BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
February 17, 2016 (LJS)
P.D. 902-A is the reorganization decree of the Securities and
Exchange Commission (SEC). This has been since
superseded by R.A 8799 or the Securities Regulation Code.
But we still have to look up PD 902-A because of Sec. 5 of
RA 8799.
Why? The SEC Code in Sec. 5.2 refers back to Sec. 5 of PD
902-A.
RA 8799
Section 5. Powers and Functions of the Commission. 5.1.
The commission shall act with transparency and shall have
the powers and functions provided by this code, Presidential
Decree No. 902-A, the Corporation Code, the Investment
Houses law, the Financing Company Act and other existing
laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:
(a) Have jurisdiction and supervision over all
corporations, partnership or associations who are
the grantees of primary franchises and/or a license
or a permit issued by the Government;
(b) Formulate policies and recommendations on
issues concerning the securities market, advise
Congress and other government agencies on all
aspect of the securities market and propose
legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require
amendments to registration statements, and
registration and licensing applications;
(d) Regulate, investigate or supervise the activities
of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the
activities of exchanges, clearing agencies and other
SROs;
(f) Impose sanctions for the violation of laws and
rules, regulations and orders, and issued pursuant
thereto;
(g) Prepare, approve, amend or repeal rules,
regulations and orders, and issue opinions and
provide guidance on and supervise compliance with
such rules, regulation and orders;
(h) Enlist the aid and support of and/or deputized
any and all enforcement agencies of the
Government, civil or military as well as any private
institution, corporation, firm, association or person
in the implementation of its powers and function
under its Code;
(i) Issue cease and desist orders to prevent fraud or
injury to the investing public;
(j) Punish for the contempt of the Commission, both
direct and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules
of Court;
(k) Compel the officers of any registered
corporation or association to call meetings of
stockholders or members thereof under its
supervision;
(l) Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the
examination, search and seizure of all documents,
papers, files and records, tax returns and books of
accounts of any entity or person under investigation
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as may be necessary for the proper disposition of
the cases before it, subject to the provisions of
existing laws;
(m) Suspend, or revoke, after proper notice and
hearing the franchise or certificate of registration of
corporations, partnership or associations, upon any
of the grounds provided by law; and
(n) Exercise such other powers as may be provided
by law as well as those which may be implied from,
or which are necessary or incidental to the carrying
out of, the express powers granted the Commission
to achieve the objectives and purposes of these
laws.
5.2. The Commissions jurisdiction over all cases enumerated
under section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction
over the cases. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted
for final resolution which should be resolved within one (1)
year from the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of
payment/rehabilitation cases filed as of 30 June 2000 until
finally disposed.
PD 902-A
Section 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving.
a) Devices or schemes employed by or any acts, of
the board of directors, business associates, its
officers or partnership, amounting to fraud and
misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder,
partners, members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate or
partnership relations, between and among
stockholders, members, or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders,
members or associates, respectively; and between
such corporation, partnership or association and the
state insofar as it concerns their individual franchise
or right to exist as such entity;
c) Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.
It says all cases enumerated under section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court
more specifically that sala of the RTC branch that is
designated by the SC as the intra-corporate court.
What are those cases?
First, Devises and Schemes (5.2 (a)). [Ms. Gonzales, read
Sec. 5.2(a)]. The shorthand terminology of those cases are
devises and schemes. The popular name for that in the
business world, internationally, is the Ponzi Scheme. Named
after a 19th century immigrant in the US who started this
particular scheme put your money with me and I will give
you 2% a month or even 3%. Now, in the beginning, he just
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016

gets it from your principal. Imagine, you give 100,00, 3% of such corporation, partnership or association and the
that is 3,000. Then he tries to get more people. So, as long state insofar as it concerns their individual franchise
as he can get more people to put in their money, the scheme or right to exist as such entity;
can continue that is why the popular name called in the
Philippines is Pyramiding. c) Controversies in the election or appointments of
directors, trustees, officers or managers of such
Father illiustrates. You start with two people, then you pay corporations, partnerships or associations.
them and you continue to pay them. But then you get
another two people. You tell those two to get another 2 (NB: There are additions in this section as provided for by PD
people, and so on. So what do you see? It is a pyramid. 1758 Please check!)
Once, people stops coming in, that is when it all stops, and
that is when you will be discovered. That is what happened According to Section 5 of PD 902- A, these are:
with Legacy. 1. Devices and schemes
You see, it seems very simple. Now the issue is, How do Ex. Pyramiding. Refer to US Fair Trade Commission
you differentiate this pyramiding scheme to the so Report what is pyramiding.
called Multi-layer marketing corporation? An example
of that multi-layer marketing corporation is Pamapapayat Pyramiding is a multi- level marketing program of
Herbalife! So when you enter, you give a capital then you get corporation, otherwise known as NETWORKING.
agents and when your agents sells, you get commission. These companies are AMWAY, Herbalife and etc.
Isnt that a pyramiding scheme?
2. Controversies arising from partnership
About 4 years ago, our SEC was asked of that question. And relations between and among
our SEC answered that the difference of a pyramiding stockholders/members or associates (intra-
scheme and a Multi-layer marketing firm, like herbalife, is corporate controversies)
that there is a commodity that is actually sold. In a scheme,
there is none, there is actually no business here. Lead case is COSARE v. BroadComm Asia Inc.
715 SCRA 534, 2014 case. The SC says that for a
But now, with the proliferation of Multi-layer marketing controversy to arise from intra- corporate or
corporations, that is now what they call networking. Because partnership relations, there are two requisites:
of that, there has been investigations made in the US, and
the US has come up with a ruling in the Fair Trade i. The status or relationship of the
Commission, that even if there is a thing of value that is the parties, namely:
subject matter of the business transaction, if the corporation
a. Between the corporation/ partnership
depends more on the enrollment fees of its agents than the
thing of value that is distributed, then that is a pyramiding or association and the public
scheme. That your proceeds for enrollment of agents b. Between the corporation/ partnership
exceeds than your proceeds from the sale of your products, or association and the State
then you are a pyramiding scheme. That is the result of the
investigation of the Fair Trade Commission regarding Amway c. Between the corporation/partnership
and Herbalife. I think our SEC would be following that ruling. or association and its
stockholders/partners/members or
Because there is no business there. There would always just
have seminars, then there would be testimony. That is my officers
house, that is my car. [Rants about using the gospel for d. Among the stockholders, members,
people to follow pareho radaw na ang mga tao nga ga partners and associate themselves
recruit sa herbalife and talks of his brother being an
administrator in herbalife and it containing nothing hebal ii. The nature of the question that is the
about it] subject of the controversy
Just because the stockholder sues another
stockholder does not make it necessarily an intra-
February 18, 2016 (CG)
corporate suit if the controversy is not to be
Intra-corporate controversies. resolved using the corporation code or the SRC or
any corporation law.
Section 5. In addition to the regulatory and adjudicative
The second requisite is the nature of the question
functions of the Securities and Exchange Commission over
that is the subject of the controversy must involve a
corporations, partnerships and other forms of associations
corporation law statute to be resolved by it. So, if
registered with it as expressly granted under existing laws
the stockholder sells his shares to another
and decrees, it shall have original and exclusive jurisdiction
stockholder and even after he has been paid he has
to hear and decide cases involving.
not delivered the transfer certificate. They buyer
a) Devices or schemes employed by or any acts, of sues the seller. Is that an intra-corporate suit? It is
the board of directors, business associates, its NOT even if it is between stockholders. Why?
officers or partnership, amounting to fraud and Because it is a contract of sale! It is a suit for
misrepresentation which may be detrimental to the specific performance. It is not enough that the
interest of the public and/or of the stockholder, status of their relationship is corporate. The statute
partners, members of associations or organizations needed to resolve the dispute is the final mark of an
registered with the Commission. intra- corporate controversy. That is what Cosare
v. Broadcomm says. Please read that case.
b) Controversies arising out of intra-corporate or
partnership relations, between and among 3. Controversies arising from the election or
stockholders, members, or associates; between any appointments of directors, trustees, officers
or all of them and the corporation, partnership or or managers of such corporations,
association of which they are stockholders, partnerships or associations
members or associates, respectively; and between

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 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Landmark case is GSIS by PGM Winston Garcia
vs. Anthony Rosete and CA.
The facts are: theres an annual meeting of
stockholders of MERALCO. Garcia comes in bringing
a restraining order issued by the SEC, but this TRO
is signed only by one commissioner. He says that
even if only one signed, in effect all the other
commissioners signed it since he signed it in for and
in behalf of others. The restraining order restrains
the whole body from going on with the annual
meeting since the annual meeting will proceed to
elect the directors of MERALCO. Why does Garcia
need to restrain the meeting? He said that he still
needs to examine the proxies used by the Lopez
Group. The Lopez Group does not have ownership
of the majority of the OCS. In other words, the
Lopez Group, with the use of its allies with shares
and execute proxies, has the majority of the OCS.
Now, the issue is, is this a controversy about the
election or controversy about proxies? This is
because under the SRC, the sole and exclusive
jurisdiction to determine the adequacy in form and
substance of proxies belong to the SEC. Here in sec.
5, it says that controversies in the election or
appointments of directors, trustees, officers or
manager of such corporations, partnerships or
associations belongs to the intra- corporate court
which is designated RTC.
It reached the SC. Standing alone and by itself, the
proxies as an issue w/n it is adequate in form and in
substance belongs to the SEC.
But if the proxies are just an incidental issue, in the
bigger issue of election of officers/ BODs in a
stockholders meeting, the issue on proxies is
subsumed to what is provided for in section 5 letter
c, which says that the controversies in the election
should be under the intra- corporate court.
So, the restraining order of Garcia is without effect
because it was issued ultra-vires or beyond the
powers of the SEC to issue. The one that has
jurisdiction to issue restraining orders on this matter
is the regular court. The issue should have brought
up to the intra- corporate court of Quezon City
which has the jurisdiction.
Now, another provision in PD 902- A that is important and is
still valid is the power of the SEC to suspend or revoke after
proper notice and hearing the franchise or certificate of
registration of corporations, partnerships or associations for
any of the grounds provided by the law including the
following: (wala niya gimention unsa na section and unsa
ang following but I assume na Section 6 iyang gina-mean).
So you must be reminded that there are two ways to attack
intra-corporate franchise:
1. By Quo Warranto Proceedings under the Rules of
Court by the Solicitor General and filed before the intra-
corporate court. That is the main.
2. By bringing an administrative action to the SEC and
the commission itself who serves notice and conducts a
hearing. This is the other one under section 6 letter L.
So what are the grounds for the cancellation, revocation or
suspension of the franchise or the certificate of corporation?
Please do not mistaken franchise here as the name it is
always referred to as the privilege to conduct public utility
such as the franchise to run a passenger vehicles from Davao
to Tagum, which is given by LTO. This is a secondary
franchise, but to exist as a corporation is a primary franchise.
You get a secondary franchise if you are a natural person or
juridical person, thus you must first exist to get that
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secondary franchise. The right of a secondary franchise
resides on the corporation. The right to exist as a corporation
which is a primary franchise resides in the constituents of the
corporation. The incorporators since wala pa may
corporation. That is where the seat of the primary franchise
resides.
