2016-2017-IBL Finals Notes

INTERNATIONAL BUSINESS LAW Atty.
Karen Climaco-Gaviola l For the exclusive use of EH 404 2016-2017

On top of their primary license, they are also required to have a
INTERNATIONAL BUSINESS LAW FINALS secondary license from SEC and are therefore covered by AMLA.
ANTI MONEY LAUNDERING ACT
―(4) jewelry dealers in precious metals, who, as a business, trade in

ANTI MONEY LAUNDERING ACT precious metals, for transactions in excess of One million pesos
(P1,000,000.00);
What is money laundering?
It is the Act of cleaning up of funds coming from an illegitimate source ―(5) jewelry dealers in precious stones, who, as a business, trade in
to make it appear that it came from a legitimate source. precious stones, for transactions in excess of One million pesos
(P1,000,000.00);
AIM OF AMLA
―(6) company service providers which, as a business, provide any of
Relevant provision the following services to third parties:
SEC. 2. Declaration of Policy. – It is hereby declared the policy of (i) acting as a formation agent of juridical persons;
the State to protect and preserve the integrity and confidentiality of (ii) acting as (or arranging for another person to act as) a director or
bank accounts and to ensure that the Philippines shall not be used as a corporate secretary of a company, a partner of a partnership, or a
money laundering site for the proceeds of any unlawful activity. similar position in relation to other juridical persons;
Consistent with its foreign policy, the State shall extend cooperation in (iii) providing a registered office, business address or accommodation,
transnational investigations and prosecutions of persons involved in correspondence or administrative address for a company, a
money laundering activities wherever committed. partnership or any other legal person or arrangement; and
(iv) acting as (or arranging for another person to act as) a nominee
Atty: There is still a statement of protection of confidentiality of bank shareholder for another person; and
accounts and at the same time, we don‘t want to become the money
laundering capital in the world. ―(7) persons who provide any of the following services:
(i) managing of client money, securities or other assets;
AMLA is relatively a new law which was passed only in 2001. This only (ii) management of bank, savings or securities accounts;
came about because the international banks were starting to black list (iii) organization of contributions for the creation, operation or
the Philippines because it does not have AMLA. There were only management of companies; and
issuances of BSP, but no legislative act. Congress passed AMLA so the (iv) creation, operation or management of juridical persons or
Philippines is no longer in the black list, but in the gray list. arrangements, and buying and selling business entities.
Under AMLA, the provisions are not that strong. So, everytime there is ―Notwithstanding the foregoing, the term ‗covered persons‘ shall
an attempt to black list us, we amend the AMLA. This law has exclude lawyers and accountants acting as independent legal
undergone several amendments. professionals in relation to information concerning their clients or
where disclosure of information would compromise client confidences
or the attorney-client relationship: Provided, That these lawyers and
COVERED PERSONS accountants are authorized to practice in the Philippines and shall
continue to be subject to the provisions of their respective codes of
Relevant provision conduct and/or professional responsibility or any of its amendments.‖
Covered persons, natural or juridical, refer to:
Lawyers and accountants acting as independent legal
―(1) banks, non-banks, quasi-banks, trust entities, foreign exchange professionals are not covered by AMLA
dealers, pawnshops, money changers, remittance and transfer You are a lawyer, working for a firm. As a usual practice, the firm
companies and other similar entities and all other persons and their nominated you as a corporate secretary as one of its clients. It‘s called
subsidiaries and affiliates supervised or regulated by the Bangko a corporate secretarial service and that is being offered by most of the
Sentral ng Pilipinas (BSP); law firms. Are you a covered person under AMLA?
A: While a corporate secretary is a covered person, the law provides
―(2) insurance companies, pre-need companies and all other persons for exclusion for lawyers and accountants acting as independent legal
supervised or regulated by the Insurance Commission (IC); professionals. So, in this case, you are not considered as a covered
person.
―(3) (i) securities dealers, brokers, salesmen, investment houses and
other similar persons managing securities or rendering services as Atty: This is part of the interpretation of BSP. The Bangko Sentral said
investment agent, advisor, or consultant, that the exclusion only extends to reporting requirements. As regards
(ii) mutual funds, close-end investment companies, common trust all other requirements, you are still covered.
funds, and other similar persons, and
(iii) other entities administering or otherwise dealing in currency, Important: There is a list of covered persons, but accountants and
commodities or financial derivatives based thereon, valuable objects, lawyers who acts as independent legal professionals – meaning they
cash substitutes and other similar monetary instruments or property are not working within the institution, which is the covered person –
supervised or regulated by the Securities and Exchange Commission are exempt.
(SEC);
Important: The covered persons are only those who have secondary But if you are a lawyer, and you are employed as corporate secretary
license from SEC. of a particular covered institution, then you fall under the covered
person.
All corporations have the Certificate of Incorporation from SEC which is
their primary license. However, not all corporations are covered by
AMLA. Only those with secondary licenses are covered persons under
AMLA.
1| UNIVERSITYOFSANCARLOS
INTERNATIONAL BUSINESS LAW Atty. Karen Climaco-Gaviola l For the exclusive use of EH 404 2016-2017
JURISDICTION OVER THE REGISTRY OF DEEDS Breaking up of deposits or transactions in order not to reach the limit
in a covered transaction. For example, deposit 300K today, on the next
day 400K.
Sec 7 (12) to require the Land Registration Authority and all its
Registries of Deeds to submit to the AMLC, reports on all real estate
transactions involving an amount in excess of Five hundred thousand
pesos (P500,000.00) within fifteen (15) days from the date of e. Any circumstance relating to the transaction which is
registration of the transaction, in a form to be prescribed by the AMLC. observed to deviate from the profile of the client and/or
The AMLC may also require the Land Registration Authority and all its the client's past transactions with the covered
Registries of Deeds to submit copies of relevant documents of all real institution;
estate transactions. The bank will look at the profile of its client and his financial capacity
as well as his past transactions. For example, a client normally
deposits P500 a day, but suddenly he deposited 400k per day. So
Registry of Deeds, although not among those enumerated as a
there is a change in circumstance which is a deviation from your past
covered person, falls within the jurisdiction of AMLA
transactions.
Technically the Registries of Deeds are not covered persons, and in
fact are government entities. Under Sec 7, the AMLC has the power to
require the LRA ad all its Registries of Deeds to submit to the AMLC,
reports on all real estate transactions exceeding 500K. f. The transaction is in any way related to an unlawful
activity or offense under this Act that is about to be, is
being or has been committed; or
TRANSACTIONS COVERED UNDER AMLA
g. Any transaction that is similar or analogous to any of
Transactions covered under AMLA the foregoing.
1. Covered transactions
A transaction in cash or other equivalent monetary
instrument involving a total amount in excess of Five If you have a covered or suspicious transaction, does it mean
hundred thousand pesos (P500,000.00) within one (1) that you are in violation of AMLA?
banking day. No, it does not follow that it is a violation of AMLA. It will only give rise
to an obligation on the part of a covered person to report the
2. Suspicious Transaction transaction with AMLC.
Transactions with covered institutions, regardless of the amounts
involved, where any of the following circumstances exist:
MONEY LAUNDERING OFFENSE
a. There is no underlying legal or trade obligation,
purpose or economic justification; Relevant provision
SEC. 4. Money Laundering Offense. – Money laundering is
Where a person has no profession which can provide him a significant committed by any person who, knowing that any monetary
amount of money but will regularly transact large amounts and such instrument or property represents, involves, or relates to the
cannot be justified. proceeds of any unlawful activity:
If I will transfer 1M to your account for no reason at all, is (a) transacts said monetary instrument or property;
that a suspicious transaction?
No, it is a covered transaction because it exceeds 500K. Regardless of (b) converts, transfers, disposes of, moves, acquires, possesses or
the reason of transaction, the transaction is required to be reported uses said monetary instrument or property;
If I will transfer 300k to your account for no reason at all, is (c) conceals or disguises the true nature, source, location, disposition,
that a suspicious transaction? movement or ownership of or rights with respect to said monetary
Yes, it is a suspicious transaction. If there is no underlying obligation, instrument or property;
purpose or economic justification, and the bank will require you to give
an underlying reason for the transaction but you cannot present proof (d) attempts or conspires to commit money laundering offenses
or anything, then the transaction might be considered as a suspicious referred to in paragraphs (a), (b) or (c);
transaction.
(e) aids, abets, assists in or counsels the commission of the money
b. The client is not properly identified; laundering offenses referred to in paragraphs (a), (b) or (c) above;
This is when you are not able to present proper identification as when and
you presented an ID and the picture is different from your face or
when a corporation that has a list of BOD and cannot present proper (f) performs or fails to perform any act as a result of which he
identification of its directors. facilitates the offense of money laundering referred to in paragraphs
(a), (b) or (c) above.
c. The amount involved is not commensurate with the
business or financial capacity of the client; What is the violation of AMLA? How is the crime committed?
You declare that you have a sole proprietorship business which earns Money laundering is also committed by any covered person who,
20K per month, but suddenly you deposited 100K in successive knowing that a covered or suspicious transaction is required under this
transactions. Act to be reported to the Anti-Money Laundering Council (AMLC), fails
to do so.
d. Taking into account all known circumstances, it may be
perceived that the client's transaction is structured in Important: The operative act here is knowing that money relates to
order to avoid being the subject of reporting an unlawful activity and you transact, convert, conceal and conspire to
requirements under the Act; do any of those or attempt or conspire to commit or aid, abet, or
assist, perform or fail to perform any act as a result of which those secure or obtain, any Government permit or license, in
transactions were committed. That is the violation of the AMLA. That is consideration for the help given or to be given, without
the crime of money laundering. prejudice to Section thirteen of this Act|
It is not the facts of being actually covered nor falling under suspicious c. Par E - Causing any undue injury to any party, including the
transactions, but those transactions enumerated in Sec 4 that make Government, or giving any private party any unwarranted
you liable for money laundering. benefits, advantage or preference in the discharge of his
official administrative or judicial functions through manifest
The operative word is that it must be related to an unlawful activity. partiality, evident bad faith or gross inexcusable negligence.
This provision shall apply to officers and employees of
offices or government corporations charged with the grant
of licenses or permits or other concessions
UNLAWFUL ACTIVITIES
Relevant provision d. Par G - Entering, on behalf of the Government, into any
Section 3(i) of the same Act is further amended to read as follows: contract or transaction manifestly and grossly
disadvantageous to the same, whether or not the public
(i) 'Unlawful activity' refers to any act or omission or series or officer profited or will profit thereby
combination thereof involving or having direct relation to the
following: e. Par H - Director or indirectly having financing or pecuniary
(1) Kidnapping for ransom under Article 267 of Act No. 3815, interest in any business, contract or transaction in
otherwise known as the Revised Penal Code, as amended; connection with which he intervenes or takes part in his
official capacity, or in which he is prohibited by the
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act Constitution or by any law from having any interest
No. 9165, otherwise known as the Comprehensive Dangerous
Drugs Act of 2002; f. Par I - Directly or indirectly becoming interested, for
a. Sec 4 – Importation of Dangerous Drugs and/or Controlled personal gain, or having a material interest in any
Precursors and Essential Chemicals transaction or act requiring the approval of a board, panel or
b. Sec 5 - group of which he is a member, and which exercises
Sale, Trading, Administration, Dispensation, Delivery, Distrib discretion in such approval, even if he votes against the
ution and Transportation of Dangerous Drugs and/or same or does not participate in the action of the board,
Controlled Precursors and Essential Chemicals committee, panel or group
c. Sec 6 - Maintenance of a Den, Dive or Resort
d. Sec 8 - Manufacture of Dangerous Drugs and/or Controlled (4) Plunder under Republic Act No. 7080, as amended;
Precursors and Essential Chemicals
e. Sec 9 - Illegal Chemical Diversion of Controlled Precursors (5) Robbery and extortion under Articles 294, 295, 296, 299, 300,
and Essential Chemicals 301 and 302 of the Revised Penal Code, as amended;
f. Sec 10 - Manufacture or Delivery of Art. 297 and 298 are not included, which refer to attempted
Equipment, Instrument, Apparatus, and Other Paraphernalia robbery. Only consummated robbery are included because if
for Dangerous Drugs and/or Controlled Precursors and it‘s just attempted, there is nothing to launder there
Essential Chemicals
g. Sec 12 - Possession of Equipment, Instrument, Apparatus a. Art 294 - Robbery with Violence Against or Intimidation of
and Other Paraphernalia for Dangerous Drugs Persons
h. Sec 13 - Possession of Dangerous Drugs During b. Art 295 - Robbery with Physical Injuries, Committed in an
Parties, Social Gatherings or Meetings Uninhabited Place and by a Band
i. Sec 14 - Possession of Equipment, Instrument, Apparatus c. Art 296 - Definition of a Band and Penalty Incurred by the
and Other Paraphernalia for Dangerous Drugs During Members Thereof
Parties, Social Gatherings or Meetings d. Art 299 - Robbery in an Inhabited House or Public Building
j. Sec 15 - Use of Dangerous Drugs or Edifice Devoted to Worship
k. Sec 16 - Cultivation or Culture of Plants Classified as e. Art 300 - Robbery in an Uninhabited Place and by a Band
Dangerous Drugs or are Sources Thereof f. Art 301 - What is an Inhabited House, Public Building or
Building Dedicated to Religious Worship and Their
Important: So not all offenses under the Dangerous Drugs Dependencies
Act are considered unlawful activities. Only those specified g. Art 302 - Robbery in an Uninhabited Place or in a Private
Building
(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. (6) Jueteng and Masiao punished as illegal gambling
3019, as amended, otherwise known as the Anti-Graft and under Presidential Decree No. 1602;
Corrupt Practices Act;
a. Par B - Directly or indirectly requesting or receiving any gift, (7) Piracy on the high seas under the Revised Penal Code, as
present, share, percentage, or benefit, for himself or for any amended and Presidential Decree No. 532;
other person, in connection with any contract or transaction
between the Government and any other party, wherein the (8) Qualified theft under Article 310 of the Revised Penal Code, as
public officer in his official capacity has to intervene under amended;
the law.
(9) Swindling under Article 315 of the Revised Penal Code, as
b. Par C - Directly or indirectly requesting or receiving any gift, amended;
present or other pecuniary or material benefit, for himself or RP vs Glasgow Credit
for another, from any person for whom the public officer, in The crime here was estafa which is included under unlawful
any manner or capacity, has secured or obtained, or will activities
(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No.
(10) Smuggling under Republic Act Nos. 455 and 1937; SEID 8550, otherwise known as the Philippine Fisheries Code of 1998;
a. RA 455- Revised Administrative Code
b. RA 1937 – Tariff and Customs Code a. SECTION 86. Unauthorized Fishing or Engaging in Other
Unauthorized Fisheries Activities
(11) Violations under Republic Act No. 8792, otherwise known as the b. SECTION 87. Poaching in Philippine Waters
Electronic Commerce Act of 2000; c. SECTION 88. Fishing Through Explosives, Noxious or
 All violations of E-Commerce Act are unlawful activities Poisonous Substance, and/or Electricity
d. SECTION 89. Use of Fine Mesh Net
(12) Hijacking and other violations under Republic Act No. 6235; e. SECTION 90. Use of Active Gear in the Municipal Waters and
destructive arson and murder, as defined under the Revised Bays and Other Fishery Management Areas
Penal Code, as amended, including those perpetrated by terrorists f. SECTION 91. Ban on Coral Exploitation and Exportation
against non-combatant persons and similar targets; g. SECTION 92. Ban on Muro-Ami Other Methods and Gear
Destructive to Coral Reefs and Other Marine Habitat
(13) Terrorism and conspiracy to commit terrorism as defined h. SECTION 93. Illegal Use of Superlights
and penalized under Sections 3 and 4 of Republic Act No. 9372 or The i. SECTION 94. Conversion of Mangroves
Human Security Act j. SECTION 95. Fishing in Overfished Area and During Closed
Season
(14) Financing of terrorism under Section 4 and offenses k. SECTION 96. Fishing in Fishery Reserves, Refuge and
punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168, Sanctuaries
otherwise known as the Terrorism Financing Prevention and l. SECTION 97. Fishing Or Taking of Rare, Threatened or
Suppression Act of 2012: Endangered Species
m. SECTION 98. Capture of Sabalo and Other
a) SEC. 4. Financing of Terrorism Breeders/Spawners
n. SECTION 99. Exportation of Breeders, Spawners, Eggs or
b) SEC. 5. Attempt or Conspiracy to Commit the Crimes of Fry
Financing of Terrorism and Dealing with Property or Funds o. SECTION 100. Importation or Exportation of Fish or Fishery
of Designated Persons. Species
p. SECTION 101. Violation of Catch Ceilings
c) SEC. 6. Accomplice. q. SECTION 102. Aquatic Pollution
r. SECTION 103. Other Violations: failure to comply with
d) SEC. 7. Accessory. minimum safety standards; failure to conduct yearly report on
fishponds; gathering and marketing shell fishes; obstruction to
e) SEC. 8. Prohibition Against Dealing with Property or Funds of navigation or flow and ebb of tide in any stream, river, lake or
Designated Persons. bay; construction and operation of fish corrals/traps, fish pens
and fish cages
(15) Bribery under Articles 210, 211 and 211-A of the Revised Penal s. SECTION 104. Commercial Fishing Vessel Operators
Code, as amended, and Corruption of Public Officers under Article 212 Employing Unlicensed Fisherfolk or Fishworker or Crew
of the Revised Penal Code, as amended; t. SECTION 105. Obstruction of Defined Migration Paths
u. SECTION 106. Obstruction to Fishery Law Enforcement
(16) Frauds and Illegal Exactions and Transactions under Officer
Articles 213, 214, 215 and 216 of the Revised Penal Code, as
amended; (22) Violations of Sections 101 to 107, and 110 of Republic Act No.
7942, otherwise known as the Philippine Mining Act of 1995;
(17) Malversation of Public Funds and Property under Articles
217 and 222 of the Revised Penal Code, as amended; a. SECTION 101. False Statements
b. SECTION 102. Illegal Exploration
(18) Forgeries and Counterfeiting under Articles 163, 166, 167, c. SECTION 103. Theft of Minerals
168, 169 and 176 of the Revised Penal Code, as amended; d. SECTION 104. Destruction of Mining Structures
e. SECTION 105. Mines Arson
(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise f. SECTION 106. Willful Damage to a Mine
known as the Anti-Trafficking in Persons Act of 2003; g. SECTION 107. Illegal Obstruction to Permittees or
Contractors|
a) Section 4. Acts of Trafficking in Persons. h. SECTION 110. Other Violations. — Any other violation of this
b) Section 5. Acts that Promote Trafficking in Persons. Act and its implementing rules and regulations
c) Section 6. Qualified Trafficking in Persons
(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act
(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential No. 9147, otherwise known as the Wildlife Resources Conservation and
Decree No. 705, otherwise known as the Revised Forestry Code of Protection Act;
the Philippines, as amended;
a. Section 78 – Unlawful occupation or destruction of forest or Section 27. Illegal Acts.
grazing lands (c) effecting any of the following acts in critical habitat(s)
b. Section 79 – Pasturing livestock (i) dumping of waste products detrimental to wildlife;
 If you pasture livestock land considered as forest land, (ii) squatting or otherwise occupying any portion of the
that is violation of sec 79. Any money that you profit critical habitat;
from such act if you attempt to launder it is a violation (iii) mineral exploration and/or extraction;
of the AMLA (iv) burning;
(v) logging; and
(vi) quarrying
(e) trading of wildlife; otherwise, including residential places, who allows any person
(f) collecting, hunting or possessing wildlife, their by-products to take along with him to such place or places any minor herein
and derivatives; described
(g) gathering or destroying of active nests, nest trees, host g. SECTION 10(E). Any person who shall use, coerce, force or
plants and the like; intimidate a street child or any other child to: beg or use
(i) transporting of wildlife. begging for a living; act as conduit or middlemen in drug
trafficking or pushing; conduct any illegal activities
(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise h. SECTION 11. Sanctions for Establishments or Enterprises
known as the National Caves and Cave Resources Management which Promote, Facilitate, or Conduct Activities Constituting
Protection Act; Child Prostitution and Other Sexual Abuse, Child Trafficking,
Obscene Publications and Indecent Shows, and Other Acts of
Sec 7b - Gathering, collecting, possessing, consuming, selling, Abuse
bartering or exchanging or offering for sale without authority any cave i. SECTION 12. Employment of Children
resource j. SECTION 14. Prohibition on the Employment of Children in
Certain Advertisements
(25) Violation of Republic Act No. 6539, otherwise known as the Anti-
Carnapping Act of 2002, as amended; (33) Fraudulent practices and other violations under Republic Act No.
8799, otherwise known as the Securities Regulation Code of 2000; and
(26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866,
as amended, otherwise known as the decree Codifying the Laws on (34) Felonies or offenses of a similar nature that are punishable under
Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or the penal laws of other countries.‖
Disposition of Firearms, Ammunition or Explosives; If you are wondering how are we involved in Bangladesh case,
since the crime was not committed inside the Philippines but the
Section 1. Unlawful Manufacture, Sale, Acquisition, Disposition money was only brought in. There is no crime committed here so
or Possession of Firearms or Ammunition or Instruments Used there is no money laundering related to unlawful activity
or Intended to be Used in the Manufacture of Firearms of committed here in the Philippines. But AMLA provides that
Ammunition. felonies or offenses of a similar nature that are punishable under
Section 3. Unlawful Manufacture, Sales, Acquisition,
the penal laws of other countries are also considered as unlawful
Disposition or Possession of Explosives.
activities. So, the act of bringing in the money in our country is
Section 5. Tampering of Firearm's Serial Number
considered as one laundering offense even if the crime was not
(27) Violation of Presidential Decree No. 1612, otherwise known as the committed here in the Philippines.
Anti-Fencing Law;
Important: Only those provided under the AMLA are considered
(28) Violation of Section 6 of Republic Act No. 8042, otherwise known unlawful activities, not all crimes. There can only be a violation of
as the Migrant Workers and Overseas Filipinos Act of 1995, as AMLA if it relates to an unlawful activity enumerated under AMLA.
amended by Republic Act No. 10022;
 Sec 6 – Illegal recruitment Atty: The suspicious and covered transactions are not illegal per se
under AMLA if the crime is not related to an unlawful activity. What is
(29) Violation of Republic Act No. 8293, otherwise known as the a violation of AMLA is if you transact money which is related to an
Intellectual Property Code of the Philippines; unlawful activity.
 All violations
Illustration
(30) Violation of Section 4 of Republic Act No. 9995, otherwise known I kidnapped somebody for ransom, and I kept the money with me.
as the Anti-Photo and Video Voyeurism Act of 2009; There is no money laundering because I didn‘t transact the money. But
 Sec 4 – take photo or video coverage; copy or reproduce; if you go to bank, in an attempt to clean up the money, that is now a
sell or distribute; publish or broadcast persons performing crime of money laundering.
sexual acts
(31) Violation of Section 4 of Republic Act No. 9775, otherwise known CRIMINAL PROSECUTION
as the Anti-Child Pornography Act of 2009;
 Sec 4 – Unlawful or prohibited acts (e.g. hire a child to Relevant provision
perform pornography; produce or direct; publish or offer; SEC. 6. Prosecution of Money Laundering –
possess; provide a venue; to lure a child; to conspire to a) Any person may be charged with and convicted of both the offense
commit any of the unlawful acts) of money laundering and the unlawful activity as herein defined.
(b) The prosecution of any offense or violation under this Act shall
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 proceed independently of any proceeding relating to the unlawful
of Republic Act No. 7610, otherwise known as the Special Protection activity.
of Children Against Abuse, Exploitation and Discrimination;
a. SECTION 5. Child Prostitution and Other Sexual Abuse Conviction of an unlawful activity is not necessary to be
b. SECTION 7. Child Trafficking prosecuted for violation of AMLA
c. SECTION 8. Attempt to Commit Child Trafficking The crime of money laundering is independent of any unlawful activity
d. SECTION 9. Obscene Publications and Indecent Shows enumerated.
e. SECTION 10(c). Any person who shall induce, deliver or
offer a minor to any one prohibited by this Act to keep or have One can be charged of money laundering and the unlawful
in his company a minor||| activity at the same time
f. SECTION 10(D). Any person, owner, manager or one Money laundering is a separate crime from unlawful activity and both
entrusted with the operation of any public or private place of are can proceed independently from each other. Prosecution does not
accommodation, whether for occupancy, food, drink or
have to wait for conviction of money laundering before filing a charge Banks are strict now in opening bank accounts. They have KYC - Know
for the unlawful activity can be had. your client system which requires you to to fill up many forms in order
to open a bank account.
For corporations, banks observe stricter policy. The corporation is

