union Bank in Makati City, based on the contract
stipulation that "the venue of all suits and actions arising out or in
connection with the Contract to Sell shall be in Makati City."11 The RTC ruled
that the proper venue for the ejectment action is in Malolos, Bulacan,
pursuant to the second paragraph of Section 1, Rule 4 of the Rules of Court,
which states:
Section 1. Venue of real actions. - Actions affecting title to or possession of
real property, or interest therein, shall be commenced and tried in the proper
court which has jurisdiction over the area wherein the real property involved,
or a portion thereof, is situated.
Forcible entry and detainer actions shall be commenced and tried in the
municipal trial court of the municipality or city wherein the real property
involved, or a portion thereof, is situated. [emphasis ours]
The RTC declared that Union Bank cannot rely on the waiver of venue
provision in the contract because ejectment is not an action arising out of or
connected with the contract.
Union Bank appealed the RTC decision to the CA through a petition for review
under Rule 42 of the Rules of Court. The CA affirmed the RTC decision in its
October 28, 2009 decision,12 ruling that Union Banks claim of possession is
based on its claim of ownership which in turn is based on its interpretation of
the terms and conditions of the contract, particularly, the provision on the
consequences of Maunlad Homes breach of contract. The CA determined
that Union Banks cause of action is premised on the interpretation and
enforcement of the contract and the determination of the validity of the
rescission, both of which are matters beyond the jurisdiction of the MeTC.
Therefore, it ruled that the dismissal of the ejectment suit was proper. The
CA, however, made no further ruling on the issue of venue of the action.
From the CAs judgment, Union Bank appealed to the Court by filing the
present petition for review on certiorariunder Rule 45 of the Rules of Court.
THE PARTIES ARGUMENTS
Union Bank disagreed with the CAs finding that it is claiming ownership over
the property through the ejectment action. It claimed that it never lost
ownership over the property despite the execution of the contract, since only
the right to possess was conceded to Maunlad Homes under the contract;
Union Bank never transferred ownership of the property to Maunlad Homes.
Because of Maunlad Homes failure to comply with the terms of the contract,
Union Bank believes that it rightfully rescinded the sale, which rescission
terminated Maunlad Homes right to possess the subject property. Since
Maunlad Homes failed to turn over the possession of the subject property,
Union Bank believes that it correctly instituted the ejectment suit.
The Court initially denied Union Banks petition in its Resolution dated March
17, 2010.13 Upon motion for reconsideration filed by Union Bank, the Court
set aside its Resolution of March 17, 2010 (in a Resolution dated May 30,
201114) and required Maunlad Homes to comment on the petition.
Maunlad Homes contested Union Banks arguments, invoking the rulings of
the lower courts. It considered Union Banks action as based on the propriety
of the rescission of the contract, which, in turn, is based on a determination
of whether Maunlad Homes indeed failed to comply with the terms of the
contract; the propriety of the rescission, however, is a question that is within
the RTCs jurisdiction. Hence, Maunlad Homes contended that the dismissal
of the ejectment action was proper.
THE COURTS RULING
ofP 15,554,777.01 and monthly thereafter until the premises are fully
vacated and turned over" to Union Bank, and (2) to vacate the property
peacefully and turn over possession to Union Bank.21 As the demand went
unheeded, Union Bank instituted an action for unlawful detainer before the
MeTC on February 19, 2004, within one year from the date of the last
demand. These allegations clearly demonstrate a cause of action for
unlawful detainer and vested the MeTC jurisdiction over Union Banks action.
Maunlad Homes denied Union Banks claim that its possession of the
property had become unlawful. It argued that its failure to make payments
did not terminate its right to possess the property because it already
acquired ownership when Union Bank failed to reserve ownership of the
property under the contract. Despite Maunlad Homes claim of ownership of
the property, the Court rules that the MeTC retained its jurisdiction over the
action; a defendant may not divest the MeTC of its jurisdiction by merely
claiming ownership of the property.22 Under Section 16, Rule 70 of the Rules
of Court, "when the defendant raises the defense of ownership in his
pleadings and the question of possession cannot be resolved without
deciding the issue of ownership, the issue of ownership shall be resolved
only to determine the issue of possession." Section 18, Rule 70 of the Rules
of Court, however, states that "the judgment x x x shall be conclusive with
respect to the possession only and shall in no wise bind the title or affect the
ownership of the land or building."
The authority granted to the MeTC to preliminarily resolve the issue of
ownership to determine the issue of possession ultimately allows it to
interpret and enforce the contract or agreement between the plaintiff and
the defendant. To deny the MeTC jurisdiction over a complaint merely
because the issue of possession requires the interpretation of a contract will
effectively rule out unlawful detainer as a remedy. As stated, in an action for
unlawful detainer, the defendants right to possess the property may be by
virtue of a contract, express or implied; corollarily, the termination of the
defendants right to possess would be governed by the terms of the same
contract. Interpretation of the contract between the plaintiff and the
defendant is inevitable because it is the contract that initially granted the
defendant the right to possess the property; it is this same contract that the
plaintiff subsequently claims was violated or extinguished, terminating the
defendants right to possess. We ruled in Sps. Refugia v. CA23 that
FELICIANO, J.:p
Sometime in February 1983, the authorized capital stock of petitioner Nestle
Philippines Inc. ("Nestle") was increased from P300 million divided into 3
million shares with a par value of P100.00 per share, to P600 million divided
into 6 million shares with a par value of P100.00 per share. Nestle underwent
the necessary procedures involving Board and stockholders approvals and
effected the necessary filings to secure the approval of the increase of
authorized capital stock by respondent Securities and Exchange Commission
("SEC"), which approval was in fact granted. Nestle also paid to the SEC the
amount of P50,000.00 as filing fee in accordance with the Schedule of Fees
and Charges being implemented by the SEC under the Corporation Code. 1
Nestle has only two (2) principal stockholders: San Miguel Corporation and
Nestle S.A. The other stockholders, who are individual natural persons, own
only one (1) share each, for qualifying purposes, i.e., to qualify them as
members of the Board of Directors being elected thereto on the strength of
the votes of one or the other principal shareholder.
On 16 December 1983, the Board of Directors and stockholders of Nestle
approved resolutions authorizing the issuance of 344,500 shares out of the
previously authorized but unissued capital stock of Nestle, exclusively to San
Miguel Corporation and to Nestle S.A. San Miguel Corporation subscribed to
and completely paid up 168,800 shares, while Nestle S.A. subscribed to and
paid up the balance of 175,700 shares of stock.
On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate
Secretary, M.L. Antonio, with the SEC seeking exemption of its proposed
issuance of additional shares to its existing principal shareholders, from the
registration requirement of Section 4 of the Revised Securities Act and from
payment of the fee referred to in Section 6(c) of the same Act. In that letter,
Nestle requested confirmation of the correctness of two (2) propositions
submitted by it:
1. That there is no need to file a petition for exemption under
Section 6(b) of the Revised Securities Act with respect to the
issuance of the said 344,600 additional shares to our existing
stockholders out of our unissued capital stock; and
2. That the fee provided in Section 6(c) of [the Revised
Securities] Act is not applicable to the said issuance of additional
shares. 2
The principal, indeed the only, argument presented by Nestlewas that
Section 6(a) (4) of the Revised Securities Act which provides as follows:
Sec. 6. Exempt transactions. a) The requirement of
registration under subsection (a) of Section four of this Act shall
not apply to the sale of any security in any of the following
transactions:
xxx xxx xxx
In respect of its claimed exemption from the fee provided for in Section 6(c)
of the Revised Securities Act, Nestle contended that since Section 6 (a) (4) of
the statute declares (in Nestle's view) the proposed issuance of 344,500
previously authorized but unissued shares of Nestle's capital stock to its
existing shareholders as an exempt transaction, the SEC could not collect
fees for "the same transaction" twice. Nestle adverted to its payment back in
21 February 1983 of the amount of P50,000.00 as filing fees to the SEC when
it applied for and eventually received approval of the increase of its
authorized capital stock effected by Board and shareholder action last 16
December 1983.
In a letter dated 26 June 1986, the SEC through its then Chairman Julio A.
Sulit, Jr. responded adversely to petitioner's requests and ruled that the
proposed issuance of shares did not fall under Section 6 (a) (4) of the
Revised Securities Act, since Section 6 (a) (4) is applicable only where there
is an increase in the authorized capital stock of a corporation. Chairman Sulit
held, however, that the proposed transaction could be considered by the
Commission under the provisions of Section 6 (b) of the Revised Securities
Act which reads as follows:
(b) The Commission may, from time to time and subject to such
terms and conditions as it may prescribe, exempt transactions
other than those provided in the preceding paragraph, if it finds
that the enforcement of the requirements of registration under
this Act with respect to such transactions is not necessary in the
public interest and for the protection of the investors by reason
of the small amount involved or the limited character of the
public offering.
The Commission then advised petitioner to file the appropriate request for
exemption and to pay the fee required under Section 6 (c) of the statute,
which provides:
(c) A fee equivalent to one-tenth of one per centum of the
maximum aggregate price or issued value of the securities shall
be collected by the Commission for granting a general or
particular exemption from the registration requirements of this
Act.
Petitioner moved for reconsideration of the SEC ruling, without success.
On 3 July 1987, petitioner sought review of the SEC ruling before this Court
which, however, referred the petition to the Court of Appeals.
In a decision dated 13 January 1989, the Court of Appeals sustained the
ruling of the SEC.
Dissatisfied with the Decision of the Court of Appeals, Nestle is now before
this Court on a Petition for Review, raising the very same issues that it had
raised before the SEC and the Court of Appeals.
Examining the words actually used in Section 6 (a) (4) of the Revised
Securities Act, and bearing in mind common corporate usage in this
jurisdiction, it will be seen that the statutory phrase "issuance of additional
capital stock" is indeed infected with a certain degree of ambiguity. This
phrase may refer either to: a) the issuance of capital stock as part of and in
the course of increasing the authorized capital stock of a corporation; or (b)
issuance of already authorized but still unissued capital stock. By the same
token, the phrase "increased capital stock" found at the end of Section 6 (a)
(4), may refer either: 1) to newly or contemporaneously authorized capital
stock issued in the course of increasing the authorized capital stock of a
corporation; or 2) to previously authorized but unissued capital stock.