Remember these two franchises lahi ni. Kaning secondary
franchise an still be subject to commerce with the approval
of the granting authority. Example kanang taxi na gikapoy
naka so pwede nimu itransfer sa uban with the approval of
the LTFRB. Pero kung gikapoy naka sa corporation muingon
ka, gikapoy nako ibalhin ko ni, mahimo ba na? No! It is not
transferrable. The primary franchise is not subject to
commerce. It cannot be executed upon. So when you read
franchise here, put this in mind that this is primary franchise.
You can suspend, cancel or revoke the franchise and the SEC
has the power to do it after due notice and hearing. What
are the grounds?
Sec. 6, i) To suspend, or revoke, after proper notice and
hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the
grounds provided by law, including the following:
1. Fraud in procuring its certificate of registration;
This should not be certificate of registration but certificate of
incorporation. Thats the more accurate term.
2. Serious misrepresentation as to what the corporation can
do or is doing to the great prejudice of or damage to the
general public;
Example: You primary purpose is a recruitment and
placement agency but actually what you are doing is
trafficking women so your franchise can be revoked because
what you are doing is contrary to public morals. This is to the
damage of the general public.
3. Refusal to comply or defiance of any lawful order of the
Commission restraining commission of acts which would
amount to a grave violation of its franchise;
Example: Akong franchise is rent a car. Pila kabuok imong
cars? Naa kay duha kabuok na urvan unya 2 ka Honda jazz
ug 2 camri cars. Imong franchise within davao region lang.
unya ang imong Urvan ningtungtung mag Nabuturan unya
Davao nasad nay sakay pasahero. Nahimo naman hinuon
xag public utility. Abangan kas LTO na di na mahimo kay
rent a car raka not passenger. What is the difference of the
two? Rent a car walay employer- employee relationship. You
can drive anywhere but the drivers of boundary system has
ER- EE relationship. So if rent a car, rentahan ra gyud nimu
nang van. Pero kung de pasahero ka, you need a franchise.
(FGN yawyaw about urvan ug habalhabal) there are six
gorunds but we only finished 3.
4. Continuous in operation for a period of at least five (5)
years;
The provision in the Corporation Code leave the impression
that continuous inoperation for 5 years by the very fact
results to the cancellation of corporates franchise because if
you look at section 22 on the effects on non- use of
corporate charter and continuous inoperation of a
corporation it says:
If a corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from
the date of its incorporation, its corporate powers
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
cease and the corporation shall be deemed dissolved.
So this is automatic.
However, if a corporation has commenced the
transaction of its business but subsequently becomes
continuously inoperative for a period of at least five
(5) years, the same shall be a ground for the
suspension or revocation of its corporate franchise or
certificate of incorporation.xxx
So meaning, continuous inoperative for a period of
at least 5 years, you need due notice and hearing
bago ka ma-revoke or ma-suspend.
5. Failure to file by-laws within the required period;
The landmark case is the Loyola Grand Villas case. it has
been operating for 20 years without by- laws. The SC said
its a de facto corporation. Something that is fatally defective
because your franchise can be cancelled and your corporate
personality will be revoked.
6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed period;
The failure to file annual report or financial statements can
be a ground for cancellation of your corporate franchise. You
must file according to the Corporation Code. Except if you
have below 50k capital, then you dont need to have an
external auditor but still you need to file. Refer to Sec. 141 of
the Corpo Code.
Now the penalty for non- submission of the audited financial
report is the daily fine computed from the time that you
should have submitted it. Magka-anan ug kadako. Same with
the corporation sole.
So these are the important provisions of PD 902-A. Now lets
go to Securities Regulation Code.
SECURITIES REGULATION CODE
Republic Act 8799
Section 1. This shall be known as The Securities
Regulation Code.
Just like The Corporation Code, its complete name is with the
article THE. Its not Corporation Code. The correct title is
The Corporation Code. Even the Supreme Code forgets that!
It should be the complete title. Dili mana pwede na REV
Salazar na. Dapat DEMREV man gyud na. diba kung dili
complete imong ngalan masuko ka.. makasulti lang ning mga
balaod, masuko ni sila.
This law has been called the BLUE SKY LAW. Why? This is
a quotation from the US Supreme Court. It says that the
Securities Act in the 1930s is the law which seeks to protect
the investing public from scam artists who go around
defrauding people promising them nothing but a few feet of
the blue sky, thus questionable securities. Securities are
intangible properties. What you are selling is not the piece of
paper, the certificate of stock. The certificate of stock
represents what you are selling which is an intangible
property. It is different if you are selling a toaster. oh palita,
muinit, kasing init sa akong ilok, pwede iinit ang pan. But
shares of stock of San Miguel Corporation, ikaw karon naa
nakay panag- iya sa San Miguel tungod aning papela. That is
why it needs an elaborate legislation to protect the people,
because you cannot see it, parehas sa kabayo na imo lang
panguyaun unya tanawon ang ngipon na kung upat nlng ang
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ngipon tigulang na. You cannot just examine securities that
is why there is a need for an elaborate law, thus called BLUE
SKY LAW referring to the pronouncement of the US SC.
Section 3. Definition of terms tanawa dira. Naa bay definition
sa securities. It is not. It is just an enumeration of securities.
No definition what is securities.
SEC. 3. Definition of Terms. -
3.1. Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate,
contract, instrument, whether written or electronic
in character. It includes:
a) Shares of stock, bonds, debentures, notes,
evidences of indebtedness, asset-backed
securities;
b) Investment contracts, certificates of
interest or participation in a profit sharing
agreement, certificates of deposit for a
future subscription;
c) Fractional undivided interests in oil, gas or
other mineral rights;
d) Derivatives like option and warrants;
e) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
f) Proprietary or non proprietary membership
certificates in corporations; and
g) Other instruments as may in the future be
determined by the Commission.
3.2 Issuer is the originator, maker, obligor, or creator
of the security.
3.3 Broker is a person engaged in the business of
buying and selling securities for the account of
others.
3.4 Dealer means any person who buys and sells
securities for his/her own account in the ordinary
course of business.
3.5. Associated person of a broker or dealer is an
employee thereof who, directly exercises control of
supervisory authority, but does not include a
salesman, or an agent or a person whose functions
are solely clerical or ministerial.
3.6. Clearing Agency is any person who acts as
intermediary in making deliveries upon payment to
effect settlement in securities transactions.
3.7. Exchange is an organized marketplace or facility
that brings together buyers and sellers and
executes trades of securities and/or commodities.
3.8. Insider means: (a) the issuer; (b) a director or
officer (or person performing similar functions) of,
or a person controlling the issuer; (c) a person
whose relationship or former relationship to the
issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public; (d) a
government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or (e) a person who learns
such information by a communication from any of
the foregoing insiders.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
3.9. Pre-Need Plans are contracts which provide for the
performance of future services or the payment of
future monetary considerations at the time of actual
need, for which planholders pay in cash or
installment at stated prices, with or without interest
or insurance coverage and includes life, pension,
education, interment, and other plans which the
Commission may from time to time approve.
3.10. Promoter is a person who, acting alone or with
others, takes initiative in founding and organizing
the business or enterprise of the issuer and receives
consideration therefore.
3.11. Prospectus is the document made by or on behalf
of an issuer, underwriter or dealer to sell or offer
securities for sale to the public through a
registration statement filed with the Commission.
3.12. Registration statement is the application for the
registration of securities required to be filed with
the Commission.
3.13. Salesman is a natural person, employed as such or
as an agent, by a dealer, issuer or broker to buy
and sell securities.
3.14. Uncertificated security is a security evidenced by
electronic or similar records.
3.15. Underwriter is a person who guarantees on a firm
commitment and/or declared best effort basis the distribution
and sale of securities of any kind by another company.
But several years ago, in commercial law bar examination,
kalit lang nangutana WHAT IS THE HOWEY TEST? that is
taken from the US Supreme Court decision in SEC v. WJ
Howey and Co., where the US SC in 1946 declared the
elements of what an investment contract is that qualify as a
security. What did WJ Howey & Co., do? Research on that!
[ends class]
U.S. Supreme Court
SEC v. Howey Co., 328 U.S. 293 (1946)
Securities and Exchange Commission vs. Howey Co.
No. 843
Argued May 2, 1946
Decided May 27, 1946
328 U.S. 293
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Syllabus
1. Upon the facts of this case, an offering of units of a citrus
grove development, coupled with a contract for cultivating,
marketing, and remitting the net proceeds to the investor,
was an offering of an "investment contract" within the
meaning of that term as used in the provision of 2(1) of
the Securities Act of 1933 defining "security" as including any
"investment contract," and was therefore subject to the
registration requirements of the Act. Pp. 328 U. S. 294-
297, 328 U. S. 299.
2. For purposes of the Securities Act, an investment contract
(undefined by the Act) means a contract, transaction, or
scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts
of the promoter or a third party, it being immaterial whether
the shares in the enterprise are evidenced by formal
certificates or by nominal interests in the physical assets
employed in the enterprise. Pp. 328 U. S. 298-299.
5
3. The fact that some purchasers, by declining to enter into
the service contract, chose not to accept the offer of the
investment contract in its entirety does not require a
different result, since the Securities Act prohibits the offer, as
well as the sale, of unregistered nonexempt securities. P.328
U. S. 300.
4. The test of whether there is an "investment contract"
under the Securities Act is whether the scheme involves an
investment of money in a common enterprise with profits to
come solely from the efforts of others; and, if that test be
satisfied, it is immaterial whether the enterprise is
speculative or nonspeculative, or whether there is a sale of
property with or without intrinsic value. P. 328 U. S. 301.
5. The policy of the Securities Act of affording broad
protection to investors is not to be thwarted by unrealistic
and irrelevant formulae. P. 328 U. S. 301.
151 F.2d 714 reversed.
The Securities & Exchange Commission sued in the District
Court to enjoin respondents from using the mails and
instrumentalities of interstate commerce in the offer
Page 328 U. S. 294
and sale of unregistered and nonexempt securities in
violation of the Securities Act of 1933. The District Court
denied the injunction. 60 F.Supp. 440. The Circuit Court of
Appeals affirmed. 151 F.2d 714. This Court granted
certiorari. 327 U.S. 773. Reversed, p. 328 U. S. 301.
MR. JUSTICE MURPHY delivered the opinion of the Court.
This case involves the application of 2(1) of the Securities
Act of 1933 [Footnote 1] to an offering of units of a citrus
grove development, coupled with a contract for cultivating,
marketing and remitting the net proceeds to the investor.
The Securities and Exchange Commission instituted this
action to restrain the respondents from using the mails and
instrumentalities of interstate commerce in the offer and sale
of unregistered and nonexempt securities in violation of
5(a) of the Act. The District Court denied the injunction, 60
F.Supp. 440, and the Fifth Circuit Court of Appeals affirmed
the judgment, 151 F.2d 714. We granted certiorari, 327 U.S.
773, on a petition alleging that the ruling of the Circuit Court
of Appeals conflicted with other federal and state decisions,
and that it introduced a novel and unwarranted test under
the statute which the Commission regarded as
administratively impractical.
Most of the facts are stipulated. The respondents, W. J.
Howey Company and Howey-in-the-Hills Service,
Page 328 U. S. 295
Inc., are Florida corporations under direct common control
and management. The Howey Company owns large tracts of
citrus acreage in Lake County, Florida. During the past
several years, it has planted about 500 acres annually,
keeping half of the groves itself and offering the other half to
the public "to help us finance additional development."
Howey-in-the-Hills Service, Inc., is a service company
engaged in cultivating and developing many of these groves,
including the harvesting and marketing of the crops.
