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LAWS
ATTY. DARREN M. DE JESUS
Overview of Mercantile Law
•Morning of the 3rd Weekend
•Your 5th Exam (out of 8)
•Disjointed topics, all relating to activities to make money
•Covered laws are written differently
•Codal is too technical
Setting Up Doing Business Closing
E-Commerce Business Management Down
Act • Corp Code Banking (NCBA, Corp Code
Negotiable • Transpo Bank Secrecy, FRIA
Instruments • Data Privacy GBL, PDIC) Banking
Letters of Act IP Code (NCBA)
Credit and Insurance
Trust Receipts AMLA
Securities
Regulation Code
SPECIAL COMMERCIAL LAWS
Based on the 2019 Mercantile Law Coverage
1. E-Commerce Act
2. Letters of Credit and Trust Receipts
3. Data Privacy Act
4. Securities Regulation Code
5. Anti-Money Laundering Act (AMLA)
6. Financial Rehabilitation and Insolvency Act (FRIA)
OUTLINE OF THIS LECTURE
1.E-Commerce Act
2.Letters of Credit and Trust Receipts
3.Securities Regulation Code
E-COMMERCE ACT
RA 8792
Setting Up Doing Business Closing
E-Commerce Business Management Down
Act • Corp Code Banking (NCBA, Corp Code
Negotiable • Transpo Bank Secrecy, FRIA
Instruments • Data Privacy GBL, PDIC) Banking
Letters of Act IP Code (NCBA)
Credit and Insurance
Trust Receipts AMLA
Securities
Regulation Code
Bar Syllabus of E-Commerce Act
A. Legal recognition of electronic data messages,
documents, and signatures
B. Presumption relating to electronic signatures
C. Admissibility and evidential weight of electronic
data message or electronic document
D. Obligation of confidentiality
Overview
A. Basic Concepts on E-Commerce
B. Electronic Data Message
C. Electronic Documents
D. Electronic Signature
A. Presumptions
E. Admissibility and Evidential Weight
F. Obligations of Confidentiality
E-Commerce
This Act aims to facilitate domestic and international
transactions, contracts and exchanges and storage of
information through the utilization of electronic, optical and
similar technology to recognize the authenticity and
reliability of electronic documents and to promote the
universal use of electronic transactions. (Sec. 2)
This Act shall apply to any kind of data message and
electronic document used in the context of commercial and
non-commercial activities. (Sec. 3)
E-Commerce
Buying and selling of goods over the Internet
• However, E-Commerce Act also applies to non-
commercial activities
In Mercantile Law, E-Commerce Act is relevant with the use
of electronic data message, electronic documents and
electronic signatures in everyday business transaction.
Functional
Equivalent
Electronic Data Message
LC + TR
Mr. A Exporter
Letters of Credit (LC)
Governing Laws
1. Code of Commerce
◦ Article 2 - In the absence of any particular provision in the
Code, commercial transactions shall be governed by the
usages and customs generally observed (BPI v Nery)
◦ Article 567-572
2. Customs - Uniform Customs and Practice for Documentary
Credits (UCP) adopted by the International Chamber of
Commerce
Letters of Credit (LC)
Prudential v IAC (1992) - LC is an engagement by a bank or
other person made at the request of a customer that the
issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit.
Primary Purpose: To substitute for and support the agreement
of the buyer-importer to pay money under a contract or other
arrangement, but it does not necessarily constitute as a
condition of the perfection of such arrangement.
Letters of Credit (LC)
Financial device developed by Merchants dealing with
Sale of Goods
Seller – refuses to part from goods until he is paid
Buyer – wants to control goods before paying
Buyer contracts a Bank to issue a LC in favor of Seller
- Buyer and Seller on documents to be presented
- Bank pays Seller upon presentment of documents
- Buyer reimburses Bank
Letters of Credit (LC)
3 distinct contract relationships:
1.Between Buyer and Seller – Governed by Contract of sale
2.Between Issuing Bank and Buyer — Governed by terms of the
application and agreement for the issuance of the LC by the Bank
3.Between Issuing Bank and Seller— Governed by terms of the LC
◦ Issuing Bank issues the LC and undertakes to pay Seller upon receipt of
proper documents and surrender the documents to the Buyer upon
reimbursement.