Under Section 38 of the Corporation Code, a corporation engaged in
increasing its authorized capital stock, with the required vote of its Board of
Directors and of its stockholders, must file a sworn statement of the
treasurer of the corporation showing that at least twenty-five percent (25%)
of "such increased capital stock" has been subscribed and that at least
twenty-five percent (25%) of the amount subscribed has been paid either in
actual cash or in property transferred to the corporation. In other words, the
corporation must issue at least twenty-five percent (25%) of the newly or
contemporaneously authorized capital stock in the course of complying with
the requirements of the Corporation Code for increasing its authorized
capital stock.
In contrast, after approval by the SEC of the increase of its authorized capital
stock, and from time to time thereafter, the corporation, by a vote of its
Board of Directors, and without need of either stockholder or SEC approval,
may issue and sell shares of its already authorized but still unissued capital
stock to existing shareholders or to members of the general public. 5
Both the SEC and the Court of Appeals resolved the ambiguity by construing
Section 6 (a) (4) as referring only to the issuance of shares of stock as part of
and in the course of increasing the authorized capital stock of Nestle. In the
case at bar, since the 344,500 shares of Nestle capital stock are proposed to
be issued from already authorized but still unissued capital stock and since
the present authorized capital stock of 6,000,000 shares with a par value of
P100.00 per share is not proposed to be further increased, the SEC and the
Court of Appeals rejected Nestle's petition.
We believe and so hold that the construction thus given by the SEC and the
Court of Appeals to Section 6 (a) (4) of the Revised Securities Act must be
upheld.
In the first place, it is a principle too well established to require extensive
documentation that the construction given to a statute by an administrative
agency charged with the interpretation and application of that statute is
entitled to great respect and should be accorded great weight by the courts,
unless such construction is clearly shown to be in sharp conflict with the
governing statute or the Constitution and other laws. As long ago as 1903,
this Court said in In re Allen 6 that
[t]he principle that the contemporaneous construction of a
statute by the executive officers of the government, whose duty
is to execute it, is entitled to great respect, and should ordinarily
control the construction of the statute by the courts, is so firmly
embedded in our jurisdiction that no authorities need be cited to
support it. 7
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. 8 In Asturias Sugar Central, Inc. v.
Commissioner of Customs 9 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The
courts give much weight to contemporaneous construction because of the
respect due the government agency or officials charged with the
of the corporation and of the proposed utilization of the fresh capital sought
to be raised.
Upon the other hand, as already noted, issuance of previously authorized but
theretofore unissued capital stock by the corporation requires only Board of
Directors approval. Neither notice to nor approval by the shareholders or the
SEC is required for such issuance. There would, accordingly, under the view
taken by petitioner Nestle, no opportunity for the SEC to see to it that
shareholders (especially the small stockholders) have a reasonable
opportunity to inform themselves about the very fact of such issuance and
about the condition of the corporation and the potential value of the shares
of stock being offered.
Under the reading urged by petitioner Nestle of the reach and scope of the
third clause of Section 6(a) (4), the issuance of previously authorized but
unissued capital stock would automatically constitute an exempt
transaction,without regard to the length of time which may have intervened
between the last increase in authorized capital stock and the proposed
issuance during which time the condition of the corporation may have
substantially changed, and without regard to whether the existing
stockholders to whom the shares are proposed to be issued are only two
giant corporations as in the instant case, or are individuals numbering in the
hundreds or thousands.
In contrast, under the ruling issued by the SEC, an issuance of previously
authorized but still unissued capital stock may, in a particular instance, be
held to be an exempt transaction by the SEC under Section 6(b) so long as
the SEC finds that the requirements of registration under the Revised
Securities Act are "not necessary in the public interest and for the protection
of the investors" by reason, inter alia, of the small amount of stock that is
proposed to be issued or because the potential buyers are very limited in
number and are in a position to protect themselves. In fine, petitioner
Nestle's proposed construction of Section 6(a) (4) would establish an
inflexible rule of automatic exemption of issuances of additional, previously
authorized but unissued, capital stock. We must reject an interpretation
which may disable the SEC from rendering protection to investors, in the
public interest, precisely when such protection may be most needed.
Petitioner Nestle's second claim for exemption is from payment of the fee
provided for in Section 6 (c) of the Revised Securities Act, a claim based
upon petitioner's contention that Section 6 (a) (4) covers both issuance of
stock in the course of complying with the statutory requirements of increase
of authorized capital stock and issuance of previously authorized and
unissued capital stock. Petitioner claims that to require it now to pay onetenth of one percent (1%) of the issued value of the 344,500 shares of stock
proposed to be issued, is to require it to pay a second time for the same
service on the part of the SEC. Since we have above rejected petitioner's
reading of Section 6 (a) (4), last clause, petitioner's claim about the
additional fee of one-tenth of one percent (1%) of the issue value of the
proposed issuance of stock (amounting to P34,450 plus P344.50 for other
fees or a total of P37,794.50) need not detain us for long. We think it clear
that the fee collected in 21 February 1983 by the SEC was assessed in
connection with the examination and approval of the certificate of increase
of authorized capital stock then submitted by petitioner. The fee, upon the
other hand, provided for in Section 6 (c) which petitioner will be required to
pay if it does file an application for exemption under Section 6 (b), is quite
different; this is a fee specifically authorized by the Revised Securities Act,
(not the Corporation Code) in connection with the grant of an exemption
from normal registration requirements imposed by that Act. We do not find
such fee either unreasonable or exorbitant.
WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is
hereby DENIED for lack of merit and the Decision of the Court of Appeals
dated 13 January 1989 in C.A.-G.R. No. SP-13522, is hereby AFFIRMED. Costs
against petitioner.
SO ORDERED.
This is an appeal by way of a Petition for Certiorari under Rule 45 of the Rules
of Court to annul and set aside the following actions of the Court of Appeals:
a) Decision * in Case CA-G.R. CV No. 08924; and
b) Resolution ** denying a Motion for Reconsideration
on the ground of grave abuse of discretion amounting to lack or excess
of jurisdiction and further ground that the decision is contrary to law
and evidence. The questioned decision upheld the trial court's findings
that the Trading Contract 1 on "futures" is a specie of gambling and
therefore null and void. Accordingly, the petitioner (as defendant in
lower court) was ordered to refund to the private respondent (as
plaintiff) the losses incurred in the trading transactions.
In support of the petition, the grounds alleged are:
1) Article 2018 of the New Civil Code is inapplicable to the factual milieu of
the instant case considering that in a commodity futures transaction the
broker is not the direct participant and cannot be considered as winner or
loser and the contract itself, from its very nature, cannot be considered as
gambling.
2) A commodity futures contract, being a specie of securities, is valid and
enforceable as its terms are governed by special laws, notably the Revised
Securities Act and the Revised Rules and Regulations on Commodity Futures
Trading issued by the Securities and Exchange Commission (SEC) and
approved by the Monetary Board of the Central Bank; hence, the Civil Code is
not the controlling piece of legislation.
From the records, We gather the following antecedent facts and proceedings.
The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly
organized and existing corporation, was licensed as commission
merchant/broker by the SEC, to engage in commodity futures trading in Cebu
City under Certificate of Registration No. CEB-182. On April 27, 1983,
petitioner and private respondent concluded a "Trading Contract". Like all
customers of the petitioner, private respondent was furnished regularly with
"Commodities Daily Quotations" showing daily movements of prices of
commodity futures traded and of market reports indicating the volume of
trade in different future exchanges in Hongkong, Tokyo and other centers.
The contract between the parties falls under the kind commonly called
"futures". In the late 1880's, trading in futures became rampant in the
purchase and sale of cotton and grain in the United States, giving rise to
unregulated trading exchanges known as "bucket shops". These were
common in Chicago and New York City where cotton from the South and
grain from the Mid-west were constantly traded in. The name of the party to
whom the seller was to make delivery when the future contract of sale was
closed or from whom he was to receive delivery in case of purchase is not
given the memorandum (contract). The business dealings between the
parties were terminated by the closing of the transaction of purchase and
sale of commodities without directions of the buyer because his margins
were exhausted. 5 Under the rules of the trading exchanges, weekly
settlements were required if there was any difference in the prices of the
cotton between those obtaining at the time of the contract and at the date of
delivery so that under the contract made by the purchaser, if the price of
cotton had advanced, he would have received in cash from the seller each
week the advance (increase) in price and if cotton prices declined, the
purchaser had to make like payments to the seller. In the terminology of the
exchange, these payments are called "margins". 6 Either the seller or the
buyer may elect to make or demand delivery of the cotton agreed to be sold
and bought, but in general, it seems practically a uniform custom that
settlements are made by payments and receipts of difference in prices at the
time of delivery from that prevailing at the time of payment of the past
weekly "margins". These settlements are made by "closing out" the
contracts. 7 Where the broker represented the buyer in buying and selling
cotton for future delivery with himself extending credit margins, and some of
the transactions were closed at a profit while the others at a loss, payments
being made of the difference in prices arising out of their rise or fall above or
below the contract price, and the facts showed that no actual delivery of
cotton was contemplated, such contracts are of the kind commonly called
"futures". 8 Making contracts for the purchase and sale of commodities for
future delivery, the parties not intending an actual delivery, or contracts of
the kind commonly called futures, are unenforceable. 9
The term "futures" has grown out of those purely speculative transactions in
which there are nominal contracts to sell for future delivery, but where in fact
no delivery is intended or executed. The nominal seller does not have or
expect to have a stock of merchandise he purports to sell nor does the
nominal buyer expect to receive it or to pay for the price. Instead of that, a
percentage or margin is paid, which is increased or diminished as the market
rates go up and down, and accounted for to the buyer. This is simple
speculation, gambling or wagering on prices within a given time; it is not
buying and selling and is illegal as against public policy. 10
The facts as disclosed by the evidence on record show that private
respondent made arrangements with Elizabeth Diaz, Account Executive of
petitioner for her to see Mr. Albert Chiam, petitioner's Branch Manager. The
contract signed by private respondent purports to be for the delivery of
goods with the intention that the difference between the price stipulated and
the exchange or market price at the time of the pretended delivery shall be
paid by the loser to the winner. We quote with approval the following findings
of the trial court as cited in the Court of Appeals decision:
The evidence of the plaintiff tend to show that in her transactions
with the defendant, the parties never intended to make or accept
delivery of any particular commodity but the parties merely
made a speculation on the rise or fall in the market of the
contract price of the commodity, subject of the transaction, on
the pretended date of delivery so that if the forecast was correct,
one party would make a profit, but if the forecast was wrong, one
party would lose money. Under this scheme, plaintiff was only
able to recover P470,000.00 out of her original and "additional"
deposit of P800,000.00 with the defendant.