Each prospective customer is offered both a land sales
contract and a service contract, after having been told that it
is not feasible to invest in a grove unless service
arrangements are made. While the purchaser is free to make
arrangements with other service companies, the superiority
of Howey-in-the-Hills Service, Inc., is stressed. Indeed, 85%
of the acreage sold during the 3-year period ending May 31,
1943, was covered by service contracts with Howey-in-the-
Hills Service, Inc.
The land sales contract with the Howey Company provides
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
for a uniform purchase price per acre or fraction thereof,
varying in amount only in accordance with the number of
years the particular plot has been planted with citrus trees.
Upon full payment of the purchase price, the land is
conveyed to the purchaser by warranty deed. Purchases are
usually made in narrow strips of land arranged so that an
acre consists of a row of 48 trees. During the period between
February 1, 1941, and May 31, 1943, 31 of the 42 persons
making purchases bought less than 5 acres each. The
average holding of these 31 persons was 1.33 acres, and
sales of as little as O.65, O.7 and O.73 of an acre were
made. These tracts are not separately fenced, and the sole
indication of several ownership is found in small land marks
intelligible only through a plat book record.
Page 328 U. S. 296
The service contract, generally of a 10-year duration without
option of cancellation, gives Howey-in-the-Hills Service, Inc.,
a leasehold interest and "full and complete" possession of
the acreage. For a specified fee plus the cost of labor and
materials, the company is given full discretion and authority
over the cultivation of the groves and the harvest and
marketing of the crops. The company is well established in
the citrus business, and maintains a large force of skilled
personnel and a great deal of equipment, including 75
tractors, sprayer wagons, fertilizer trucks, and the like.
Without the consent of the company, the landowner or
purchaser has no right of entry to market the crop;
[Footnote 2] thus, there is ordinarily no right to specific fruit.
The company is accountable only for an allocation of the net
profits based upon a check made at the time of picking. All
the produce is pooled by the respondent companies, which
do business under their own names.
The purchasers, for the most part, are nonresidents of
Florida. They are predominantly business and professional
people who lack the knowledge, skill, and equipment
necessary for the care and cultivation of citrus trees. They
are attracted by the expectation of substantial profits. It was
represented, for example, that profits during the 1943-1944
season amounted to 20%, and that even greater profits
might be expected during the 1944-1945 season, although
only a 10% annual return was to be expected over a 10-year
period. Many of these purchasers are patrons of a resort
hotel owned and operated by the Howey Company in a
scenic section adjacent to the groves. The hotel's advertising
mentions the fine groves in the vicinity, and the attention of
the patrons is drawn to the
Page 328 U. S. 297
groves as they are being escorted about the surrounding
countryside. They are told that the groves are for sale; if
they indicate an interest in the matter, they are then given a
sales talk.
It is admitted that the mails and instrumentalities of
interstate commerce are used in the sale of the land and
service contracts, and that no registration statement or letter
of notification has ever been filed with the Commission in
accordance with the Securities Act of 1933 and the rules and
regulations thereunder.
Section 2(1) of the Act defines the term "security" to include
the commonly known documents traded for speculation or
investment. [Footnote 3] This definition also includes
"securities" of a more variable character, designated by such
descriptive terms as "certificate of interest or participation in
any profit-sharing agreement," "investment contract," and,
"in general, any interest or instrument commonly known as
a security.'" The legal issue in this case turns upon a
determination of whether, under the circumstances, the land
sales contract, the warranty deed and the service contract
together constitute an "investment contract" within the
meaning of 2(1). An affirmative answer brings into
6
operation the registration requirements of 5(a), unless the
security is granted an exemption under 3(b). The lower
courts, in reaching a negative answer to this problem,
treated the contracts and deeds
Page 328 U. S. 298
as separate transactions involving no more than an ordinary
real estate sale and an agreement by the seller to manage
the property for the buyer.
The term "investment contract" is undefined by the
Securities Act or by relevant legislative reports. But the term
was common in many state "blue sky" laws in existence prior
to the adoption of the federal statute, and, although the
term was also undefined by the state laws, it had been
broadly construed by state courts so as to afford the
investing public a full measure of protection. Form was
disregarded for substance, and emphasis was placed upon
economic reality. An investment contract thus came to mean
a contract or scheme for "the placing of capital or laying out
of money in a way intended to secure income or profit from
its employment." State v. Gopher Tire & Rubber Co., 146
Minn. 52, 56, 177 N.W. 937, 938. This definition was
uniformly applied by state courts to a variety of situations
where individuals were led to invest money in a common
enterprise with the expectation that they would earn a profit
solely through the efforts of the promoter or of some one
other than themselves. [Footnote 4]
By including an investment contract within the scope of
2(1) of the Securities Act, Congress was using a term the
meaning of which had been crystalized by this prior judicial
interpretation. It is therefore reasonable to attach that
meaning to the term as used by Congress, especially since
such a definition is consistent with the statutory aims. In
other words, an investment contract, for purposes of the
Securities Act, means a contract, transaction
Page 328 U. S. 299
or scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts
of the promoter or a third party, it being immaterial whether
the shares in the enterprise are evidenced by formal
certificates or by nominal interests in the physical assets
employed in the enterprise. Such a definition necessarily
underlies this Court's decision in SEC v. Joiner Corp., 320 U.
S. 344, and has been enunciated and applied many times by
lower federal courts. [Footnote 5] It permits the fulfillment of
the statutory purpose of compelling full and fair disclosure
relative to the issuance of "the many types of instruments
that, in our commercial world, fall within the ordinary
concept of a security." H.Rep. No.85, 73rd Cong., 1st Sess.,
p. 11. It embodies a flexible, rather than a static, principle,
one that is capable of adaptation to meet the countless and
variable schemes devised by those who seek the use of the
money of others on the promise of profits.
The transactions in this case clearly involve investment
contracts, as so defined. The respondent companies are
offering something more than fee simple interests in land,
something different from a farm or orchard coupled with
management services. They are offering an opportunity to
contribute money and to share in the profits of a large citrus
fruit enterprise managed and partly owned by respondents.
They are offering this opportunity to persons who reside in
distant localities and who lack the equipment
Page 328 U. S. 300
and experience requisite to the cultivation, harvesting, and
marketing of the citrus products. Such persons have no
desire to occupy the land, or to develop it themselves; they
are attracted solely by the prospects of a return on their
investment. Indeed, individual development of the plots of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
land that are offered and sold would seldom be economically
feasible, due to their small size. Such tracts gain utility as
citrus groves only when cultivated and developed as
component parts of a larger area. A common enterprise
managed by respondents or third parties with adequate
personnel and equipment is therefore essential if the
investors are to achieve their paramount aim of a return on
their investments. Their respective shares in this enterprise
are evidenced by land sales contracts and warranty deeds,
which serve as a convenient method of determining the
investors' allocable shares of the profits. The resulting
transfer of rights in land is purely incidental.
Thus, all the elements of a profit-seeking business venture
are present here. The investors provide the capital and share
in the earnings and profits; the promoters manage, control,
and operate the enterprise. It follows that the arrangements
whereby the investors' interests are made manifest involve
investment contracts, regardless of the legal terminology in
which such contracts are clothed. The investment contracts
in this instance take the form of land sales contracts,
warranty deeds, and service contracts which respondents
offer to prospective investors. And respondents' failure to
abide by the statutory and administrative rules in making
such offerings, even though the failure result from a bona
fide mistake as to the law, cannot be sanctioned under the
Act.
This conclusion is unaffected by the fact that some
purchasers choose not to accept the full offer of an
investment contract by declining to enter into a service
contract with
Page 328 U. S. 301
the respondents. The Securities Act prohibits the offer, as
well as the sale, of unregistered, nonexempt securities.
[Footnote 6] Hence, it is enough that the respondents merely
offer the essential ingredients of an investment contract.
We reject the suggestion of the Circuit Court of Appeals, 151
F.2d at 717, that an investment contract is necessarily
missing where the enterprise is not speculative or
promotional in character and where the tangible interest
which is sold has intrinsic value independent of the success
of the enterprise as a whole. The test is whether the scheme
involves an investment of money in a common enterprise
with profits to come solely from the efforts of others. If that
test be satisfied, it is immaterial whether the enterprise is
speculative or nonspeculative, or whether there is a sale of
property with or without intrinsic value. See SEC v. Joiner
Corp., supra, 320 U. S. 352. The statutory policy of affording
broad protection to investors is not to be thwarted by
unrealistic and irrelevant formulae.
Feb. 19, 2016 (Spouses Tan)
We saw yesterday the rules with respect to disclosure on the
part of those:
First: With 5% or more of the outstanding capital stock of
the corporation, you must disclose the true beneficial owner.
What are some of the practices in the stock market by which
they circumvent this rule? The problem is if you want to
control a corporation and you start buying shares what
happens in the stock market? The price of the shares starts
going up. That is why, what people do is they look for the
sizable and substantial stockholders and then they contact
them. They agree on the price. It will not be the price that is
recorded in the stock market in its last transaction. It will be
between the parties. And certainly if this seller if he is in
need of money he will ask for a high premium for the
acquirer to pay. So where does that leave the small
7
stockholder? He will not get the benefit of the stock market
which is built on the basis of open and transparent
transactions.
Remember the basis is if you put the price at which the
shares are bought and sold the true price is likely to prevail
because everybody knows this is the price. That is the whole
point. Then if you transact with the owner, nag-agree na mo
sa price, subsequently what will you do? You just record it.
That is what you call an over the counter transaction. So
the purpose of the recording is defeated already. The price is
agreed first before the recording of the transaction.
You will say, ayaw nalang e-record. You just transact right
there and you do not transact through the stock market.
Patay ka ana kay 10% man ang capital gains tax. But in the
stock market the capital gains tax is only of 1%.
Eventually they will list otherwise they will pay the higher
capital gains tax.
The moment you acquire 5% or over you must disclose. If
you acquire 35% of the OCS then you must make a tender of
offer. A Tender Offer is a publicly announced intention by
the person acting alone or in concert with other persons to
acquire equity securities of a public company and listed in
the stock exchange. It is also defined as an offer by an
acquiring person to stockholders of the public company for
them to tender their shares on the terms specified in the
offer.
When must tender offer be made to shareholders? Tender
offer must be made to those holders with the class of shares
to be acquired when:
a. Any person or group of persons acting in concert
intends to acquire 35% or more of the equity shares
in a public company.
b. Any person or group of persons acting in concert
intends to acquire 35% or more of the equity shares
in a public company in one or more transactions
within a period of 12 months or 1 year. This is
called Creeping 35%. Hinay-hinayon man nimo
pag-acquire, why? Because di ka gusto musaka ang
presyo. If you have the intention to gradually
acquire up to 35% what is the significance of this
35%? You do not control the corporation with that
number. Ngano man 35% man magsugod ang
tender offer rule? 35% is already a blocking
minority. Certain decisions according to Section 6
of the corporation code requires 2/3 ratification of
the stockholders. How much is that? That is
66.66%. If you have 35% of the OCS you can block
increase/decrease of capital stock. You can stop the
corporation from entering into a merger or
acquiring/entering into another business or
corporation. So that is the significance. Whether it is
outright 35% or it is creeping 35% you must make
a tender offer.
Now, what do many people do like Mr. Pangilinan when he
took over MERALCO? First, he bought 34%. Then they
waited for 1 year. Then they are no longer subject to the
tender offer rule. They acquired 44% so they are not
covered by the next rule which is the General Offer Rule.