Issuing Bank
Buyer Seller
Letters of Credit (LC)
Buyer - procures LC and obliges himself to reimburse
Issuing Bank upon receipt of documents
Seller - beneficiary who ships goods to Buyer and delivers
documents of title to Issuing Bank
Issuing Bank - issues LC and undertakes to pay Seller upon
receipt of documents
Letters of Credit
Other parties..
Notifying (or Advising) Bank - informs Seller of
existence of LC
Negotiating Bank - bank that buys or discounts draft
under LC
Confirming Bank - bank that lends credence to the LC
issued by a lesser known bank; directly liable to the
Seller
Issuing Bank Confirming
Bank
Buyer Seller
Different Types of LC
Irrevocable LC – definite undertaking of issuing bank, will
not be revoked without the consent of buyer and seller
Standby LC - absolute undertaking to pay the money
advanced or the amount for which credit is given on the
faith of the instrument. They are primary obligations and
not accessory contracts. (Insular Bank of America v IAC,
1988)
Doctrine of Independence
The obligation of the Issuing Bank to pay Seller is distinct and
independent from the main and originating contract underlying the
LC. Such obligation to pay does not depend on the fulfillment or non-
fulfillment of the originating contract. It arises upon tender of the
stipulated documents under the LC.
Insular Bank of Asia and America v. IAC (1988) - Tender of the
certificate of default entitles Y to payment under the Standby LC
notwithstanding that X Company was not in default. This is without
prejudice to the right of X Company to proceed against Y Company
Fraud Exception Principle
Doctrine of Independence provides that obligations of parties to LC
are independent of the obligations of the parties to the underlying
transaction.
Transfield v. Luzon Hydro Corporation (2004) - Fraud is an exception
to the independence principle. If the Seller fraudulently presents to
the Issuing or Confirming Bank documents that contain material facts
that, to his knowledge, are untrue, then payment under the letter of
credit may be prevented through court injunction.
Doctrine of Strict Compliance
Feati Bank v. CA (1991) - Issuing bank or confirming bank must
determine the tender documents and make sure that the terms and
conditions of the letters of credit are strictly complied with. The
bank has no discretion to waive the requirement. Tender documents
must not only be complete but they must on their faces be in
compliance with the terms of the credit. Documents that are not
stipulated as tender documents will not be examined.
TRUST RECEIPTS (TR)
P.D. NO. 115
Governing Law
◦ Presidential Decree No. 115 (1973)
◦ Policy: (a) encourage and promote TR as an additional
and convenient aid to commerce and trade; (b) provide
for the regulation of TR transactions to assure the
protection of the rights and enforcement of obligations
of the parties; and (c) declare the misuse and/or
misappropriation of goods or proceeds realized from the
sale of goods, documents or instruments released under
TR punishable under Art 315, RPC.
Trust Receipts (TR)
TR is a written or printed document signed by the entrustee in
favor of the entruster containing terms and conditions
substantially complying with the provisions of the Trust Receipts
law
-Where the bank as entruster releases the goods to the
possession of the entrustee but retains ownership thereof while
the entrustee may sell the goods and apply the proceeds for the
full payment of his liability to the bank.
Trust Receipts (TR)
Entruster – entity (usually bank) holding title over the goods
subject of the TR
Entrustee – person or company having or taking possession of
the goods
Goods – chattels and personal property other than money
Security Interest – property interest in goods to secure
performance of the entrustee
Trust Receipts (TR)
Entruster-bank has a “security interest” over the goods. Ownership
vested in the person who advanced payment until he has been paid
in full or if the merchandise has been sold, the proceeds thereof
shall be turned over to him.
Being a mere “security interest”, entruster not responsible as a
vendor under any sale or contract to sell. Entrustee bears the loss
after delivery to him
DBP v. Prudential Bank (2005) – Entrustee cannot mortgage the
property. He does not have free disposal of the property.
Trust Receipts (TR)
An innocent purchaser for value (from an entrustee with a right
to sell) acquires the goods, documents or instrument free from
entruster’s security interest. (Sec. 11)
The security interest of the entruster prevails against all
creditors of the entrustee for the duration of the TR. (Sec. 12)
Bank /
Entruster
TR
Buyer /
Entrustee
Rights and Obligations of Entruster
The entruster entitled to the proceeds from the sale of the
goods, documents or instruments released under TR to the
entrustee to the extent of the amount owing to the entruster or
as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the
enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of this
Decree. (Sec. 7)
Rights and Obligations of Entruster
The entruster may cancel TR and take possession upon
default or failure of the entrustee to comply with the terms
and conditions of the TR, and the entruster may give notice
to sell.