required to provide for the identifications of all of its directors,
Rationale of the law signatures of all directors to prove that the directors are real persons.
Money laundering and the unlawful activity are separate crimes with
separate elements. Regardless of what happens in the unlawful activity RECORD KEEPING REQUIREMENT
case, you can still be convicted of money laundering.
All records of all transactions of covered institutions shall be
The AMLA case cannot say whether or not the unlawful activity is maintained and safely stored for five (5) years from the dates of
committed, but only whether or not money laundering was committed. transactions. With respect to closed accounts, the records on customer
identification, account files and business correspondence, shall be
Flaws in AMLA preserved and safely stored for at least five (5) years from the dates
Our AMLA is still not very strong. For example, in the list of covered when they were closed (Section 9)
persons, it seems comprehensive but it does not include casino. That
is how they lost the Bangladesh case—from RCBC to money changers REPORTING OF COVERED AND SUSPICIOUS
to casino. TRANSACTIONS
In the unlawful activities, tax evasion should also be included. There is Reporting of Covered and Suspicious Transactions - Covered
a move by the DOF to lower taxes but to include tax evasion as one of institutions shall report to the AMLC all covered transactions and
the unlawful activities because it will help the government in going suspicious transactions within five (5) working days from occurrence
after tax evaders. thereof, unless the Supervising Authority prescribes a longer period not
exceeding fifteen (15) working days.
PROHIBITIONS AGAINST POLITICAL HARRASMENT Should a transaction be determined to be both a covered transaction
Relevant provision and a suspicious transaction, the covered institution shall be required
SECTION 16. Prohibitions Against Political Harassment. — This Act to report the same as a suspicious transaction.
shall not be used for political persecution or harassment or as an
instrument to hamper competition in trade and commerce. When reporting covered or suspicious transactions to the AMLC,
No case for money laundering may be filed against and no assets shall covered institutions and their officers and employees shall not be
be frozen, attached or forfeited to the prejudice of a candidate for an deemed to have violated Republic Act No. 1405, as amended, Republic
electoral office during an election period. Act No. 6426, as amended, Republic Act No. 8791 and other similar
laws, but are prohibited from communicating, directly or indirectly, in
Atty: This small provision is a very powerful provision. AMLC is any manner or by any means, to any person, the fact that a covered
helpless during election because during that time, politicians are or suspicious transaction report was made, the contents thereof, or
exempt from AMLA. any other information in relation thereto. In case of violation thereof,
the concerned officer and employee of the covered institution shall be
criminally liable. However, no administrative, criminal or civil
proceedings, shall lie against any person for having made a covered or
PREVENTIVE MEASURES suspicious transaction report in the regular performance of his duties
The AMLA not only aims for prosecution of money laundering but in good faith, whether or not such reporting results in any criminal
preventions as well. prosecution under this Act or any other law.
Preventive Measures for Money Laundering When reporting covered or suspicious transactions to the AMLC,
1. Customer Identification covered institutions and their officers and employees are prohibited
2. Record Keeping Requirement from communicating directly or indirectly, in any manner or by any
3. Reporting of Covered and Suspicious Transactions means, to any person or entity, the media, the fact that a covered or
suspicious transaction report was made, the contents thereof, or any
Important: It is the covered persons who are required to implement other information in relation thereto. Neither may such reporting be
these preventive measures. published or aired in any manner or form by the mass media,
electronic mail, or other similar devices. In case of violation thereof,
CUSTOMER IDENTIFICATION the concerned officer and employee of the covered institution and
Customer Identification – Covered institutions shall establish and media shall be held criminally liable." (Section 9)
record the true identity of its clients based on official documents. They
shall maintain a system of verifying the true identity of their clients, Covered and suspicious transactions must be reported within
and in case of corporate clients, require a system of verifying their 5 working days from occurrence thereof
legal existence and organizational structure, as well as the authority In the RCBC case, when the transaction was reported with AMLC, the
and identification of all persons purporting to act on their behalf. The money was long gone. They are required to report within 5 working
provisions of existing laws to the contrary notwithstanding, anonymous days from occurrence of the transaction.
accounts, accounts under fictitious names, and all other similar
accounts shall be absolutely prohibited. Peso and foreign currency Atty’s opinion: It must be reported at the time of transaction but we
checking non-checking numbered accounts shall be allowed. The BSP don‘t have enough facilities.
may conduct annual testing solely limited to the determination of the
existence and true identity of the owners of such accounts (Section No violation of Bank Secrecy Laws
9) When a covered person reported the transaction with AMLC, there is
no violation of Bank Secrecy Laws whether under RA 1405 or 6426.
Know Your Client system (KYC)
While there is no violation, the covered person is prohibited from AMLC may also require the Land Registration Authority
communicating directly or indirectly the fact that a covered transaction and all its Registries of Deeds to submit copies of relevant
or suspicious transaction was made. They are required to report it with documents of all real estate transactions.
the AMLC but with AMLC only. If they announced it to the media, for
example, that is no longer covered in the exemption and they can be
held liable. REMEDIES AVAILABLE TO THE AMLC
When a covered person makes a report and it turns out that
there is no money laundering, does it mean that the covered
person can be prosecuted for malicious prosecution or Remedies available to the AMLC
reporting? 1. Freezing of monetary instrument or property
No. As long as the reporting is done in good faith and in compliance 2. Inquire into bank deposits
with law, there is no violation even if the report turns out to be not 3. Civil Forfeiture
well-grounded because maybe, there is a donation, or economic 4.
justification for the transaction. The covered person cannot be FREEZING OF MONETARY INSTRUMENT OR PROPERTY
prosecuted for malicious reporting Relevant provision
SEC. 10. Freezing of Monetary Instrument or Property. – Upon
a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in
ANTI MONEY LAUNDERING COUNCIL (AMLC)
any way related to an unlawful activity as defined in Section 3(i)
hereof, the Court of Appeals may issue a freeze order which shall be
The AMLC shall act unanimously in the discharge of its functions as effective immediately, and which shall not exceed six (6) months
defined hereunder: depending upon the circumstances of the case: Provided, That if there
(1) to require and receive covered or suspicious transaction reports is no case filed against a person whose account has been frozen within
from covered institutions; the period determined by the court, the freeze order shall be deemed
(2) to issue orders addressed to the appropriate Supervising ipso facto lifted: Provided, further, That this new rule shall not apply to
Authority or the covered institution to determine the true identity pending cases in the courts. In any case, the court should act on the
of the owner of any monetary instrument or property subject of a petition to freeze within twenty-four (24) hours from filing of the
covered transaction or suspicious transaction report or request for petition. If the application is filed a day before a nonworking day, the
assistance from a foreign State, or believed by the Council, on the computation of the twenty-four (24)-hour period shall exclude the
basis of substantial evidence, to be, in whole or in part, wherever nonworking days.
located, representing, involving, or related to, directly or
indirectly, in any manner or by any means, the proceeds of an ―A person whose account has been frozen may file a motion to lift the
unlawful activity. freeze order and the court must resolve this motion before the
(3) to institute civil forfeiture proceedings and all other remedial expiration of the freeze order.
proceedings through the Office of the Solicitor General;
(4) to cause the filing of complaints with the Department of Justice or ―No court shall issue a temporary restraining order or a writ of
the Ombudsman for the prosecution of money laundering injunction against any freeze order, except the Supreme Court.‖
offenses;
(5) to investigate suspicious transactions and covered transactions STEPS:
deemed suspicious after an investigation by AMLC, money 1. AMLC will file an ex parte petition for issuance of freeze
laundering activities, and other violations of this Act; order with the CA
(6) to apply before the Court of Appeals, ex parte, for the freezing of 2. Account holder need not be notified
any monetary instrument or property alleged to be laundered, 3. If CA finds there is probable cause that the money subject of
proceeds from, or instrumentalities used in or intended for use in the petition is related to an unlawful activity, then the CA will
any unlawful activity as defined in Section 3(i) hereof issue the freeze order
(7) to implement such measures as may be necessary and justified
under this Act to counteract money laundering; Effect
(8) to receive and take action in respect of, any request from foreign You cannot withdraw since the account is ―frozen.‖
states for assistance in their own anti-money laundering
operations provided in this Act; INQUIRE INTO BANK DEPOSITS
(9) to develop educational programs on the pernicious effects of Relevant provision
money laundering, the methods and techniques used in money SEC. 11. Authority to Inquire into Bank Deposits. –
laundering, the viable means of preventing money laundering and Notwithstanding the provisions of Republic Act No. 1405, as amended;
the effective ways of prosecuting and punishing offenders; Republic Act No. 6426, as amended; Republic Act No. 8791; and other
(10) to enlist the assistance of any branch, department, bureau, office, laws, the AMLC may inquire into or examine any particular deposit or
agency or instrumentality of the government, including investment, including related accounts, with any banking institution or
government-owned and -controlled corporations, in undertaking non-bank financial institution upon order of any competent court based
any and all anti-money laundering operations, which may include on an ex parte application in cases of violations of this Act, when it has
the use of its personnel, facilities and resources for the more been established that there is probable cause that the deposits or
resolute prevention, detection and investigation of money investments, including related accounts involved, are related to an
laundering offenses and prosecution of offenders; and SEIDAC unlawful activity as defined in Section 3(i) hereof or a money
(11) to impose administrative sanctions for the violation of laws, rules, laundering offense under Section 4 hereof; except that no court order
regulations and orders and resolutions issued pursuant thereto. shall be required in cases involving activities defined in Section 3(i)(1),
(12) to require the Land Registration Authority and all its (2), and (12) hereof, and felonies or offenses of a nature similar to
Registries of Deeds to submit to the AMLC, reports on all those mentioned in Section 3(i)(1), (2), and (12), which are Punishable
real estate transactions involving an amount in excess of under the penal laws of other countries, and terrorism and conspiracy
Five hundred thousand pesos (P500,000.00) within to commit terrorism as defined and penalized under Republic Act No.
fifteen (15) days from the date of registration of the 9372.
transaction, in a form to be prescribed by the AMLC. The
otherwise transferred, or it is located outside the Philippines or has
The Court of Appeals shall act on the application to inquire into or been placed or brought outside the jurisdiction of the court, or it has
examine any deposit or investment with any banking institution or been commingled with other monetary instrument or property
non-bank financial institution within twenty-four (24) hours from filing belonging to either the offender himself or a third person or entity,
of the application. thereby rendering the same difficult to identify or be segregated for
purposes of forfeiture.
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas
may, in the course of a periodic or special examination, check the
compliance of a Covered institution with the requirements of the AMLA How is it done?
and its implementing rules and regulations. Civil Forfeiture is allowed in AMLA cases but you have to apply the
rules on civil forfeiture.
For purposes of this section, ‗related accounts‘ shall refer to accounts,
the funds and sources of which originated from and/or are materially Before in Glasgow case, if there is already a report of suspicious
linked to the monetary instrument(s) or property(ies) subject of the and/or covered transaction, it can be a ground for filing an application
freeze order(s). for civil forfeiture.
A court order ex parte must first be obtained before the AMLC can Now, under Sec 12, there has to be determination of AMLC that
inquire into these related Accounts: Provided, That the procedure for probable cause exists that any monetary instrument or property is in
the ex parte application of the ex parte court order for the principal any way related to an unlawful activity as defined in Section 3(i) or a
account shall be the same with that of the related accounts." money laundering offense under Section 4 hereof before the AMLC can
The authority to inquire into or examine the main account and the file an application for Civil Forfeiture.
related accounts shall comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which are hereby What was the basis of the insistence of Bangladesh that the
incorporated by reference. Philippines must return the money to them?
Relevant provision
Inquiry into bank deposits Sec 12 (b) Claim on Forfeited Assets. – Where the court has
GR: Inquiry into bank deposits can only be upon order of competent issued an order of forfeiture of the monetary instrument or property in
court, upon ex parte application by AMLC. a criminal prosecution for any money laundering offense defined under
Section 4 of this Act, the offender or any other person claiming an
Important: it is not the AMLC which will issue the order. interest therein may apply, by verified petition, for a declaration that
the same legitimately belongs to him and for segregation or exclusion
XPNS: of the monetary instrument or property corresponding thereto.
The ff are the exceptions to the requirement of court order: The victim can actually apply in case the money has been subject to
1. Kidnapping for ransom civil forfeiture, and can demand the return of the money to him.
2. Violations under Dangerous drugs Act
3. Hijacking, and destructive arson and murder RP vs EUGENIO
4. Terrorism and Conspiracy to commit terrorism. Facts:
A series of investigations concerning the award of NAIA 3 contracts to
Which Competent Court? PIATCO were undertaken by the Ombudsman and AMLC. AMLC issued
It is the Court of Appeals which shall act on the application to resolution authorizing the Executive Director of AMLC to sign and verify
inquire into or examine any deposit or investment with any banking an application to inquire into and/or examine the deposits or
institution or non-bank financial institution within twenty-four (24) investments of Alvarez, etc. (the persons involved). AMLC then applied
hours from filing of the application. to inquire into the investments of Alvarez before the RTC which
granted it being satisfied of existence of probable cause that the
The distinction before under Section 10 and the old Section 11 as ruled deposits were related to the offense of violation of Anti-Graft and
in the case RP vs Eugenio, is that unlike in Freeze Order, Section 11 Corrupt Practices Act.
does not provide for the phrase an ex parte applicaton. The SC said
that you must notify the other party. Congress later on amended the Ruling:
law allowing an ex parte application. Still, even if the bank inquiry order may be availed of without need of
a pre-existing case under the AMLA, it does not follow that such order
CIVIL FORFEITURE may be availed of ex parte.
Relevant provision Important: This has now been changed by the subsequent
Section 12 of the same Act is hereby amended to read as amendment of the law.
follows:
(a) Civil Forfeiture. – Upon determination by the AMLC that probable
cause exists that any monetary instrument or property is in any way Discussion
related to an unlawful activity as defined in Section 3(i) or a money There are two things that stand out in the case.
laundering offense under Section 4 hereof, the AMLC shall file with the 1. “In cases of” means “In the event of”
appropriate court through the Office of the Solicitor General, a verified The defense stated that AMLC cannot do inquiry until the case
ex parte petition for forfeiture, and the Rules of Court on Civil has been filed in court because of the term in cases of money
Forfeiture shall apply. laundering, but SC said that the use of the word cases is
The forfeiture shall include those other monetary instrument or unfortunate because it does not literally mean actual case but in
property having an equivalent value to that of the monetary the event of violation of the AMLA. There is no need to file
instrument or property found to be related in any way to an unlawful an actual case before AMLC can file petition for bank inquiry
activity or a money laundering offense, when with due diligence, the order.
former cannot be located, or it has been substantially altered,
destroyed, diminished in value or otherwise rendered worthless by any 2. Actual case must be filed
act or omission, or it has been concealed, removed, converted, or In bank secrecy law, there must be actual case filed not only
investigation conducted by the Ombudsman. Actual case must be filed
first. The law provides that there must be competent order in cases of Example:
bribery and dereliction of duty, and when bank account is the subject San Miguel sell shares of stocks through public offering. If there was
matter of litigation no PSE and San Miguel wants to expand or extend its capital, if you
were the President of San Miguel, who would you approach to invest in
The petition cannot be done ex parte. After the ruling, the Congress your company? Of course you would approach the Big investors, the
amended the law and the petition now can be done ex parte. tycoons because they are the people who can afford to invest in your
RP vs. GLASGOW company but if instead of doing a private sale, San Miguel wants to
Facts: Republic filed a complaint in the RTC for civil forfeiture of have a public offering of its shares, who are allowed to buy those
assets against the bank deposits in the account maintained by shares?
Glasgow. It opposed the motion to dismiss of Glasgow and asserted - ANYONE without necessarily having to be a tycoon. That is
that prior conviction for unlawful activity is not a precondition to the how the SRC encourages the widest participation in
filing of a civil forfeiture case. ownership of enterprises.
Ruling: The Court agrees with the Republic. Whether or not there is NOTE: If shares are listed in the exchange, you can buy them because
truth in the allegation that account no. CA-005-10-000121-5 contains it‘s an open market. Anyone can buy.
the proceeds of unlawful activities is an evidentiary matter that may be
proven during trial. The complaint, however, did not even have to Atty: The SRC itself requires that every time a company does a public
show or allege that Glasgow had been implicated in a conviction for, or offering, a portion of that offering is for the Local Small Investors
the commission of, the unlawful activities of estafa and violation of the (LSIs). Under the law, 10% should be allocated because otherwise,
Securities Regulation Code. LSIs will not have a chance of buying your shares.
A criminal conviction for an unlawful activity is not a But under PSE and SEC regulation, the requirement is to maintain your
prerequisite for the institution of a civil forfeiture proceeding public ownership at 12%. A portion of stocks, you cannot sell to the
Stated otherwise, a finding of guilt for an unlawful activity is not an big buyers; you have to offer it for sale to the public.
essential element of civil forfeiture.
3. Enhance the democratization of wealth
Discussion. This is as oppose to monopoly. It is also related to the encouragement
Respondent‘s contention of widest participation of ownership in enterprises. So instead of being
There is no basis for the civil forfeiture because they were not fully owned by the tycoons, the public offering of shares allows the
convicted of estafa and other criminal violation. In fact, they were not wealth to be spread out to the small investors. These investors, then,
served with summons. can share the wealth of the big companies.
Conviction is not necessary before civil forfeiture can be done 4. Promote the development of the capital market, protect
The requirement of filing civil forfeiture is the reporting of covered investors, ensure full and fair disclosure about securities
and/or suspicious transactions. But as amended, the basis now is the Capital Market - market for funds through the trading of securities.
determination by AMLC that probable cause exists that any monetary
instrument or property is in any way related to an unlawful activity as Promote the development of capital market
defined in Section 3(i) or a money laundering offense under Section 4 You promote the capital market by ensuring that trading of securities
of AMLA. is robust, and not stagnant. There is a pre- buy and sale of securities.
Important: Conviction of a crime is not a requirement for civil SRC aims to ensure that there is a robust trading of securities; buying
forfeiture. and selling of securities easily. In that way the SRC promotes a scrip
less trading or paperless trading.
SECURITIES AND REGULATIONS CODE
Scrip less trading or paperless trading
DECLARATION OF POLICY Meaning, your shares does not require to be certificated (stock
certificate). Everything are electronic. All shares are deposited under
―The State shall establish a social conscious, free market that Philippine Deposit Trust Corporation (PDTC). It will cancel all stock
regulates itself, encourage the widest participation of ownership in certificates, and issue them scrip less. NO CERTIFICATES.
enterprises, enhance the democratization of wealth, promote the
development of the capital market, protect investors, ensure full and Protect Investors
fair disclosure about securities, minimize if not totally eliminate By requiring companies to make a full and fair disclosure about
insider trading and other fraudulent or manipulative devices and everything in their operations; regular reporting.
practices which create distortions in the free market. To achieve
these ends, this Securities Regulation Code is hereby enacted.‖ Atty: SRC requires the submission of annual reports, information
statements, quarterly financial reports. In fact, a company selling
1. To establish a socially conscious, free market that shares to the public is required to comply with the 10 minute rule.
regulates itself.
10-minute rule
2. To encourage the widest participation of ownership in If there is any material event that the company is going through, they
enterprises. are required to report it to the PSE in 10 minutes from the happening
of the event. The reporting requirement is that tedious.
Companies usually issue stocks for sale in the Phil Stock Exchange
(PSE). They enlist themselves and have their shares of stocks sold Example:
through public offering. Smart wants to buy the telecomm facilities of San Miguel. Both
companies are listed. The moment that they enter into the transaction,
How does the SRC encourage participation of ownership in the their Compliance Officer has to be there so he can send the report to
process? the PSE within 10 mins. That is the extent of the requirement for full
and fair disclosure. Otherwise, the company shall pay for a penalty per Example:
violation plus P1000- per day of delay. Globe is buying property of San Miguel, how will this affect shares of
both companies?
How does it protect the public?
Anyone dealing with the shares, will make a decision to sell or to buy It would increase the price of shares, so that if I am a holder of a San
the shares fully equipped with the knowledge to make the proper Miguel share trading at 150 per share and somebody wants to but it at
decision. 150, if I knew san Miguel entered into a deal like this with globe, will I
sell if for 150? No, I will wait for a few more days because I know this
5. To minimize if not totally eliminate insider trading and transaction will increase the value of the shares. But if I did not know,
other fraudulent or manipulative devices and practices because globe and san Miguel did not disclose, then I will sell it to
which create in the free market. somebody who knows of the transaction and then he will sell it for
(will be discussed on the latter provisions) P500.00.
FULL AND FAIR DISCLOSURE VS. MERIT-BASED APPROACH This is the danger that the law is trying to prevent. So that anyone
dealing with the shares will know and make their decisions fully
equipped with knowledge they need to make the proper decision. SRC
Full and Fair Disclosure Merit-Based Approach also has rules against insider trading and manipulative practices
When the SEC allows the Stamp of approval on the
registration of securities, it company saying that this NOTE: The company is valued based on its book value (total assets –
is simply saying that this shares are good. liabilities) or net worth. This is based on the performance of the
issuer has made a full company, so if the company is doing good, this will go up.
disclosure of its status. It
is not saying that this Atty: But trading value of the company is different. There are
company is earning, or it companies with low book value but with high trading value because
has good investment. So the latter is not just historical cost which book value is as it only
when the SEC allows accounts for earnings already earned. But the trading prices is not just
registration, it is only an historical but on the potential of the company for growth. That is why
affirmation that the trading journals normally gauge whether a price is overprice is the P-E
company has disclosed ratio or price to earnings ratio. This will determine the relationship of
everything or made a your price and your earnings now. Such that if your earnings now are
material full- and fair low and your price is high, it means that your company has a bigger
disclosure. potential for growth. But if the gap between the earning and price is
low, it means that the potential for growth is just for that small gap
Atty: You can still see a company suffering from a net loss that has only. So PE ratio is comparison of historical and potential for growth.
been allowed to register. Why? As long as they make a full disclosure
and the investors are willing to take the risk, then it‘s up to the Value of the shares in the exchange
investor because it‘s a free market. Losing or incurring a loss is not It is the value of how much the shares are currently trading
really a sufficient ground to allow or suspend the registration of a independent of the actual book value of the shares. It can be that the
company. What is important is a company makes a full and fair book value of the shares is 3 but trading at 5. You have 10 shares, so
disclosure. your wealth is 50. This is the market price for your shares.
Book value of the (net worth) = total assets – liabilities Atty: But there is also a possibility that it can go below. Book value at
- Historical cost 3 but trading at 2 because market thinks that 3 pesos is the most that
you can earn, no room for company growth. So the price goes down.
Trading value
- Refers to the potential of the company for growth Important: The focus of the SRC is on the full and fair
- Price Earnings Ratio – determines the relationship of price disclosure approach versus Merit based approach.
and earnings now; such that, if your earnings now is low Full and fair disclosure
and the price is high, it means that the company has bigger The SEC when it allows registration of securities, it is simply saying
potential for growth. But if the gap between the earnings that this issuer has disclosed or made a full and fair disclosure of its
and the price is low, it means that the potential for growth is operations or the status of the company. It is not saying that the
for that potential gap nalang. company is earning or a good investment. So when registration is
allowed, it is only an affirmation that the company has made material
Value of the shares full and fair disclosure
It is the value of how much the shares are currently trading
independent of the actual book value of the shares. Merit Based Approach
Whereas in merit based approach, registration is a stamp of approval
Example: on the company saying that these shares are good. This is not what
It can be that the book value is Php 3 per share, and it is trading at SRC wants. It is still up to the investor whether it wants to take a risk
Php 5, how much is the value of 0your shares? It is Php 50.00
Atty: That is why you can still register a company with a net loss.
Penalty for not following 10-minute rule Because as long as they make a disclosure, and investors are willing to
P50,000.00 + P1,000.00 per day. But just imagine if reported in public, take a risk, then it is upon the investor to buy or not because it is a
shares go down. free market. So incurring losses is not a sufficient ground for SEC to
disallow or suspend registration of a company.
Important: This is a requirement under SRC under full and fair
disclosure and protection of public Like in CEMEX, they reported a loss, but their shares are selling at a
high price especially now because Duterte said his focus is on more
How does this protect the public? infrastructures. So industry sector shares are expected to go up.
10 | U N I V E R S I T Y O F S A N C A R L O S
enforcement agencies of the Government, civil or military as
Important: Again, registration with SRC is not an assurance of well as any private institution, corporation, firm, association
profit. It just proves there was fair and full disclosure. or person in the implementation of its powers and function
under its Code;
POWERS AND FUNCTIONS OF SEC
(i) Issue cease and desist orders to prevent fraud or injury to
Sec. 5 of the SRC: the investing public;
(a) Have jurisdiction and supervision over all corporations,
partnership or associations who are the grantees of primary (j) Punish for the contempt of the Commission, both direct
franchises and/or a license or a permit issued by the and indirect, in accordance with the pertinent provisions of
Government; and penalties prescribed by the Rules of Court;
Primary franchise (k) Compel the officers of any registered corporation or