If the acquisition of even less than 35% would result in the
ownership over 51% of the total outstanding securities of the
company the acquirer must make a tender offer for all the
outstanding equities security and that is a general offer no
longer a tender offer. You must say I am willing to buy
everybody at this price of all remaining stockholders of the
said company at the price reported by a fair opinion by an
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
independent financial advisor or an equivalent 3rd party and
in such case the acquirer shall be required to accept any and
all securities thus tendered.
What is the meaning of this Swiss Challenge? Di ba gi-
explain ko na na? Let us say the charter of the corporation
gives the existing stockholders the right of first refusal for
any disposition of shares. So any stockholder who wants to
dispose of his shares must give the corporation of the
existing stockholders the chance to purchase the shares. So
what do you do? You look for a buyer of the shares. When
you have found one you announce it. This group is willing to
buy my shares at this much. So you are effectively informing
this corporation or the existing stockholders to exercise their
right of first refusal. If you cannot meet that same price all
you have to do is meet the same price that the 3rd party is
willing to buy. If you cannot meet that then he will sell to the
3rd party. That is a Swiss challenge. You do not have top it
you just have to equal it.
Are there exceptions to the tender offer rule? A mandatory
tender offer shall not apply to the following:
1. Any purchase of shares from the unissued capital
stock provided that the acquisition will not result in
a 50% or more ownership of shares by the
purchaser. This means that so many did not
exercise their pre-emptive right. So the board is left
with the option on how to dispose and in what
proportion to offer the shares of stock. The tender
offer rule does not apply to this.
2. Any purchase of shares from an increase of the
authorized capital stock because that is pre-emptive
right.
3. Purchases in connection with the privatization
undertaken by the government of the Philippines.
When PBN was privatized it was basically a
negotiated sale. The government opened it for
bidding but subsequently there was no tender offer
that was available.
4. Purchases in connection with corporate
rehabilitation under court supervision.
5. Purchases through an open market at the prevailing
market price.
6. Mergers and consolidation.
What are the rules with respect to proxy? That is covered by
Section 20.
SEC. 20. Proxy Solicitations. 20.1. Proxies must be
issued and proxy solicitation must be made in accordance
with rules and regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder
or his duly authorized representative and filed before the
scheduled meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than five (5)
years at one time.
20.4. No broker or dealer shall give any proxy, consent or
authorization, in respect of any security carried for the
account of a customer, to a person other than the customer,
without the express written authorization of such customer.
20.5. A broker or dealer who holds or acquires the proxy for
at least ten per centum (10%) or such percentage as the
Commission may prescribe of the outstanding share of the
8
issuer, shall submit a report identifying the beneficial owner
within ten (10) days after such acquisition, for its own
account or customer, to the issuer of the security, to the
Exchange where the security is traded and to the
Commission.
What does this mean? If you are a punter (Google: one who
gambles in the stock market by buying and selling stocks)
and you play the stock market you go in and out. Before ka
mamalit ug shares mutawag sa ka ug broker. Mu-ingon ka na
can you be my broker? Kinsa man ka? Describe ka sa imong
kaugalingon unya aron magka-amigo ta you open an account
with me and then I will execute your orders up to your
account. I will deposit with you P 1 million and you execute
my orders.
The following day you tell the broker, buy San Miguel Corp.
class A shares at the market. What does that mean? Kung
unsay presyo diha na nilakra diha sa katapusang transaksyon
mao nang presyoha, palita 10,000 shares. Asa man siya
mukuha ug kwarta? Didto sa imong account kay ni-abri man
ka ug account sa broker ug nideposito man ka. Unya
mangutana ang broker, do you want this certificated? Unsa
may pasabot ana? Gusto ba nimo kuhaon tong certificates
representing the shares of stock that you bought. Then you
say no keep it long. Thats the terminology.
That means that the broker will just hold the certificate of
stock of the seller endorsed at the back, iya ra na kuptan.
Dili na siya muhatag ug certificate sa imo. Unsa na lang man
iya ihatag sa imo? What he will give you is what you call a
confirmation slip which says executed by the holder of
1,000 shares of San Miguel at this much. So mao nay imong
evidence that you have in trust for you with this broker at
this much shares which he bought for you.
Come stockholders general meeting of San Miguel, who will
vote for those shares? Your name does not appear in the
books of the corporation kay long man na wa man kay
certificate. But the stock broker has the certificates. Can the
stock broker not go the secretary of San Miguel and say I am
holding these certificates and exercise the votes? I will be
the proxy. Can the broker do that? The law says there must
be a written approval by the client because the broker is not
the owner of the certificates. The client is the true owner.
Then 20.5 provides for the transparency report made by the
broker if the broker holds the proxy of up to 10% OCS. That
means that he has a written approval and he has to make a
report to the stock exchange etc.
Can the broker hold a trustees certificate and exercise the
vote? Im talking about a voting trust agreement. Can the
broker hold that? He cannot. Remember, a voting trust
agreement once it is executed you must give a copy to the
secretary of the corporation the issuer. And then it is the
issuer who issues a voting trust certificate to the one who
bought the voting trust agreement. Then he (the purchaser)
will issue a certificate to the trustor that he will be the
trustee. The broker cannot enter into a voting trust
agreement because the broker cannot buy for himself the
shares of stock. The broker always buys the shares of stock
for others. Thats why in the Securities Code the broker only
holds proxies and he does so only if there is an express
written permission from the customer.
[Father tells a story about a broker who ran off with the
certificates he possessed then blackout! And continued
telling the story anyway.]
What are the unlawful acts in the sale of any equity? It will
be unlawful for any beneficial owner, director or officer
directly or indirectly to sell any equity security of such issuer
if the person selling the security or his principal:
(a) Does not own the security sold; or
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
(b) If owning the security, does not deliver it against such
sale within twenty (20) days thereafter, or does not within
five (5) days after such sale deposit it in the mails or other
usual channels of transportation; but no person shall be
deemed to have violated this subsection if he proves that
notwithstanding the exercise of good faith he was unable to
make such delivery or deposit within such time, or that to do
so would cause undue inconvenience or expense. (Section
23.3)
This is now outmoded these rules because now they
encourage electronic certification and no longer paper
certification in our stock market because of the numerous
transactions. Singapore is almost 100% electronically
certificated they no longer exchange certificates of stocks.
Can you sell shares which you do not own or you still do not
have? Yes you can because the law says if owning the
certificate, does not deliver it within 5 days so you still have
5 days. Baligya ka ug security padulong na sa ubos ang
presyo, it is selling at 30, 27, 26, 25. You sell it at 25 for
1,000 shares hoping meet it here (father makes a gesture of
meeting in the middle) and the following day you can buy at
23. That is called shorting or short-selling. Padulong na sa
ubos ang shares of stock and since you have time to meet it,
you short it. If you have been listening to Bloomberg,
pangutan-on man na nila ang mga analysts are you shorting
it or are you long on this? Mao nay pasabot ana.
Whether the market is going up or the market is going down
you can still make money. Pero the ordinary market here is
buy low and sell high. Mao ra na inyo nahibal-an, palit ka ug
barato baligya ka pagsaka. Pero padulong gani sa ubos ang
market its a bear market and its not a bull market. Unsa
man pasabot ana? Bull: pasaka ang market ka ang bull
(acting like a bull) pataas daw ang sungay pag-attack. Bear:
pa ubos ang market ka yang bear (acting like a bear) kawras
man pa ubos pag-attack.
If the market is bearish the tendency is you short it.
In the equities and financial markets there are two kinds of
philosophies.
1. Fundamental school
2. Technical school.
If you belong to the fundamental school you trade stock or
buy or sell stocks on the basis of the financial statements of
the issuer. You look at their financial history whether the
profits are going up. You are fundamental school.
If you are a technical analysis school, what do you do? You
ignore financial statements. What do you look at? You look
at the graphs. You study the graphs: how the market
behaves. Their thesis is everybody looks at the fundamentals
or the financial statements. So the study of financial
statements is already in the graphs.
Mu-ingon na sila na its dead cat bounce. Primiro pagsaka
sa presyo sa oil after the agreement of Saudi Arabia and
Russia. Russia produces about 9 million barrels a day and
Saudi produces about 12 million barrels a day. They met and
agreed that they will hold their volume. Nisaka ang presyo sa
market. After 2 days balik na sad. Makit-an man na nimo sa
graph. Gikan sa ubos sa graph unya naay kalit ug taas
gamay. Mu ingon sila na kana that is dead cat bounce. Patay
na iring imong gibutangan ug sawop nilukso siya. Naa pud
double-shoulder. (I cant remember the gestures father
made at this point but I think he means that when the graph
rises then plateaus and then goes down a double-shoulder
happens). Naa daw abaga then ulo unya naa gyud na abaga
sa pikas.
The ones who really study the graphs are the so-called day
traders. Kanang day traders they specialize on 1 or 2 issues.
9
Lets say San Miguel or MERALCO, kani lang sila ilang gitun-
an. They know the graph there and the history. Unya mao
lang na ilang bantayan sa usa ka adlaw. Sulod sila unya
gawas dayon mao lang tong ila trade. Their margins are very
little.
They trade for the day and they win or lose for the day.
Unya dili na sila mupadayon. Kung sugal pa na mu adto sila
sa casino mag-baccarat sila pusta sila ka usa ug kadsuha
unya biya dayon. Thats the advantage you have over the
house that you can leave at anytime. Mao na sila gitawag
day traders. Makaganansya sila 1000 or 500 mu-uli na sila
naka-boundary na sila kung taxi drivers pa sila. Kung mapildi
sila, cut your losses and leave tomorrow is another day. But
they know the graph of a particular issue.
So, it is not unlawful to sell, lets say equity, which you still
do not own as long as when the day of the settlement
arrives, you can produce it. That is the law of the SRC.
CHAPTER VII
Prohibitions on Fraud, Manipulation and Insider
Trading
What are those?
There is the prohibition of the so-called unlawful acts,
prohibition of fraud.
SEC. 24. Manipulation of Security Prices; Devices and
Practices.
24.1 It shall be unlawful for any person acting for himself
or through a dealer or broker, directly or indirectly:
a) To create a false or misleading appearance of active
trading in any listed security traded in an Exchange or any
other trading market (hereafter referred to purposes of this
Chapter as Exchange):
(i) By effecting any transaction in such security which
involves no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or
sale of such security with the knowledge that a simultaneous
order or orders of substantially the same size, time and price,
for the sale or purchase of any such security, has or will be
entered by or for the same or different parties; or
(iii) By performing similar act where there is no change
in beneficial ownership.
b) To effect, alone or with others, a series of
transactions in securities that:
(i) Raises their price to induce the purchase of a
security, whether of the same or a different class of the
same issuer or of a controlling, controlled, or commonly
controlled company by others;
(ii) Depresses their price to induce the sale of a security,
whether of the same or a different class, of the same issuer
or of a controlling, controlled, or commonly controlled
company by others; or
(iii) Creates active trading to induce such a purchase or
sale through manipulative devices such as marking the close,
painting the tape, squeezing the float, hype and dump, boiler
room operations and such other similar devices.
c) To circulate or disseminate information that the price
of any security listed in an Exchange will or is likely to rise or
fall because of manipulative market operations of any one or
more persons conducted for the purpose of raising or
depressing the price of the security for the purpose of
inducing the purchase or sale of such security.
d) To make false or misleading statement with respect
to any material fact, which he knew or had reasonable
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
ground to believe was so false or misleading, for the purpose
of inducing the purchase or sale of any security listed or
traded in an Exchange.
e) To effect, either alone or others, any series of
transactions for the purchase and/or sale of any security
traded in an Exchange for the purpose of pegging, fixing or
stabilizing the price of such security, unless otherwise
allowed by this Code or by rules of the Commission.
