Src Cases Digested

CEMCO -versusNational Life Insurance Co. [G.R. No. 171815; August 7, 2007] Legend: - Cemco Holdings, Inc. (Cemco) - Bacnotan Consolidated Industries, Inc. (BCI) - Atlas Cement Corporation (ACC) - Union Cement Holdings Corporation (UCHC) Petition for Review under Rule 45 of the Rules of Court seeks to reverse and set aside the Decision rendered by the Court of Appeals which affirmed the judgmentof the Securities and Exchange Commission (SEC) finding that the acquisition of petitioner CEMCO of the shares of stock of BCI and ACC in UCHC was covered by the Mandatory Offer Rule under Section 19 of Republic Act No. 8799, otherwise known as the Securities Regulation Code. FACTS: - Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders:  UCHC, a non-listed company, with shares amounting to 60.51%, and  petitioner Cemco with 17.03%. - Majority of UCHCs stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks. - In a disclosure letter, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell to Cemco BCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in UCHC equivalent to 29.69%. In the PSE Circular for Brokers No. 3146-2004 - that as a result of petitioner Cemcos acquisition of BCI and ACCs shares in UCHC, petitioners total beneficial ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the shares of UCC. - As a consequence of this disclosure, the PSE inquired to the SEC as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC. - SEC, through its Corporate Finance Department responded to the query of the PSE that the matter must still have to be confirmed by the SEC en banc. - Thereafter, the SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule. - Respondent, National Life Insurance Company of the Philippines, Inc., (NLICPI) - a minority stockholder of UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer.

- In their comments, they were uniform in arguing that the tender offer rule applied only to a direct acquisition of the shares of the listed company and did not extend to an indirect acquisition arising from the purchase of the shares of a holding company of the listed firm. - In a Decision, the SEC ruled in favor of the respondent by reversing and setting aside its previous Resolution, and directed petitioner Cemco to make a tender offer for UCC shares to respondent and other holders of UCC shares similar to the class held by UCHC in accordance with Section 9(E), Rule 19 of the Securities Regulation Code. - CEMCO filed a petition with the Court of Appeals challenging the:  SECs jurisdiction to take cognizance of respondents complaint and its authority to require Cemco to make a tender offer for UCC shares, and arguing that the tender offer rule does not apply, or 

that the SECs re-interpretation of the rule could not be made to retroactively apply toCemcos purchase of UCHC shares.

- The CA rendered a decision affirming the ruling of the SEC. - It ruled that the SEC has jurisdiction to render the questioned decision and that Cemco was barred by estoppel from questioning the SECs jurisdiction. -It, likewise, held that the tender offer requirement under the Securities Regulation Code and its Implementing Rules applies to Cemcos purchase of UCHC stocks. : - Cemco filed a motion for reconsideration which was denied by the Court of Appeals. - Hence, the instant petition. ISSUES: 1. Whether or not the SEC has jurisdiction over respondents complaint and to require Cemco to make a tender offer for respondents UCC shares. 2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the shares in UCHC, a non-listed company. 3. Whether or not the questioned ruling of the SEC can be applied retroactively to Cemcos transaction which was consummated under the authority of the SECs prior resolution RULING: 1. On the first issue, the Court ruled that petitioners contention lacks merit.

- Cemco, however, refused. - Then a Share Purchase Agreement was executed by ACC and BCI, as sellers, and Cemco, as buyer and as such, the transaction was consummated and close. - Respondent National Life Insurance filed a complaint with the SEC asking it to reverse it previous Resolution in favor of CEMCO and to declare the purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares. - Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC, which were then required to file their respective comment on the complaint.

- In taking cognizance of respondents complaint against petitioner and eventually rendering a judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to Rule 19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code, to wit: - The foregoing rule emanates from the SECs power and authority to regulate, investigate or supervise the activities of persons to ensure compliance with the Securities Regulation Code, more specifically the provision on mandatory tender offer under Section 19 thereof. - Another provision of the statute, which provides the basis of Rule 19(13) of the Amended Implementing

Rules and Regulations of the Securities Regulation Code, is Section 5.1. - The foregoing provision bestows upon the SEC the general adjudicative power which is implied from the express powers of the Commission or which is incidental to, or reasonably necessary to carry out, the performance of the administrative duties entrusted to it. - As a regulatory agency, it has the incidental power to conduct hearings and render decisions fixing the rights and obligations of the parties. - In fact, to deprive the SEC of this power would render the agency inutile, because it would become powerless to regulate and implement the law. - That the power conferred upon the SEC to promulgate rules and regulations is a legislative recognition of the complexity and the constantly-fluctuating nature of the market and the impossibility of foreseeing all the possible contingencies that cannot be addressed in advance. - Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner had participated in all the proceedings before the SEC and had prayed for affirmative relief. - Petitioner did not question the jurisdiction of the SEC when it rendered an opinion favorable to it.