The certificate of incorporation from the SEC association to call meetings of stockholders or members
thereof under its supervision;
Who are required?
All corporation, partnerships (Articles of partnership). Basically all Atty: This is also found in the corporation code
juridical entities, it is the SEC which has jurisdiction over them
(l) Issue subpoena duces tecum and summon witnesses to
(b) Formulate policies and recommendations on issues appear in any proceedings of the Commission and in
concerning the securities market, advise Congress and other appropriate cases, order the examination, search and seizure
government agencies on all aspect of the securities market of all documents, papers, files and records, tax returns and
and propose legislation and amendments thereto; books of accounts of any entity or person under investigation
as may be necessary for the proper disposition of the cases
(c) Approve, reject, suspend, revoke or require amendments before it, subject to the provisions of existing laws;
to registration statements, and registration and licensing
applications; Atty: Otherwise known as investigative powers.
Registration statement (m) Suspend, or revoke, after proper notice and hearing the
Required if you want to register your securities. franchise or certificate of registration of corporations,
partnership or associations, upon any of the grounds provided
Registration of corporation vs. Registration of securities by law; and
Registration of corporation is different from registration of securities.
Atty: Includes incidental powers necessary to carry powers.
Atty: All corporations are required to register with the SEC. They are
required to get their certificate of incorporation. But not all are (n) Exercise such other powers as may be provided by law as
required to register their securities or shares. Getting certificate of well as those which may be implied from, or which are
incorporation does not mean you can now sell your shares to public necessary or incidental to the carrying out of, the express
powers granted the Commission to achieve the objectives and
(d) Regulate, investigate or supervise the activities of persons purposes of these laws.
to ensure compliance;
TRANSFER OF JURISDICTION OF CASES FROM SEC TO RTC
(e) Supervise, monitor, suspend or take over the activities of
exchanges, clearing agencies and other SROs; Section 5.2 transfers the jurisdiction of case under Sec. 5 PD 902A
from SEC to RTC.
Atty: So even though SROs are private entities, SEC still supervises
them. In fact, PSE is being penalized by the SEC for the last 10 years What are those cases?
already. Everyday there is a violation because there is a requirement a) Devices or schemes employed by or any acts, of the board of
that the PSE that is made up of trading participants (Brokers and directors, business associates, its officers or partnership, amounting to
dealers, or the market stall ins the PSE, the entities who are allowed to fraud and misrepresentation which may be detrimental to the interest
make the buy and sell transactions. As an ordinary person, you can‘t of the public and/or of the stockholder, partners, members of
just go to PSE and sell shares directly. You need a broker) associations or organizations registered with the Commission.
The PSE is required to only have a certain number of brokers. The b) Controversies arising out of intra-corporate or partnership
ownership of the PSE should only be up to a certain number of brokers relations, between and among stockholders, members, or associates;
and the rest made public. But because PSE was organized by brokers, between any or all of them and the corporation, partnership or
they are in breach of max limit and no one wants to give up their seat association of which they are stockholders, members or associates,
and the PSE cannot compel the brokers to give up. So they are in respectively; and between such corporation, partnership or association
constant violation. So the regulator itself, the PSE is violating and the and the state insofar as it concerns their individual franchise or right to
SEC has power to penalize them. exist as such entity;
(f) Impose sanctions for the violation of laws and rules, Intra = within
regulations and orders, and issued pursuant thereto; 1. among stockholders
2. between stockholders and corporation
(g) Prepare, approve, amend or repeal rules, regulations and 3. between corporation and state insofar as it involves their
orders, and issue opinions and provide guidance on and individual franchise or right to exist. So not all disputes
supervise compliance with such rules, regulation and orders;
Example: When stockholders want to see company books of
(h) Enlist the aid and support of and/or deputized any and all account. Before this was with SEC, now it is with the RTC.
Include any evidence of indebtedness such as bonds, notes,
c) Controversies in the election or appointments of directors, trustees, debentures, commercial papers, treasury bills, treasury bonds and
officers or managers of such corporations, partnerships or other similar instruments as may be determined by the Commission.
associations.
Equity securities
Does this mean SEC no longer has any jurisdiction over Include shares of stock in a corporation.
companies?
Atty: Under the new rules, securities are no longer defined but
SEC vs Subic Bay Golf Country Club enumerated as the previous rules contains an incomplete definition.
The SEC found that the SBGCCI did not comply with the promises in its
registration n statements. So SEC required SBGCC to update their Two types of securities based on the new IRR
prospectus since it did not show the correct standing of SBGCCI. It has Debt securities and equity securities
become misleading because the country club failed to deliver on their
promise in their prospectus and so required to update and disclose (a) Shares of stock, bonds, government Securities, commercial
everything. SEC also required the return the investments of the papers, debentures, notes, evidences of indebtedness, asset-
stockholders. The company complained about the return of investment backed securities
decision saying that SEC does not have jurisdiction.
Shares of stocks
SC said SEC has no jurisdiction. Before they had, under PD 902, but Equity which shows your participation or interest in a corporation
this was transferred by RA 8799 which is the SRC.
Bonds
TWO tests for determining whether intra corporate dispute Obligation or undertaking to pay a sum certain in money; it‘s
1. Relationship test – dispute must be between the difference between a promissory note is that a bond is a long-term
corporation, partnership, association and the public, or the obligation and generally covered by a mortgage security; it is a
state regarding the franchise or between stockholders, security which requires registration under SRC.
partners or members.
2. Nature test – action involves enforcement of corporate Debentures
rights and obligations. Undertaking to pay a sum certain in money but normally in short or
medium term and are not secured by other forms of securities.
Applying these tests, it was an intracorpoate dispute and jurisdiction
should be with RTC. But not for all aspects of the complaint because Notes
SEC still had jurisdiction over the administrative matters. Are promissory notes which are really short term promises to pay a
sum certain in money.
Atty: It does not mean that, automatically, if the controversy is
between the corporation and its stockholders, RTC has jurisdiction. Asset-backed securities (definition from previous transcript)
SEC still has regulatory and administrative powers. Asset-Backed Securities are defined under RA 9627 which means that
certificates issued by an SPE (Special Purpose Entity), the repayment
Example: of which shall be derived from the cash flow of the assets in
It passed the relationship test but did not pass the controversy test, it accordance with the Plan. Under the Securitization Act of 2004, these
is not an intra-corporate dispute and thus falls within the jurisdiction of SPEs will buy receivables or bonds, basically debt securities. These
SEC. Note that even if the issue is intra-corporate, the SEC has the debt securities have very large face amount, in millions. Ordinary
power to determine if there are administrative violations but does not investors cannot really buy them. In turn, the SPE will turn around and
have the power to adjudicate rights. issue securities. These securities issued by SPEs are Asset Back
Securities.
When SEC takes cognizance of its regulatory and administrative power,
it does not adjudicate rights. It merely determines if there is a violation Why do you call them as Asset Back Securities?
of its own rules and regulation. Then can impose penalties. They are backed up by these debt securities which are recognized as
assets of these SPEs. Since these are debt securities, whatever
earnings from these debt securities like interests, discounting, these
are the income which flows down to the holders the Asset Back
SECURITIES Securities. These debt securities are normally have very big face
amounts so the ordinary investing public cannot buy them but when
3.1.20. Securities shall include: the SPEs buy them in bulk, then, it will in turn create its own securities
(a) Shares of stock, bonds, government Securities, commercial and distribute it to the public. These are smaller denomination
papers, debentures, notes, evidences of indebtedness, asset-backed securities.
securities;
(b) Investment contracts, certificates of interest or participation in a These debt instruments are assets of the SPE and they are the basis of
profit sharing agreement, certificates of deposit for a future the SPE in issuing the Asset Back Securities
subscription; Example:
(c) Fractional undivided interests in oil, gas or other mineral rights; They will buy debt securities worth P20M, in turn, this is one debt
(d) Derivatives like option and warrants; securities, the SPE then in turn divide this into several securities which
(e) Certificates of assignments, certificates of participation, trust would be easily accessible or made more affordable to the investing
certificates, voting trust certificates or similar instruments; public.
(f) Proprietary or non-proprietary membership certificates in
corporations; and Investment Contract
(g) Other instruments as may in the future be determined by the An investor invests money in a common enterprise with expectation of
Commission. profits primarily from the efforts of others
Debt securities/instruments
SRC Rule 3.1-1 - Definition of Investment Contract
1. An investment contract means a contract, transaction or scheme (d) Derivatives like option and warrants;
(collectively ―contract‖) whereby a person invests his money in a
common enterprise and is led to expect profits primarily from the 2015 IRR:
efforts of others. 3.1.9. Derivative is a financial instrument whose value changes in
a. A presumption that a contract is an investment contract arises response to changes in a specified interest rate, security price,
whenever a person seeks to use the money of others on the promise commodity price, foreign exchange rate, index of prices or rates,
of profits. credit rating or credit index, or similar variable or underlying factor It
b. When two or more investors ―pool‖ their resources, there is a is settled at a future date. This term shall include, but not limited, to
common enterprise, even if the promoter does not do more than the following:
receive a broker‘s commission.
3.1.9. I. Options or contracts that give the buyer the right, but not
SEC v Prosperity.com the obligation, to buy or sell an underlying security at a
It is important to determine whether or not it is an investment contract predetermined price called the exercise or strike price, on or before a
to know if it is a security under SRC. If is under SRC, you need to predetermined date, called the expiry date; and
register with SEC before you can sell it to the public. In this case, the
scheme is not an investment contract but a networking scheme. Thus 3.1.9.2. Warrants or rights to subscribe or purchase new or
need not be registered. existing shares in a company on or before a predetermined date.
To determine whether the scheme is an investment contract, use the