The defendant admits that in all the transactions that it had with
the plaintiff, there was (sic) no actual deliveries and that it has
made no arrangement with the Central Bank for the remittance
of its customer's money abroad but defendant contends in its
defense that the mere fact that there were no actual deliveries
made in the transactions which plaintiff had with the defendant,
did not mean that no such actual deliveries were intended by the
parties since paragraph 10 of the rules for commodity trading,
attached to the trading contract which plaintiff signed before she
traded with the defendant, amply provides for actual delivery of
the commodity subject of the transaction.
The court has, therefore, to find out from all the facts and
circumstances of this case, whether the parties really intended to
make or accept deliveries of the commodities traded or whether
the defendant merely placed a provision for delivery in its rules
speculative contracts in which the parties merely gamble on the rise or fall in
prices. A contract for the sale or purchase of goods/commodity to be
delivered at future time, if entered into without the intention of having any
goods/commodity pass from one party to another, but with an understanding
that at the appointed time, the purchaser is merely to receive or pay the
difference between the contract and the market prices, is a transaction
which the law will not sanction, for being illegal. 13
The written trading contract in question is not illegal but the transaction
between the petitioner and the private respondent purportedly to implement
the contract is in the nature of a gambling agreement and falls within the
ambit of Article 2018 of the New Civil Code, which is quoted hereunder:
If a contract which purports to be for the delivery of goods,
securities or shares of stock is entered into with the intention
that the difference between the price stipulated and the
exchange or market price at the time of the pretended delivery
shall be paid by the loser to the winner, the transaction is null
and void. The loser may recover what he has paid.
The facts clearly establish that the petitioner is a direct participant in the
transaction, acting through its authorized agents. It received the customer's
orders and private respondent's money. As per terms of the trading contract,
customer's orders shall be directly transmitted by the petitioner as broker to
its principal, Frankwell Enterprises Ltd. of Hongkong, being a registered
member of the International Commodity Clearing House, which in turn must
place the customer's orders with the Tokyo Exchange. There is no evidence
that the orders and money were transmitted to its principal Frankwell
Enterprises Ltd. in Hongkong nor were the orders forwarded to the Tokyo
Exchange. We draw the conclusion that no actual delivery of goods and
commodity was intended and ever made by the parties. In the realities of the
transaction, the parties merely speculated on the rise and fall in the price of
the goods/commodity subject matter of the transaction. If private
respondent's speculation was correct, she would be the winner and the
petitioner, the loser, so petitioner would have to pay private respondent the
"margin". But if private respondent was wrong in her speculation then she
would emerge as the loser and the petitioner, the winner. The petitioner
would keep the money or collect the difference from the private respondent.
This is clearly a form of gambling provided for with unmistakeable certainty
under Article 2018 abovestated. It would thus be governed by the New Civil
Code and not by the Revised Securities Act nor the Rules and Regulations on
Commodity Futures Trading laid down by the SEC.
Article 1462 of the New Civil Code does not govern this case because the
said provision contemplates a contract of sale of specific goods where one of
the contracting parties binds himself to transfer the ownership of and deliver
a determinate thing and the other to pay therefore a price certain in money
or its equivalent. 14 The said article requires that there be delivery of goods,
actual or constructive, to be applicable. In the transaction in question, there
was no such delivery; neither was there any intention to deliver a
determinate thing.
The transaction is not what the parties call it but what the law defines it to
be. 15
After considering all the evidence in this case, it appears that petitioner and
private respondent did not intend, in the deals of purchasing and selling for
future delivery, the actual or constructive delivery of the goods/commodity,
despite the payment of the full price therefor. The contract between them
falls under the definition of what is called "futures". The payments made
under said contract were payments of difference in prices arising out of the
rise or fall in the market price above or below the contract price thus making
it purely gambling and declared null and void by law. 16
In England and America where contracts commonly called futures originated,
such contracts were at first held valid and could be enforced by resort to
courts. Later these contracts were held invalid for being speculative, and in
some states in America, it was unlawful to make contracts commonly called
"futures". Such contracts were found to be mere gambling or wagering
agreements covered and protected by the rules and regulations of exchange
in which they were transacted under devices which rendered it impossible for
the courts to discover their true character. 17 The evil sought to be
suppressed by legislation is the speculative dealings by means of such
trading contracts, which degenerated into mere gambling in the future price
of goods/commodities ostensibly but not actually, bought or sold. 18
Under Article 2018, the private respondent is entitled to refund from the
petitioner what she paid. There is no evidence that the orders of private
respondent were actually transmitted to the petitioner's principal in
Hongkong and Tokyo. There was no arrangement made by petitioner with the
Central Bank for the purpose of remitting the money of its customers abroad.
Philippines of its shares of capital stock was fraudulent or would work or tend
to work fraud on the investors. On August 29, 1958, and on September 9,
1958 the Securities and Exchange Commissioner issued the orders object of
the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a "prospective
investor" in respondent's securities, has personality to file the present
petition for review of the order of the Securities and Exchange
Commission;
2. Whether or not the issue raised herein is already moot and
academic;
3. Whether or not the "tie-up" between the respondent SAN JOSE
PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC.,
a domestic mining corporation, is violative of the Constitution, the
Laurel-Langley Agreement, the Petroleum Act of 1949, and the
Corporation Law; and
4. Whether or not the sale of respondent's securities is fraudulent, or
would work or tend to work fraud to purchasers of such securities in
the Philippines.
1. In answer to the notice and order of the Securities and Exchange
Commissioner, published in 2 newspapers of general circulation in the
Philippines, for "any person who is opposed" to the petition for registration
and licensing of respondent's securities, to file his opposition in 7 days,
herein petitioner so filed an opposition. And, the Commissioner, having
denied his opposition and instead, directed the registration of the securities
to be offered for sale, oppositor Palting instituted the present proceeding for
review of said order.
Respondent raises the question of the personality of petitioner to bring this
appeal, contending that as a mere "prospective investor", he is not an
"Aggrieved" or "interested" person who may properly maintain the suit.
Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the
phrase "party aggrieved" used in the Securities Act3 and the Rules of
Court4 as having the right to appeal should refer only to issuers, dealers and
salesmen of securities.
It is true that in the cited case, it was ruled that the phrase "person
aggrieved" is that party "aggrieved by the judgment or decree where it
operates on his rights of property or bears directly upon his interest", that
the word "aggrieved" refers to "a substantial grievance, a denial of some
personal property right or the imposition upon a party of a burden or
obligation." But a careful reading of the case would show that the appeal
therein was dismissed because the court held that an order of registration
was not final and therefore not appealable. The foregoing pronouncement
relied upon by herein respondent was made in construing the provision
regarding an order of revocation which the court held was the one
appealable. And since the law provides that in revoking the registration of
any security, only the issuer and every registered dealer of the security are
notified, excluding any person or group of persons having no such interest in
the securities, said court concluded that the phrase "interested person"
refers only to issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State Court as
controlling on the issue in this case. Our Securities Act in Section 7(c)
thereof, requires the publication and notice of the registration statement.
Pursuant thereto, the Securities and Exchange Commissioner caused the
publication of an order in part reading as follows:
. . . Any person who is opposed with this petition must file his written
opposition with this Commission within said period (2 weeks). . . .
In other words, as construed by the administrative office entrusted with the
enforcement of the Securities Act, any person (who may not be "aggrieved"
or "interested" within the legal acceptation of the word) is allowed or
permitted to file an opposition to the registration of securities for sale in the
Philippines. And this is in consonance with the generally accepted principle
that Blue Sky Laws are enacted to protect investors and prospective
purchasers and to prevent fraud and preclude the sale of securities which are
in fact worthless or worth substantially less than the asking price. It is for this
purpose that herein petitioner duly filed his opposition giving grounds
therefor. Respondent SAN JOSE PETROLEUM was required to reply to the
opposition. Subsequently both the petition and the opposition were set for
hearing during which the petitioner was allowed to actively participate and
did so by cross-examining the respondent's witnesses and filing his
memorandum in support of his opposition. He therefore to all intents and
purposes became a party to the proceedings. And under the New Rules of
Court,5 such a party can appeal from a final order, ruling or decision of the
Securities and Exchange Commission. This new Rule eliminating the word
"aggrieved" appearing in the old Rule, being procedural in nature,6 and in
view of the express provision of Rule 144 that the new rules made effective
on January 1, 1964 shall govern not only cases brought after they took effect
but all further proceedings in cases then pending, except to the extent that
in the opinion of the Court their application would not be feasible or would
work injustice, in which event the former procedure shall apply, we hold that
the present appeal is properly within the appellate jurisdiction of this Court.
The order allowing the registration and sale of respondent's securities is
clearly a final order that is appealable. The mere fact that such authority
may be later suspended or revoked, depending on future developments,
does not give it the character of an interlocutory or provisional ruling. And
the fact that seven days after the publication of the order, the securities are
deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality
of the order. Rights and obligations necessarily arise therefrom if not
reviewed on appeal.
Our position on this procedural matter that the order is appealable and the
appeal taken here is proper is strengthened by the intervention of the
Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the
constitutional issues herein presented affect the validity of Section 13 of the
Corporation Law, which, according to the respondent, conflicts with the Parity
Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its
right to exploit our petroleum resources notwithstanding said provisions of
the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30 days from
September 3, 1958, and since no stay order has been issued by the Supreme
Court, respondent's shares became registered and licensed under the law as
of October 3, 1958. Consequently, it is asserted, the present appeal has
become academic. Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August 29 and that of
September 9, 1958 are not final orders and therefor are not appealable. Then
when these orders, according to its theory became final and were
implemented, it argues that the orders can no longer be appealed as the
question of registration and licensing became moot and academic.