24.2. No person shall use or employ, in connection with
the purchase or sale of any security any manipulative or
deceptive device or contrivance. Neither shall any short sale
be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security except
in accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
24.3. The foregoing provisions notwithstanding, the
Commission, having due regard to the public interest and the
protection of investors, may, by rules and regulations, allow
certain acts or transactions that may otherwise be prohibited
under this Section.
It is important for you to know certain terms like wash
sale. What is a wash sale? It is not the same as that
referred to under the NIRC which you already took.
Can you remember what a wash sale is under the
NIRC?
Within one year a certain capital good you sell is sold back to
you and then you sold it back again (?). I will leave that to
you.
But a wash sale here means mutawag ka sa broker, Buy
me San Miguel at P72 per share. It is trading at P50 ha but
you called your broker to buy you at P72 per share. Unya
mutawag na sad ka ug laing broker, sell me San Miguel at
P72, 1 000 shares. Kinsa may nagbaligya? Ikaw. Kinsay
nipalit? Ikaw ra sad. Duha ka broker imong gigamit. Its
called a wash sale because there is no real transfer of
ownership. There is no transaction. You are creating a false
or misleading appearance of active trading when there is
none. That is prohibited.
What is a matched order?
Pre, ugma inig abri sa stock market ug 9am, muadto lang ko
kadyot. Unya pagka alas 10, tawag ka sa imong broker,
mupalit ka ug San Miguel, P72. Ako sad mubaligya ko, P72
sad. After 1 hour, ako nasad mupalit, ikaw nasad mubaligya.
Siguraduha baya ha? Texi ko ha kung ready ka na? Unsa
man na? gi-match lang nimo. Actually, nobody is trading. It
is a dead issue but you are creating a false impression or if it
is traded, it is traded at a much lower price. Ikaw ray
nagpataas ana. That is a fraudulent act. That is prohibited.
Those are few of the prohibited practices and there are many
of them. Naa pay put, option, etc.
What is pegging the close?
Daghan kaayo ka ug shares of stock sa San Miguel pero
gipalit na nimo P70. San Miguel is trading at P60, P55,
mubalik saka ug P60, balik nasad ug P55. Wa gyud na
mugawas sa P55-P60 range. Unya nia, imong San Miguel
stocks daghan kaayo, unya P70 may imong palit ana. Gusto
nimo pasakaon. So, bantayan nimo ang trading. Hapit na
gani, mga 25 secoonds nalang gani na mu-close na ang
trading, tawag ka sa imong broker, Sell San Miguel at P72.
Ikaw raman ang naa unya daghan ka shares, baligya nimong
1 000 shares, di mao toy mulakra. It gives a false impression
that from P55-P60 range, nisaka na ug kalit. Pagka ugma
ana, makaingon ng mga tao, Oi, nisaka diay ang San
Miguel, anhi ta magsugod dinhi because you pegged the
10
close. Imong gimarkahan ang pagsira ba. That is a
prohibited practice.
Daghan na. Mabuang mo ug basa ana sa Sec 24, taas kaayo
na especially the fraudulent practices.
Now, how is that likened to your experience? [Chika about
pangilad anang 3 ka lata na tag-an2 and shrills in Las Vegas]
When you conjure or simulate trading activity in one issue
when there is none, you are attracting people to be
interested and you are manipulating the market.
Another practice which is prohibited is the so-called insider
trading.
Who is an insider?
3.8. Insider means:
(a) the issuer;
(b) a director or officer (or person performing similar
functions) of, or a person controlling the issuer;
(c) a person whose relationship or former relationship to the
issuer gives or gave him access to material information about
the issuer or the security that is not generally available to the
public;
(d) a government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information about
an issuer or a security that is not generally available to the
public; or
(e) a person who learns such information by a
communication from any of the foregoing insiders.
There are 5 ways to be an insider:
1) Issuer;
2) A director or officer (or person performing similar
functions) of, or a person controlling the issuer;
3) A person whose relationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public (you are an
inside track?);
4) A government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
5) A person who learns such information by a
communication from any of the foregoing insiders.
That is the actor, ha? The actors are the insiders.
What is a material non-public information?
That is defined in Sec 27.2.
27.2. For purposes of this Section, information is material
non-public if:
(a) It has not been generally disclosed to the public and
would likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or
(b) would be considered by a reasonable person important
under the circumstances in determining his course of action
whether to buy, sell or hold a security.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
If you are an insider, you possess material information not
disclosed to the public and you trade shares and gained, that
is unlawful. The gain will be confiscated from you even if you
spent money in realizing that gain.
27.3. It shall be unlawful for any insider to communicate
material non-public information about the issuer or the
security to any person who, by virtue of the communication,
becomes an insider as defined in Subsection 3.8, where the
insider communicating the information knows or has reason
to believe that such person will likely buy or sell a security of
the issuer while in possession of such information.
Gikiha ka kay insider ka, what are your defenses?
That is provided by Sec 27.1
27.1. It shall be unlawful for an insider to sell or buy a
security of the issuer, while in possession of material
information with respect to the issuer or the security that is
not generally available to the public, unless:
(a) The insider proves that the information was not gained
from such relationship; or
(b) If the other party selling to or buying from the insider (or
his agent) is identified, the insider proves: (i) that he
disclosed the information to the other party, or
(ii) that he had reason to believe that the other party
otherwise is also in possession of the information.
A purchase or sale of a security of the issuer made by an
insider defined in Subsection 3.8, or such insiders spouse or
relatives by affinity or consanguinity within the second
degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-public
information if transacted after such information came into
existence but prior to dissemination of such information to
the public and the lapse of a reasonable time for the market
to absorb such information: Provided, however, That 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 the time of the purchase or sale.
That is why all the listed companies make a disclosure with
the Philippine Stock Exchange (PSE). Once you have
disclosed a material information, it is no longer non-public.
How do you disclose it?
By filing it with the PSE office. That is already presumed as
public information.
Now, let us make it concrete. They are now digging north of
Malampaya. Thats a consortium. Exon, Shell, Chevron,
Petron, the government are part of it. you are a newspaper
person and you convinced the government, especially Sec
Purisima, that you can make a write-up and it will be
disseminated and it will put the Philippines on the map and
encourage investors to come here. So you write about this
and you are asking to get you to the offshore platform.
Sakay ka sa helicopter, gidala ka didto. Pag-abot nimo didto,
mao man gyuy pagbusok sa oil. Gawas gyud ang oil so
nobody can leave the platform. Kuha dayo na sila ug sample.
Embargo tanan inyong cellphones and nobody can leave the
platform because this is material information. It can influence
a reasonable mind whether or not to make a decision to buy,
sell, or hold the security. Kanang tanan dinha nga nanagapil,
Petron, Shell, Exonn Mobil, they are all traded in the stock
market. Naa ka ana, saka gyud ng presyo nimo kay nakaigo
naman sila sa oil. Naa ka man diay extra nga cellphone.
Satellite pa gyud (?). Dali dali ka ug tawag sa imong asawa.
Day, dali-a day. Palit na dayon ug Petron kutob sa kwarta
nimo sa banko. Palita na. Wa pa man silay hanaw ana. Wa
pa man misaka ang presyo. That is non-public information.
3-4 days later , pagdisclose na, wa na, sirit sirit na stocks.
11
Pero ikaw, naka-posisyon ka na, nakapalit ka na. That is one
way you perpetuate fraud.
[Chika about Mr Boesky, an Merger & Acquisition lawyer of
JP Morgan na famous insider kay if ma-feel na niya na mag
push through ang merger, munaog na sya sa iyang office sa
Wall Street, adto sya ug phone booth and call his bank,
Credit Swiss in Switzerland (not in Suez Canal) to buy shares
for his account. After the merger, musaka na ang presyo sa
iyang shares of stocks and make a lot of money. He did that
for couple of years. Then the men in black showed up in his
office. Nadakpan siya because the NYSE installed a program
that detects insider trading based on a graph kay mupalit sad
ang Swiss Bank sa iyang ginapapalit na stocks. He wrote a
book about insider trading and then nakakwarta nasad sya.
Nabawi niya ang gikuha sa iya na kwarta. Then a law was
enacted in the US na after you commit a crime, you should
not profit from your story.]
Now, what is the problem of insider trading? The problem is
structural insider trading. What is structural insider trading?
Structural insider trading is substantial stockholders of a
publicly-traded firm retirement funds, etc. Tagaan man na
sila ug special briefing of the planned moves of the
corporation ahead of the public. Naa na sila diha sa
pagplano, etc. in the guise of informing them as
stockholders. So they have information ahead of the general
public.
Ill give you an example. PLDT is traded in the NYSE, in
London, in Singapore by way of Asian Depositary Receipts
(ADR). Its a security, the underlying value of which is the
shares of stocks of PLDT. It is called PLDT ADRs. They are
traded. Many of those who buy it are retirement funds,
hedge funds, mutual funds. Unya mureport ng mga
executives sa PLDT, the plan is this, etc. then, pagkahuman
ana naay question question tapos kaon. Pagkahuman ug
kaon ana, naa na dayon mutupad sa treasurer, sa investors
relation manager, mangutana ug What do I get if I put in
$5M - $10M? So, he will give his number to the treasurer
himself. You will be given these bulletins as to the activities
of PLDT.
So kahibalo sila ahead of the general public. They have the
time to react before the public even knows by way of
disclosure. It may be only a matter of hours but they are
ahead. They can call their brokers and their brokers can act
simply at the push of a button. That is the big anomaly. That
is structural insider trading. Bug-at gani ka, daghan ka ug
kwarta i-invest, naa kay pipeline of information not open to
the general public. Ultimo ra gani ka nga mamalitay, gamay
ra kaayo ka, di ka makauna sa balita na makapahimo nimo
ug kwarta ug makapawala sa imong kwarta. That is a big
discussion now in the economist market how will you
control structural insider trading.
Manipulative practices that are done during or while the
tender offer has commenced
27.4. a) It shall be unlawful where a tender offer has
commenced or is about to commence for:
(i) Any person (other than the tender offeror) who is in
possession of material non-public information relating to
such tender offer, to buy or sell the securities of the issuer
that are sought or to be sought by such tender offer if such
person knows or has reason to believe that the information is
non-public and has been acquired directly or indirectly from
the tender offeror, those acting on its behalf, the issuer of
the securities sought or to be sought by such tender offer, or
any insider of such issuer; and
(ii) Any tender offeror, those acting on its behalf, the issuer
of the securities sought or to be sought by such tender offer,
and any insider of such issuer to communicate material non-
public information relating to the tender offer to any other
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
person where such communication is likely to result in a
violation of Subsection 27.4 (a)(i).