- The rule in this jurisdiction is that the construction given to a statute by an administrative agency charged with the interpretation and application of that statute is entitled to great weight by the courts, unless such construction is clearly shown to be in sharp contrast with the governing law or statute. - The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. - The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or any type of acquisition. - The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies. 3. As to the third issue, petitioner stresses that the ruling on mandatory tender offer rule should not have retroactive effect. The argument is not persuasive.

2. On the second issue, petitioner asserts that the mandatory tender offer rule applies only to direct acquisition of shares in the public company.

- The action of the SEC on the PSE request for opinion on the Cemco transaction cannot be construed as passing merits or giving approval to the questioned transaction.

This contention is not meritorious. - Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. - A public company is defined as a corporation which is listed on an exchange or a corporation with assets exceeding P50, 000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than 100 shares of such company. - Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders. Under existing SEC Rules, the 15% and 30% threshold acquisition of shares under the foregoing provision was increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still applicable even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total outstanding equity securities of the public company. - The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule. - This interpretation given by the SEC and the Court of Appeals must be sustained.

- That there was no public hearing where interested parties could have been heard. Hence, it was not issued upon a definite and concrete controversy affecting the legal relations of parties thereby making it a judgment conclusive on all the parties. Said letter was merely advisory. - Jurisprudence has it that an advisory opinion of an agency may be stricken down if it deviates from the provision of the statute. ABACUS SECURITIES CORPORATION versus RUBEN U. AMPIL [G.R. No. 160016 February 27, 2006] Facts: Petitioner - Abacus Securities Corporation ("Abacus') is engaged in business as a broker and dealer of securities of listed companies at the Philippine Stock Exchange Center.Sometime in April 1997, Respondent Ruben Ampil (1) opened a cash account with Abacus for his transactions in securities;[10] (2) Ampil’s purchases were consistently unpaid from April 10 to 30, 1997;[11] (3) Ampil failed to pay in full, or even just his deficiency,[12] for the transactions on April 10 and 11, 1997;[13] (4) despite Ampil’s failure to cover his initial deficiency, Abacus subsequently purchased and sold securities for Ampil’s account on April 25 and 29; [14] (5) Abacus did not cancel or liquidate a substantial amount of respondent’s stock transactions until May 6, 1997.[15] Issues:

1) Whether the pari delicto rule is applicable in the present case, and 2) Whether the trial court had jurisdiction over Abacus alleged violation of the Revised Securities Act. Ruling: The Petition is partly meritorious. The provisions governing the above transactions are Sections 23 and 25 of the RSA[16] and Rule 25-1 of the RSA Rules, which state as follows: “SEC. 23. Margin Requirements. – xxxxxxxxx (b)It shall be unlawful for any member of an exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer – (1)On any security other than an exempted security, in contravention of the rules and regulations which the Commission shall prescribe under subsection (a) of this Section; (2)Without collateral or on any collateral other than securities, except (i) to maintain a credit initially extended in conformity with the rules and regulations of the Commission and (ii) in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circumventing the provisions of subparagraph (1) of this subsection. x x x x x x x x x” “SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent indirect violations of the margin requirements under Section 23 hereof, the broker or dealer shall require the customer in non-margin transactions to pay the price of the security purchased for his account within such period as the Commission may prescribe, which shall in no case exceed three trading days; otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten trading days following the last day for the customer to pay such purchase price, unless such sale cannot be effected within said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer to recover any deficiency from the customer. x x x.” xxx. The law places the burden of compliance with margin requirements primarily upon the brokers and dealers.[22] Sections 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,”[23] clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three days from the date of purchase. The word “shall” as opposed to the word “may,” is imperative and operates to impose a duty, which may be legally enforced. For transactions subsequent to an unpaid order, the broker should require its customer to deposit funds into the account sufficient to cover each purchase transaction prior to its execution. These duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the law, which forbids a broker from extending undue credit to a customer.