But the fact is that because of the authority to sell, the securities are, in all
probabilities, still being traded in the open market. Consequently the issue is
much alive as to whether respondent's securities should continue to be the
subject of sale. The purpose of the inquiry on this matter is not fully served
just because the securities had passed out of the hands of the issuer and its
dealers. Obviously, so long as the securities are outstanding and are placed
in the channels of trade and commerce, members of the investing public are
entitled to have the question of the worth or legality of the securities
resolved one way or another.
But more fundamental than this consideration, we agree with the late
Senator Claro M. Recto, who appeared asamicus curiae in this case, that
while apparently the immediate issue in this appeal is the right of respondent
SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino
public, the real and ultimate controversy here would actually call for the
construction of the constitutional provisions governing the disposition,
utilization, exploitation and development of our natural resources. And
certainly this is neither moot nor academic.
3. We now come to the meat of the controversy the "tie-up" between SAN
JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its
associates, on the other. The relationship of these corporations involved or
affected in this case is admitted and established through the papers and
documents which are parts of the records: SAN JOSE OIL, is a domestic
mining corporation, 90% of the outstanding capital stock of which is owned
by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation,
the majority interest of which is owned by OIL INVESTMENTS, Inc., another
foreign (Panamanian) company. This latter corporation in turn is wholly
(100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL
PETROLEUM COMPANY, C.A., both organized and existing under the laws of
Venezuela. As of September 30, 1956, there were 9,976 stockholders of
PANCOASTAL PETROLEUM found in 49 American states and U.S. territories,
holding 3,476,988 shares of stock; whereas, as of November 30, 1956,
PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373
stockholders scattered in 49 American state. In the two lists of stockholders,
there is no indication of the citizenship of these stockholders,7 or of the total
number of authorized stocks of each corporation, for the purpose of
determining the corresponding percentage of these listed stockholders in
relation to the respective capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor General8 contend
that the relationship between herein respondent SAN JOSE PETROLEUM and
its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the
Philippine Constitution, and Section 13 of the Corporation Law, which inhibits
a mining corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far from
violating the Constitution; such relationship between the two corporations is
in accordance with the Laurel-Langley Agreement which implemented the
Ordinance Appended to the Constitution, and that Section 13 of the
Corporation Law is not applicable because respondent is not licensed to do
business, as it is not doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all forces of
potential energy, and other natural resources of the Philippines belong
to the State, and their disposition, exploitation, development, or
utilization shall be limited to citizens of the Philippines, or to
corporations or associations at least sixty per centum of the capital of
which is owned by such citizens, subject to any existing right, grant,
lease or concession at the time of the inauguration of this Government
established under this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to utilize and
exploit our natural resources) was extended to citizens of the United States,
thus:
Notwithstanding the provisions of section one, Article Thirteen, and
section eight, Article Fourteen, of the foregoing Constitution, during the
effectivity of the Executive Agreement entered into by the President of
the Philippines with the President of the United States on the fourth of
July, nineteen hundred and forty-six, pursuant to the provisions of
Commonwealth Act Numbered Seven hundred and thirty-three, but in
no case to extend beyond the third of July, nineteen hundred and
seventy-four, the disposition, exploitation, development, and utilization
of all agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all forces of
potential energy, and other natural resources of the Philippines, and
the operation of public utilities shall, if open to any person, be open to
States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL
COMPANY and PANCOASTAL PETROLEUM.
Thirdly Although it is claimed that these two last corporations are owned
and controlled respectively by 12,373 and 9,979 stockholders residing in the
different American states, there is no showing in the certification furnished
by respondent that the stockholders of PANCOASTAL or those of them
holding the controlling stock, are citizens of the United States.
Fourthly Granting that these individual stockholders are American citizens,
it is yet necessary to establish that the different states of which they are
citizens, allow Filipino citizens or corporations or associations owned or
controlled by Filipino citizens, to engage in the exploitation, etc. of the
natural resources of these states (see paragraph 3, Article VI of the LaurelLangley Agreement, supra). Respondent has presented no proof to this
effect.
Fifthly But even if the requirements mentioned in the two immediately
preceding paragraphs are satisfied, nevertheless to hold that the set-up
disclosed in this case, with a long chain of intervening foreign corporations,
comes within the purview of the Parity Amendment regarding business
enterprises indirectly owned or controlled by citizens of the United States, is
to unduly stretch and strain the language and intent of the law. For, to what
extent must the word "indirectly" be carried? Must we trace the ownership or
control of these various corporationsad infinitum for the purpose of
determining whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock of the
PANTEPEC and PANCOASTAL which are allegedly owned or
controlled directly by citizens of the United States, are traded in the stock
exchange in New York, and you have a situation where it becomes a practical
impossibility to determine at any given time, the citizenship of the controlling
stock required by the law. In the circumstances, we have to hold that the
respondent SAN JOSE PETROLEUM, as presently constituted, is not a business
enterprise that is authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up
with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock
is owned by SAN JOSE PETROLEUM? This is a query which we need not
resolve in this case as SAN JOSE OIL is not a party and it is not necessary to
American currency, divided into 50,000,000 shares at par value of $0.01 per
share. By virtue of a 3-party Agreement of June 14, 1956, respondent was
supposed to have received from OIL INVESTMENTS 8,000,000 shares of the
capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note
for $250,000.00 due in 6 months, for which respondent issued in favor of OIL
INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or
with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years
at 6% per annum interest,9 and the assumption of payment of the unpaid
price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased
from $500,000.00 to $17,500,000.00 by increasing the par value of the same
50,000,000 shares, from $0.01 to $0.35. Without any additional
consideration, the 16,000,000 shares of $0.01 previously issued to OIL
INVESTMENTS with a total value of $160,000.00 were changed with
16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received for these reissued 16,000,000 shares, the board of directors of respondent corporation
placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL
(still having par value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per
share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE
OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged
difference between the "value" of the said shares and the subscription price
thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00,
the subscription price of the SAN JOSE OIL shares, the amount of
$319,702.03 was deducted, as allegedly unpaid subscription price, thereby
giving a difference of $480,297.97, which was placed as the amount
allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS,
for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE
PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN
JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00 the
valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no
basis for such valuation other than belief by the board of directors of
respondent that "should San Jose Oil Company be granted the bulk of the
concessions applied for upon reasonable terms, that it would have a
reasonable value of approximately $10,000,000." 10 Then, of this amount, the
subscription price of $800,000.00 was deducted and called it "difference
between the (above) valuation and the subscription price for the 8,000,000
shares." Of this $800,000.00 subscription price, they deducted the sum of
$480,297.97 and the difference was placed as the unpaid portion of the
subscription price. In other words, it was made to appear that they paid in
$480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for
7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and
a sum of $230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among
respondent's liabilities, for $230,297.97 appearing as note payable to Oil
Investments, maturing in two (2) years at six percent (6%) per annum. 11 As
far as it appears from the records, for the 16,000,000 shares at $0.35 per
share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM
received from OIL INVESTMENTS only the note for $250,000.00 plus the
8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a
total of $1,050,000.00 the only assets of the corporation. In other words,
respondent actually lost $4,550,000.00, which was received by OIL
INVESTMENTS.
But this is not all. Some of the provisions of the Articles of Incorporation of
respondent SAN JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be
represented and may vote through a proxy who also need not be a
director or stockholder; and
(3) that no contract or transaction between the corporation and any
other association or partnership will be affected, except in case of
fraud, by the fact that any of the directors or officers of the corporation
is interested in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of the corporation
with any other person or persons, firm, association or partnership shall
be affected by the fact that any director or officer of the corporation is
a party to or has an interest in, such contract or transaction, or has in
as holder of the only subscribed stock of the former corporation and acting
"on behalf of all future holders of voting trust certificates," entered into a
voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby
said Trustees were given authority to vote the shares represented by the
outstanding trust certificates (including those that may henceforth be issued)
in the following manner:
(a) At all elections of directors, the Trustees will designate a suitable
proxy or proxies to vote for the election of directors designated by the
Trustees in their own discretion, having in mind the best interests of
the holders of the voting trust certificates, it being understood that any
and all of the Trustees shall be eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees shall
designate a suitable proxy or proxies to vote for or against such
proposition as the Trustees in their own discretion may
determine, having in mind the best interest of the holders of the voting
trust certificates;
(c) With respect to all other matters arising at any meeting of
stockholders, the Trustees will instruct such proxy or proxies attending
such meetings to vote the shares of stock held by the Trustees in
accordance with the written instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be binding upon
the parties thereto, their successors, and upon all holders of voting trust
certificates.
And these are the voting trust certificates that are offered to investors as
authorized by Security and Exchange Commissioner. It can not be doubted
that the sale of respondent's securities would, to say the least, work or tend
to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to
dismiss this appeal, is denied and the orders of the Securities and Exchange
Commissioner, allowing the registration of Respondent's securities and
licensing their sale in the Philippines are hereby set aside. The case is
remanded to the Securities and Exchange Commission for appropriate action
in consonance with this decision. With costs. Let a copy of this decision be
furnished the Solicitor General for whatever action he may deem advisable
to take in the premises. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P.,
Zaldivar and Sanchez, JJ., concur.
Castro, J., took no part.
August 3, 2011
In a letter dated April 20, 2004, Director Callangan rejected the Banks
explanation and assessed it a total penalty of One Million Nine Hundred
Thirty-Seven Thousand Two Hundred Sixty-Two and 80/100 Pesos
(P1,937,262.80) for failing to comply with the SRC reportorial requirements
from 2001 to 2003. The Bank moved for the reconsideration of the
assessment, but Director Callangan denied the motion in SEC-CFD Order No.
085, Series of 2005 dated July 26, 2005.4 When the SEC En Banc also
dismissed the Banks appeal for lack of merit in its Order dated August 31,
2006, prompting the Bank to file a petition for review with the Court of
Appeals (CA).5
On March 6, 2008, the CA dismissed the petition and affirmed the assailed
SEC ruling, with the modification that the assessment of the penalty be
recomputed from May 31, 2004.6
The CA also denied the Banks motion for reconsideration,7 opening the way
for the Banks petition for review on certiorari filed with this Court. 8
On June 16, 2010, the Court denied the Banks petition for failure to show
any reversible error in the assailed CA decision and resolution.9
The Motion for Reconsideration
The Bank reiterates that it is not a "public company" subject to the
reportorial requirements under Section 17.1 of the SRC because its shares
can be owned only by a specific group of people, namely, World War II
veterans and their widows, orphans and compulsory heirs, and is not open to
the investing public in general. The Bank also asks the Court to take into
consideration the financial impact to the cause of "veteranism"; compliance
with the reportorial requirements under the SRC, if the Bank would be
considered a "public company," would compel the Bank to spend
approximately P40 million just to reproduce and mail the "Information
Statement" to its 400,000 shareholders nationwide.