Howey test. Using the Howey test, the elements of the investment Important: An option is a derivative because the value of the option
contract are: will depend/is derived from the value of the underlying security. The
(1) a contract, transaction, or scheme; higher the price of the underlying security, the higher the value of the
(2) an investment of money; option. The lower the value of the underlying security, the lower the
(3) investment is made in a common enterprise; value of the option.
(4) expectation of profits; and
(5) profits arising primarily from the efforts of others. Example of an underlying security: shares of stocks
The money paid by PCI was for a purchase price for a product and not Example of an option:
for investment. They were buying rights to a website. You have an option being sold for P200 and the option gives you the
right to buy shares of stock for P150 until September 15, 2016. If on
(b) Investment contracts, certificates of interest or Sept 15, 2016, the underlying security (shares of stock) is being traded
participation in a profit sharing agreement, certificates of for P500. Will you buy this option?
deposit for a future subscription;
Atty: Yes. Because even if I have to pay P200 for this option, I will
Subscription have to pay P150 only for the shares of stock. So my total expense is
The term used when you purchase shares of stocks. only P350. Whereas if I don‘t have an option, I will have to pay P500.
So you are discounted at P150.
Atty: But in this case, the purchase is not complete yet.
Let‘s say that this stock at September 15, 2016 is only trading for P100
Ordinarily, your investment to purchase shares of stock are considered pesos. Would anyone want to buy an option that is selling for P1,
as deposit for future subscription. which would give you the right to buy the shares at P150?
Instances where the company has not yet been incorporated: Atty: No, because if you exercise the option, you will have to pay
1. You don’t have shares yet. P150 + P1 for the option = P151.
You‘ve already put in/ contributed your money in the But if you buy without the option, you will only pay P100.
corporation because, remember, you cannot incorporate
unless 25% of the authorized capital stock is subscribed and If the underlying security is valued at P500, you can sell the option
25% is paid up. But there is no corporation yet, so what are even for P300 because the investor will still be able to save P50
you paying for? Definitely not shares of stock but a deposit (P300+P150).
for future subscription (aka deposit for future
subscription of shares or DFSS). But if your underlying security goes down to P100, even if you sell the
option for P1, you can never sell it because the underlying security is
2. The authorized capital stock of the company is down.
already fully subscribed.
Now you want to put in more capital. You apply with the Important: A derivative is called a derivative because it derives its
SEC for an increase in your authorized capital stock. And the value from the value of the underlying security.
increase is still subject to the requirement of 25% must be
subscribed and 25% must be paid up, even if the shares are An option, and also a warrant, allows you to purchase shares at a
not yet existing. They will not exist yet until the SEC predetermined time. Where an option is a contract that is given to
approves your increase. Again, you have a deposit for future stock holders or other persons; a warrant, aside from an underlying
subscription. security, has a beneficiary security.
This deposit for future subscription can be certificated and sold as Beneficiary security
securities. So even if they are not yet shares, they can already be sold One where a warrant is attached or warrant is issued for the benefit of
as securities. that security.
(c) Fractional undivided interests in oil, gas or other mineral Example:

rights; I‘m a shareholder. I have 100 shares of stocks. I already own this.
Let‘s say 1 warrant per share. So I have 100 warrants from my 100
shares, to buy securities/shares at P1.50. P1 is the par value of the
shares. Proprietary
You are allowed to use the facilities and at the same time you earn
This 100 shares are what you call the beneficiary securities. They are dividends.
the securities which benefit from my warrants. But the warrants allow
me to buy the new shares (called the underlying securities) for P1.50. Non-proprietary
The beneficiary security is one you already own for which a warrant You are allowed to use the facilities but you don‘t earn dividends.
was issued. You have warrants because you have those beneficiary
securities. But the shares that you can purchase using your warrants is (g) Other instruments as may in the future be determined by
called the underlying security. the Commission.
NOTE: Par value does not necessarily mean the same as the trading
price. Par value is the basic value of your security. REGISTRATION OF SECURITIES
Two kinds of options: REQUIREMENT OF REGISTRATION OF SECURITIES
Call option – option to buy
Put option – option to sell Sec 8. Requirement of Registration of Securities. – 8.1. Securities
shall not be sold or offered for sale or distribution within the
Two kinds of Warrants: Philippines, without a registration statement duly filed with and
Detachable warrants approved by the Commission. Prior to such sale, information on
Are those which can be sold separately from its beneficiary security. the securities, in such form and with such substance as the
You can sell the warrant while I keep my securities. The warrant itself Commission may prescribe, shall be made available to each
has a value separate from the beneficiary security. You keep the prospective purchaser.
security and you can sell the warrant by itself. 8.2. The Commission may conditionally approve the registration
statement under such terms as it may deem necessary.
Non-detachable warrants 8.3. The Commission may specify the terms and conditions under
Are those which you have to sell the shares in order to sell the which any written communication, including any summary
warrants. I can only sell my warrants if I sell my shares because the prospectus, shall be deemed not to constitute an offer for sale
warrants cannot be detached from the beneficiary security. under this Section.
8.4. A record of the registration of securities shall be kept in
Example: Register Securities in which shall be recorded orders entered by
The shares are trading for P5. If I sell the detachable warrant, it will the Commission with respect such securities. Such register and all
allow me to buy shares at P1.50 each. How much is the value of my documents or information with the respect to the securities
warrant? registered therein shall be open to public inspection at reasonable
Can I sell my warrant for P1? Yes. hours on business days.
P2? Yes. 8.5. The Commission may audit the financial statements, assets
P3? Yes. and other information of firm applying for registration of its
P4? No because I will be paying more than the market price of the securities whenever it deems the same necessary to insure full
shares. disclosure or to protect the interest of the investors and the public
What if it’s a non-detachable warrant?

Can you sell the shares at P5? Yes, because that‘s the market value for In the securities law, there is a prevailing theme: there is a need to
the shares. You can sell it with the warrant. register these securities before they can be sold to the Filipinos
Can you sell my shares with warrants at P7.00 per share? Yes, When you say securities, it can be equity securities or debt securities
because at P7, I bought shares plus I paid two pesos for the option to
buy future shares only at P1.50 pesos. These securities cannot be sold within the Philippines unless they are
registered with the SEC
If the market price will remain steady at P5, if I exercise my warrant,
P7(amount paid to buy the shares with warrant) +1.50 (because I Documents to be submitted for registration:
exercised my warrant) = P8.50. I only paid P8.50 for two shares or 1. Registration statement – SRC Form 12-1
P4.25 per share. Whereas if I buy shares straight from the market, I 2. Prospectus
would have to pay P10 for two shares. TN: Registration statement must be accompanied by a prospectus.
This contains all the information including the financial statements.
NOTE: A warrant is always either detachable or non-detachable. You
cannot convert it in the middle. It is the corporation/issuer who When Required?
determines if it‘s detachable or not. Registration is required in ANY type of sale of securities
NOTE: Detachable warrant – you are just buying the warrant, not the General Rule: Before any securities are to be sold WITHIN the
shares. Non-detachable warrant – the derivative is not a surplus. It Philippines, it must first be registered in the Securities and Exchange
may add value to your shares. Commission.
(e) Certificates of assignments, certificates of participation, Example

trust certificates, voting trust certificates or similar I have a corporation here in the Philippines. I want to sell my shares in
instruments; Hong Kong.
(f) Proprietary or non-proprietary membership certificates in Shares to be sold in Hong Kong Not required to be registered in
corporations; and SEC. As far as the SRC is concerned, we are not required to register in
Atty: These are the ones in country clubs or sports clubs. the SEC. Of course, the SEC in Hong Kong is another matter that is not
governed by our law. Our law only requires if the shares are sold
within the Philippines, they must be registered. When you say approve, the SEC has examined the veracity,
truthfulness of all the disclosure of the prospectus and it finds this is
truthful so it approves. If you say approve there will be a semblance of
PROCESS FOR REGISTRATION
guaranty.
PRE-FILING STAGE
The SEC will not examine the veracity. It will only determine if you
This stage is when you are still preparing for your documents. (RS & have disclosed everything that you need to disclose. That is why it
Prospectus) uses the word effective. There is no judgment of the contents of the
registration statement and prospectus.
No sale and no dissemination of information
Everything has to be confidential. OFFERING PERIOD
Otherwise, the SEC will penalize you if information gets out you have Registration statement has been declared EFFECTIVE.
already spreading information about your company.
In this stage, the corporation can now sell its securities
PRE-OFFERING STAGE
Duration of offering period
In this stage, actual selling is not yet allowed. There is only a simple IRR Sec 8.1.1.5. The sale of the securities subject of the
dissemination of information about the securities. registration statement shall commence within ten (10) business
days from the date of the effectivity of the registration statement'
1. File your registration and prospectus and shall continue until the end of the offering period or until the
2. Pay the filing fee then publish notice sale is terminated by the Issuer. If the sale is not commenced
within ten (10) business days, the RS shall be cancelled and all
But since the prospectus has not yet been registered, it is called the fees paid thereon forfeited.
Preliminary Prospectus
General Rule: Offering period is only for a limited period of 10 days.
Preliminary prospectus (Red Herring Prospectus) Exception: Unless listed in PSE
This is the prospectus of the issuer that was filed for registration but it
has not yet been rendered effective by SEC. If you list your shares in the PSE, it can be traded on a day to day
basis.
―Red Herring‖ because you want to bait somebody but it is actually
fake. Registration in the SEC is different from the registration in the PSE.
You can register your shares with the SEC without listing your shares
Tombstone advertisements in the PSE.
These are advertisements allowed to the issuer after it has filed with
SEC the registration requirements. These advertisements are NOT Registration in SEC
DEEMED AS OFFER FOR SALE. You can then sell the moment your registration is rendered effective in
the SEC. Once rendered effective, registration of securities can now
TN: These are just an announcement and issuer are not allowed to commence to the public (i.e. to 20 or more people) without having to
sell. The prospectus is distributed. list in the PSE.
Thus, in this stage: Registration for Listing purposes in PSE

1. You are not yet allowed to receive orders to buy. If you want to sell your shares in the PSE, (you are selling your shares
2. Only a mere dissemination of Information. in the public) you need to register your shares.
3. No buying, no selling allowed.
TN: Offering period is only up to a limited number of days - 10 days
EFFECTIVITY/DENIAL PERIOD from approval of your registration and only until such payment as has
been agreed by the SEC and the issuer.
IRR Sec 12.6. Within forty-five (45) days after the date of filing of
the registration statement, or by such later date to which the SHELF REGISTRATION
issuer has consented, the Commission shall declare the
registration statement effective or rejected, unless the applicant is Sec. 8.1.2. Delayed and Continuous Offering and Sale of
allowed to amend the registration statement as provided in Securities (Shelf Registration) - Securities, which are intended to
Section 14 hereof. The Commission shall enter an order declaring be issued in tranches at more than one instance after the
the registration statement to be effective if it finds that the registration statement has been rendered effective by the
registration statement together with all the other papers and Commission, may be registered for an offering to be made on a
documents attached thereto, is on its face complete and that the continuous or delayed basis in the future, for a period not
requirements have been complied with. exceeding three (3) years from the effective date of the
registration statement under which they are being offered and
The Commission may impose such terms and conditions as may be
Situation:
necessary or appropriate for the protection of the investors.
Issuer wants to register 20K shares, sell 5K shares now, the
The law does not say that the Commission will approve, it says that it next year 5K shares. Is the issuer allowed to do that?
Yes. One may sell in tranches (batches).
will declare the Registration Statement effective
Old Rule vs New Rule
The law uses effective because of the: Full and Fair Disclosure
Approach
Under the old rules, IF your offered shares are not sold out, you are
allowed to shelf that then reissue it later.
E. Munsayac, Jr. inquired from SEC whether petitioner‘s business
Under the new rules, the kind of shelfing under the old rules is not involves legitimate network marketing.
allowed. As provided in Sec. 8.1.2, if you intend to issue/sell securities
in tranches, you have to have a registration on a continuous or Business Scheme:
delayed basis. This means that there has to be an intention to sell 1. One will enroll in a program for a fee
securities by tranches from the very beginning. 2. Entitles the enrollee to recruit 2 more investors for the same fee.
(you earn by getting a proportion from their fees)
Important: It is no longer allowed that if you choose to sell your 3. The min. requirement for investors is to recruit to 2 persons then
securities at one time and then you don‘t sell everything, you can keep they recruit again 2 each.
and do another shelf registration later on. It is no longer allowed under
the new rules.
What happens if there are unsold shares? Will that happen

under the new rules? Is there a provision under the new rules
that your offered shares will remain unsold? 4. Share in the registration fee is put in to a common fund.
It is not possible. It is required under Sec. 12.1.1. (2015 IRR) 5. Use that fund to purchase property from any authorized dealer.
Sec 12.1.1. Underwriting Requirement for Registered Securities - ISSUE:

Issuers of Registered Securities shall enter into an underwriting Whether petitioner‘s business constitutes an investment contract which
agreement with a universal bank, investment house or any other should be registered with public respondent SEC before its sale or offer
financial institution duly licensed under the Investment Houses for sale or distribution to the public
Law; Provided, that if the underwriter is part of a group composed
of such institutions, the group shall agree on a syndicate manager RULING:
that shall act on behalf of, and be responsible to, the group and The scheme should be discontinued because it was not
whose actions shall be binding on the members of the group. registered under SEC.
The business operation or the scheme of petitioner constitutes an
No underwriting agreement shall be required for issuers of investment contract that is a security under R.A. No. 8799. Thus, it
proprietary/non-proprietary securities and timeshares. must be registered with SEC before its sale or offer for sale or
If you enter in to an underwriting agreement, the underwriter will buy distribution to the public. As an investment contract that is security
all of the unsold securities. under R.A. No. 8799, it must be registered with SEC, otherwise the
SEC cannot protect the investing public from fraudulent securities. The
Essence of underwriting securities strict regulation of securities is founded on the premise that the capital
They will undertake to sell your securities to the public on a markets depend on the investing public‘s level of confidence in the
guaranteed basis. system.
Important: There is no such thing as offered shares not being taken An investment contract is defined in the Amended
up because ALL issuers of registered securities are now required to Implementing Rules and Regulations of R.A. No. 8799 as a
enter in to an underwriting agreement. contract, transaction or scheme (collectively contract)
whereby a person invests his money in a common enterprise
TAKE NOTE: and is led to expect profits primarily from the efforts of
1. The old rule that you can shelf when you cannot sell all your others.
securities is no longer relevant. Because now, ALL registration,
DISCUSSION ON HISTORY OF INVESTMENT CONTRACT: (from
issuance of registered securities (ALL SALES, ALL OFFERINGS)
will have to be done through an underwriter. There is no other ―solely‖ from the efforts of other to ―primarily‖ from efforts of others)
way to sell your securities. Whether public or non-public, if you Our definition of an investment contract traces its roots from the 1946
are selling registered securities, it has to be done through an United States (US) case of SEC v. W.J. Howey Co:. It established
underwriter. a test to determine whether a transaction falls within the scope of an
2. FROM THE VERY BEGINNING, you have to state if you want to investment contract. Known as the Howey Test, it requires a
sell by tranches. transaction, contract, or scheme whereby a person:
(1) makes an investment of money,
Underwriter (2) in a common enterprise,
Person who undertakes to sell securities on a guaranteed basis. Thus, (3) with the expectation of profits,
if a portion is not sold to public, the underwriter has to buy it (4) to be derived solely from the efforts of others.
themselves.
He is not just a buyer but he is also an agent to sell your securities. After Howey, came the 1973 US case of SEC v. Glenn W. Turner
Enterprises, Inc. et al: This case ruled that the element that profits
Is there a limitation as to how long will the sale of securities must come solely from the efforts of others should not be given a strict
will take place? Or is it up to the issuer? interpretation. It held that a literal reading of the requirement solely
When you apply for registration, you have to state how long your offer would lead to unrealistic results. It reasoned out that its flexible
period. So that the registration statement that is rendered effective will reading is in accord with the statutory policy of affording broad
have to state how long your offer period would be. protection to the public.
Power Homes Unlimited Corp. vs. SEC Meaning of Investment Contract in the Philippines
FACTS: Our R.A. No. 8799 appears to follow this flexible concept. Thus, to be
Power Homes is a domestic corporation duly registered with public a security subject to regulation by the SEC, an investment contract in
respondent SEC. Manero requested SEC to investigate Power Homes‘s our jurisdiction must be proved to be:
(1) an investment of money,
business, claiming that the latter sold properties that were inexistent
(2) in a common enterprise,
and without any broker‘s license. On November 21, 2000, one Romulo
(3) with expectation of profits,
(4) primarily from efforts of others. (e) Any security issued by a bank except its own shares of stock.
SIMILARITY OF TURNER CASE WITH THE CASE AT BAR: This contemplates of a situation when a bank will issue a bond, and
In Turner, the SEC brought a suit to enjoin the violation of federal therefore exempt.
securities laws by a company offering to sell to the public contracts
characterized as self-improvement courses. It held that self- But if a bank will issue its own shares of stock, that is not exempt and
improvement contracts which primarily offered the buyer the that is still covered by the registration requirement under Section 8.
opportunity of earning commissions on the sale of contracts to others
were investment contracts and thus were securities within the meaning 2015 IMPLEMENTING RULES AND REGULATIONS OF THE
of the federal securities laws. This is regardless of the fact that buyers, SECURITIES REGULATION CODE (REPUBLIC ACT 8799)
in addition to investing money needed to purchase the contract, were These are additional exemptions under the IRR.
obliged to contribute their own efforts in finding prospects and Sec. 9.1 Exempt Securities -
bringing them to sales meetings. 9.1.1. Any evidence of indebtedness issued by a financial institution
that has been licensed by the BSP to engage in banking or quasi-
Difference between Power Homes and PCI Cases banking shall be exempt from registration under Section 8.1 of the
In PCI, your payment entitles you to buy a product which is the Code.
website. This is a valid networking scheme.
Those undertaking quasi-banking activities are exempt under
In Power Homes, your payment entitles you to recruit 2 more persons the IRR (not under the law)
(clearly not a product) and you earn because the persons you recruit Under the law (SRC Code), only banks are exempt because it provides
will have to recruit 2 more people. This is a clear case of issuance by a bank of a security under its own shares of stock.
pyramiding/ponzi scheme.
Under the IRR, it says issuance of evidence of indebtedness. Meaning,
Ponzi Scheme it is a debt security issued not just by a bank but also by a quasi-bank.
An invalid networking scheme. There is really no product and you only
earn from the investment of other people. Does the Commission have the right to add to the
exemptions?
EXEMPT SECURITIES Yes. Under Sec. 9.2. of the Securities and Regulations Code, the SEC is
allowed to add to the list, to wit:
Sec 9. Exempt Securities. - Sec 9.2. The Commission may, by rule or regulation after public
9.1. The requirement of registration under Subsection 8.1 shall not hearing, add to the foregoing any class of securities if it finds that
as a general rule apply to any of the following classes of securities: the enforcement of this Code with respect to such securities is not
(a) Any security issued or guaranteed by the Government of the necessary in the public interest and for the protection of investors.
Philippines, or by any political subdivision or agency thereof, or
by any person controlled or supervised by, and acting as an Sec 9.1.2. The registration requirements shall not likewise apply to
instrumentality of said Government. the following:
(b) Any security issued or guaranteed by the government of any 9.1.2.1. Evidence of indebtedness issued to the BSP under its
country with which the Philippines maintains diplomatic open market and/or rediscounting operations;
relations, or by any state, province or political subdivision 9.1.2.2. Bills of exchange arising from a bona fide sale of
thereof on the basis of reciprocity: Provided, That the goods and services that are distributed and/or traded by
Commission may require compliance with the form and content banks or investment houses duly licensed by the Commission
of disclosures the Commission may prescribe. and BSP through an organized market that is operated under
the rules approved by the Commission;
Non-risk securities are exempt 9.1.2.3. Any security issued or guaranteed by multilateral
The securities in (a) and (b) are non-risk because these are financial entities established through a treaty or any other
guaranteed or issued by the Government itself. binding agreement to which the Philippines is a party or
subsequently becomes a member (hereinafter referred as
The assumption is for the government. To fail in its obligation is the Multilateral Financial Entities or MFE), e.g., international
worst case scenario. If all private companies fail, the Government is financial institutions, multilateral development banks,
still expected to stand. development finance institutions or any other similar entities;
or by facilities or funds established, administered, and
Assumption: If a security is guaranteed, it is considered LOW-RISK. supported by MFEs; Provided, that the issuer shall file an
offering circular/ memorandum in a format prescribed by the
(c) Certificates issued by a receiver or by a trustee in bankruptcy Commission and containing among others; (1) information
duly approved by the proper adjudicatory body. about the issuer and the security to be issued, (2)
information about the MFE, and (3) information about the
When the receiver or a trustee issues securities, it means that it has guarantee.
been approved by the court. 9.1.2.4. The registration requirements shall not likewise apply
to evidence of indebtedness, e.g., commercial papers, that
A receiver or a trustee is simply an officer of the court. They will only meet the following conditions:
undertake transactions upon approval of the court. There is proper 9.1.2.4.1. Issued to not more than nineteen (19) non-
supervision. institutional lenders;
9.1.2.4.2. Payable to a specific person;
(d) Any security or its derivatives the sale or transfer of which, by 9.1.2.4.3. Neither negotiable nor assignable and held on to
law, is under the supervision and regulation of the Office of the maturity; and
Insurance Commission, Housing and Land Use Regulatory Board, or 9.1.2.4.4. In an amount not exceeding One Hundred Fifty
the Bureau of Internal Revenue. Million Pesos (PhP 150,000,000.00) or such higher amount as the
Commission may prescribe.
Atty. G: I think this last one is really redundant because if you go to Exempt security
exempt transactions, any issuance to less than 19 persons is also If you have a bankrupt company who holds SMC, Globe, and BPI
exempt. shares and I am the receiver or trustee. If I don‘t want to break up
this property but instead, based on these properties, I created
Exempt security vs Exempt transaction securities or certificates of participation in the asset of this company. I
sold it based on the order of the court.
Exempt Security Exempt Transaction
No matter how many times It is only exempt in that However, if I did not issue certificates but instead, sold these one by
you trade it, it will always be particular instance. Securities one, this is an exempt transaction because this is any sale of any
exempt. involved in an exempt security by a receiver or a trustee in a bankruptcy or insolvency
transaction, if subsequently sold proceeding.
From the moment of its or resold, may no longer be
issuance to its next trading— exempt and may already require (b) By or for the account of a pledge holder, or mortgagee or any
secondary third, fourth, etc. registration. other similar lien holder selling or offering for sale or delivery in
sale—it is always exempt. the ordinary course of business and not for the purpose of
Issuer of the security is the Issuer is anyone. avoiding the provisions of this Code, to liquidate a bona fide debt,
receiver or the trustee. a security pledged in good faith as security for such debt.
Example: Securities held as pledge, or chattel mortgage