The sale shall be held 5 days after receipt of notice.
Proceeds of the sale, whether public or private, shall be
applied (a) expenses of sale; (b) storage expenses; (c) to the
satisfaction of the entrustee's indebtedness to the
entruster. (Sec. 7)
Rights and Obligations of Entrustee
Entrustee shall (1) hold goods in trust for the entruster and
shall dispose of them in accordance with TR; (2) receive
proceeds in trust for the entruster and turn over the same to
the extent of the amount owed or as appears on TR; (3) insure
the goods for their total value; (4) keep goods separate and
capable of identification as property of the entruster; (5)
return goods in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of TR.
Rights and Obligations of Entrustee
2 Obligations in TR:
(1)To return the money over to the owner of the
merchandise sold (entregarla); and
(2)To return the merchandise received under the
obligation that are unsold (devolvera).
Rights and Obligations of Entrustee
The risk of loss shall be borne by entrustee.
Loss of goods subject of a TR, pending their disposition,
irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his
obligation to the entruster for the value thereof. (Sec. 10)
Remedies Available
The failure of entrustee to turn over the proceeds of the sale of
goods covered by TR to the extent of the amount owing to the
entruster or as appears in the TR or to return said goods if they
were not sold shall constitute the crime of ESTAFA, Article 315,
par. 1(b) RPC.
If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty
shall be imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense. (Sec. 13)
Warehouse Receipts
(WR)
ACT NO. 2137 (1912)
Governing Law
• Act No. 2137 (1912)
• WR - Document of title issued by a warehouseman or a
person lawfully engaged in the business of storing goods for
profit
• Sec. 1 - the issuance of WR in the form provided by it is
merely permissive and directory and not obligatory.
• Gonzalez vs Go Tiong (1958) - "Receipt” can be construed
as any receipt issued by a warehouseman for commodity
delivered to him
WR
Negotiability - May be delivered to (a) the bearer, or (b) the
order of any person named in such receipt (Sec. 5)
Philippine Trust Co. v. National Bank (1922) - Negotiation of
the document has the effect of manual delivery so as to
constitute the transferee as the owner of the goods.
Negotiation carries with it both the title and possession of
the property
Seller Warehouseman
Warehouseman’s Lien
What claims included in Warehouseman’s Lien:
1. All lawful charges for storage and preservation of the goods;
2. All lawful claims for money advanced, interest, insurance,
transportation, labor and other charges and expenses in
relation to such goods;
3. All reasonable charges and expenses for notice and
advertisements of sale, and for sale of the goods where default
had been made in satisfying the lien (Sec. 27)
Warehouseman’s Lien
PNB v. Se (1996) - Storage fees are chargeable. PNB is legally
bound to stand by the express terms and conditions on the
face of the WR as to the payment of storage fees. Even in
the absence of such a provision, law and equity dictate the
payment of the warehouseman’s lien pursuant to Sections
27 and 31 of the Warehouse Receipts Law (R.A. 2137)
Warehouseman’s Lien
Loss of Lien - By surrendering possession thereof; or by refusing
delivery when demand is made with which he is bound to
comply (Sec. 29)
True or False. A warehouseman loses lien when he surrenders
possession thereof. Answer: True. A lien is dependent on
possession. When a warehouseman surrenders possession, he
thereby loses his lien on the goods over which he no longer has
possession. (Bar Exam, 2009)
Recap…
Issuing Bank Confirming
Bank
LC + TR
Mr. A Exporter
Bar Trends
Is the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce
applicable to commercial letters of credit issued by a
domestic bank even if not expressly mentioned in such
letters of credit? What is the basis for your answer? (Bar
Exam, 2015)
Bar Trends
Answer: Yes.
BPI v. De Reny (1970) – The observance of the Uniform Customs
and Practice in the Philippines is justified by Article 2 of the Code
of Commerce which enunciates that in the absence of any
particular provision in the Code of Commerce, commercial
transaction shall be governed by usage and customs generally
observed.
Bar Trends
Is a letter of credit a commercial transaction? Is it governed by
the NIL? (Bar Exam, 1976)
Answer:
Yes, it is a commercial transaction because it is covered by the
Code of Commerce, and accompanies a commercial
transaction. It is not a negotiable instrument because it is not
for a sum certain in money and is not payable to order or to
bearer but is issued in the name of a specified person.