The Courts Ruling
We DENY the motion for reconsideration for lack of merit.
To determine whether the Bank is a "public company" burdened with the
reportorial requirements ordered by the SEC, we look to Subsections 17.1
and 17.2 of the SRC, which provide:
August 7, 2007
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
Existing shares of Cemco in UCHC
Percentag
e
9%
51%
60%
60%
36%
17%
53%
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 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.
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
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:
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 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
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 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 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.
xxx
xxx
Perhaps the fact that there had been this improved situation in the bank that
attracted Banco de Oro . xxx. I wouldnt know whether the prices would
eventually go up to 60 of (sic) 120. But on the basis of my being the vicechair on the bank, I believe that this is the subject of a lot of conjecture. It
can also go down . So, in the present situation where the holdings of SSS in
[EPCIB] consists of about 10 percent of the total reserve fund, we cannot
afford to continue holding it at the present level of income .xxx. And
therefore, on that basis, an exposure to certain form of assets whose price
can go down to 16 to 17 which is a little over 20 percent of what we have in
our books, is not a very prudent way or conservative way of handling those
funds. We need not continue experiencing opportunity losses but have an
amount that will give us a fair return to that kind of value (Words in bracket
added.)
Albeit there were other interested parties, only Banco de Oro Universal Bank
(BDO) and its investment subsidiary, respondent BDO Capital,8 appeared in
earnest to acquire the shares in question. Following talks between them,
BDO and SSS signed, on December 30, 2003, a Letter- Agreement,9 for the
sale and purchase of some 187.8 million EPCIB common shares (the Shares,
hereinafter), at P43.50 per share, which represents a premium of 30% of the
then market value of the EPCIB shares. At about this time, the Shares were
trading at an average ofP34.50 @ share.
In the same Letter-Agreement,10 the parties agreed "to negotiate in good
faith a mutually acceptable Share Sale and Purchase Agreement and execute
the same not later than thirty (30) business days from [December 30,
2003]."
On April 19, 2004, the Commission on Audit (COA),11 in response to
respondent Dela Pazs letter-query on the applicability of the public bidding
requirement under COA Circular No. 89-29612 on the divestment by the SSS
of its entire EPICB equity holdings, stated that the "circular covers all assets
of government agencies except those merchandize or inventory held for sale
in the regular course of business." And while it expressed the opinion13that
the sale of the subject Shares are "subject to guidelines in the Circular," the
COA qualified its determination with a statement that such negotiated sale
would partake of a stock exchange transaction and, therefore, would be
adhering to the general policy of public auction. Wrote the COA:
xxx
xxx
converted into fully-paid and non assessable common stock of BDO (BDO
common shares) at the ratio of 1.80 BDO Common shares for each issued
[EPCIB] share (the Exchange Ratio)." And under the exchange
procedure, "BDO shall issue BDO Common Shares to EPCI stockholders
corresponding to each EPCI Share held by them in accordance with the
aforesaid Exchange Ratio."
It appears that BDO, or BDO-EPCI, Inc. to be precise, has since issued BDO
common shares to respondent SSS corresponding to the number of its former
EPCIB shareholdings under the ratio and exchange procedure prescribed in
the Plan of Merger. In net effect, SSS, once the owner of a block of EPCIB
shares, is now a large stockholder of BDO-EPCI, Inc.
On the postulate that the instant petition has now become moot and
academic, BDO Capital supplemented its earlier Compliance and
Manifestation37 with a formal Motion to Dismiss.38
By Resolution dated July 10, 2007, the Court required petitioners and
respondent SSS to comment on BDO Capitals motion to dismiss "within ten
(10) days from notice."
To date, petitioners have not submitted their compliance. On the other hand,
SSS, by way of comment, reiterated its position articulated in respondents
Compliance and Motion39 that the SM-BDO Group Tender Offer at the price
therein stated had rendered this case moot and academic. And respondent
SSS confirmed the following: a) its status as BDO-EPCIB stockholder; b) the
Tender Offer made by the SM Group to EPCIB stockholders, including SSS, for
their shares at P92.00 per share; and c) SSS acceptance of the Tender Offer
thus made.
A case or issue is considered moot and academic when it ceases to present a
justiciable controversy by virtue of supervening events, 40 so that an
adjudication of the case or a declaration on the issue would be of no practical
value or use.41 In such instance, there is no actual substantial relief which a
petitioner would be entitled to, and which would be negated by the dismissal
of the petition.42 Courts generally decline jurisdiction over such case or
dismiss it on the ground of mootness -- save when, among others, a
compelling constitutional issue raised requires the formulation of controlling
principles to guide the bench, the bar and the public; or when the case is
capable of repetition yet evading judicial review.43
The case, with the view we take of it, has indeed become moot and
academic for interrelated reasons.
We start off with the core subject of this case. As may be noted, the LetterAgreement,44 the SPA,45 the SSC resolutions assailed in this recourse, and
the Invitation to Bid sent out to implement said resolutions, all have a
common subject: the Shares the 187.84 Million EPCIB common shares. It
cannot be overemphasized, however, that the Shares, as a necessary
consequence of the BDO-EPCIB merger46 which saw EPCIB being absorbed by
the surviving BDO, have been transferred to BDO and converted into BDO
common shares under the exchange ratio set forth in the BDO-EPCIB Plan of
Merger. As thus converted, the subject Shares are no longer equity security
issuances of the now defunct EPCIB, but those of BDO-EPCI, which, needless
to stress, is a totally separate and distinct entity from what used to be EPCIB.
In net effect, therefore, the 187.84 Million EPCIB common shares are now lost
or inexistent. And in this regard, the Court takes judicial notice of the
disappearance of EPCIB stocks from the local bourse listing. Instead, BDOEPCI Stocks are presently listed and being traded in the PSE.
Under the law on obligations and contracts, the obligation to give a
determinate thing is extinguished if the object is lost without the fault of the
debtor.47 And per Art. 1192 (2) of the Civil Code, a thing is considered lost
when it perishes or disappears in such a way that it cannot be recovered.48 In
a very real sense, the interplay of the ensuing factors: a) the BDO-EPCIB
merger; and b) the cancellation of subject Shares and their replacement by
totally new common shares of BDO, has rendered the erstwhile 187.84
million EPCIB shares of SSS "unrecoverable" in the contemplation of the
adverted Civil Code provision.
With the above consideration, respondent SSS or SSC cannot, under any
circumstance, cause the implementation of the assailed resolutions, let alone
proceed with the planned disposition of the Shares, be it viathe traditional
competitive bidding or the challenged public bidding with a Swiss
Challenge feature.1wphi1
At any rate, the moot-and-academic angle would still hold sway even if it
were to be assumed hypothetically that the subject Shares are still existing.
This is so, for the supervening BDO-EPCIB merger has so effected changes in
the circumstances of SSS and BDO/BDO Capital as to render the fulfillment of
any of the obligations that each may have agreed to undertake under either
SO ORDERED.
VITUG, J.:
The Securities and Exchange Commission ("SEC") has both regulatory and
adjudicative functions.
Under its regulatory responsibilities, the SEC may pass upon applications for,
or may suspend or revoke (after due notice and hearing), certificates of
registration of corporations, partnerships and associations (excluding
cooperatives, homeowners' associations, and labor unions); compel legal and
regulatory compliances; conduct inspections; and impose fines or other
penalties for violations of the Revised Securities Act, as well as implementing
rules and directives of the SEC, such as may be warranted.
Relative to its adjudicative authority, the SEC has original and exclusive
jurisdiction to hear and decide controversies and cases involving
a. Intra-corporate and partnership relations between or among
the corporation, officers and stockholders and partners, including
their elections or appointments;
b. State and corporate affairs in relation to the legal existence of
corporations, partnerships and associations or to their franchises;
and
c. Investors and corporate affairs, particularly in respect of
devices and schemes, such as fraudulent practices, employed by
directors, officers, business associates, and/or other
aside the decision of the SEC which had (a) ordered the replacement of the
certificates of stock of Philex and (b) imposed fines on both FIDELITY and
CUALOPING.
There is partial merit in the petition.
The first aspect of the SEC decision appealed to the Court of Appeals, i.e.,
that portion which orders the two stock transfer agencies to "jointly replace
the subject shares and for FIDELITY to cause the transfer thereof in the
names of the buyers" clearly calls for an exercise of SEC's adjudicative
jurisdiction. This case, it might be recalled, has started only on the basis of a
request by FIDELITY for an opinion from the SEC. The stockholders who have
been deprived of their certificates of stock or the persons to whom the
forged certificates have ultimately been transferred by the supposed
indorsee thereof are yet to initiate, if minded, an appropriate adversarial
action. Neither have they been made parties to the proceedings now at
bench. A justiciable controversy such as can occasion an exercise of SEC's
exclusive jurisdiction would require an assertion of a right by a proper party
against another who, in turn, contests it. 5 It is one instituted by and against
parties having interest in the subject matter appropriate for judicial
determination predicated on a given state of facts. That controversy must be
raised by the party entitled to maintain the action. He is the person to whom
the right to seek judicial redress or relief belongs which can be enforced
against the party correspondingly charged with having been responsible for,
or to have given rise to, the cause of action. A person or entity tasked with
the power to adjudicate stands neutral and impartial and acts on the basis of
the admissible representations of the contending parties.
In the case at bench, the proper parties that can bring the controversy and
can cause an exercise by the SEC of its original and exclusive jurisdiction
would be all or any of those who are adversely affected by the transfer of the
pilfered certificates of stock. Any peremptory judgment by the SEC, without
such proceedings having first been initiated, would be precipitate. We thus
see nothing erroneous in the decision of the Court of Appeals, albeit not for
the reason given by it, to set aside the SEC's adjudication "without prejudice"
to the right of persons injured to file the necessary proceedings for
appropriate relief.