I buy shares of stock and it is an exempt security. If I sell that stock, This pertains to securities which are held as pledge, or chattel
that is still an exempt security. No need to register. mortgage. If there is a default and the securities, pledge or chattel is
sold in a public auction, it is an exempt transaction because any such
If I buy shares of stock and it is only an exempt transaction, if I resell sale would have to be supervised by the courts.
it, it may already require registration. This is because the exempt
transaction only apply to particular transactions but the security itself (c) An isolated transaction in which any security is sold, offered for
is not exempt. sale, subscription or delivery by the owner thereof, or by his
representative for the owner‘s account, such sale or offer for sale,
Exempt security subscription or delivery not being made in the course of repeated
I sell this to #1, who sells it to number #2, still exempt. and successive transactions of a like character by such owner, or
on his account by such representative and such owner or
Exempt transaction representative not being the underwriter of such security.
If I sell to #1, #2, #3, exempt. But if #1 sells it to #4, #5,#6, this
may no longer be exempt if it does not fall under any other exempt Applies only when the issuer is the OWNER of the security
transactions. Does it apply to an issuer selling shares to only one person after 20
years who is not currently its shareholder? Isolated transaction?
EXEMPT TRANSACTIONS This exemption does not apply because the issuer is not the owner of
Sec. 10. Exempt Transactions. - 10.1. The requirement of his own shares or security. The buyer who acquired said securities is
registration under Subsection 8.1. shall not apply to the sale of any the owner. If the buyer will resell on an isolated transaction basis, he
security in any of the following transactions: can use this exemption. Registration is not required. But if it is the
(a) At any judicial sale, or sale by an executor, administrator, issuer, you cannot use this exemption. This exemption is only for the
guardian or receiver or trustee in insolvency or holder or owner of this security on an isolated transaction.
bankruptcy.
(d) The distribution by a corporation, actively engaged in the
EXEMPT because the sale is done through a court order. business authorized by its articles of incorporation, of securities to
its stockholders or other security holders as a stock dividend or
What is the difference between this one and the exempt other distribution out of surplus.
security under (c) - Exempt security: ―(c) Certificates issued by a Three forms of dividends
receiver or by a trustee in bankruptcy duly approved by the proper 1. Cash
adjudicatory body.‖? 2. Property
3. Stocks
In exempt security, the issuer of the security is the receiver or the
trustee. Dividend distribution that are exempt:
1. Cash dividend – cash is not security.
In exempt transaction, the issuer is anyone. It is the securities owned 2. Property dividend – Any form of security. It can be debt or equity.
by the company undergoing receivership or insolvency sold by the
trustee or receiver. Stock dividends
It is a matter of converting your retained earnings to paid-up capital.
Illustrations:
Instead of issuing cash when you dividend out which is taken from
Exempt transaction retained earnings, you say no cash but you issue shares instead. It is
If somebody who owns shares in San Miguel Corporation dies or is as if your shareholders bought new shares from you. You are giving
insolvent or is under bankruptcy proceedings, and the trustee will sell them shares of stock in your own company.
his shares. Here, SMC is not the receiver or trustee. SMC did not sell,
but it was the receiver or trustee who sold the property of a bankrupt Example:
company who owns SMC shares. Company X declared stock dividends, it will give shares of stocks of
company X itself to its own stockholders.
(g) The issue and delivery of any security in exchange for any
Property dividends
other security of the same issuer pursuant to a right of conversion
Property that is owned by the company and it uses that asset to
entitling the holder of the security surrendered in exchange to
declare dividends to its stockholders. Instead of distributing cash or its
make such conversion: Provided, That the security so surrendered
own shares, it distributes securities of other corporations that it owns. has been registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security issued and
Example: delivered in exchange, if sold at the conversion price, would at the
Instead of paying cash, company X will give condo units. It can be any
time of such conversion fall within the class of securities entitled to
asset of the company.
registration under this Code. Upon such conversion the par value
of the security surrendered in such exchange shall be deemed the
If it gives San Miguel shares that company X owns instead? That is price at which the securities issued and delivered in such exchange
allowed because these are still assets of the company just like the are sold.
condo unit.
Convertible securities
San Miguel shares are securities. You are giving it away or transferring Those which are in one form but can be converted into another form.
ownership. This is not a sale because you are not receiving money.
Ordinarily, that requires registration but since it is in the form of a Example:
property dividend—a distribution of profit—that is also exempt. Preferred shares having its own characteristics which are convertible to
common shares having its own qualifications & characteristics.
Important: Exempt transactions are—
1. Stock dividends (when you issue your own shares) and In the process of converting from preferred to common, registration is
2. Any other distributions of income or surplus using securities not needed for the common shares—as long as it is done through a
(property dividends). right of conversion.
TN: All distributions out of profit or surplus are exempt. The difference (h) Broker‘s transactions, executed upon customer‘s orders, on
is that in stock dividends, you issue your own share. In property any registered Exchange or other trading market.
dividends, you transfer ownership of securities that you own.
Pertains to the buying and selling in the PSE
This is exempt because registration requirement applies not just to any
(e) The sale of capital stock of a corporation to its own
type of securities but also to each transaction.
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in connection
Generally, listed securities are not exempt securities.
with the sale of such capital stock.
Exception: Listed securities under broker‘s transactions.
Example:
Company X has 5 stockholders, A, B, C, D, and E. It sells shares to A, Example:
an additional issuance to its own stockholders. It is exempt if you sell I am listing my shares and sells it not through the PSE, I did
shares to your own stockholders exclusively. not use a broker. I already bought it, do I need to register?
Yes. You need to register, even if it‘s already registered, because it is
Difference between (d) and (e) not among the exemptions.
Under para (e), it is a sale. The company gives its shares in exchange
for cash. Important: When it is not an exempt security or transaction, you
have to register the sale, resale, reconveyance of EACH security.
Under para (d), it is a distribution of surplus so there is no
consideration. Registration requirement is not only required at time of birth, but when
buyers of shares also sell subsequently, there‘s also a requirement
If you sell to your shareholders only (A,B,C,D, or E) or all of them, it is because the law does not say ―when an issuer sells securities‖ it says
exempt because the main purpose of registering your security is full ―when securities are sold within the Philippines.‖ The law does not
and fair disclosure. To let the potential buyers know about your state that it has be primary issuance.
company so that they will make investment decisions with open eyes.
There‘s no to do that if you‘re just selling to our stockholders as it is ANY SALE, you have to examine it and see if it requires registration. It
presumed that they already know about your company. applies not just on first issuance but on subsequent transactions.
That‘s why we distinguish:

(f) The issuance of bonds or notes secured by mortgage upon real EXEMPT SECURITIES EXEMPT TRANSACTIONS
estate or tangible personal property, where the entire mortgage
if it is exempt here, it is forever it may be exempt here but
together with all the bonds or notes secured thereby are sold to a
exempt subsequent transactions may no
single purchaser at a single sale.
longer be exempt
If one issue debt instrument, bonds or notes secured by a mortgage
by real property or tangible personal property, with a single buyer, it is It is not correct to say that just because it is already registered, it is
exempt. already exempt. The law specifically exempts broker transaction
because if you require registration for broker‘s transaction, it will
Note that it states ―tangible personal property‖. If your chattel defeat purpose of PSE – who is supposed to promote trading and
mortgage are shares or receivables, it is NOT exempt because these healthy market for securities. But every time that they have to go to
are intangible. Example of tangibles are jewelries, cars, anything that the SEC and do the prospectus, etc, it will take 3 years for each
you can touch, etc. transaction to be completed.
TN (for exam): Broker’s transactions are exempt. Otherwise, it

will defeat the purpose of listing the shares if registration is to
be required.
It is not because the shares are already registered. Being registered You count within ANY 12 month period. On Feb. 25, you are not
shares, it does not mean that subsequent transactions are then required to register yet because you are only required to register if you
exempt. Look at it not just on the security but on per transaction basis. already breached the 19-person cap. So you register on Jan. 5.
(i) Subscriptions for shares of the capital stock of a corporation You are no longer exempt, you are just required to register your future
prior to the incorporation thereof or in pursuance of an increase in sales, securities?
its authorized capital stock under the Corporation Code, when no Atty. G: No. Registration requires all outstanding shares, not just
expense is incurred, or no commission, compensation or the shares you intend to sell.
remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for What if on Jan. 1, it was an open offer. I sell it to anyone who wants
soliciting, giving or taking of such subscriptions is to comply with to buy, but only 1 bought. This is NOT exempt because under the
the requirements of such law as to the percentage of the capital provision:
stock of a corporation which should be subscribed before it can be Section 10.1.2.1. Sections 8 and 12 of the Code are violated if
registered and duly incorporated, or its authorized capital (a) the number of persons holding the exempt security under
Section 10.1(k) exceeds nineteen (19) within a twelve (12)
month period or
Your pre-incorporation subscription or if you want to increase your (b) the sale, offer for sale, or distribution of a security, which is
ACS, you know that has to be 25% subscribed and 25% paid up, is not exempt or which does not fall under an exempt
exempt. transaction, is actively solicited from or marketed to
The exemption is only to the 25-25. nonqualified buyers in the Philippines by any entity, including
its agents, representatives, employees or any person acting on
(j) The exchange of securities by the issuer with its existing its behalf.
security holders exclusively, where no commission or other
remuneration is paid or given directly or indirectly for soliciting In proper cases, the issuer of the security and its directors and officers
shall be held liable.
Difference between Exchange and Right of Conversion
While both have the same effect, the nature of the security determines If you are marketing to any buyer who wants to buy (public), but only
the difference. 1 buys, not an exempt transaction.
CONVERSION EXCHANGE It is only exempt if from the beginning you only planned to sell to 1
The right to convert already Not technically a conversion
exists from the moment of because there is no right to Example:
issuance convert. If the Jan. 5 transaction did not happen, instead, Dec. 31 buyer sells
his securities to 5 persons. The sale to Dec. 31 buyer is exempt, but
Shares is convertible-preferred. Not convertible and the when he sells it to another, you have to check the registration
(Convert to common, subject to corporation allows it. requirement. You have to look at it not just on the security but on per
exemption under conversion of transaction basis.
securities)
Sec 10.1.2.2. A prima facie presumption of circumvention of
Sections 8 and 12 of the Code shall arise when the number of non-
qualified investors shall exceed nineteen (19) within one (I) year.
(k) The sale of securities by an issuer to fewer than twenty (20) The issuer shall be liable for penalty in accordance with the Scale of
persons in the Philippines during any twelve-month period. Fines of the Commission, without prejudice to other actions which
1. 19 or less – not required to register may be taken against the issuer.
2. 20 or more – required
If the original purchaser/s shall resell said securities resulting in more
―during any 12-month period‖ (not calendar year) than nineteen (19) holders, Sections 8 and 12 of the SRC shall apply,
Reckoning period is from the time of transaction. During that period, notwithstanding the exemption of their issuances, unless such
you should not have sold it in excess of 19 persons. succeeding sale shall qualify as an exempt transaction.
Example: If anyone of your 19 holders will share their shares resulting in more
than 19 holders, it is no longer an exempt transaction. Hence, you are
Jan. 1 – 1 person sold
st
now required to register.
to
Feb. 25 – 2nd person Issuer is the one always required to register.
April 3 – 3rd person
. (l) The sale of securities to any number of the following qualified
. buyers:
Exempt 
does not exceed 19 persons
(i) Bank;
Jan. 1 – 1st person sold (ii) Registered investment house;
to (ii) Insurance company;
Feb. 25 – 2nd person (iv) Pension fund or retirement plan maintained by the
April 3 – 3rd person Government of the Philippines or any political subdivision
. thereof or managed by a bank or other persons authorized
. by the Bangko Sentral to engage in trust functions;
Dec. 31 – 18th person (v) Investment company; or
NOT exempt from Feb. 25, it would
(vi) Such other person as the Commission may by rule
exceed 19 persons.
determine as qualified buyers, on the basis of such factors process. It does not exercise quasi-judicial power. It is exercising
as financial sophistication, net worth, knowledge, and regulatory & law enforcement powers. It is not a strict compliance of
experience in financial and business matters, or amount of due process.
assets under management.
REPORTORIAL REQUIREMENTS
The law considers these qualified buyers as experts, so no need to
protect them. Relevant provision
Section 17.Periodic and Other Reports of Issuer.
17.1. Every issuer satisfying the requirements in Subsection 17.2
GROUNDS FOR REVOCATION/REJECTION OF
hereof shall file with the Commission:
REGISTRATION SECURITIES
(a) Within one hundred thirty-five (135) days, after the end of the
Relevant provision issuer‘s fiscal year, or such other time as the Commission may
Section 13. Rejection and Revocation of Registration of Securities. – prescribe, an annual report which shall include, among others,
13.1.The Commission may reject a registration statement and refuse a balance sheet, profit and loss statement and statement of
registration of the security there-under, or revoke the affectivity of a cash flows, for such last fiscal year, certified public accountant,
registration statement and the registration of the security there-under an a management discussion and analysis of results of
after the due notice and hearing by issuing an order to such effect, operation; and
setting forth its finding in respect thereto, if it finds that: (b) Such other periodical reports for interim fiscal periods and
(a) The issuer: current reports on significant developments of the issuer as the
i. Has been judicially declared insolvent; Commission may prescribe as necessary to keep current
ii. Has violated any of the provision of this Code, the rules information on the operation of the business and financial
promulgate pursuant thereto, or any order of the Commission condition of the issuer.
of which the issuer has notice in connection with the offering
for which a registration statement has been filed An issuer is required to submit a report to the SEC.
iii. as been or is engaged or is about to engage in fraudulent
transactions; Reports required to be submitted
iv. Has made any false or misleading representation of material Your Income Statement that the Sales is Php 10B, and in your notes,
facts in any prospectus concerning the issuer or its securities; you would discuss the method of computing or determining the sales.
v. Has failed to comply with any requirements that the
Commission may impose as a condition for registration of the In an annual report, you will need to do a breakdown of your sales.
security for which the registration statement has been filed; or For example, you have to do a breakdown per store. You have to
(b) The registration statement is on its face incomplete or inaccurate discuss who is your biggest client, etc. And that, if this client will not
in any material respect or includes any untrue statements of a continue to be my client for the next years, this is the risk that the
material fact required to be stated therein or necessary to make company will face. It‘s all very detailed because under the SRC, the
the statement therein not misleading; or requirement is full and fair disclosure.
(c) The issuer, any officer, director or controlling person performing
similar functions, or any under writer has been convicted, by a This must be submitted 135 days after the end of the fiscal year.
competent judicial or administrative body, upon plea of guilty, or
otherwise, of an offense involving moral turpitude and /or fraud TN: The full and fair disclosure does not only apply during registration.
or is enjoined or restrained by the Commission or other It applies all throughout the operation of the registered issuer.
competent or administrative body for violations of securities,
commodities, and other related laws. The annual report is submitted to the Commission in lieu of the
audited financial statements. The annual report is a more detailed
For the purposes of this subsection, the term "competent judicial or information of the status of the company.
administrative body" shall include a foreign court of competent
jurisdiction as provided for under Rules of Court. Periodical reports for interim fiscal period
1. Quarterly reports
Can the Commission revoke the registration? 2. Unaudited financial statements
Yes. They SEC can also suspend the right to sell or offer the securities 3. 45 days after the end of every report
to the public. Provided, that there is a notice and hearing. It has to
comply with due process. The issuer should be given the opportunity Current reports on significant developments
to be heard. 1. If the company listed in exchange: 10 minutes from the
happening of the event to the Exchange
SEC v. Universal Rightfield Case 2. 5 days to the SEC
URPH alleged that SEC violated the due process clause because it did
not give notice or conduct a hearing when it revoked the registration
PERIODIC AND OTHER REPORTS OD ISSUERS
URPH. There was only notice of hearing when the SEC suspended the
right to sell, but there was no more notice of hearing when the SEC Section 17. Periodic and Other Reports of Issuers. –
revoked. It was done automatically. 17.1. Every issuer satisfying the requirements in Subsection 17.2
hereof shall file with the Commission:
Only substantial compliance is required for due process because the (a) Within one hundred thirty-five (135) days, after the end of the
SEC was only exercising regulatory and not quasi-judicial powers. issuer‘s fiscal year, or such other time as the Commission may
prescribe, an annual report which shall include, among others, a
The SEC can actually shortcut the proceedings. balance sheet, profit and loss statement and statement of cash flows,
for such last fiscal year, certified by an independent certified public
According to the SC, when you already had notice but you still did not accountant, and a management discussion and analysis of results of
comply, your registration can be revoked. There is no need for operations; and
additional notice. Because being an administrative and regulatory
body, it only needs to comply with the substantive requirement of due
(b) Such other periodical reports for interim fiscal periods and current available only to a limited class or sector, i.e., to World War II
reports on significant developments of the issuer as the Commission veterans, and not to the general public. Not being a public company,
may prescribe as necessary to keep current information on the the reportorial requirements will not apply.
operation of the business and financial condition of the issuer.
Director Callangan rejected the Banks explanation and assessed it a
17.2. The reportorial requirements of Subsection 17.1 shall apply to total penalty of P1,937,262.80 for failing to comply with the SRC
the following: reportorial requirements from 2001 to 2003.
(a) An issuer which has sold a class of its securities pursuant to a
registration under section 12 hereof: Provided however, That the Issue: WON the Bank is a public company burdened with the
obligation of such issuer to file reports shall be suspended for any reportorial requirements ordered by the SEC.
fiscal year after the year such registration became effective if such
issuer, as of the first day of any such fiscal year, has less than one Held: Yes. There are 2 types of public company in the SRC.
hundred (100) holder of such class securities or such other number as 1st are those company whose securities are listed in the stock
the Commission shall prescribe and it notifies the Commission of such; exchange. Once shares are listed, shares are available to the public
(b) An issuer with a class of securities listed for trading on an thus becomes a public company.
Exchange; and
(c) An issuer with assets of at least Fifty million pesos (50,000,000.00) 2nd even if the shares are not listed in the stock exchange, but
or such other amount as the Commission shall prescribe, and having company has assets in excess of Php 50 M and have at least 200
two hundred (200) or more holder each holding at least one hundred stockholders holding 100 shares each, as stated in Rule 3(1)(m) of
(100) share of a class of its equity securities: Provided, however, That the Amended IRR of the SRC, one is a public company.
the obligation of such issuer to file report shall be terminate ninety
(90) days after notification to the Commission by the issuer that the And even if it does not fall in the definition, let us say strictly speaking
number of its holders holding at least one hundred (100) share they are just those whose shares are listed in exchange. Sec. 17 of the
reduced to less than one hundred (100). SRC provides 3 types of corporation who are required to submit the
reportorial requirements.
PERIODIC AND OTHER REPORTS
Those whose 1) securities are registered under Section 1; 2) securities
Current Report are listed for trading on the Philippine Stock Exchange; and 3)issuer
Within 10 minutes from the happening of the event, you need to with assets of at least Php 50,000,000.00 or such other amount as
report it to the Philippine Stock Exchange ; and the Commission shall prescribe, and having 200 or more
Within 5 days from the happening of the event, you need to report it stockholders each holding at least 100 shares.
to the Securities and Exchange Commission.
The records establish, and the Bank does not dispute, that the Bank
Annual Report has assets exceeding P50,000,000.00 and has 395,998 shareholders.
Within 135 days after the end of the issuer‘s fiscal year PV Bank, is a public company and must comply with the reportorial
requirements set forth in Section 17.1 of the SRC. They must also
Periodical Report provide copies of the reports to their stockholders are required by law.
Within 45 days after the end of every quarter While compliance with this requirement will undoubtedly cost the Bank
money, the benefit provided to the shareholders clearly outweighs the
Other Reports expense.
Section 20 – Information Statement
Section 23 – Changes in the Beneficial Ownership of the Stockholders TENDER OFFERS
of the company. Only apply to the Directors, Officers and Principal
Stockholders (Principal stockholders those who own 10% or more of Relevant provision
the total outstanding capital stock of the company). Section 19. Tender Offers. – Any person or group of persons acting
in concert who intends to acquire at least 15% of any class of any
SEC v URPH equity security of a listed corporation of any class of any equity
Failure to file these reports can lead to a revocation of the registration. security of a corporation with assets of at least fifty million pesos
(50,000,000.00) and having two hundred(200) or more stockholders at
WHERE TO FILE REPORTS least one hundred shares each or who intends to acquire at least thirty
SECURITIES AND EXCHANGE COMMISSION (SEC) percent(30%) of such equity over a period of twelve months(12) shall
make a tender offer to stockholders by filling with the Commission a
declaration to that effect; and furnish the issuer, a statement
PERSONS REQUIRED TO FILE REPORTS containing such of the information required in Section 17 of this Code
1. An issuer with a class of securities registered under Section 12 as the Commission may prescribe.
2. An issuer with a class of securities listed for trading on the Philippine
Stock Exchange Such person or group of persons shall publish all request or invitations
3. An issuer with assets of at least Php 50,000,000.00 or such or tender offer or requesting such tender offers subsequent to the
other amount as the Commission shall prescribe, and having 200 or initial solicitation or request shall contain such information as the
more stockholders each holding at least 100 shares, even if the Commission may prescribe, and shall be filed with the Commission and
issuer is not listed in the exchange and no registered securities. sent to the issuer not alter than the time copies of such materials are
first published or sent or given to security holders.
Philiippine Veterans Bank vs Justina Callangan
Facts: The Director of the Finance Department of the SEC sent the a) Any solicitation or recommendation to the holders of such a
Bank a letter informing it that it qualifies as a public company under security to accept or reject a tender offer or request or invitation
Sec. 17.2 of the SRC in relation with Rule 3 (1)(m) of the IRR. for tenders shall be made in accordance with such rules and
regulations as may be prescribe.
The Bank officers argues that it should not be considered as a public b) Securities deposited pursuant to a tender offer or request or
company because it is a private company whose shares of stock are invitation for tenders may be withdrawn by or on behalf of the
depositor at any time throughout the period that tender offer
remains open and if the securities deposited have not been Associate, controls Person interested to
previously accepted for payment, and at any time after sixty (60) parent company buy equity securities
days from the date of the original tender offer to request or
Parent
invitation, except as the Commission may otherwise prescribe.
c) Where the securities offered exceed that which person or group of Company
persons is bound or willing to take up and pay for, the securities
that are subject of the tender offers shall be taken up us nearly as
may be pro data, disregarding fractions, according to the number MANDATORY TENDER OFFERS
of securities deposited to each depositor. The provision of this
subject shall also apply to securities deposited within ten (10) days CREEPING TRANSACTION
after notice of increase in the consideration offered to security
Relevant provision
holders, as described in paragraph (e) of this subsection, is first
Rule 19.2.1. Any person or group of persons acting in concert, who
published or sent or given to security holders.
intends to acquire fifteen percent (15 %) of equity securities in a
d) Where any person varies the terms of a tender offer or request or
public company in one or more transactions within a period of twelve
invitation for tenders before the expiration thereof by increasing
(12) months, shall file a declaration to that effect with the
the consideration offered to holders of such securities, such person
Commission.
shall pay the increased consideration to each security holder whose
securities are taken up and paid for whether or not such securities
have been taken up by such person before the variation of the
intends to acquire thirty five percent (35%) of the outstanding voting
tender offer or request or invitation.
shares or such outstanding voting shares that are sufficient to gain
control of the board in a public company in one or more transactions
19.2. It shall be lawful for any person to make any untrue statement
within a period of twelve (12) months, shall disclose such intention and
of a material fact or omit to state any material fact necessary in order
contemporaneously make a tender offer for the percentage sought to
to make the statements made in the light of the circumstances under
all holders of such securities within the said period.
which they are made, not misleading, or to engaged to any fraudulent,
deceptive or manipulative acts or practices, in connection with any
If the tender offer is oversubscribed, the aggregate amount
tender offer or request or invitation for tenders, or any solicitation for
of securities to be acquired at the close of such tender offer shall be
any security holders in opposition to or in favor of any such favor of
proportionately distributed across selling shareholders with whom the
any such offer, request, or invitation. The Commission shall, for the
acquirer may have been in private negotiations and other
purposes of this subsection, define and prescribe means reasonably
shareholders. For purposes of SRC Rule 19.2.2, the last sale that
designed to prevent, such acts and practices as are fraudulent,
meets the threshold shall not be consummated until the closing and
deceptive and manipulative.
completion of the tender offer.
TENDER OFFER Creeping transaction
Old definition: A publicly announced intention by a person or a group Series of transactions over a period of 12 months.
of persons who intend to acquire equity securities of a public company.
Not just any securities. If debt securities, tender offer rule will NOT SEC. 19, SRC
apply. 1. person intends to acquire at least 15% of the equity
securities of a public company in a single transaction or
Equity securities are not just shares. Also, derivatives, options and
warrants. 2. who intends to acquire at least 30% of such equity securities
to a series of transactions within a period of 12 months.
New definition: extends, aside from acquiring equity securities, tender
offer is also required when an individual or group of individuals acting Rule 19.2.1 IRR SRC - One who intends to acquire at least 15% of
together will also buy the equity securities of an associate of a public the equity securities of a public company in one time or
company which associate controls the public company. creeping transaction. In this instance, only file a DECLARATION of
your intention with the SEC. Not a tender offer. Just an
If somebody intends to buy the equity securities of the issuer and announcement.
meet the requirements under Sec. 19 you are required to do a tender
offer. Rule 19.2.2 IRR SRC - One who intends to acquire at least 35% or
more of the outstanding voting shares of stock, in ONE OR
Person interested to MORE transactions within a period of 12 months. It talks about
Issuer creeping transactions, required to disclose intention and make a tender
buy equity securities
offer to all holders of security.
HOW TO DO A TENDER OFFER in Sec 19.2.2. (35% of