Bar Trends
Bar Exam, 2012
ABC Co. filed a Petition for Rehabilitation. An Order was issued
by the Court, (1) staying enforcement of all claims, whether
money or otherwise against ABC Co., its guarantors and sureties
not solidarily liable with the company; and (2) prohibiting ABC
Co. from making payments on its outstanding. XYZ Co. is a holder
of an irrevocable Standby Letter of Credit which was previously
procured by ABC Co. to secure performance of certain
obligations. In the light of the Order issued by the Court -
Bar Trends
a. Can XYZ Co. still draw on their irrevocable Standby Letter of Credit
when due? (Bar Exam, 2012)
Yes, MWSS v Daway (2004) - As an exception to a Stay or
Suspension Order included in a Commencement Order issued
pursuant to the FRIA, Section 18(c) of the said law provides that a
Stay or Suspension Order shall not apply “to the enforcement of
claims against sureties and other persons solidarily liable with the
debtor, and third party or accommodation mortgagors as well as
issuers of letters of credit x x x”
Bar Trends
b. Explain the nature of Letters of Credit as a financial
device. (Bar Exam, 2012)
LC is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sale of
goods to satisfy the seemingly irreconcilable interest of the
seller, who refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the goods before
paying.
Bar Trends
Bar Exam, 1994
In LC’s in banking transactions, distinguish the liability of a
confirming bank from a notifying bank.
Answer:
In case anything wrong happens to the LC, a confirming bank
incurs liability for the amount of the LC, while a notifying bank
does not incur any liability.
Bar Trends
Explain the 3 distinct but intertwined contract relationships that are
indispensable in a letter of credit transaction. (Bar Exam, 2002)
Yes, X Corp. can claim directly from PT. the call upon
the letter of credit is not exclusive; it is merely an
alternative remedy in case of delay due to the fault
of PT.
Bar Trends
The Supreme Court has held that fraud is an exception to
the “independence principle” governing letters of credit.
Explain this principle and give an example of how fraud
can be an exception. (Bar Exam, 2010)
Bar Trends
The “independence principle” posits that the obligations of
the parties to a LC are independent of the obligations of the
parties to the underlying transaction.
Transfield v. Luzon Hydro (2004) declared that fraud is an
exception to the independence principle. For instance, if the
beneficiary fraudulently presents to the issuing or
confirming bank documents that contain material facts that,
to his knowledge, are untrue, then payment under the letter
of credit may be prevented through court injunction.
Bar Trends
BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic
meters of logs at $27 per cubic meter FOB. After inspecting the logs,
CD issued a purchase order.
On the arrangements made upon instruction of the consignee, H&T
Corporation of Los Angeles, California, the SP Bank of Los Angeles
issued an irrevocable letter of credit available at sight in favor of BV
for the total purchase price of the logs. The letter of credit provided
that the draft to be drawn is on SP Bank and that it be accompanied
by, among other things, a certification from AC, stating that the logs
have been approved prior to shipment in accordance with the terms
and conditions of the purchase order. (Bar Exam, 1993)
Bar Trends
Continuation…
Before loading on the vessel chartered by AC, the logs were inspected
by custom inspectors and representatives of the Bureau of Forestry,
who certified to the good condition and exportability of the logs.
After the loading was completed, the Chief Mate of the vessel issued
a mate receipt of the cargo which stated that the logs are in good
condition. However, AC refused to issue the required certification in
the letter of credit. Because of the absence of the certification, FE
Bank refused to advance payment on the letter of credit. (Bar Exam,
1993)
Bar Trends
A. May FE Bank be held liable under the letter of credit? Explain.
D. Protection of Investors
1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule
SEC – Purpose
The State shall establish a socially conscious, free market
that regulates itself, encourage the widest participation of
ownership in enterprises, enhance the democratization of
wealth, promote the development of the capital market,
protect investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider trading
and other fraudulent or manipulative devices and practices
which create distortions in the free market. (Sec. 2)
SEC – Purpose
SEC v. Santos (2014) - “Too good to be true” investments
The transaction is an investment contract or participation in a
profit sharing agreement that falls within the definition of the law.
When the investor is relatively uninformed and turns over his
money to others, essentially depending upon their representations
and their honesty and skill in managing it, the transaction
generally is considered to be an investment contract. The
touchstone is the presence of an investment in a common venture
premised on a reasonable expectation of profits to be derived
from the entrepreneurial or managerial efforts of others.