Naay tawo, gusto sya mu-take over sa corporation. Iyang
plano, magsugod na sya ug 35%. Actually, his plan is paliton
niya tanan pero di pa sya gusto mahalon ug palit so hinay-
hinay sa sya. Kasagaran, imong buhaton ana, mag-employ
ka ug daghang broker. Unya dinhi gani ka sa Pilipinas, dili
ikaw mismo ang mutawag sa broker. Mailhan ka nga ikaw
diay ang maoy naay tuyo. Mutawag ka sa SG, sa HK, sila
nga brokerage didto mangita silag mga brokers diri, sila
maoy mu-execute sa imong plano. Hinay-hinay ug
accumulate ha? Say, accumulate Victorias Milling. Bisag wa
pay tender offer. Ikaw sa madugay na, naa nakay pondo
diha, mugawas ka dayon, tender offer, ako, mupalit ko kini
nia. Unya barato ra kaayo ang presyo nimo. Pero naa na gud
ka ana daan kay 35% ka kay nag-una man ka. That is also a
fraudulent practice prohibited by the SRC.
CHAPTER IX
Exchanges and Other Securities Trading Markets
Mao ning akong ginaingon nga mga derivatives. [Mao ni ang
estimate sa Newsweek in Oct 27, 2008, 450 trillion
derivatives. Chika about bonds and equities in the world.
Basaha daw nganong nidaghan ang derivatives. Because it is
unregulated. It is not traded in stock exchange. It is over-
the-counter.]
What is over-the-counter?
SEC. 32. Prohibition on Use of Unregistered Exchange;
Regulation of Over-the-Counter Markets. -
32.1. No broker, dealer, salesman, associated person of a
broker or dealer, or Exchange, directly or indirectly, shall
make use of any facility of an Exchange in the Philippines to
effect any transaction in a security, or to report such
transaction, unless such Exchange is registered as such
under Section 33 of this Code.
32.2. a) No broker, dealer, salesman or associated person
of a broker or dealer, singly or in concert with any other
person, shall make, create or operate, or enable another to
make, create or operate, any trading market, otherwise than
on a registered Exchange, for the buying and selling of any
security, except in accordance with rules and regulations the
Commission may prescribe.
b) The Commission may promulgate rules and regulations
governing transactions by brokers, dealers, salesmen or
associated persons of a broker or dealer, over any facilities of
such trading market and may require such market to be
administered by a self-regulatory organization determined by
the Commission as capable of insuring the protection of
investors comparable to that provided in the case of a
registered Exchange. Such self-regulatory organization must
provide a centralized marketplace for trading and must
satisfy requirements comparable to those prescribed for
registration of Exchanges in Section 33 of this Code.
Remember, all these people have to be registered with the
SEC before they can function as such broker, dealer,
salesman, associated person of a broker or dealer or
exchange. Mao na atong stock market is a self-regulatory
organization (SRO). The SEC will not intervene unless the
PSE is in a very bad light. They can discipline their brokers,
they check the practices of their brokers. They have a
prosecutorial office, etc.
Nganong naa may trading outside the stock market or why
are there issues traded outside of the stock market?
Because the stock market is not open 24 hours. During the
times when it is closed, there are people who will buy or who
will sell. Ikaw broker ka or dealer ka, naa kay daghan
MERALCO and then MERALCO is also traded in Wall Street by
12
an ADR. Ang palit nimo diri sa MERALCO, taas. Say, ang palit
nimo P300 per share. Unya, nikalit ug kusgan ang peso. Ni-
deperensya ang dollar ug 3 pesos. Instead of 47.72. it is now
traded at 44. Unsa may temptasyon ana? Mupalit ka didto sa
Wall Street ug ADR. Unya, pag abri, una pa ka mubaligya sa
imoha kay pulihan nimo kay mu-ginansya man ka. You did
not gain because something happened to the issuer, you
gained because of foreign exchange. So, mu-transact ka ana
bisan wala pa muabri ang stock market. itransact na na
nimo. Mao nay gitawag ug arbitrage.
I-google ra gud na ninyo unsay pasabot ana.
What is arbitrage?
Arbitrage is the simultaneous purchase and sale of an asset
in order to profit from a difference in the price. It is a trade
that profits by exploiting price differences of identical or
similar financial instruments, on different markets or in
different forms. Arbitrage exists as a result of market
inefficiencies; it provides a mechanism to ensure prices do
not deviate substantially from fair value for long periods of
time.1
Didto, lain ang currency nila, diri lain man, eh di muginansya
ka not because of the inherent change in value of the goods
sold but because of the currency fluctuation. So, sira pa
dinhi, palit ka didto. Balhin na nimo diri imong karaan.
Baligya na nimo diri aron makakwarta ka didto.
[Chika about Mr. George Soros, mug-ot daw ug nawng.
Expert ug arbitrage. ]
FGN: Wa man gyuy na-excite ninyo. Wa man gyuy nalipay
ninyo ani. Anyway, you just have to know enough of it so
that you will not go crashing like the stock market in the
exam.
Feb. 24, 1016 (LJQ)
Special laws & provision of the 902 Securities Regulation
Code and Financial Rehabilitation & Insolvency Act (FRIA)
So we have seen the 3 kinds of fraudulent activities that are
proscribed by the Securities Regulation Code.
1. Fraudulent Manipulations; remember, wash sale,
matched order, etc.
2. Insider Trading. We regain stocks buying or selling
and you are in possession of a material information
not disclosed to the public and you profit thereby. So
that is fraudulent.
Corporations that are traded in the stock market making
special favors to big investors. They gather them on a so
called Investors Briefing so they know the latest
developments _ public even if it is just a few hours of the
day. So they can make the necessary moves to defend
themselves.
The publicly listed corporations do not want to antagonize
huge investors, big investors. How big is big? REALLY BIG
@@
Blackrock $4.5 trillion Assets
PIMCO, it is in fixed income business, bonds, how much in
bonds does it trade/manage. Because they keep several
portfolios.
Who is Mohamed El-Erian? He is an American
businessman, chief economic adviser at Allianz, a
multinational financial services company. He is the former
CEO and co-chief investment officer at PIMCO, a global
1
http://www.investopedia.com/terms/a/arbitrage.asp
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
investment firm and one of the world's largest bond
investors, with approximately $2 trillion in assets under
management as of December 2013. PIMCO is a subsidiary of
Allianz.
How much in bonds does PIMCO manage? $2 trillion. Mura
naman nag mga bitoon sa langit. Only astronomers and
micro biologist have a right to deal w/ those numbers. But
investment, they have that kind of money.
What is _? You look-up at youtube, you listen to el-erian. He
just resigned from his CEO post. Why? Because her daughter
w/c is 10 yrs. old told her, we are your biggest investment,
stop your work. That is he told the investing public. He is
one of these, he finished his PhD. very young before he
reached 30 and he was already __ in investment. He just
wrote a book and it is a best seller, The Only Business in
Town. New York best seller. [I searched online, The Only
Game in Town lang ang naa nga book by El-Erian. Father ha]
He is a contrarian. His shares, parts of his analysis, but he
shares it mostly after the fact. Mura bag over ripe na. ang
iya analysis gigamit na niya sa PIMCO, sa Alianz.
How come they have so much funds? Ila ba na? NO. that is
Other People's Money w/c they manage.
The Norway Sovereign Fund is in the vicinity of $750 billion.
Diin man na kawata sa Norway ? nganong naa man sila
anang kwartaha? Because Norway, in its constitution says,
whatever earnings it has from its soil cannot be spent. Only
the interest or the fruits of that can be spent because their
natural resources, according to the constitution, is owned by
every Norwegian, dead, living, and still to be born. So di na
nila mahilabtan, they just invest it and the earnings are what
they use.
So if you have $750 billion, you can only spend the earnings.
What is your number 1 goal? What is you no. 1 pre
occupation?
According to El-Erian, he says that this kind of funds, the no.
1 pre occupation is NOT the return on principal but the
RETURN OF PRINCIPAL. Get it?
Dako kaayo nang kwartaha, asa mn na nimo ibutang, pirting
dakoa anang kwartaha? The no. 1 educational system in the
world, if you read this book, the smartest kids in the world,
the no. educational system is Norway because of the fund.
The average of graduate of high school in Norway speaks 3
languages, some graduates speaks 6 to 8 languages. The
graduates in Norway, high school pa lang already completed
90% of engineering math. Humana silag differential og
integral calculus, naa pa silay gamay analysis.
Why? Because they have so much money. They can pay the
biggest teacher and it is almost on tutorial basis.
They say class size of 25 is an ideal number of size, if you
have more than 25 in a class no amount of technique can
make up for the deficiency of the teacher. But in Norway the
class size is only 12-15.
And they have come of the best oil, Brent oil. The
benchmark, Brent Crude is from the Norwegian sea offshore.
Brent Crude is the most expensive oil because it has the
lowest sulfur content. Its refining process is the cheapest,
even cheaper than Saudi Arabian oil which is one of the
dirtiest oil.
So thats you have these corporations PIMCO, Blackrock.
There are these other smaller funds also billion , trillion. You
manage these funds, you do not disabuse your money that
to make a profit you must produce a profit.
Of the level of investing, you can already make a profit. On
the finance level ang padagan nimo sa kawarta, asa nimo
ibutang ang kwarta. Ilubong ba nimo taguan ba nimo sa __.
13
The form that you chose to possess your assets is it self-
productive on profit. Asa man nimo ibutang imo assets? Sa
bangko? Palit kag yuta, real estate. Palit kag shares-of-stock,
it is in equities. Palit kabag bonds, that is still in the finance
level.
On a finance the level, you can already make a profit or lose
your __. That is why your idea of security is just growing.
We have been saved from the storms, from the ravages of
the fianancial markets. Why? Simply because we are non-
advanced enough to be exposed to financial __.
Ang atong backwardness maoy naka-save nato. They say in
World War II, napildi ang Germany sa Russia dili tungod kay
ngilngig ang Russia, tungod kai backward ang Russia. Gi
atake sila sa Germans daghan kaayo, pila kabuok? 66
kabuok divisions, mga tao lng galakaw. Supported by
another 30 divisions of canons. Unya gamay ra gud kaayoy
ang population sa Russia. Ngano gipildi mn sila? Tungod kai
backward man ang mga dalan, di diri sila agi sa__
nangalubong sila pag abot sa winter . mao lang gika pildihan
sa mga Germans. Stories told on so many books who are left
in defeat, kung unsa kapilit sa lapok sa Russia tangtangon
niya ang botas nimo. Unya ang temperature -15 -20. Pag
tangtang nimo sa imo botas asta imo bukog ma tangtang.
They were defeated by the backwardness of Russia.
Unsaon pag daog sa Pilipino? Backwardness, mao nang
nasalbar ta. Bonds pila ba ning binds nga gi trade nimo?
derivatives wala man tai gi derivatives.
You read Mohamed El-Erian. To me I wonder how he makes
sense of the interest rates when the Sharia Law prohibits the
loaning in interest. So he must be already a very
sophisticated Muslim that he has already rationalized it
because sharia law, that is why there is Amana banks here to
get around the prohibition of Sharia Law from loaning in
interest. The borrowing w/ interest, that is prohibited by
Sharia Law. Mohamed El-Erian, he is a Phd not from Harvard
but his degree is from Europe, he is from London School of
Economics.
I would suggest you read the Only Business(Game) in Town
or read the news. Because he claims that the Only
Business(Game) in Town is the Central Banks in the world.
They are now the holders of so much securities because they
intervene in the open market.
So insider trading, fraudulent manipulative practices and so
called fraudulent practices that are presumptively made by
traders and __.