outstanding shares of stock in creeping transaction)
Tender Offer- a public announcement of one‘s intention to acquire the By declaring that one intends to purchase these securities to all
equity securities of a company. Aside from this, under new rules. holders of such securities and make an offer.
If one intends to acquire the equity securities of a company, which is Example:
an associate of the public company who controls that public company, I am declaring to buy 35% of the outstanding voting shares of stock
one is required to do a tender offer. who among you are offering to sell. I am buying it for Php 20/share.
Whoever wants to sell can sell to the offeror.
If there are more people offering (oversubscribed) the offer is required
to buy the securities of ALL those who offered but buy in proportion to One intends to buy 35% or more of the outstanding voting
each selling shareholder with respect to their offered securities. shares at ONE TIME not through the exchange but in a private
sale.
Example
One intends to buy only 10 shares but there were 10 persons who Required to do tender offer immediately since one intends to buy
accepted the offer each having 2 shares. the 35% share one time unlike in Sec. 19.2.2 you just make a tender
offer when you reach the threshold.
Thus, the offers amounted to 20 shares. Since offer needs to accept
proportionate to each seller with respect to their offered securities, BLOCK SALE VS CREEPING TRANSACTION
only accept 1 share each for the 10 offers. Creeping Transaction Block Sale
FORMULA transaction takes place over a one time transaction

#of share of that particular person Total # period of 12 months
Proportionate # of share= total # of shares offered x of shares
to buy
Tender offer is required only Tender offer immediately takes
upon reaching the 35% place since transaction intends
When to make tender offer in creeping transactions?
threshold to immediately acquire the
Buy 1st 5% no tender offer yet, 2nd 5% no tender offer yet.
35%.
Only required to make tender offer upon the last sale when one
reached the threshold.
Pro-rata tender offer - only for Tender offer not only to the
How much supposed to buy? the percentage sought. percentage sought to be
Only with respect to the percentage required. If oversubscribed no acquired but to ALL outstanding
need to buy everything. shares.
If you only want to buy 35%,
PSE TRADING SYSTEM TRANSACTION then you only get 35% of the
offered shares
intends to acquire thirty five percent (35%) of the outstanding voting
shares or such outstanding voting shares that are sufficient to gain
control of the board in a public company through the Exchange trading If you are oversubscribed, you
system shall not be required to make a tender offer even if such
don‘t have to buy everything.
person or group of persons acting in concert acquire the remainder
through a block sale if, after acquisition through the Exchange trading
system, they fail to acquire their target of thirty five percent (35%) or Atty: So again if you do a creeping transaction, you only do your
such outstanding voting shares that is sufficient to gain control of the tender offer for the percentage you want to acquire but if you do a
board. block sale, you are to make your tender offer for all outstanding
shares.
One intends to buy 35% or more of the outstanding voting
shares or such number of shares sufficient to get you control
ANY OTHER TYPE TRANSACTION
over the board of the issuer.
Rule 19.2.5. If any acquisition that would result in ownership of over
If creeping transaction - make a tender offer. fifty percent (50%) of the total outstanding equity securities of a
public company, the acquirer shall be required to make a tender offer
Important: If buy through Exchange System (PSE) – NO NEED for a under this Rule for all the outstanding equity securities to all remaining
tender offer, even if you buy more than 35% that would let you stockholders of the said company at a price supported by a fairness
control the board. opinion provided by an independent financial advisor or equivalent
third party. The acquirer in such a tender offer shall be required to
Reason: Purpose of tender offers is to protect the minority accept all securities tendered.
stockholders in case the company would have private transaction to
the buyers. One intends to acquire any type of transaction as long as buying
results to acquiring more than 50% of the share. One controls
However, in the exchange the sale is already a public transaction, no the company.
more secrets. Whoever wants to sell their shares can sell their shares
in the exchange. If any acquisition will result in you acquiring over 50% of the total
outstanding voting shares, what do you need to do?
BLOCK SALE You have to make a tender offer to all outstanding shares.
Relevant provision Example:

Rule 19.2.4. Any person or group of persons acting in concert, who I have 50% shares already and I owned them for 10 years. On the 11th
intends to acquire thirty five percent (35%) of the outstanding voting year, I bought 1%. Do I have to make a tender offer even if I did not
shares or such outstanding voting shares that are sufficient to gain buy 35%?
control of the board in a public company directly from one or more The rule says any transaction that would result to you owning over
stockholders shall be required to make a tender offer for all the 50%. So if you buy even just 1%, as long as it would bring your total
outstanding voting shares. The sale of shares pursuant to the private ownership to more than 50%, you have to make a tender offer and
transaction or block sale shall not be completed prior to the closing this time, same requirement for a block sale, you are required to make
and completion of the tender offer. a tender offer for all outstanding shares.
EXEMPTION FROM MANDATORY TENDER OFFER RULE
SUMMARY ON THE PROCEDURE
Rule 19.3.1.1. Any purchase of securities from the unissued capital
Under the SRC- you have to make a tender offer if: stock; Provided, the acquisition will not result to a fifty percent (50%)
a. You buy 15% or more in a one-time transaction or more ownership of securities by the purchaser or such percentage
b. You buy 30% or more in a creeping transaction that is sufficient to gain control of the board;
Under the IRR- If you are buying directly from the issuer through the unissued capital,
A. You do NOT have to make a tender offer if you are purchasing Issuer has 10B shares, 7B shares subscribed, and you bought from the
15% of equity securities in a public company over a period of 12 3B unsubscribed. UNLESS it will result to ownership of 50% or more.
months BUT you required to file a declaration to the Securities
and Exchange Commission. 19.3.1.2. Any purchase of securities from an increase in authorized
capital stock;
B. If you are buying (1) 35% or more of the outstanding voting
shares or (2) such number of shares that would lead to control of
the Board of Director of the issuer: Reason for exemption: if you do an increase in authorized capital
a. If you are buying in a creeping transaction meaning over a stock, you need to amend your Articles of Incorporation. And in doing
period of 12 months, you should do a tender offer for the so, you need the votes of 2/3 of your outstanding capital stocks.
percentage that you require. Such that if the offer is Which means that all your stockholders will know that you‘re
oversubscribed, you have to apportion the number of shares increasing your ACS and this person is buying from such increase. So
that you buy per offeror. this time, it is the decision of the stockholders whether they allow the
b. If you are buying in the stock exchange, you don‘t have to purchases.
do a tender offer EVEN IF eventually you have to do a block
sale later on because what you bought in the exchange is 19.3.1.3. Purchase in connection with foreclosure proceedings
not sufficient to get the 35%. This is because you started involving a duly constituted pledge or security arrangement where the
out buying through the stock exchange (19.2.3) acquisition is made by the debtor or creditor;
c. If you acquire the 35% or the controlling interest through a 19.3.1.4. Purchases in connection with a privatization undertaken by
block sale meaning one- time transaction with one or more the government of the Philippines;
person (private transaction), you are required to make a 19.3.1.5. Purchases in connection with corporate rehabilitation under
tender offer for all outstanding shares. court supervision;
d. If your purchase, no matter how small and in any type of 19.3.1 .6. Purchases in the open market at the prevailing market price;
transaction, would bring your ownership to more than 50%, and
you need to make a tender offer to all outstanding shares. 19.3.1.7. Merger or consolidation.
TN: 19.3.1.6 is simply purchasing through the exchange.
WITHDRAWAL/LAPSE OF TENDER OFFER
PURPOSE OF TENDER OFFER
Rule 19.9.4. The Offeror in a tender offer shall permit the securities
Cemco Holdings vs National Life Insurance
tendered to be withdrawn (i) at any time during the period such tender
offer remains open; and(ii) if not yet accepted for payment, after the Union Cement Corporation (UCC)
expiration of sixty (60) business days from the commencement of the
tender offer.
The offeror wants to withdraw his shares. Is he allowed to do so? You UCHC (60.51%) (non CEMCO (17.03%)
offered to buy shares and someone would offer their share, is he listed company)
allowed to withdraw?
Yes:
1. As long as the tender offer remains open. So you‘re still accepting, BCI (21.31%) CEMCO (9%) ACC (29.69%)
anyone can withdraw. Or
2. As long as the securities deposited has not yet been accepted for BCI and ACC offered their shares in UCHC to CEMCO and CEMCO
payment, you can still withdraw 60 days from date of original the acquired such.
tender offer.
TN: It was the shares of the UCHC that was being sold and not UCC.
Rule 19.9.8. No tender offer shall be made unless:
19.9.8.1. It is open to all security holders of the class of securities EFFECTS OF THE SALE:
subject to the tender offer; and a. Total shares of CEMCO in UCHC is now 60%. (BCI plus ACC plus
19.9.8.2. The consideration paid to any security holder pursuant to CEM
the tender offer shall be the highest consideration paid to any other b. Indirect ownership of CEMCO in UCC = 36% (60% shares of
security holder during such tender offer. CEMCO in UCHC multiplied to 60.51% shares of UCC in UCHC )
c. Total ownership of CEMCO in UCC is now 53% (direct ownership of
What if you made a tender offer, 35% at P20 per share but only few 17.03% plus indirect ownership of 36%)
were interested such that you later announced to buy at P25 and there
National Life, a minority shareholder of UCC, then complained that
are now more offerors, what price will prevail?
they were not notified and that CEMCO should have made a tender
P25. If you increase your consideration, you have to pay the same
offer. National Life contends that there was an indirect increase in the
amount to all the offerors regardless of when they made their offer.
ownership of CEMCO in UCC.
Atty: Whether or not to do a tender offer would depend if the

threshold was met.
The question is do you consider indirect control when you do tender
offer? Because the rule says you have to acquire 35% or more of the PROHIBITIONS OF FRAUD, MANIPULATION, AND INSIDER
outstanding voting shares of the public company. In this case, there
TRADING
was no acquisition of 35% or more of the voting company. Instead,
what it acquired was 36% additional control of the public company MANIPULATION OF SECURITY PRICES, DEVICES, AND
through indirect ownership. So the question in this case is whether the PRACTICES
threshold applies only to direct acquisition or does it also include the
indirect acquisition. So when you determine the 35% or 50% PROHIBITED ACTIVITIES (SRC AND IRR)
threshold, we refer to BOTH.
WASH SALES
Because if it is only direct acquisition, then obviously we will not meet
the threshold as there was no purchase directly of the UCC shares. But Section 24. Manipulation of Security Prices; Devices and Practices . –
if the threshold also applies to indirect acquisition, then you will fall 24.1 It shall be unlawful for any person acting for himself or through a
under the mandatory tender offer requirement because you indirectly dealer or broker, directly or indirectly:
acquired the 35% threshold. a) To create a false or misleading appearance of active trading in any
listed security traded in an Exchange of any other trading market
Purpose of tender offer as discussed in this case (hereafter referred to purposes of this Chapter as "Exchange"):
It is in place to protect minority shareholders against any scheme that i. By effecting any transaction in such security which involves
dilutes the share value of their investments. no change in the beneficial ownership thereof;
xxx
How does tender offer protect the value of the investments of SRC IRR
the minority shareholder? Rule 24.1.5. Set forth below are examples of prohibited conduct:
It gives minority shareholders the chance to exit the company under xxx
reasonable terms, giving them opportunity to sell their shares at the 24.1.5.5. Engaging in transactions in which there is no change in
same price as those of the majority shareholders. beneficial ownership of a security (wash sales).
Why does it matter if they want to sell their shares with the When you effect transaction in such security which involves no change
majority shareholders? in the beneficial ownership thereof. You create two accounts, one
account owns the shares, the other account buys it. But in reality only
Atty: If you were for example the purchaser, here comes a one person owns the account. There is no change in the beneficial
stockholder that owns 40% of the shares you want to acquire, as ownership of the shares.
compared to another shareholder who only owns 5% of the shares. If
you were the purchaser and you want to take control of the company Reason for prohibition
and the par value of the shares is at P5 per share, would you be Induce the public to sell and buy shares, while the truth and in fact,
willing to pay P100 per share to the owner of thr 40%? Yes of course, the active trading of the shares was not real.
you would for a reasonable amount to get control. Would you pay the
same to the owner of the 5%? No, you won‘t because why would you IMPROPER MATCHED ORDERS
do that when even if you acquire his shares, you would not take
control of the company. Section 24. Manipulation of Security Prices; Devices and Practices . –
24.1 It shall be unlawful for any person acting for himself or through a
So what does a tender offer do? dealer or broker, directly or indirectly:
It will level the playing field as between majority stockholders and a) To create a false or misleading appearance of active trading in any
minority stockholders. It is a way for the minority shareholders to sell listed security traded in an Exchange of any other trading market
shares of stock to the extent the majority shareholders can sell. (hereafter referred to purposes of this Chapter as "Exchange"):
xxx
Without the tender offer, majority stockholders can abuse the minority ii. By entering an order or orders for the purchase or sale of
stockholders through their influence to the Board of directors, making such security with the knowledge that a simultaneous order
the lives of the minority stockholders to be miserable and thus selling or orders of substantially the same size, time and price, for
their shares to the majority stockholders. the sale or purchase of any such security, has or will be
entered by or for the same or different parties; or
In the CEMCO CASE, it is required for investors by way of a direct and xxx
indirect purchasing of shares to offer all stockholders. Hence, the SRC IRR
amendment of the IRR for SRC which already includes the indirect Rule 24.1.5. Set forth below are examples of prohibited conduct:
acquisition of shares. xxx
24.1.5.3. Engaging in transactions where both the buy and sell orders
are entered at the same time with the same price and quantity by
different but colluding parties (improper matched orders);
This requires collusion
Similar with wash sale but differs such that there is a change in
beneficial ownership by buyer and seller colluding with each other.
There is a separate buyer and a separate seller but they are in