SEC – Overview
Chairman and 4 Commissioners, with 7 year terms
Power to issued CDOs, contempt, issue subpoena and
summon witnsses
SEC may impose administrative penalties and conduct
investigations for referral to the DOJ
SEC – Overview
Jurisdiction over cases under PD 902-A transferred to
RTCs constituted as Special Commercial Courts (SCCs)
- Civil Claims filed before the SCCs
- Intra-corporate disputes – SCCs
(1)Between corporation, partnership or association (CPAs) and Public
(2)Between CPAs and the State insofar as franchise, permit or license is
concerned
(3)Between CPAs and its stockholders, partners, members or officers
Securities
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.
Securities
(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;
Securities
(e) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments;
(f) Proprietary or non proprietary membership certificates
incorporations; and
(g) Other instruments as may in the future be determined by the
Commission.
Securities
Investment contract - a contract, transaction or scheme (collectively
contract) whereby a person invests his money in a common enterprise
and is led to expect profits primarily from the efforts of others.
Known as the Howey Test to determine whether the offerings are of
investment contract or not, it requires a transaction, contract, or
scheme whereby a person (1) makes an investment of money, (2) in a
common enterprise, (3) with the expectation of profits, (4) to be
derived solely from the efforts of others.
Securities
Power Homes v SEC (2008) - The Howey test was clarified in
Secretary v. Turner (1973), here the US Court of Appeals ruled that
profits must come from the efforts of others should not be given a
strict interpretation.
SRC follows this for it defines an investment contract where a
person invests money in a common enterprise and is led to expect
profits not solely but primarily from the efforts of others. An
investment contract must be proved to be: (1) an investment of
money, (2) in a common enterprise, (3) with expectation of profits,
(4) primarily from efforts of others.
Broker
Exchange
Dealer
Issuer
Broker
Underwriter
Dealer
Requirement of Registration
Securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration
statement duly filed with and approved by the Commission.
Prior to such sale, information on the securities, in such
form and with such substance as the Commission may
prescribe, shall be made available to each prospective
purchaser. (Sec. 8.1)
Exempt Securities
(a) Security issued by the Government of the Philippines, or by
any political subdivision or agency
(b) Security issued by the government of any country with which
the Philippines maintains diplomatic relations
(c) Certificates issued by a receiver or trustee in bankruptcy
(d) Security sold under the supervision and regulation of the
Office of the Insurance Commission, HLURB, or BIR.
(e) Any security issued by a bank (Sec. 9)
Exempt Transactions
(a) Judicial sale, or sale by executor, administrator, guardian or
receiver or trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or
any other similar lien holder selling or offering for sale or
delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of this Code, to liquidate a
bona fide debt, a security pledged in good faith as security for
such debt.
Exempt Transactions
(c) Isolated transaction – not in the course of repeated and successive
transactions of a like character by such owner
(d) Distribution by a corporation of securities to its stockholders as a stock
dividend or other distribution out of surplus
(e) Sale of capital stock of a corporation to its own stockholders exclusively,
where no commission is paid
(f) Issuance of bonds or notes secured by mortgage where the entire
mortgage sold to a single purchaser at a single sale
Exempt Transactions
(g) Issuance of security in exchange for any other security of
the same issuer pursuant to a right of conversion
(h) Broker’s transactions, executed upon customer’s orders, on
any registered Exchange or other trading market
(i) Subscriptions for shares of the capital stock of a corporation
prior to the incorporation thereof or in pursuance of an
increase in its authorized capital stock
Exempt Transactions
(j) The exchange of securities by the issuer with its existing
security holders exclusively, where no commission or other
remuneration is paid
(k) The sale of securities by an issuer to fewer than twenty (20)
persons in the Philippines during any 12-month period.
(l) The sale of securities to any number of the following qualified
buyers: Bank; Registered investment house; Insurance company;
Pension fund or retirement plan; Investment company; or other
person as the Commission may by rule. (Sec. 10)
Registration of Securities
All securities required to be registered shall be registered through the
filing of a sworn registration statement with respect to such securities
The information on on ownership, on the mix of ownership, especially
foreign and local ownership
The registration statement shall be signed by the issuer’s executive
officer, its principal operating officer, its principal financial officer, its
comptroller, principal accounting officer, its corporate secretary or
persons performing similar functions accompanied by a duly verified
resolution of the board of directors of the issuer corporation.