The other issue, i.e., the question on the legal propriety of the imposition by
the SEC of a P50,000 fine on each of FIDELITY and CUALOPING, is an entirely
different matter. This time, it is the regulatory power of the SEC which is
involved. When, on appeal to the Court of Appeals, the latter set aside the
fines imposed by the SEC, the latter, in its instant petition, can no longer be
deemed just a nominal party but a real party in interest sufficient to pursue
an appeal to this Court.
The Revised Securities Act (Batas Pambansa Blg. 178) is designed, in main,
to protect public investors from fraudulent schemes by regulating the sale
and disposition of securities, creating, for this purpose, a Securities and
Exchange Commission to ensure proper compliance with the law. Here, the
SEC has aptly invoked the provisions of Section 29, in relation to Section 46,
of the Revised Securities Act. This law provides:
Sec. 29. Fraudulent transactions. (a) It shall be unlawful for
any person, directly or indirectly, in connection with the purchase
or sale of any securities
xxx xxx xxx
(3) To engage in any act, transaction practice, or course of
business which operates or would operate as a fraud or deceit
upon any person.
Sec. 46. Administrative sanctions. If, after proper notice and
hearing, the Commission finds that there is a violation of this
Act, its rules, or its orders or that any registrant has, in a
registration statement and its supporting papers and other
reports required by law or rules to be filed with the Commission,
made any untrue statement of a material fact, or omitted to
state any material fact required to be stated therein or necessary
to make the statements therein not misleading, or refused to
permit any unlawful examination into its affairs, it shall, in its
discretion, impose any or all of the following sanctions:
(a) Suspension, or revocation of its certificate of registration and
permit to offer securities;
(b) A fine of no less than two hundred (P200.00) pesos nor more
than fifty thousand (P50,000.00) pesos plus not more than five
hundred (P500.00) pesos for each day of continuing violation.
(Emphasis supplied.)
There is, to our mind, no question that both FIDELITY and CUALOPING have
been guilty of negligence in the conduct of their affairs involving the
questioned certificates of stock. To constitute, however, a violation of the
Revised Securities Act that can warrant an imposition of a fine under Section
29(3), in relation to Section 46 of the Act, fraud or deceit, not mere
negligence, on the part of the offender must be established. Fraud here is
akin to bad faith which implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity; it is unlike that of the
negative idea of negligence in that fraud or bad faith contemplates a state of
mind affirmatively operating with furtive objectives. Given the factual
circumstances found by the appellate court, neither FIDELITY nor
CUALOPING, albeit indeed remiss in the observance of due diligence, can be
held liable under the above provisions of the Revised Securities Act. We do
not imply, however, that the negligence committed by private respondents
would not at all be actionable; upon the other hand, as we have earlier
intimated, such an action belongs not to the SEC but to those whose rights
have been injured.
Our attention is called by the Solicitor General on the violation by FIDELITY of
SEC-BED Memorandum Circular No. 9, series of 1987, which reads:
To expedite the release of Certificates of Securities to the buyers,
the Commission reiterates the following rules in delivery of stock
certificates:
1. Deadlines for Delivery of Documents All requirements must
be complied with the certificates of stock, as well as necessary
documents required for the transfer of shares shall be delivered
within the following periods:
xxx xxx xxx
d. From transfer agent back to clearing house and/or broker
not longer than ten (10) days from receipt of documents
provided there is a "good delivery," where there is no "good
delivery," the certificate and the accompanying documents shall
be returned to the clearing house or broker not later than two (2)
days after receipt thereof, except when defects can be readily
remedied, in which case the clearing house or the broker shall
instead be notified of the requirements within the same period.
The notice to the clearing house or broker shall indicate that the
ROMERO, J.:
The issue in this petition is whether the Court of Appeals committed
reversible error in its decision[1] dated August 16, 1995 overturning the
decision[2] dated May 31, 1993 of the Regional Trial Court of Pasig, Branch
165, by ordering the dismissal of petitioners complaint against private
respondent for lack of merit.
On February 19, 1987, petitioner Roy Nicolas and private respondent
Blesito Buan entered into a Portfolio Management Agreement, [3] wherein the
former was to manage the stock transactions of the latter for a period of
three months with an automatic renewal clause. However, upon the initiative
of the private respondent the agreement was terminated on August 19,
1987, and thereafter he requested for an accounting of all transactions made
by the petitioner.
Three weeks after the termination of the agreement, petitioner
demanded from the private respondent the amount of P68,263.67
representing his alleged management fees covering the periods of June 30,
July 31 and August 19, 1987 as provided for in the Portfolio Management
Agreement. But the demands went unheeded, much to the chagrin of the
petitioner.
Rebuffed, petitioner filed a complaint[4] for collection of sum of money
against the private respondent before the trial court. In his answer,[5] private
respondent contended that petitioner mismanaged his transactions resulting
in losses, thus, he was not entitled to any management fees.
After hearing, the trial court rendered its decision in favor of plaintiff,
herein petitioner, thus:
In View Of All The Foregoing, judgment is hereby rendered ordering
the defendant to pay plaintiff as follows:
1. The amount of P68,263.67 for the management fees of plaintiff.
2. The amount of P8,000.00 as and for attorneys fees and expenses of
litigation.
3. Costs of suit.
SO ORDERED.
Dismayed, private respondent appealed the decision to the Court of
Appeals. Finding merit in his case, the appellate court reversed the trial
courts finding and ruled against the petitioner, to wit:
WHEREFORE, the appealed decision should be, as it is hereby
REVERSED and SET ASIDE, and as a consequence thereof, appellees
complaint is hereby DISMISSED. No costs.
SO ORDERED.
Petitioners motion for reconsideration was denied by the Court of Appeals
on November 29, 1995.[6]
Due to the sudden reversal of events, petitioner is now before us
assailing the Court of Appeals ruling alleging that it misappreciated the
evidence he presented before the trial court.
In reversing the trial courts decision, the Court of Appeals opined that:
The lower court simply made a sweeping statement that the profits
were generated by appellees (Petitioner herein) transactions, making
appellant (Private respondent herein) liable for the payment of the
money demanded by appellee on the basis of self-serving profit and
loss statements submitted as evidence by appellee. Other than these
pieces of evidence, the trial court offered no satisfactory reason why
the sum demanded by appellee be paid.
We affirm the ruling of the Court of Appeals.
Under the Portfolio Management Agreement, it was agreed that private
respondent would pay the petitioner 20% of all realized profits every end of
the month as his management fees.The exact wording of the provision reads:
xxxxxxxxx
3. For his services, the INVESTOR agrees to pay the PORTFOLIO
MANAGER 20% of all realized profits every end of the month.
Evidently, the key word in the provision is profits. Simply put, profit has
been defined as the excess of return over expenditure in a transaction or
series of transactions[7] or the series of an amount received over the amount
paid for goods and services.[8]
To begin with, petitioner has the burden to prove that the transaction
realized gains or profits to entitle him to said management fees, as provided
in the Agreement. Accordingly, petitioner submitted the profit and loss
statements[9] for the period of June 30, July 31 and August 19, 1987, showing
a total profit of P341,318.34, of which 20% would represent his management
fees amounting to P68,263.70.
For clarity these documents are reproduced hereunder:
Profit & Loss Statement
of
Atty. Blesilo Buan
for the Period Ended June 30, 1987
Shares Issue Profit Loss
1,500 PLDT P 7,265.62
5,000 ATLAS 4,609.38
2,000 SMC 11,477.50
5,000 ATLAS 1,450.00
5,000 ATLAS 3,906.25
5,000,000 SEAFRONT 11,487.50
1,000 SMC 5,247.50
2,000 SMC 5,895.00
1,000 SMC 12,242.50
The mere fact that evidence is admissible does not necessarily mean
that it is also credible (People vs. Agripa, 208 SCRA 589). The
statements, covering the months of June, July and up to 19 August
1987, simply tabulate the number of shares acquired from each
company, a column for profit and the last column for loss. The
statements were not authenticated by an auditor, nor by the person
who caused the preparation of the same.[13]
The analysis of the evidence made by the Court of Appeals deserves our
concurrence. A cursory reading of these purported profit and loss statements
immediately raises doubts as to the veracity of the entries stated therein.
Admittedly, like any services rendered or performed, stock brokers are
entitled to commercial fees or compensation pursuant to the Revised
Securities Act Rule 19-13, which reads:
RSA Rule 19-13. Charges for Services Performed.
Charges by brokers or dealers, if any, for service performed, including
miscellaneous services such as collection of monies due for principal,
dividends, interests, exchange or transfer of securities, appeals,
safekeeping or custody of securities, and other services, shall be
reasonable and not unfairly discriminatory between customers. [14]
Moreover, the same law provides that any fee or commission must be
with due regard to relevant circumstances.[15]
Unfortunately, the profit and loss statements presented by the petitioner
are nothing but bare assertions, devoid of any concrete basis or specifics as
to the method of arriving at the amounts indicated in the documents. In fact,
it did not even state when the stocks were purchased, the type of stocks
(whether Class A or B or common or preferred) bought, when the stocks were
sold, the acquisition and selling price of each stock, when the profits, if any,
were delivered to the private respondent, the cost of safekeeping or custody
of the stocks, as well as the taxes paid for each transaction. With respect to
the alleged losses, it has been held that where a profit or loss statement
shows a loss, the statement must show income and items of expense to
explain the method of determining such loss. [16] However, in the instant
petition, petitioner hardly elucidated the reasons and the factors behind the
losses incurred in the course of the transactions.
customer to sell. And if there is a loss, [petitioner] only requires the payment
of the deficiency (i.e., the difference between the higher buying price and
the lower selling price). In addition, it charges a commission for brokering the
sale.
"However, if the customer sells and there is a profit, [petitioner] deducts the
purchase price and delivers only the surplus after charging its commission.