collusion with each other.
Significance of the Closing Price
SIMILAR ACT
Because the closing price is the one published.
Section 24. Manipulation of Security Prices; Devices and Practices. –
24.1 It shall be unlawful for any person acting for himself or through a To do this, do the transaction on the later day, you could buy high or
dealer or broker, directly or indirectly: sell low, to effect the closing pricing.
a) To create a false or misleading appearance of active trading in any
listed security traded in an Exchange of any other trading market So if the closing price is being manipulated, it will affect the
(hereafter referred to purposes of this Chapter as "Exchange"): transactions on the next day since it will price said stocks at a closer
xxx rate to the last closing price.
iii. By performing similar act where there is no change in
beneficial ownership. HYPE AND DUMP
b) To affect, alone or with others, securities or transactions insecurities Rule 24.1.5. Set forth below are examples of prohibited conduct:
that: xxx
(I) Raises their price to induce the purchase of a security, whether 24.1.5.4. Engaging in buying activity at increasingly higher prices and
of the same or a different class of the same issuer or of controlling, then selling securities in the market at the higher prices (hype and
controlled, or commonly controlled company by others; or dump) or vice versa (i.e. selling activity at lower prices and then
buying at such lower prices);
(iii) Creates active trading to induce such a purchase or sale
through manipulative devices such as marking the close, painting Example:
the tape, squeezing the float, hype and dump, boiler room I would tend to buy shares that I already have at P5, next P5.5, and
operations and such other similar devices. then P6. Here people will be wondering why there is a sudden increase
in the price of the stock, at the end of the day you sell your shares at
c) To circulate or disseminate information that the price of any security P9. So here, you raise the expectation and then dump it. Clearly, an
listed in an Exchange will or is likely to rise or fall because of income to your part.
manipulative market operations of any one or more persons conducted
for the purpose of raising or depressing the price of the security for Or if you want to acquire shares, so you will start selling the shares
the purpose of inducing the purpose of sale of such security. costing at P10 to P9, then P8 and lastly P7. Here, people will be
panicking why is there a lower price, so the result now is that they will
d) To make false or misleading statement with respect to any material have to sell their shares and you acquire it at a lower price than your
fact, which he knew or had reasonable ground to believe was so false cost of P10.
or misleading, for the purpose of inducing the purchase or sale of any
security listed or traded in an Exchange.
SQUEEZING THE FLOAT
e) To effect, either alone or others, any series of transactions for the Rule 24.1.5. Set forth below are examples of prohibited conduct:
purchase and/or sale of any security traded in an Exchange for the xxx
purpose of pegging, fixing or stabilizing the price of such security; 24.1.5.6. Taking advantage of a shortage of securities in the market
unless otherwise allowed by this Code or by rules of the Commission. by controlling the demand side and exploiting market congestion
during such shortages in a way as to create artificial prices (squeezing
the float);
PAINTING THE TAPE
Here, you start buying and buying from the PSE until you demand
Rule 24.1.5. Set forth below are examples of prohibited conduct: other persons to sell their shares. So prices of the stocks goes up, then
24.1.5.1. Engaging in a series of transactions in securities that are you sell your own shares. Thus taking advantage of the demand for
reported publicly to give the impression of activity or price movement such stocks to increase the price of such stocks.
in a security (e.g. painting the tape);
OTHER
Remember there is a requirement in sec 23 for any directors to
disclose their transaction in a security. Here you want said directors to Rule 24.1.5. Set forth below are examples of prohibited conduct:
transact with the PSE and SEC in order for said transaction to be xxx
published, if it is published people will know that there is active 24.1.5.7. Disseminating false or misleading market information
trading, while the truth and in fact there is none. So here is a through media, including the internet, or any other means to move the
manipulative scheme to induce the public to buy and sell shares. price of a security in a direction that is favorable to a position held or a
transaction; and
So basically painting an illusion about the securities in order to give an
impression that these securities are being actively traded and to 24.1.5.8. Other types of prohibited conduct and/or manipulative
influence the price. practices which include, among others, the creation of temporary
funds for the purpose of engaging in other manipulative practices.
MARKING THE CLOSE
24.1.6. Obligations imposed on registered persons under this rule
Rule 24.1.5. Set forth below are examples of prohibited conduct: apply in respect of all orders, irrespective of the trading system used
xxx and whether executed or not.
24.1.5.2. Buying and selling securities at the close of the market in an
effort to alter the closing price of the security (marking the close);
SHORT SALES 23.2. For the purpose of preventing the unfair use of information
which may have been obtained by such beneficial owner, director or
Relevant provision officer by reason of his relationship to the issuer, any profit realized
Rule 24.2-2.1. Definition of Short Sale by him from any purchase or sale, or any sale or purchase, of
The term "short sale" shall mean any sale of a security which the any equity security of such issuer within any period of less
seller does not own or any sale which is consummated by the delivery than (6) months unless such security was acquired in good
of a security borrowed by, or for the account of the seller with the faith in connection with a debt previously contracted, shall
commitment of the seller or securities borrower to return or deliver inure to and be recoverable by the issuer, irrespective of any
said securities or their equivalent to the lender on a determined or intention of holding the security purchased or of not repurchasing the
determinable future date. A person shall be deemed to own a security security sold for a period exceeding six (6) months. Suit to recover
if: such profit may be instituted before the Regional Trial Court by the
(1) he or his agent has title to it; issuer, or by the owner of any security of the issuer in the name and in
(2) he has purchased, or has entered into an unconditional contract, behalf of the issuer if the issuer shall fail or refuse to bring such suit
binding on both parties thereto, to purchase it and has not yet within sixty (60) days after request or shall fail diligently to prosecute
received it; the same thereafter, but not such shall be brought more than two
(3) he owns a security convertible into or exchangeable for it and has years after the date such profit was realized. This Subsection shall not
tendered such security for conversion or exchange; be construed to cover any transaction were such beneficial owner was
(4) he has an option to purchase or acquire it and has exercised such not such both time of the owner or the sale, or the sale of purchase, of
option; or the security involved, or any transaction or transactions which the
(5) he has rights or warrants to subscribe to it and has exercised Commission by rules and regulations may exempt as not
such rights or warrants provided, however, that a person shall be comprehended within the purpose of this subsection.
deemed to own securities only to the extent he has a net long
position in such securities. Sell and Buy or Buy and Sell within a period of 6 months, any profit
shall belong to the issuer.
Atty: It is not really a manipulative practice but a speculative practice.
It is not prohibited, it is VALID.
Speculative Practice
You don‘t own the shares yet since no delivery is made. So let us say The reason for such rule is that it aims to prevent a situation that
that today, as if you are buying shares at P8 and the delivery is next these people will take advantage of the information regarding the
week. You then anticipate the increase in prices and then sell it at a issuer. They will know the information of their issuer because of their
higher price at the time of delivery. relationship to the issuer.
It is not prohibited, but it is REGULATED. Since they are privy to the basic information of the issuer.
Example:
FRAUDULENT TRANSACTIONS
BUY
Section 26. Fraudulent Transactions. – It shall be unlawful for any BUY
person, directly or indirectly, in connection with the purchase or sale of BUY,
any securities to:
26.1. Employ any device, scheme, or artifice to defraud; Is this prohibited?
26.2. Obtain money or property by means of any untrue statement of No because there is no selling. If there is already a sale, then it is
a material fact of any omission to state a material fact necessary in already against the rule, hence, income is given to the issuer.
order to make the statements made, in the light of the circumstances
under which they were made, not misleading; or Important: To be prohibited, there must be a combination of BUY
26.3. Engage in any act, transaction, practice or course of business and SELL, or SELL AND BUY within 6 months—counted from the last
which operates or would operate as a fraud or deceit upon any person. SELL/BUY.
TRANSACTIONS OF DIRECTORS, AND PRINCIPAL

STOCKHOLDERS INSIDER TRADING
Relevant provision Relevant provision
Section 23. Transactions of Directors officers and Principal 3.8. ―Insider‖ means: (a) the issuer; (b) a director or officer (or
Stockholders. – person performing similar functions) of, or a person controlling the
23.1. Every person who is directly or indirectly the beneficial owner of issuer; (c) a person whose relationship or former relationship to the
more than ten per centum (10%) of any class of any equity security issuer gives or gave him access to material information about the
which satisfies the requirements of subsection 17.2, or who is a issuer or the security that is not generally available to the public; (d) a
director or an officer of the issuer of such security, shall file, at the government employee, or director, or officer of an exchange, clearing
time either such requirement is first satisfied or after ten days after he agency and/or self-regulatory organization who has access to material
becomes such a beneficial owner, director, or officer, a statement form information about an issuer or a security that is not generally available
the Commission and, if such security is listed for trading on an to the public; or (e) a person who learns such information by a
exchange, also with the exchange of the amount of all the equity communication from any of the foregoing insiders.
security of such issuer of which he is the beneficial owner, and within
ten days after the close of each calendar month thereafter, if there has WHO are considered insiders?
been a change in such ownership at the close of the calendar month
and such changes in his ownership as have occurred during such 3.8. ―Insider‖ means:
calendar month.
a. the issuer;
b. a director or officer (or person performing similar functions) of, reasonable person important under the circumstances in determining
or a person controlling the issuer; his course of action whether to buy, sell or hold a security.
TN: Directors, officers and controlling stockholders generally A Material Non Public Information is information:
have inside information regarding operations of the issuer. They
are deemed to have information that is not generally available to 1. That it is not generally available to the public, or if published or
the public made available to the public, the public don‘t have a sufficient
time to absorb the information; and
c. a person whose relationship or former relationship to the
issuer gives or gave him access to material information 2. an information which can affect the change in market price of
about the issuer or the security that is not generally available to security or it can potentially affect the decision of the public to
the public; sell or buy securities
Same with directors, etc TN: Any insider who will transact with securities of the issuer while
in possession of the material non public information is in violation of
d. a government employee, or director, or officer of an Sec 27 of SRC and that it is a criminal liability
exchange, clearing agency and/or self-regulatory organization
who has access to material information about an issuer or a
security that is not generally available to the public; or Example of Insider Trading
The president of a particular corporation died, but that fact is not yet
e. a person who learns such information by a communication available to the public or if available, not yet absorbed by the public.
from any of the foregoing insiders. And you start selling your shares knowing the fact of death of the
president. This is an insider trading.
TN: Anyone who has knowledge or information about the
operations of the issuer through any of the insider. The buyers of said securities would have think twice before buying the
shares had they known the fact of death of the president considering
NOTE: Being an insider is not illegal per se. Otherwise, all officers of that such fact might cause instability in the corporation.
the corporations are in jail because of mere fact that they held
information that is not generally available to the public. NOTE: The material information that is not fraudulent but something
factual. Unlike in hype and dump, you hype the price and you dispose
PROHIBITED ACT the securities. This is manipulative transaction.
Relevant provision NOTE: What is important here is not that the information is not
SEC. 27. Insider‘s Duty to Disclose When Trading. - divulged. Even if divulged the information is made to the public it is
27.1. It shall be unlawful for an insider to sell or buy a security of still insider trading if there as yet no sufficient time for the public to
the issuer, while in possession of material information with respect to absorb or digest the information.
the issuer or the security that is not generally available to the public,
unless: (a) The insider proves that the information was not gained
from such relationship; or (b) If the other party selling to or buying BLOCK-OFF PERIOD
from the insider (or his agent) is identified, the insider proves: (i) that Two-day Block off Period
he disclosed the information to the other party, or (ii) that he had General Rule: If a corporation discloses the material information to
reason to believe that the other party otherwise is also in possession the public, all the insiders are prohibited from transacting the shares
of the information. A purchase or sale of a security of the issuer made for 2 days. Two days is considered as sufficient time for the public to
by an insider defined in Subsection 3.8, or such insider‘s spouse or absorb the information.
relatives by affinity or consanguinity within the second degree,
legitimate or common-law, shall be presumed to have been effected The information is still considered non-public from the time it arose
while in possession of material non-public information if transacted until two-days after it is disclosed.
after such information came into existence but prior to dissemination
of such information to the public and the lapse of a reasonable time EXEMPTIONS:
for the market to absorb such information: Provided, however, That Where the insider is allowed to transact or his possible defences:
this presumption shall be rebutted upon a showing by the purchaser or
seller that he was not aware of the material non-public information at 1. when the insider did not gain the information from his
the time of the purchase or sale. relationship with the issuer; or
2. insider disclosed the information to the other party or he had
TN: The prohibition is where the insider sells or buys or basically reason to be believe that other party has already that information
transacting securities with the issuer possessing material information
that is not available to the public. What the law prohibits is where Persons that are also covered in the prohibition of engaging
insider transacts with the securities of the issuer while in possession insider trading:
of material non-public information.
1. the insider‘s spouse;
2. insider‘s relatives by affinity or consanguinity within the
MATERIAL NON-PUBLIC INFORMATION second degree, legitimate or common-law
Relevant provision
27.2. For purposes of this Section, information is ―material non- ONGPIN CASE
public‖ if: (a) It has not been generally disclosed to the public and
would likely affect the market price of the security after being Ongpin is a shareholder of Philex Mining. The company of Manny
disseminated to the public and the lapse of a reasonable time for the Pangilinan, First Pacific, started buying Philex Mining shares. First
market to absorb the information; or (b) would be considered by a Pacifc is very aggressive in acquiring the shares in fact at that point
the shares were traded at Php8.00 per shares but Pangilinana is willing
to buy the shares at Php21. What Ongpin did is that he bought the profit was realized. This subsection shall not be construed to cover any
shares of Philex for P8 up to P19 from other stockholders and then transaction where such beneficial owner was not such both at the time
Ong pin sold the share to Pangilinan at P21. When Ongpin is buying of the purchase and sale, or the sale and purchase, of the security
the shares from the public he is already in possession of the involved, or any transaction or transactions which the Commission by
information that Pangilinan is willing to buy at P21. He was able to buy rules and regulations may exempt as not comprehended within the
the shares of Philex from public at a price significantly lower than P21 purpose of this subsection.
The SEC found out and they issued a show cause to ongpin why he
should not be held liable for insider trading. Now, the SEC came out TN: if the principal stockholder, director or officer acquires any profit
with a decision that Ongpin was guilty of insider trading. And he was in a purchase and a sale transaction or a sale and purchase
fined around P170M because there are P174 counts of insider trading. transaction of the equity securities of the issuer corporation within a
There are 174 insider transactions. Now, SEC is also bringing a period of less than 6 months, so it‘s a combination, two transactions
criminal case. The case is still with the CA pending appeal and a TRO within a 6-month period, you purchase and then you sell, all done
was sought for the injunction of the imposition of the fine. within 6 months or you sell and then you buy it back, all within 6
months this is what we call as a Short Swing Profit.
Insider trading is really hard to prove considering that having
knowledge of material information is a state of mind. However, SEC
was able to prove because before Ongpin started buying the shares of Short Swing Profit or Transaction
Philex, Ongpin already sold shares with the Pangingilinan company at Director, officers or stockholders transact with the securities in a
Php21. After such, he started buying shares at lower price and sold it combination of buy and sell or sell and buy within a period of 6
with Pangilinan. months.
OTHER PROHIBITED ACTS NOTE: Different from Short sale – This is when you sell shares that
you did not own.
Relevant provision
27.3. It shall be unlawful for any insider to communicate SHORT SWING vs INSIDER TRADING
material non-public information about the issuer or the
security to any person who, by virtue of the communication, Short Swing Insider Trading
becomes an insider as defined in Subsection 3.8, where the insider The directors, officers or principal The insider transacts with the
communicating the information knows or has reason to believe that stockholders who conduct a securities of the issuer while in
such person will likely buy or sell a security of the issuer while in combination of buy and sell or possession of material non-public
possession of such information. sell and buy within a period of 6 information.
months.
TN: Communication of material non-public information by an insider Any profit derived from those Can give rise to criminal Liability
to a person whom the former knows or has reason to be believe that transaction will belong to the
the latter will likely transact with the securities of the issuer while in issuer because what the law is
possession of such information is also prohibited trying to prohibit is to take
advantage of their knowledge of
Aside from transacting, an insider is also prohibited from disclosing the information about the
or communicating but only if you had knowledge that person will company
likely buy or sell a security having in mind that information or giving
an insider tip knowing that his person will transact the securities of No criminal liability
the issuer.
NOTE: Not all communication is prohibited. What defined the law or

what matters is that the insider knows that this person will transact Illustration
knowing such information. A is a director of Corp X. A transacts the shares of Corp X by buying
shares of Corp X. After one week, he buys again, and buys again
knowing that the Corp X acquired a lucrative mining right. What is his
liability?
SHORT SWING PROFIT Answer: The director is guilty of insider trading because he transacts
Relevant provision with the shares of Corp X knowing that the Corp X just acquired a
23.2. For the purpose of preventing the unfair use of information lucrative mining right. Moreover, there is no combination of buy and
which may have been obtained by such beneficial owner, director, or sell, the transaction only involves buying the shares.
officer by reason of his relationship to the issuer, any profit realized by
him from any purchase and sale, or any sale and purchase, of any Illustration 2:
equity security of such issuer within any period of less than six (6) What if, having knowledge that the company will acquire a lucrative
months, unless such security was acquired in good faith in connection mining right in the near future, a director will:
with a debt previously contracted, shall inure to and be recoverable by
the issuer, irrespective of any intention of holding the security Week 1 – 3 buy shares
purchased or of not repurchasing the security sold for a period Week 4 sell shares
exceeding six (6) months. Suit to recover such profit may be instituted
before the Regional Trial Court by the issuer, or by the owner of any Is this short swing or insider trading?
security of the issuer in the name and in behalf of the issuer if the It is insider trading because what defines insider trading is you are in
issuer shall fail or refuse to bring such suit within sixty (60) days after possession of material non-public information (MNI). If there was no
request or shall fail diligently to prosecute the same thereafter, but no material non-public information, and he just buys, buys and buys, no
such suit shall be brought more than two (2) years after the date such sale – not liable for anything. Because short swing requires buy and
sell. But if he was in possession of MNI, even if just buy, buy and buy, So if you buy every month from January – July, then sell starting
– then this is insider trading. So if there is no MNI, and he buys and August – December, this is a Short swing even if the first buy is in
sells in one month it is short swing January because you start counting on the last buy on July.
Short swing profit transaction – buying and selling within a period of 6

months. Like in criminal law (But TN: this is not a criminal action) this FOREIGN INVESTMENT ACT
is like a mala prohibita. The act itself is prohibited, regardless of your PHILIPPINE NATIONAL
intention
Relevant provision
But if you buy and sell with material MNI, that now becomes a criminal Section 3. Definitions.- As used in this Act:
act of insider trading. So short swing transactions are not really a. The term "Philippine national" shall mean a citizen of the
criminal acts. The consequence is only that the profits will be turned Philippines or a domestic partnership or association wholly owned by
over to the issuer. But insider trading is criminal, you will be penalized citizens of the Philippines; or a corporation organized under the laws
and go to jail. of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens
INSIDER TRADING IN TENDER OFFER of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
Relevant provision Philippine national and at least sixty (60%) of the fund will accrue to
27.4. (a) It shall be unlawful where a tender offer has commenced or the benefit of the Philippine nationals: Provided, That where a
is about to commence for: corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at
(i) Any person (other than the tender offeror) who is in possession of least sixty percent (60%) of the capital stocks outstanding and
material non-public information relating to such tender offer, to buy or entitled to vote of both corporations must be owned and held by
sell the securities of the issuer that are sought or to be sought by such citizens of the Philippines and at least sixty percent (60%) of the
tender offer if such person knows or has reason to believe that the members of the Board of Directors of both corporations must be
information is non-public and has been acquired directly or indirectly citizens of the Philippines, in order that the corporations shall be
from the tender offeror, those acting on its behalf, the issuer of the considered a Philippine national.
securities sought or to be sought by such tender offer, or any insider
of such issuer; and Who are considered as Philippine Nationals:
a. Citizen of the Philippines;
(ii) Any tender offeror, those acting on its behalf, the issuer of the b. Domestic partnership or association wholly owned by citizens
securities sought or to be sought by such tender offer, and any insider of the Philippines;
of such issuer to communicate material non-public information relating c. Corporation organized under the laws of the Philippines of
to the tender offer to any other person where such communication is which at least sixty percent (60%) of the capital stock
likely to result in a violation of Subsection 27.4 outstanding and entitled to vote is owned and held by
citizens of the Philippines;
What is prohibited: d. Corporations organized abroad, but is fully owned by
1. The buying and selling while in possession of material non- Filipinos
public information (MNI) about the tender offer e. Trustee of funds for pension or other employee retirement
2. The communication of material non-public information in or separation benefits, where the trustee is a Philippine
relation to the tender offer, knowing that the other person national and at least sixty (60%) of the fund will accrue to
will commit the act in number 1. (Transact with securities the benefit of the Philippine nationals:
while possessing MNI)
Liable for both short swing and insider trading TN: Most controversial is number 3, on what constitutes the term
The short swing is a private penalty. The issuer is the one who claims capital. Under the FIA it says 60% of the capital stock
the penalty. On the other hand, Insider trading is criminal. There are outstanding and entitled to vote
fines and will go to jail.
Gamboa vs Teves (2011)
The thing about short swing profits, it has to be the issuer who
initiates the claim. But in insider trading, it is the securities and The facts according to petitioner Gamboa, a stockholder of
exchanges commission, so it is a public act. PLDT:
So there is no inconsistency if one is held liable for both.