“The main purpose is to give a [g]overnment credit agency an effective method of reducing the aggregate amount of the nation’s credit resources which can be directed by speculation into the stock market and out of other more desirable uses of commerce and industry x x x.”[19] A related purpose of the governmental regulation of margins is the stabilization of the economy.[20] Restrictions on margin percentages are imposed “in order to achieve the objectives of the government with due regard for the promotion of the economy and prevention of the use of excessive credit.”[21] Otherwise stated, the margin requirements set out in the RSA are primarily intended to achieve a macroeconomic purpose -- the protection of the overall economy from excessive speculation in securities. Their recognized secondary purpose is to protect small investors. The law places the burden of compliance with margin requirements primarily upon the brokers and dealers. [22] Sections 23 and 25 and Rule 25-1, otherwise known as the “mandatory close-out rule,”[23] clearly vest upon petitioner the obligation, not just the right, to cancel or otherwise liquidate a customer’s order, if payment is not received within three days from the date of purchase. The word “shall” as opposed to the word “may,” is imperative and operates to impose a duty, which may be legally enforced. For transactions subsequent to an unpaid order, the broker should require its customer to deposit funds into the account sufficient to cover each purchase transaction prior to its execution. These duties are imposed upon the broker to ensure faithful compliance with the margin requirements of the law, which forbids a broker from extending undue credit to a customer. It will be noted that trading on credit (or “margin trading”) allows investors to buy more securities than their cash position would normally allow.[24] Investors pay only a portion of the purchase price of the securities; their broker advances for them the balance of the purchase price and keeps the securities as collateral for the advance or loan.[25] Brokers take these securities/stocks to their bank and borrow the “balance” on it, since they have to pay in full for the traded stock. Hence, increasing margins[26] i.e., decreasing the amounts which brokers may lend for the speculative purchase and carrying of stocks is the most direct and effective method of discouraging an abnormal attraction of funds into the stock market and achieving a more balanced use of such resources. “x x x [T]he x x x primary concern is the efficacy of security credit controls in preventing speculative excesses that produce dangerously large and rapid securities price rises and accelerated declines in the prices of given securities issues and in the general price level of securities. Losses to a given investor resulting from price declines in thinly margined securities are not of serious significance from a regulatory point of view. When forced sales occur and put pressures on securities prices, however, they may cause other forced sales and the resultant snowballing effect may in turn have a general adverse effect upon the entire market.”[27] The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time, the status of the client’s account.[28] Brokers, therefore,

are in the superior position to prevent the unlawful extension of credit.[29] Because of this awareness, the law imposes upon them the primary obligation to enforce the margin requirements. In securities trading, the brokers are essentially the counterparties to the stock transactions at the Exchange.[35] Since the principals of the broker are generally undisclosed, the broker is personally liable for the contracts thus made.[36] Hence, petitioner had to advance the payments for respondent’s trades. Brokers have a right to be reimbursed for sums advanced by them with the express or implied authorization of the principal,[37] in this case, respondent. It should be clear that Congress imposed the margin requirements to protect the general economy, not to give the customer a free ride at the expense of the broker.[38] Not to require respondent to pay for his April 10 and 11 trades would put a premium on his circumvention of the laws and would enable him to enrich himself unjustly at the expense of petitioner. Securities and Exchange Commission -versusInterport Resources Corporation Facts: The Board of Directors of IRC approved a Memorandum of Agreement with GHB (Ganda Holdings Berhad). Under said memorandum of agreement, IRC acquired 100% of the entire capital stock of GEHI (Ganda Energy Holdings Inc.) which would own and operate a 102 megawatt gas turbine power generating barge. In exchange, IRC will issue to GHB 55% of the expanded capital stock of IRC. On the side, IRC would acquire 67% of the entire capital of PRCI (Philippine Racing Club). It is alleged herein that a press release announcing the approval of the agreement was sent to the Philippine Stock Exchange through facsimile and the SEC, but the facsimile machine of the SEC could not receive it. However, the SEC received reports that the IRC failed to make timely public disclosures of its negotiations with GHB and that some of its directors, heavily traded IRC shares utilizing this material insider information. For this reason, the SEC required the directors to appear before the SEC to explain the alleged failure to disclose material information as required by the Rules on Disclosure of Material Facts. Unsatisfied with the explanation, the SEC issued an order finding that the IRC violated the Rules in connection with the then Old Securities Act when it failed to make timely disclosures of its negotiations with GHB. In addition, the SEC found that the directors of IRC entered into transactions involving IRC shares in violation of the Revised Securities Act. Respondents, however, questioned the authority of the SEC to investigate on said matter since according to PD 902-A, jurisdiction upon the matter was conferred upon the PED (Prosecution and Enforcement Department) of the SEC – however, this issue is already moot since pending the disposition of the case, the Securities Regulation Code was passed thereby effectively repealing PD 902-A and abolishing the PED. They also contended that their right to due process was violated when the SEC required them to appear before the SEC to show cause why sanctions should not be imposed