"[respondent] further claims that all his trades with [petitioner] were not paid
in full in cash at anytime after purchase or within the T+4 [4 days
subsequent to trading] and none of these trades was cancelled by
[petitioner] as required in Exhibit A-1. Neither did [petitioner] apply with
either the Philippine Stock Exchange or the SEC for an extension of time for
the payment or settlement of his cash purchases. This was not brought to his
attention by his broker and so with the requirement of collaterals in margin
account. Thus, his trade under an offset transaction with [petitioner] is
unlimited subject only to the discretion of the broker. x x x [Had petitioner]
followed the provision under par. 8 of Exh. A-1 which stipulated the
liquidation within the T+3 [3 days subsequent to trading], his net deficit
would only be P1,601,369.59. [respondent] however affirmed that this is not
in accordance with RSA [Rule 25-1 par. C, which mandates that if you do not
pay for the first] order, you cannot subsequently make any further order
without depositing the cash price in full. So, if RSA Rule 25-1, par. C, was
applied, he was limited only to the first transaction. That [petitioner] did not
comply with the T+4 mandated in cash transaction. When [respondent]
failed to comply with the T+3, [petitioner] did not require him to put up a
deposit before it executed its subsequent orders. [Petitioner] did not likewise
apply for extension of the T+4 rule. Because of the offset transaction,
[respondent] was induced to [take a] risk which resulted [in] the filing of the
instant suit against him [because of which] he suffered sleepless nights, lost
appetite which if quantified in money, would amount toP500,000.00 moral
damages and P100,000.00 exemplary damages."5
In its Decision6 dated June 26, 2000, the Regional Trial Court (RTC) of Makati
City (Branch 57) held that petitioner violated Sections 23 and 25 of the
Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing the Act
(RSA Rules) when it failed to: 1) require the respondent to pay for his stock
purchases within three (T+3) or four days (T+4) from trading; and 2) request
from the appropriate authority an extension of time for the payment of
respondents cash purchases. The trial court noted that despite respondents
non-payment within the required period, petitioner did not cancel the
purchases of respondent. Neither did it require him to deposit cash payments
before it executed the buy and/or sell orders subsequent to the first
unsettled transaction. According to the RTC, by allowing respondent to trade
his account actively without cash, petitioner effectively induced him to
purchase securities thereby incurring excessive credits.
The trial court also found respondent to be equally at fault, by incurring
excessive credits and waiting to see how his investments turned out before
deciding to invoke the RSA. Thus, the RTC concluded that petitioner and
respondent were in pari delicto and therefore without recourse against each
other.
Ruling of the Court of Appeals
The CA upheld the lower courts finding that the parties were in pari delicto.
It castigated petitioner for allowing respondent to keep on trading despite
the latters failure to pay his outstanding obligations. It explained that "the
reason [behind petitioners act] is elemental in its simplicity. And it is not
exactly altruistic. Because whether [respondents] trading transaction would
result in a surplus or deficit, he would still be liable to pay [petitioner] its
commission. [Petitioners] cash register will keep on ringing to the sound of
incoming money, no matter what happened to [respondent]."7
The CA debunked petitioners contention that the trial court lacked
jurisdiction to determine violations of the RSA. The court a quo held that
petitioner was estopped from raising the question, because it had actively
and voluntarily participated in the assailed proceedings.
Hence, this Petition.8
Issues
Petitioner submits the following issues for our consideration:
"I.
Whether or not the Court of Appeals ruling that petitioner and respondent
are in pari delicto which allegedly bars any recovery, is in accord with law
and applicable jurisprudence considering that respondent was the first one
who violated the terms of the Account Opening Form, [which was the]
agreement between the parties.
"II.
Whether or not the Court of Appeals ruling that the petitioner and
respondent are in pari delicto is in accord with law and applicable
jurisprudence considering the Account Opening Form is a valid agreement.
"III.
Whether or not the Court of Appeals ruling that petitioner cannot recover
from respondent is in accord with law and applicable jurisprudence since the
evidence and admission of respondent proves that he is liable to petitioner
for his outstanding obligations arising from the stock trading through
petitioner.
"IV.
Whether or not the Court of Appeals ruling on petitioners alleged violation
of the Revised Securities Act [is] in accord with law and jurisprudence since
the lower court has no jurisdiction over violations of the Revised Securities
Act."9
Briefly, the issues are (1) whether the pari delicto rule is applicable in the
present case, and (2) whether the trial court had jurisdiction over the case.
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Applicability of the
Pari Delicto Principle
In the present controversy, the following pertinent facts are undisputed: (1)
on April 8, 1997, respondent opened a cash account with petitioner for his
transactions in securities;10 (2) respondents purchases were consistently
unpaid from April 10 to 30, 1997;11 (3) respondent failed to pay in full, or
even just his deficiency,12 for the transactions on April 10 and 11, 1997;13 (4)
market and redirect resources into more productive uses. Specifically, the
main objective of the law on margins is explained in this wise:
"The main purpose of these margin provisions xxx is not to increase the
safety of security loans for lenders. Banks and brokers normally require
sufficient collateral to make themselves safe without the help of law. Nor is
the main purpose even protection of the small speculator by making it
impossible for him to spread himself too thinly although such a result will
be achieved as a byproduct of the main purpose.
xxxxxxxxx
"The main purpose is to give a [g]overnment credit agency an effective
method of reducing the aggregate amount of the nations credit resources
which can be directed by speculation into the stock market and out of other
more desirable uses of commerce and industry x x x."19
A related purpose of the governmental regulation of margins is the
stabilization of the economy.20 Restrictions on margin percentages are
imposed "in order to achieve the objectives of the government with due
regard for the promotion of the economy and prevention of the use of
excessive credit."21
Otherwise stated, the margin requirements set out in the RSA are primarily
intended to achieve a macroeconomic purpose -- the protection of the overall
economy from excessive speculation in securities. Their recognized
secondary purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily
upon the brokers and dealers.22Sections 23 and 25 and Rule 25-1, otherwise
known as the "mandatory close-out rule,"23 clearly vest upon petitioner the
obligation, not just the right, to cancel or otherwise liquidate a customers
order, if payment is not received within three days from the date of
purchase. The word "shall" as opposed to the word "may," is imperative and
operates to impose a duty, which may be legally enforced. For transactions
subsequent to an unpaid order, the broker should require its customer to
deposit funds into the account sufficient to cover each purchase transaction
prior to its execution. These duties are imposed upon the broker to ensure
faithful compliance with the margin requirements of the law, which forbids a
broker from extending undue credit to a customer.
It will be noted that trading on credit (or "margin trading") allows investors to
buy more securities than their cash position would normally allow.24 Investors
pay only a portion of the purchase price of the securities; their broker
advances for them the balance of the purchase price and keeps the
securities as collateral for the advance or loan.25 Brokers take these
securities/stocks to their bank and borrow the "balance" on it, since they
have to pay in full for the traded stock. Hence, increasing margins26 i.e.,
decreasing the amounts which brokers may lend for the speculative purchase
and carrying of stocks is the most direct and effective method of
discouraging an abnormal attraction of funds into the stock market and
achieving a more balanced use of such resources.
"x x x [T]he x x x primary concern is the efficacy of security credit controls in
preventing speculative excesses that produce dangerously large and rapid
securities price rises and accelerated declines in the prices of given
securities issues and in the general price level of securities. Losses to a given
investor resulting from price declines in thinly margined securities are not of
serious significance from a regulatory point of view. When forced sales occur
and put pressures on securities prices, however, they may cause other
forced sales and the resultant snowballing effect may in turn have a general
adverse effect upon the entire market."27
The nature of the stock brokerage business enables brokers, not the clients,
to verify, at any time, the status of the clients account.28 Brokers, therefore,
are in the superior position to prevent the unlawful extension of
credit.29 Because of this awareness, the law imposes upon them the primary
obligation to enforce the margin requirements.
Right is one thing; obligation is quite another. A right may not be exercised; it
may even be waived. An obligation, however, must be performed; those who
do not discharge it prudently must necessarily face the consequence of their
dereliction or omission.30
Respondent Liable for the First,
But Not for the Subsequent Trades
Nonetheless, these margin requirements are applicable only to transactions
entered into by the present parties subsequent to the initial trades of April
10 and 11, 1997. Thus, we hold that petitioner can still collect from
respondent to the extent of the difference between the latters outstanding
obligation as of April 11, 1997 less the proceeds from the mandatory sell out
of the shares pursuant to the RSA Rules. Petitioners right to collect is
justified under the general law on obligations and contracts.31
Article 1236 (second paragraph) of the Civil Code, provides:
"Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the
debtor." (Emphasis supplied)
Since a brokerage relationship is essentially a contract for the employment of
an agent, principles of contract law also govern the broker-principal
relationship.32
The right to collect cannot be denied to petitioner as the initial transactions
were entered pursuant to the instructions of respondent. The obligation of
respondent for stock transactions made and entered into on April 10 and 11,
1997 remains outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these dates
subsist. At that time, there was no violation of the RSA yet. Petitioners fault
arose only when it failed to: 1) liquidate the transactions on the fourth day
following the stock purchases, or on April 14 and 15, 1997; and 2) complete
its liquidation no later than ten days thereafter, applying the proceeds
thereof as payment for respondents outstanding obligation.33
Elucidating further, since the buyer was not able to pay for the transactions
that took place on April 10 and 11, that is at T+4, the broker was duty-bound
to advance the payment to the settlement banks without prejudice to the
right of the broker to collect later from the client.34
In securities trading, the brokers are essentially the counterparties to the
stock transactions at the Exchange.35Since the principals of the broker are
generally undisclosed, the broker is personally liable for the contracts thus
made.36 Hence, petitioner had to advance the payments for respondents
trades. Brokers have a right to be reimbursed for sums advanced by them
with the express or implied authorization of the principal,37 in this case,
respondent.
It should be clear that Congress imposed the margin requirements to protect
the general economy, not to give the customer a free ride at the expense of
the broker.38 Not to require respondent to pay for his April 10 and 11 trades
would put a premium on his circumvention of the laws and would enable him
to enrich himself unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms and
conditions of its Agreement with respondent, specifically paragraph 8
thereof, purportedly acting on the plea39 of respondent to give him time to
raise funds therefor. These stipulations, in relation to paragraph
4,40 constituted faithful compliance with the RSA. By failing to ensure
respondents payment of his first purchase transaction within the period
prescribed by law, thereby allowing him to make subsequent purchases,
petitioner effectively converted respondents cash account into a credit
account. However, extension or maintenance of credits on nonmargin
transactions, are specifically prohibited under Section 23(b). Thus, petitioner
was remiss in its duty and cannot be said to have come to court with "clean
hands" insofar as it intended to collect on transactions subsequent to the
initial trades of April 10 and 11, 1997.