1. PLDT 2. GTE 3. PTIC 4. PHI
Can the persons who were victims of insider trading, claim for
relief?
Insider trading is a crime. It‘s normally the SEC who brings the case,
but a person who was victimized can bring a case for fraud under the 6. First Pacific (54%) 5. PCGG (46.125%)
RPC.
8.
TN: If a person is not found to be liable for insider trading, the
company still accuse him of short swing as a separate claim.
Counting the 6 months period 9. MPAH 7. Parallax (46.125%)

There is no fix starting point. You count the difference between the
last buy and the first sell or vice versa. If it exceeds 6 months, it is not
short swing.
1) The Philippine Legislature granted PLDT the franchise and right to
engage in telecommunications business. Sec 11, Article 12 of the Constitution:
No franchise, certificate, or any other form of authorization for
2) The American company, General Telephone Electronics Corporation the operation of a public utility shall be granted except to citizens
(GTE) which is a major stockholder of PLDT, of the Philippines or to corporations or associations organized
under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens of the Philippines
3) Sold 26% of its common shares to Philippine Telecommunications
Investment Corporation (PTIC).
In the corporation code, Capital is a very general term.
It can be authorized capital, issued shares or non-issued shares.
4) PTIC stockholders executed three deeds of assignment in favor of Shares are also classified into different kinds of shares like voting
Prime Holdings, Inc. (PHI) which became the owner of 111,415 shares shares, nonvoting shares, common shares and preferred shares.
of stock of PTIC. So ―shares‖ is very broad and may mean any of the above or all
of them.
5) Such 111,415 shares of PTIC held by PHI were sequestered by the
PCGG which represent 46.125% of the outstanding capital stock of TN: The case is not about the PLDT shares. This is about PTIC‘s shares
PTIC that were later declared to be owned by the Republic of the who is a company that is a holder of PLDTs shares. What is in issue is
Philippines. the sale of PTIC shares. PTIC was owned by PHI during martial law.
But after martial law, PTIC shares were acquired by government as
6) First Pacific which is a Bermuda-registered & HK-based firm part of the ill-gotten wealth and so now the government wants to sell
acquired the remaining 54% of PTIC. these shares. There was then a bidding, there were 2 bidders, but First
Pacific who is also a current shareholder of PTIC exercised its right of
first refusal (right of a shareholder) and wanted to acquire the
7) Subsequently, Interagency Privatization Council announced selling
remainder of the PTIC shares. First pacific is a foreign company,
the 111,415 shares or 46.125% of PTIC through a public bidding.
owned by many Pangilinan (Ongpin case).
Parallax won the bid.
The PTIC shares were sold to first pacific, so now first pacific‘s shares
8) Thereafter, First Pacific as PTIC stockholder announced to match in PLDT increased from 30% to 37% (Indirectly through PTIC). This
the bid of Parallax to buy the 111,415 shares. However, it failed to do brings the total foreign shareholders in PLDT to 81.47% of total
so. outstanding common shares.
9) Through its subsidiary MPAH, First Pacific entered into a Conditional So now the petitioners are saying that PLDT now has 81% of foreign
Sale & Purchase Agreement with the government for the 111, 415 shareholders. Way above the allowed 40%.
shares.
So the issue is what really constitutes capital as contemplated in the
Since PTIC is a stockholder of PLDT, the sale by the Philippine constitution?
Government of 46.125% of PTIC shares is actually an indirect sale of PLDT has common shares and preferred shares. Of PLDT‘s total
12M shares or about 6.3% of the outstanding common shares of shares, preferred shares constituted 77.85% which were non-voting
PLDT. With the completed sale, First Pacific common shareholdings in shares. While the common shares were 22.15% but were voting
PLDT increased from 30.7% to 37%, thereby increasing the shares of shares. In the case, the foreigners owned 81.47% of the total common
foreigners to about 81.47% and thus violating the constitutional shares only (22.15% of company), meaning for the total shares of the
limitation of foreign ownership of the capital of a public utility. company as a whole, both common and preferred combined, the
foreigners really just owned 17%, 17% of total outstanding capital
The facts according to public respondents Finance Secretary stock. (22.15% x 81.47%)
Teves, Undersecretary Sevilla, and PCGG Commissioner
Abcede: The HR Committee on Good Government conducted a public So if you say that capital is based on total outstanding, they are still in
hearing of the impending sale and concluded that First Pacific‘s compliance with constitution since it is just 17%.
intended acquisition of the government‘s 111,415 PTIC shares ( see 9
But if you say capital is based only on those shares entitled to vote,
in the illustration above) resulting in First Pacific‘s 100% ownership of
(common shares), then no, they are already in violation since it is
PTIC will not violate the constitutional limit since PTIC holds only
already 81% in this case.
13.847% of the total outstanding common shares of PLDT.
Illustration
Petitioner filed the instant petition for prohibition, injunction, PLDT had two kinds of shares
declaratory relief, and declaration of nullity of sale of 111,415 shares 1. Common - made up 22.15 % of its total outstanding shares.
and averred that the sale would result in an increase in First Pacific‘s 2. Preferred non-voting shares – made up 77.85% of its total
common shareholdings in PLDT from 30.7% to 37%, and this, outstanding shares
combined with Japanese NTT DoCoMo‘s common shareholdings in
PLDT would result to 51.56% foreign shareholdings which is With the acquisition of First Pacific with PTIC shares, the total foreign
over the 40% constitutional limit. shareholdings of the common shares went up to 80%, not of the total
TN: First Pacific + Japanese NTT DoCoMo‘s common shareholdings = outstanding shares, but of the common shares.
51.56% foreign shareholdings
Discussion:
Involves the shares of PLDT which is a public utility company because
it is engaged in telecommunications. The rule in public utilities under
the constitution is that it must be granted only to citizens of the
Philippines or corporations whose 60% of capital is owned by Filipinos
required. Illegal and beneficial ownership of 60% of the outstanding
Preferred non- capital stock must rest in the hands of Filipino nationals in accordance
voting shares with the Costitutional mandate. Otherwise, the Corporation is
considered as a non-Philippine national.
Common voting
shares - Filipino
ownership What does capital mean according to the first case?
Common voting Capital means the shares of stocks entitled to vote in the election of
shares - Foreign the directors. In this case, that can only be exercised by those holding
ownership common shares, not of the total outstanding shares.
For purposes of the Constitution and the FIA, when you say 60% of
Is PLDT in compliance with the constitutional requirement of Capital, it only means capital entitled to vote in the election of
the 60% capital which must be owned by Filipino Citizens? directors.
The contention of the petitioner
It is not compliant because when you say capital, you have to look at Important: That definition of the FIA is very broad. It says entitled to
common shares only. If that is the basis, foreigners already own 80% vote, it does not qualify in the election of the directors.
which is beyond the 60% limitation.
The contention of respondent Gamboa v. Teves (2012); Motion for reconsideration

If you look at all the outstanding shares, the 80% ownership in The lawyers of PLDT felt that they were disadvantaged by this
common shares of the foreigners will only be around 17% of the pie. decision, because now it is not based on total outstanding stock, but
Hence, PLDT is compliant since this is below 60%. on the common shares. They filed a Motion for Reconsideration
brought by the foreigners and their lawyers who were insisting on the
Issue: How is capital defined under the Constitution? total outstanding capital stock. The SC realized their mistake.
The Supreme Court looked into the definition of Capital under the Law. The SC realized that Corporations vote not only in the election of
Under FIA, which governs foreign investments in the Philippines, directors. In fact, there are some matters under the corporation code
Capital is considered 60% of the capital stock outstanding and entitled where all stockholders—voting or non-voting—are required to vote.
to vote.
There are 8 items listed under the corporation wherein you can never
Capital was explained through differentiating common from preferred deprive any stockholder of their right to vote
shares of PLDT. SC said that the shares that foreign nationals own was
already in violation of the Constitutional requirement. Section 6 of the Corporation Code
Where the articles of incorporation provide for non-voting shares in the
First, the foreigners owned 64% of the common shares. Common cases allowed by this Code, the holders of such shares shall
shares include the sole, exclusive right to vote in the election of nevertheless be entitled to vote on the following matters:
directors. Thus, when they are such conferred with that right, they are
already in control and in management of the corporation. 1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
However, Filipinos only owned 35% of the PLDT‘s common shares. As 3. Sale, lease, exchange, mortgage, pledge or other disposition of
between the holdings of the Filipino citizens and foreign nationals in all or substantially all of the corporate property;
terms of common shares, the latter have the superiority. In preferred 4. Incurring, creating or increasing bonded indebtedness;
shares, the Supreme Court described them as mere investors who do 5. Increase or decrease of capital stock;
not have the right to vote in the election of directors and officers. 6. Merger or consolidation of the corporation with another
corporation or other corporations;
The preferred shares of PLDT is owned by 99% Filipinos. Thus, they 7. Investment of corporate funds in another corporation or business
do not have the voting rights—they cannot control, manage or in accordance with this Code; and
participate. However, the rest are already owned by the foreigners. 8. Dissolution of the corporation.
What type of ownership must the Filipinos have within 60%? TN: Technically, under our Corporation Code, there is no true non-
Full beneficial ownership, not mere legal title. voting shares. Preferred shares can be deprived of their right to vote in
It must be control + economic benefits: the election of the directors but in the substantial matters enumerated
1. Control is manifested by your right to vote in the election of above, they are still required to vote.
directors. Only common shares were allowed to do that in
PLDT. The SC now realized that their ruling in the First Gamboa v. Teves case
2. Economic benefit actually narrowed down the definition of capital. Because of the MR,
The Supreme Court looked at the dividends declared. the SC revised their ruling although they did not admit that they
 Preferred stockholders – P1 per share of dividends, par value revised it. They just maintained that this it was their ruling all along.
of P10 per share. But it‘s not true because they said ―entitled to vote in the election of
 Common shares - P70 per share, par value of P5 per share. directors.‖ According to them, they focused on is on the
pronouncement ―that mere legal title is not sufficient, but full beneficial
TN: Aside from the fact that those holding preferred shares cannot ownership.‖
vote in the election of directors, hence no control, they also have
lesser economic benefit than those holding common shares. What does capital mean under the Motion for
Reconsideration?
Mere legal title is insufficient to meet the 60% Filipino-owned capital There must be 60% Filipino - 40% Foreign for common shares
required in the Corporation. Full beneficial ownership of 60% of the consistent with the first ruling. However, the first ruling stopped there.
outstanding capital stock coupled with 60% of the voting rights is
The second ruling expanded it. They said that it must apply to all types
of shares—voting or non-voting. Common shares must have 60-40 It is very easy to know whether a company is Philippine
shares, preferred shares 60-40 limitation applies as well. You apply it national if for example
separately. You don‘t apply it on total outstanding shares, like what A- Natural person
PLDT wanted in their MR. The SC wanted it more strict. SC said that it B- Natural person
must apply not just those entitled to shares but to each type of C- Natural person
shares—whether voting or non-voting, class A, class B… D- Natural person
E- Natural person
Atty Gaviola: That interpretation for me is the correct interpretation
because when the law says outstanding capital stock entitled to vote, They all form Corporation X.
this is very general. You cannot say that preferred stocks are not
entitled to vote. General rule is that if the articles are silent, preferred What if each of them own 20%, and they are all Filipinos?
stocks are entitled to vote in the election of directors. Only when they Corporation X is 100% owned by Filipinos. Thus, it is a Philippine
are deemed to be non-voting expressly can they be deprived of their national.
right to vote but only in the election of directors. For all the 8 other
items enumerated in the corporation code, they are required to vote. What if A, B, C are Filipinos, D and E are aliens?
Corporation X is a Philippine national. If there is one type of share,
If you look at the FIA, the more accurate interpretation is when you common shares, it is a Philippine National.
say ―entitled to vote,‖ it applies to all types of shares—whether voting
or not. Technically, non-voting shares are still allowed to vote. Illustration:
The 60% requirement applies to each class of shares. What if instead of natural persons owning the shares, you
have corporations? Let’s say Corporation A has stockholders
IMPORTANT: You don‘t say to all class of shares which can be of 1,2,3,4,5 who are all Filipino citizens, natural persons.
interpreted as total outstanding shares. If you answer that in your final Filipino who owns 60%, B is an alien who owns 40%?
exam, ZERO! Apply it individually per class of share. Apply the 60-40% Corporation X is a Philippine national because 60% of its shares are
requirement. owned by a Filipino citizen. That qualifies under number 3 of the
definition.
Isn’t there a loop hole because of the absence of the
aggregate limit because the foreign corporation can then buy
39% of every share and in effect they would really own What if Company A is owned by Z and B corporations,
majority shares? Corporation Z owns 60%: composed of 60%--owned by 1, 2,
Wrong logic. When you say 39%, you are talking about 39% of the 3, 4, 5 all Filipinos, and 40% foreign-owned.
whole class per class. You also have the other side which has 51+51. Corporation B: owns 40%, all foreign.
It‘s wrong logic. Actually, the 39% per class is not really 39% as to the
1
whole.
2 (ALL FILIPINO)
Let‘s say, you have 100 shares. 50 voting, 50 non-voting. How much is
Corp Z - 60% Corp B- 40% (ALL FOREIGN)
40% of 50? Let‘s say you buy 40% or 20. 40% of another 50, 20.
3
When it is totalled, you just get 40%.
What if the 60% is applied for each class of shares, and they 4
are divided into class A and B which are both voting shares?
Do you apply it separately? 5
Yes, apply separately for each class. You have common class A, 60-
40%, common class B 60-40%. Always 40% for each class.
Corp A
Let‘s say there are ten classes of shares and ten types of shares, and
you get 40%, so you get 4 for each class. How much is the total? You This is corporate-layering—when corporations own corporations.
get a total of 40%.
1. Z is a Philippine national being 100% Filipino-owned.
Of course, if you get 5 for one, but only 3 for the other company, this
cannot be allowed because you don‘t check total outstanding, you 2. A, 60% owned by Philippine nationals is also a Philippine
check per class. (Gamboa v. Teves) Apply to EACH class of share, not national, even if B owns 40%.
ALL types of share.
What does the FIA say?
The case tells us that the 60% requirement under the Constitution and Relevant provision
under the FIA which says 60% of the outstanding capital stock entitled That where a corporation and its non-Filipino stockholders own
to vote actually means each class of shares—voting or non-voting. stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stocks
What are the Philippine nationals under the FIA?
outstanding and entitled to vote of both corporations must be
1. Filipino Citizens
owned and held by citizens of the Philippines and at least sixty
2. Associations, corporations wholy-owned by Filipino citizens
percent (60%) of the members of the Board of Directors of both
3. Domestic corporation at least 60% capital outstanding and corporations must be citizens of the Philippines, in order that the
entitled to vote corporations shall be considered a Philippine national;
IMPORTANT: Here, we mean to each class of shares
4. Foreign corporations wholly owned by Filipino citizens and…
3. X is a Philippine national since 60% of the shares of X are
owned by a Philippine national, as long as the 60-40%
shareholdings per level of corporation is maintained.
Atty. Gaviola: Also 60% of the board must be Filipino citizens. This is
called the control test.
Applying the control test

1. 100% Filipino, no need to use the control test
2. Corporation A – it is 60% Filipino, 40% Foreign. But who
controls? Filipinos control because 60% of its shareholdings
are owned by Philippine nationals.
3. Corporation X- it is A who controls, another Philippine
national. The 60% holding of A in X is considered as a
shareholding of a Philippine national. Philippine national
controls.
IMPORTANT: Control test-you only take a look at the controlling

stockholders.
In reality, the foreigners own more of Corporation X than the Filipinos.

Filipinos owns 60% while Foreigners own 40% of Corporation Z.
Actually, foreigner owns 24% (40%x60%) plus the 40% directly
owned by foreigners. They now own 64% in total.
However, using the control test, it does not matter. You don‘t take a
look at the indirect stockholding of foreign shareholders because this
60% being owned by a Philippine national is considered as 100%
Filipino. The controlling is the shares of Philippine national.
IMPORTANT: Control test: you only take a look at the controlling

stockholders. As long as you have 60-40% per level, you will pass the
control test.
What test do we use to determine the corporate ownership?

It‘s the control test which is used in FIA. However, in the case of
NARRA mining corporation, the Supreme Court said that if there is
doubt, the grandfather test can be used.
Under the grandfather test, the 40%+24%=64% shares is obviously

not a Philippine national. You grandfather to determine the real
stockownership of Corporation X. If you go to the grandfather, B,
actually owns 64% which exceeded the 40% limit of foreign
ownership.
IMPORTANT: The tests below are different. Do not confuse them

with each other. They are distinguished as follows:
1. Grandfather test and the control test are tests to determine

nationality.
2. In Gamboa v. Teves, the test pertains to voting and the

beneficial ownership used to determine whether Filipinos
really own the 60% portion of the company.

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INTERNATIONAL BUSINESS LAW Atty.

Karen Climaco-Gaviola l For the exclusive use of EH 404 2016-2017

―(4) jewelry dealers in precious metals, who, as a business, trade in

For corporations, banks observe stricter policy. The corporation is

Primary franchise (k) Compel the officers of any registered corporation or

To determine whether the scheme is an investment contract, use the

(c) Fractional undivided interests in oil, gas or other mineral Example:

What if it’s a non-detachable warrant?

(e) Certificates of assignments, certificates of participation, Example

Thus, in this stage: Registration for Listing purposes in PSE

What happens if there are unsold shares? Will that happen

Sec 12.1.1. Underwriting Requirement for Registered Securities - ISSUE:

Example: Securities held as pledge, or chattel mortgage

That‘s why we distinguish:

TN (for exam): Broker’s transactions are exempt. Otherwise, it

HOW TO DO A TENDER OFFER in Sec 19.2.2. (35% of

Whoever wants to sell can sell to the offeror.

FORMULA transaction takes place over a one time transaction

Relevant provision Example:

Atty: Whether or not to do a tender offer would depend if the

This requires collusion

There is a separate buyer and a separate seller but they are in

TRANSACTIONS OF DIRECTORS, AND PRINCIPAL

NOTE: Not all communication is prohibited. What defined the law or

Short swing profit transaction – buying and selling within a period of 6

So there is no inconsistency if one is held liable for both.

Counting the 6 months period 9. MPAH 7. Parallax (46.125%)

The contention of respondent Gamboa v. Teves (2012); Motion for reconsideration

Applying the control test

IMPORTANT: Control test-you only take a look at the controlling

In reality, the foreigners own more of Corporation X than the Filipinos.

IMPORTANT: Control test: you only take a look at the controlling

What test do we use to determine the corporate ownership?

Under the grandfather test, the 40%+24%=64% shares is obviously

IMPORTANT: The tests below are different. Do not confuse them

1. Grandfather test and the control test are tests to determine

2. In Gamboa v. Teves, the test pertains to voting and the

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