upon them since such requirement shifted the burden of proof to respondents. The case reached the CA and said court ruled in favor of the respondents and effectively enjoined the SEC from filing any criminal, civil or administrative cases against respondents. In its resolution, the CA stated that since there are no rules and regulations implementing the rules regarding DISCLOSURE, INSIDER TRADING OR ANY OF THE PROVISIONS OF THE REVISED SECURITIES ACT, the SEC has no statutory authority to file any suit against respondents. The CA, therefore, prohibited the SEC from taking cognizance or initiating any action against the respondents for the alleged violations of the Revised Securities Act. Issue: 1.) Whether or not the SEC has authority to file suit against respondents for violations of the RSA. 2.) Whether or not their right to due process was violated when the SEC denied the parties of their right to cross examination. Ruling: The Revised Securities Act does not require the enactment of implementing rules to make it binding and effective. The provisions of the RSA are sufficiently clear and complete by themselves. The requirements are specifically set out and the acts which are enjoined are determinable. To tule that absence of implementing rules can render ineffective an act of Congress would empower administrative bodies to defeat the legislative will by delaying the implementing rules. Where the statute contains sufficient standards and an unmistakable intent (as in this case, the RSA) there should be no impediment as to its implementation. The court does not discern any vagueness or ambiguity in the RSA such that the acts proscribed and/or required would not be understood by a person of ordinary intelligence. The provision explains in simple terms that the insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct and that the intent of the law is the protection of investors against fraud committed when an insider, using secret information, takes advantage of an uninformed investor. Insiders are obligatd to disclose material information to the other party or abstain from trading the shares of his corporation. This duty to disclose or abstain is based n 2 factors: 1) the existence of a relationship giving access, directly or indirectly to information intended to be available only for a corporate purpose and not for the personal benefit of anyone and 2) the inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing. This obligation to disclose is imposed upon "insiders" which are particularly officers, directors or controlling stockholders but that definition has already been expanded and not includes those persons whose relationship of former relationship to the issuer or the security that is not generally available and the one who learns such a fact from an insider knowing that the person from whom he learns such fact is an insider. In some case, however, there may be valid corporate reasons for the nondisclosure of material information

but it should not be used for non-corporate purposes. Respondent contends that the terms "material fact", "reasonable person", "nature and reliability" and "generally available" are vaguely used in the RSA because under the provision of the said law what is required to be disclosed is a fact of special significance, meaning:

1. 2.

a material fact which would be likely to affect the market price of a security or; one which a reasonable person would consider especially important in determining his course of action with regard to the shares of stock.

But the court dismissed said contention and stated that material fact is already defined and explained as one which induces or tends to induce or otherwise affect the sale or purchase of securities. On the other hand, "reasonable person" has already been used many times in jurisprudence and in law since it is a standard on which most of legal doctrines stand (even the doctrine on negligence uses such standard) and it has been held to mean "a man who relies on the calculus of common sense of which all reasonable men have in abundance" As to "nature and reliability" the proper adjudicative body would be able to determine if facts of a certain nature and reliability can influence a reasonable person's decision to retain, buy or sell securities and thereafter explain and justify its factual findings in its decision since the same must be viewed in connection with the particular circumstances of a case. As to "generally available", the court held also that such is a matter which may be adjudged given the particular circumstances of the case. The standards of which cannot remain at a standstill.