In seeing that the actors in the various markets require
registration before they can participate in buying or selling
securities. So you are a broker you buy for another not for
yourself , if you are a dealer you buy for yourself.
Broker buys for another
Dealer buys for himself
A broker or dealer has an associate person because normally
these are set-up plus partnerships. They also have
salesperson. All these must be registered and the way to
registration of these actors is not just by paying.
Security, when you register it, you file the necessary papers
and then you just pay.
The actors, when they register, they pay the fee only after
they pass the examination, on the ethics of the industry, on
the proper way to handle yourself vis--vis your clients, your
customers, how will you give financial advice, how do you
ask for a proxy, etc. that is all covered by the Securities
Regulation Code.
So these are all the actors. Now the facilities they are also
registered. What are the facilities to be registered?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
1. Stock Market.
Stock markets deals with equities, share of stock.
2. Financial Markets.
What are the financial markets?
a. Money market
Are those IOUs promissory notes that mature in
less than a year. It does not have collateral, the
moment you issue it, if you are the issuer, right
away you issue a payment. This is the stuff that is
dealt w/ the so called quasi banking institution.
Money Market
b. Bond Market.
Are those that mature in excess of a year.
How long a bond pay? now a bond can be a
perpetual bond. Bonds have collateral.
Those, the Financial, and the equities stock market insist for
entrepreneur to go there to raise funds. They will raise funds
by issuing shares of stock, you can raise funds by issuing a
bond or you can raise funds by issuing a money market item.
There can be a problem of course if you start using money
markets instrument in order to answer for your long term
capital need. Ang kwarta nga imo gihulaman, mapalit diay
nimo og equipment nga dugay pa mabawi nimo. Di pa man
ni siya mugenerate og cash flow unya mabayran nimo. Unya
mahimo raman ni w/in 1 year. Unsaon man nimo pag bayad
ana? Gipalit mana nimo og mga dagko kaayong truck kai in
case i.mining kana, wa man kay pambayad?
Ahh, sayon lang na manghuwan nasad kag laing money
market aron imo ipang bayad ana. Sige kag pang huwam!
There are problems if you do not understand the limits of
each market.
In law they are called facilities. A stock market is a facility. A
bond market is a facility.
A money market is a facility. Why is it called a facility? It is
called a facility because electronically physical space is
rendered a minimal. Standard and Poor (S&P) is a facility for
trading shares of stock and bonds.
Where is it located? Wa na siyay address naa ran a sa
computer, web application aron mahimo i.download.
download nana nila, naa na ta sa market!. Og alas dose na
diay sa gabii? Naa lang gihapon market na hangtod sa als
dose sa gabii. Wa di na mu-ilag oras, di na mu-ilag lugar! Wa
nay respeto sa oras og sa lugar. Maligo ka mahimo ka maka
trade. It is a facility that has no physical address.
Philippine Stock Exchange (PSE), __ man na naay floor.
Hawan na, hain lng mu tungtung og mu lingkod ang mga
brokers. Makita na sila sa mga __ dinha.
Where is the floor of the stock exchange? The PSE in fact
has 2 floors, 1 in Makati & 1 in Pasig. That is testament that
physical location is no longer material.
So it is a facility, it facilitates the meeting of buyers & sellers.
Of what? Of shares of stocks. That is what is registered, the
facility.
Now, there is also the facility, the trades if futures. Futures is
varied because it deals w/ commodities and commodities can
be varied. There can be agricultural commodities. There can
be metals as commodities divided as basic metals & precious
metals. There can be foreign exchange futures that are
traded.
1. Agricultural
2. Metals
14
a. Basic
b. Precious
Futures can be classified as a common futures or a book
futures.
Common. Is a piece of paper that you buy and you say, I
have here a piece of paper that someone in the future, 6
mos. from now is obliged to sell me when I call. US Dollars,
P47 to a dollar. That is basically the rate now.
Nganung ning palit ka anang futures? Ning palit ka ana to
hedge your loan. Your loan will mature 6 mos. from now and
it is in dollars & you have to pay in dollars.
Why do you need that? To protect you against the risk of
foreign exchange.
Suppose by then the Peso-Dollar exchange rate will be P60
to $1. Pag utang nimo, P47 pa lang to $1, your source of
revenue is in pesos kay ang imo baligya puto, Kutsinta,
palitaw, kalamay.
How will you guard against the risk of foreign exchange?
Palit ka og futures.
So __ this futures market, you are not raising capital. What
are you doing, what is your purpose? The purpose is to
minimize risk.
If you are a farmer, unsa man nay imo produkto? Corn.
Hibaw.an na nimo pilay gasto nimo matag ektarya. Pilay palit
nimo sa binhi, pilay palit nimo sa fertilizer, sweldo nimo sa
tao. Karon ng huna-huna ka, dawbe pag abot anig 3 mos.
from now, mubagsak ang presyo sa corn kay daghan man
kaayo mag harvest. Mauli ba kaha ang capital nako diha sa
corn? Maunang mu issue ko og Put Option.
Unsa man na? nga mubaligya ko og corn at this price w/c
about 10% of the break-even price. Nana koy siguradong
ginansya. Protected nako. 6 mos. from now, bisag unsay
presyo sa corn, sigirado ko makaginansya 10%, bawi na
kaayo kay naa may tao nga mupalit sa ako corn at 10%.
Baligya na nimo. What is the purpose? To protect you
against this risk.
Let us say 6 mos. from now, not so much corn was
harvested. What happened? El Nino. Kasagaran cor nga
nabuhi kanang gi attake sa ilaga. Unsa may pnlaban sa
ilaga? Hilo. Hilo-an nimo ang mga ilaga. Gi protetahan man
na nga dili ka magbutang hilo kay nangamatay na ang iro sa
imong mga silingan.
Apply kag hilo, gi hiwi-an raman sa mga ilaga, padayon silag
kaon sa imong corn. Pero nag ampo kang San Isidro,
nidagan mn tanan ilaga. Ikaw raman naka harvest.
Harvest ka na. pila man ang presyo? Doble ang presyo
kanimo nya karon kai ni issue man ka og Put futures
contract, 10% lang ang imo ginansya. Kinsa may naka
ginansya? Katong nipalit sa imong Put option. Kato siya ang
mg nagkatawa. Ikaw, dili ka mag hilak mero manakla ka,
ginansya man gihapon ka og 10%. Not bad, 10% og katong
kwartaha ibutang nimo sa bangko us aka tuig pilay tubo ato?
Mayo untag mu abo tog 1%, kasagara karn minos lng gling
sa 1%.
Lipay ka pero ang mas nalipay ang katong nipalit sa imong
Put. Pero kato siya wala na hinuon to siya mag hago, wala
pa nabulad sa init, wala pa nag gukod-gikod sa kabaw aron
mag daro unya siya ang maka ginansyag dako. Life is not
fair!
Commodities market. why do we not have commodities
market in the Philippines? Because we are backward.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
We are left to the vagaries of the fluctuations of agricultural
products, mineral resources. Besides our SC has just shut
down the way a futures market settles a futures contract.
The SC has said that the way it settles it is encouraging
others to a futures contract that are actually (from the
language of the court) is a gaming contract.
How do you settle a futures contract? when the daily
settlement comes. Let au say, foreign exchange, naa kay _
futures contract. you can buy 6 mos. from now $1M at P47
per dollar. Unya pag abot anang panahona, ang dollar P50
na. How do you settle that? You have to enforce that
contract who has _ you to sell at P47 will just give you P3
per dollar that you have to buy. He will just give you 3M
Why? Kinahnglan man nga mupalit ka. Di mubayad kag 47,
ang diperensya ato mao iyang tubagon. So tagaan nlng ka
niya. Ang rate sa gawas run P50 naman, ang diperensya sa
market rate, mao ran a iyang ihatag. That is how it is settled.
The SC calls that a gaming contract when that is the way
futures are settled.
So you can see the different functions of the different
markets. Risk capital, protected risk, futures contract.
How are they registered? You have to submit all the officers,
all the BOD, the structure.
You know PSE was not approved at first. Why? Because all
the boards are brokers and the brokers are an all-boys club.
Maka sala ang usa, ingna nabuhat mn na nko ba, sayop man
gyud na. di na mahimo ang ing ana. The SEC required that
the representation of the PSE, the majority must not be
brokers because OW it will be all boys club.
Before it is given, SRO tapos that is part of the Securities
Regulation Code. Self- regulating organization. They come up
w/ their own rules. The rules are more stringent than
Securities Regulation Code. They will be approved
immediately, they will be left alone by the SEC.
The SEC will come in if there is a great controversy that will
affect the investment __. They will investigate by
themselves, because they are suppose to be self-regulating
organization.
Feb. 26, 2016 (ELG)
Financial Rehabilitation and
Insolvency Act of 2010
Republic Act 10142
This FRIA, Act No. 1956, this became effective May 20, 1909,
the insolvency act. Since the beginning of the bar
examination, the insolvency act was always included but I
challenge you to look for a decided case on insolvency, and
there is none because this insolvency law is a compromise
between the Spanish Insolvency provisions and the American
idea of insolvency and it left out a very important provision.
What is that provision? The discharge of a corporate debtor
of these prior provisions.
You know the final order, successful order of an insolvency
case is an order of discharge, in the dispositive portion it
provides wherefore, the premises considered, the debtor in
the above entitled case is hereby discharged of any and all of
these past obligations. Pareha na sa pari mu ingon by
authority of our Lord Jesus Christ who suffered and died and
rose again through the ministry of this church, forgive you
now of your past sins. You are discharged of all your
obligations and this petition is herewith dismissed. So
ordered. The case is dismissed. Gipa say-lo naka sa imohang
15
mga utang bisag wala paka kabayad sa tanan. That is not in
the Insolvency Law, Act 1956, which became effective 1909.
Not so many therefore were motivated to seek refuge under
the Insolvency Act because you are never really discharged.
It is possible that your past debtors will still come back to
you and ask for payment, so, only individual debtors could
be discharge of their debt under the old Insolvency Law.
Now, both individual and juridical persons can be discharge
under the FRIA law of 2004. You can now be discharge
Another factor in the history of the Insolvency Law is the
cultural stigma of somebody who has undergone bankruptcy.
So nobody is culturally motivated to declare himself/herself
bankrupt. We try to hide bankruptcy. Ug naglisud ka kay
wala na kay kwarta, pasigaa tanan suga mura ka ug ga party
aron ipahibalo sa tanan na wala ka maglisud. Dili ka gusto
magpaila nga bankrupt ka that is the Filipino culture.
What is a Unicorn? According to an economic analyst Aileen
Lee (?), a unicorn is a startup corporation that reaches one
billion dollars in valuation. Nagsugod nah ang corporation in
3-5 years, it reached one billion in valuation.
This FRIA must be read together with the Interim Rules on
procedure of corporate rehabilitation. First there were interim
rules before the enactment of FRIA, after the enactment of
FRIA SC finally came out with the Rules on Corporate
Rehabilitation and Insolvency. So much so, that there is now
a specific sala that entertains this special in rem action for
financial rehabilitation and or insolvency. It is an in rem
proceeding, binding against the whole world.
What is the title of the case? In re: Petition for Financial
Rehabilitation or In re: Petition for Declaration of Insolvency
of XYZ Corporation. Makakita na gani ka ug In re one of
the hint for you is that this is an in rem proceeding. Wala
man kalaban, so kalaban nimo tanan, the whole world. The
decision is binding against the whole world.