Respondent Equally Guilty
for Subsequent Trades
On the other hand, we find respondent equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an "innocent victim" in all the
transactions. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large
profits with low -- or no -- capital outlay, as he pictures himself to be. Rather,
he is an experienced and knowledgeable trader who is well versed in the
securities market and who made his own investment decisions. In fact, in the
Account Opening Form (AOF), he indicated that he had excellent knowledge
of stock investments; had experience in stocks trading, considering that he
had similar accounts with other firms.41 Obviously, he knowingly speculated
on the market, by taking advantage of the "no-cash-out" arrangement
extended to him by petitioner.
We note that it was respondent who repeatedly asked for some time to pay
his obligations for his stock transactions. Petitioner acceded to his requests.
It is only when sued upon his indebtedness that respondent raised as a
defense the invalidity of the transactions due to alleged violations of the
RSA. It was respondents privilege to gamble or speculate, as he apparently
did so by asking for extensions of time and refraining from giving orders to
his broker to sell, in the hope that the prices would rise. Sustaining his
argument now would amount to relieving him of the risk and consequences
of his own speculation and saddling them on the petitioner after the result
was known to be unfavorable.42 Such contention finds no legal or even moral
justification and must necessarily be overruled. Respondents conduct is
precisely the behavior of an investor deplored by the law.
In the final analysis, both parties acted in violation of the law and did not
come to court with clean hands with regard to transactions subsequent to
the initial trades made on April 10 and 11, 1997. Thus, the peculiar facts of
the present case bar the application of the pari delicto rule -- expressed in
the maxims "Ex dolo malo non oritur action" and "In pari delicto potior est
conditio defendentis" -- to all the transactions entered into by the parties.
The pari delecto rule refuses legal remedy to either party to an illegal
agreement and leaves them where they were.43In this case, the pari delicto
rule applies only to transactions entered into after the initial trades made on
April 10 and 11, 1997.
Since the initial trades are valid and subsisting obligations, respondent is
liable for them. Justice and good conscience require all persons to satisfy
their debts. Ours are courts of both law and equity; they compel fair dealing;
they do not abet clever attempts to escape just obligations. Ineludibly, this
Court would not hesitate to grant relief in accordance with good faith and
conscience.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction
(sold the stocks) on the fourth day following the transaction (T+4) and
completed its liquidation not later than ten days following the last day for the
customer to pay (effectively T+14). Respondents outstanding obligation is
therefore to be determined by using the closing prices of the stocks
purchased at T+14 as basis.
We consider the foregoing formula to be just and fair under the
circumstances. When petitioner tolerated the subsequent purchases of
respondent without performing its obligation to liquidate the first failed
transaction, and without requiring respondent to deposit cash before
embarking on trading stocks any further, petitioner, as the broker, violated
the law at its own peril. Hence, it cannot now complain for failing to obtain
the full amount of its claim for these latter transactions.
directing Atty. Concepcion to account for the dividends and deliver them to
the Alcantaras. The CA ruled that the Alcantaras owned those dividends.
They did not form part of Advent Capitals assets as contemplated under the
Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules).
The CA pointed out that the rehabilitation proceedings in this case referred
only to the assets and liabilities of the company proper, not to those of its
Trust Department which held assets belonging to other people. Moreover,
even if the Trust Agreement provided that Advent Capital, as trustee, shall
have first lien on the Alcantaras financial portfolio for the payment of its
trust fees, the cash dividends in Belsons care cannot be summarily applied
to the payment of such charges. To enforce its lien, Advent Capital has to file
a collection suit. The rehabilitation court cannot simply enforce the latters
claim by ordering Belson to deliver the money to it.11
The CA denied Atty. Concepcion and Advent Capitals motion for
reconsideration,12 prompting the filing of the present petition for review
under Rule 45.
The Issue Presented
The sole issue in this case is whether or not the cash dividends held by
Belson and claimed by both the Alcantaras and Advent Capital constitute
corporate assets of the latter that the rehabilitation court may, upon motion,
require to be conveyed to the rehabilitation receiver for his disposition.
Ruling of the Court
Advent Capital asserts that the cash dividends in Belsons possession formed
part of its assets based on paragraph 9 of its Trust Agreement with the
Alcantaras, which states:
9. Trust Fee: Other Expenses As compensation for its services hereunder,
the TRUSTEE shall be entitled to a trust or management fee of 1 (one) % per
annum based on the quarterly average market value of the Portfolio or a
minimum annual fee of P5,000.00, whichever is higher. The said trust or
management fee shall automatically be deducted from the Portfolio at the
end of each calendar quarter. The TRUSTEE shall likewise be reimbursed for
all reasonable and necessary expenses incurred by it in the discharge of its
powers and duties under this Agreement, and in all cases, the TRUSTEE shall
have a first lien on the Portfolio for the payment of the trust fees and other
reimbursable expenses.
According to Advent Capital, it could automatically deduct its management
fees from the Alcantaras portfolio that they entrusted to it. Paragraph 9 of
the Trust Agreement provides that Advent Capital could automatically deduct
its trust fees from the Alcantaras portfolio, "at the end of each calendar
quarter," with the corresponding duty to submit to the Alcantaras a quarterly
accounting report within 20 days after.13
But the problem is that the trust fees that Advent Capitals receiver was
claiming were for past quarters. Based on the stipulation, these should have
been deducted as they became due. As it happened, at the time Advent
Capital made its move to collect its supposed management fees, it neither
had possession nor control of the money it wanted to apply to its claim.
Belson, a third party, held the money in the Alcantaras names. Whether it
should deliver the same to Advent Capital or to the Alcantaras is not clear.
What is clear is that the issue as to who should get the same has been
seriously contested.
The practice in the case of banks is that they automatically collect their
management fees from the funds that their clients entrust to them for
investment or lending to others. But the banks can freely do this since it
holds or has control of their clients money and since their trust agreement
authorized the automatic collection. If the depositor contests the deduction,
his remedy is to bring an action to recover the amount he claims to have
been illegally deducted from his account.
Here, Advent Capital does not allege that Belson had already deducted the
management fees owing to it from the Alcantaras portfolio at the end of
each calendar quarter. Had this been done, it may be said that the money in
Belsons possession would technically be that of Advent Capital. Belson
would be holding such amount in trust for the latter. And it would be for the
Alcantaras to institute an action in the proper court against Advent Capital
and Belson for misuse of its funds.
But the above did not happen. Advent Capital did not exercise its right to
cause the automatic deduction at the end of every quarter of its supposed
management fee when it had full control of the dividends. That was its fault.
For their part, the Alcantaras had the right to presume that Advent Capital
had deducted its fees in the manner stated in the contract. The burden of
proving that the fees were not in fact collected lies with Advent Capital.
Further, Advent Capital or its rehabilitation receiver cannot unilaterally
decide to apply the entire amount of cash dividends retroactively to cover
the accumulated trust fees. Advent Capital merely managed in trust for the
benefit of the Alcantaras the latters portfolio, which under Paragraph 214 of
the Trust Agreement, includes not only the principal but also its income or
proceeds. The trust property is only fictitiously attributed by law to the
trustee "to the extent that the rights and powers vested in a nominal owner
shall be used by him on behalf of the real owner."15
The real owner of the trust property is the trustor-beneficiary. In this case,
the trustors-beneficiaries are the Alcantaras. Thus, Advent Capital could not
dispose of the Alcantaras portfolio on its own. The income and principal of
the portfolio could only be withdrawn upon the Alcantaras written instruction
or order to Advent Capital.16 The latter could not also assign or encumber the
portfolio or its income without the written consent of the Alcantaras.17 All
these are stipulated in the Trust Agreement.
Ultimately, the issue is what court has jurisdiction to hear and adjudicate the
conflicting claims of the parties over the dividends that Belson held in trust
for their owners. Certainly, not the rehabilitation court which has not been
given the power to resolve ownership disputes between Advent Capital and
third parties. Neither Belson nor the Alcantaras are its debtors or creditors
with interest in the rehabilitation.
Advent Capital must file a separate action for collection to recover the trust
fees that it allegedly earned and, with the trial courts authorization if
warranted, put the money in escrow for payment to whoever it rightly
belongs. Having failed to collect the trust fees at the end of each calendar
quarter as stated in the contract, all it had against the Alcantaras was a
claim for payment which is a proper subject for an ordinary action for
collection. It cannot enforce its money claim by simply filing a motion in the
rehabilitation case for delivery of money belonging to the Alcantaras but in
the possession of a third party.
Rehabilitation proceedings are summary and non-adversarial in nature, and
do not contemplate adjudication of claims that must be threshed out in
ordinary court proceedings. Adversarial proceedings similar to that in
ordinary courts are inconsistent with the commercial nature of a
rehabilitation case. The latter must be resolved quickly and expeditiously for
the sake of the corporate debtor, its creditors and other interested parties.
Thus, the Interim Rules "incorporate the concept of prohibited pleadings,
affidavit evidence in lieu of oral testimony, clarificatory hearings instead of
the traditional approach of receiving evidence, and the grant of authority to
the court to decide the case, or any incident, on the basis of affidavits and
documentary evidence."18
Here, Advent Capitals claim is disputed and requires a full trial on the
merits.1wphi1 It must be resolved in a separate action where the
Alcantaras claim and defenses may also be presented and heard. Advent
Capital cannot say that the filing of a separate action would defeat the
purpose of corporate rehabilitation. In the first place, the Interim Rules do
not exempt a company under rehabilitation from availing of proper legal
procedure for collecting debt that may be due it. Secondly, Court records
show that Advent Capital had in fact sought to recover one of its assets by
filing a separate action for replevin involving a car that was registered in its
name.19
WHEREFORE, the petition is DENIED for lack of merit and the assailed
decision and resolution of the Court of Appeals in CA-G.R. SP 98692 are
AFFIRMED, without prejudice to any action that petitioner Advent Capital and
Finance Corp. or its rehabilitation receiver might institute regarding the trust
fees subject of this case.
SO ORDERED.