What is the nature of the proceedings for financial,
rehabilitation and insolvency (FRI)?
- It is in rem, means binding against the whole world
- It is summary
- It is non adversarial, thats why it is in re
Who is the respondent? Walay respondent
It does not include in its coverage the following corporations:
A. Banks
Why? Because we have found out in Banking that
distressed banks are covered by the procedures in the
New Central Bank Act.
What are those procedures?
1. Conservatorship
2. Receivership
3. Liquidatorship
Those are the proceedings applicable to banks and
quasi-banks.
B. Insurance Companies
C. Pre- need companies
D. Cooperatives
E. National and Local Government Units
FRIA is applicable to Government financial institutions and
Government owned and controlled corporations, unless their
charters provide otherwise.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
Land Bank is not covered because the charter of Land Bank
says its not covered. The government is a guarantor of Land
Bank.
DBP is not covered because the charter of DBP says the
government is a guarantor of the obligations of DBP.
The definition of an insolvent in FRIA is now wider. An
Insolvent according section 4(p):
Section 4 xxx
(p) Insolvent shall refer to the financial condition of a debtor
that is generally unable to pay its or his liabilities as they fall
due in the ordinary course of business or has liabilities that
are greater than its or his assets.
What are the proceedings that you can make use of under
FRIA. There are basically three remedies under FRIA.
1. Court-Supervised Rehabilitation
2. Pre-Negotiated Rehabilitation
3. Out-of-Court or Informal Restruction Agreement or
Rehabilitation Plans
A debtor may also chose to undergo directly or convert any
of the aforementioned reliefs into liquidation
Section 90. xxx
At any time during the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the debtor may also
initiate liquidation proceedings by filing a motion in the same
court where the rehabilitation proceedings are pending to
convert the rehabilitation proceedings into liquidation
proceedings.
COURT-SUPERVISED REHABILITATION
A court-supervised rehabilitation may be initiated either by
the:
1. Insolvent Debtor
- If initiated by the insolvent debtor himself then it is
voluntary insolvency or voluntary petition for
rehabilitation
2. By its creditor
- If initiated by the creditor it is involuntary
There is another proceeding which has since been
transferred from the jurisdiction of the SEC to the
Insolvency/Rehabilitation Court.
What is that proceeding? That proceeding is called
Suspension of Payments proceeding. The file a petition and
you alleged in that petition that you have assets more than
your liabilities but your assets are not falling due at the same
time as your liabilities. So you are asking for an extension of
time to pay your liabilities.
The beauty about this, that this proceeding is no longer
under the SEC. If the court finds out that what you are really
alleging is not true, you really have less assets that your
liabilities. What happens? The court can immediately
transform it into a rehabilitation or liquidation proceeding.
Rehabilitation that the court will ask from the petitioner and
the liquidators submit a plan of rehabilitation. If they
cannot submit within the period of time granted by the court,
then the court will order the liquidation already, very easy to
transform.
In the past when it was the SEC who had jurisdiction, when
the SEC finds out, walay mahimo ang SEC because he has no
jurisdiction for liquidation. What the SEC would do is just
dismiss the case without prejudice to refiling the petition with
16
the regular courts. Mao na dinha mag-iyahay naman nah ug
kuha sa mga assets.
You know this kind of proceeding, the interim period is very
critical, what happens to the filing up to the decision. Kinsa
diay control during the interim? The one who really comes
out as the winner, dili kadtong gi-declare na winner diri
because the assets could be dissipated. So kinsa naga kupot
sa mga assets? Pareha nah sa intestate ug testate
proceedings before the court, the one who holds the estate
is actually the winner because the filing of the testator in
testate proceedings up to the conclusion, many things can
happen. The best lawyers in insolvency/rehabilitation gains
control the assets during the interim period.
There is what we call a Stay Order, first time ni sa rules of
court. Basa ka sa rules on financial rehabilitation, its really
called stay order. In the rules of court, what is a stay order?
Its a restraining order, TRO. In the FRIA, stay order, why?
Because we copied our FRIA from the US court. Unsa man
nah ang Stay? It was taken from the analogy of dog
training. Kanang dog bah mu ingon ka stay. Mao na
pasabot sa stay. (LOL)
The beauty about the stay order is that it covers all
creditors, including secured creditors.
You file a petition, whether it is a petition for suspension of
payments, you are asking for more time or voluntary
insolvency filed by the debtor or it is involuntary insolvency
filed by the creditors. If there is 25% of total indebtedness.
25% percent na gani mo makafile namu sa debtor to
respond to the petition for rehabilitation/insolvency.
Section 13. Circumstances Necessary to Initiate
Involuntary Proceedings. - Any creditor or group of
creditors with a claim of, or the aggregate of whose claims
is, at least One Million Pesos (Php1,000,000.00) or at least
twenty-five percent (25%) of the subscribed capital stock or
partners' contributions, whichever is higher, may initiate
involuntary proceedings against the debtor by filing a petition
for rehabilitation with the court
From and after the filing, you count five working days.
Section 15. Action on the Petition. - If the court finds
the petition for rehabilitation to be sufficient in form and
substance, it shall, within five (5) working days from the
filing of the petition, issue a Commencement Order. If, within
the same period, the court finds the petition deficient in form
or substance, the court may, in its discretion, give the
petitioner/s a reasonable period of time within which to
amend or supplement the petition, or to submit such
documents as may be necessary or proper to put the petition
in proper order. In such case, the five (5) working days
provided above for the issuance of the Commencement
Order shall be reckoned from the date of the filing of the
amended or supplemental petition or the submission of such
documents.
What is to be determined? Whether it is sufficient in form
and substance.
What is a substance requirement? Whether the petition is
accompanied by a complete list of the creditors together with
the corresponding debts. If it is a petition for financial
rehabilitation, it is accompanied by a proposed plan for
rehabilitation.
If the petition is sufficient in form and substance within 5
working days the court will issue what is called a
commencement order and such order is retroactive from the
date of filing. Together with that commencement order
under section 15 of FRIA, is a stay order.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Father Gus Nazareno
Corporations Law | Ateneo de Davao College of Law | Tres Manresa SY 2015 2016
What does the stay order do?
Section 16. Commencement of Proceedings and
Issuance of a Commencement Order. xxx
(q) includes Stay or Suspension Order which shall:
(1) suspend all actions or proceedings, in court or otherwise,
for the enforcement of claims against the debtor;
(2) suspend all actions to enforce any judgment, attachment
or other provisional remedies against the debtor;
(3) prohibit the debtor from selling, encumbering,
transferring or disposing in any manner any of its properties
except in the ordinary course of business; and
(4) prohibit the debtor from making any payment of its
liabilities outstanding as of the commencement date except
as may be provided herein.
The debtors, cannot enforce their claim. The enforcement of
the claim must be comprehensive, decided by the court,
bayron pa or reschedule ba ang payments, its the court that
will decide, the bankruptcy court. In the meantime you can
continue to manufacture and do your business, pero unsaon
man nah nga wala naman ka kwarta, all your suppliers etc.
cannot refuse to supply you, for as long you just pay your
subsequent obligation. The past pwede ipa stay and the
future you can continue your business because the court will
force all your suppliers to continue to supply you for as long
as you can pay. It can only stop supplying you if you no
longer pay the current obligations, not the past.
Section 17. Effects of the Commencement Order. -
Unless otherwise provided for in this Act, the court's issuance
of a Commencement Order shall, in addition to the effects of
a Stay or Suspension Order described in Section 16 hereof:
(a) vest the rehabilitation with all the powers and functions
provided for this Act, such as the right to review and obtain
records to which the debtor's management and directors
have access, including bank accounts or whatever nature of
the debtor subject to the approval by the court of the
performance bond filed by the rehabilitation receiver;
There is also an appointment of a receiver, the court will
appoint. The receiver will continue to maximize the assets.
Remember the receiver does not run the business, its
another, the court can also appoint the manager or it could
be the present management of the debtor. The function of
the receiver is to maximize the assets.
Here comes the duty part of the rehabilitation, this is the toll
gate and you will not learn it from reading your
commentaries. There will be oppositors to rehabilitation as
well as in the declaration of insolvency.
Who are those who oppose?
1. Individual creditors whom are already secured in
the debt. If you are a creditor and you have a
mortgage and you know very well that the
mortgage property that secured your credit is more
valuable than your credit itself, mosugot ka na i-
rehabilitate, dili ka mosugot kay maka ginansya
man ka if you foreclose the mortgage. They will be
the one who will be opposing the courts
determination on whether or not the rehabilitation
plan is proper.
2. Or those that have already had a special
arrangement with the owner.
How do you remedy that, because that used to be a problem
under the old Insolvency Law, wala man mahitabo na
rehabilitation kay mag sige man ug away? Now there is this
17
so called Cram down effect under section 86 bag-o ni, gi
copy ni from the New York Insolvency Law:
Section 86. Cram Down Effect. - A restructuring/workout
agreement or Rehabilitation Plan that is approved pursuant
to an informal workout framework referred to in this chapter
shall have the same legal effect as confirmation of a Plan
under Section 69 hereof. The notice of the Rehabilitation
Plan or restructuring agreement or Plan shall be published
once a week for at least three (3) consecutive weeks in a
newspaper of general circulation in the Philippines. The
Rehabilitation Plan or restructuring agreement shall take
effect upon the lapse of fifteen (15) days from the date of
the last publication of the notice thereof.
What is that? Pug-son sa court. Pag painom sa tambal, pug-
son ka ug painom. The court can cram down the
rehabilitation plan even if it is opposed provided there are
certain requisites that are complied.
Section 84. Minimum Requirements of Out-of-Court
or Informal Restructuring Agreements and
Rehabilitation Plans. - For an out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan to
qualify under this chapter, it must meet the following
minimum requirements:
(a) The debtor must agree to the out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan;
(b) It must be approved by creditors representing at least
sixty-seven (67%) of the secured obligations of the debtor;
(c) It must be approved by creditors representing at least
seventy-five percent (75%) of the unsecured obligations of
the debtor; and
(d) It must be approved by creditors holding at least eighty-
five percent (85%) of the total liabilities, secured and
unsecured, of the debtor.
These are very new provisions. Usually the debtor kung
rehabilitation plan, the court will make sure that the debtor is
no longer in control. Ngano man? He is the one who place,
the controlling owners are the ones who placed the debtor in
that tragic shit, so therefore he should not be given the
remaining control. They will agree for a third party to come
in, to bring in normally new equity to the corporation that is
the subject of the rehabilitation. This is something new that
the court is not helpless, before dugay kaau ang
rehabilitation because there are so many oppositors, now
there is a way out.
You must read the law itself. Do not rely only on the handout
given.
What is the sweetest word for the part of the debtor?
Discharge debtor of the debts.
Between the debtor and the creditor who has the side of
rehabilitation? Debtor dyud nah permi. No person can be
imprisoned for bad debt. Interest rates, you cannot charge
interest unless it is in writing. Unya ibutang nimo ang rate
kay taas kaau, then its exorbitant.
Again there is a law that is debtor-friendly kini ang FRIA, it
allows for rehabilitation, discharge or obligation. This more
for the debtor. Tanawa to akoang gihatag sa inyoha
involving escalation clause, bisan ni pirma ang debtor I
agree that every year at the end of the term, the bank can
increase the interest, you just inform us. The SC said it must
be written notice sent to the debtor and then the debtor
(buying) should also be in writing.
WALANG BA ITONG CLOSURE?