Registration of Securities
Pay fee of not more than one-tenth (1/10) of one per centum (1%) of
the maximum aggregate price at which such securities are proposed
to be offered
Notice to be published by the issuer, at its own expense, in two (2)
newspapers of general circulation in the Philippines, once a week for
two (2) consecutive weeks
Within forty-five (45) days after the date of filing of the registration
statement, or by such later date to which the issuer has consented,
the Commission shall declare the registration statement effective or
rejected, unless the applicant is allowed to amend the registration
statement.
SEC
Not
Exempt
Exempt
Reject Approve
Manipulation of Security Prices
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:
(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.
Manipulation of Security Prices
(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.
Manipulation of Security Prices
(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 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.
Manipulation of Security Prices
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.
Fraudulent Transactions
SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person,
directly or indirectly, in connection with the purchase or sale of any
securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a
material fact of any omission to state a material fact necessary in order
to make the statements made, in the light of the circumstances under
which they were made, not misleading; or
26.3. Engage in any act, transaction, practice or course of business
which operates or would operate as a fraud or deceit upon any person.
Fraudulent Transactions
1.Wash Sale – effect a series of transaction to raise price to induce sale or
purchase
2.Marking the Close – buying and selling at close of market to alter closing
price of shares
3.Hype and Dump – engaging in heavy buying at high prices then selling at
higher prices
4.Boiler Room Operations – well-organized operation where salesmen
operate over several phones using high pressured sales talk
Fraudulent Transactions
5. Squeezing the float – taking advantage of shortage of
securities by controlling demand side and exploiting
market congestion to create artificial prices
6. Short Sale – sale of security borrowed by seller; share is
sold and re-bought as the share price is going down,
thereby making a profit for each purchase
7. Option – Derivatives, granting holder option to buy (call
option) or put (sell option)
Insider Trading
Material
Non-Public
Information
Tender Offer Rule
Publicly announced intention to acquire equity securities of a public
company
- Filing with SEC of a declaration with payment of filing fee
- Furnishing issuer statement with information required by SEC
- Publishing all requests or invitations for tender
-An offer to stockholder of a public company for them to tender their
shares to the offeror.
-CEMCO Holdings v. National Life (2007) - This is to protect minority shareholders
from dilution and gives them the chance to leave the company under reasonable
terms
Tender Offer Rule
-Public Company
- Any corporation listed on an exchange or with assets in excess of
P50 Million and have 200 or more shareholders, 200 of which must
be holders of at least 100 shares of a class of its equity securities.
Tender Offer Rule
When Tender is Mandatory:
1) Filing of Declaration with SEC is necessary
◦ If acquisition of 15% of equity securities in a public company within 12
months
2) Required to Disclose Intention and to Make Tender Offer for the
Percentage Sought of all Holders of Such Securities
◦ If acquisition is 35% or more of outstanding voting shares or such
number of outstanding shares that are sufficient to gain control of the
board in a public company within 12 months
Tender Offer Rule
3) Required to Make Tender Offer for Outstanding Voting Shares
◦ If acquisition is 35% or more of the outstanding voting shares or such number
of outstanding shares that are sufficient to gain control of the board in a
public company DIRECTLYfrom one or more shareholders, shall be required to
make a tender offer for all the Outstanding Voting Shares.
4) Required to Make Tender Offer for All Outstanding Equity Shares
◦ If acquisition of even less than 35% but would result in ownership of over
51%, acquirer must make a tender offer for all Outstanding Equity Securities
Tender Offer Rule
CEMCO Holdings v National Life (2007) - SEC’s interpretation
that tender offer rule covers direct acquisition but also indirect
acquisition (or any type of acquisition) is given weight.
Company Shareholders
Proxy Solicitations
Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the
Commission;
In writing, signed by the stockholder or his duly authorized
representative and filed before the scheduled meeting with the
corporate secretary.
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.
Proxy Solicitations
No broker or dealer shall give any proxy to a person other than the
customer, without the express written authorization of such
customer.
A broker or dealer who holds or acquires the proxy for at 10% or such
percentage as the Commission may prescribe of the outstanding
share of the 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 (Sec. 20)
Civil Liabilities
SEC. 56. On Account of False Registration Statement.
SEC. 57. Arising in Connection With Prospectus, Communications
and Reports.
SEC. 58. For Fraud in Connection With Securities Transactions.
SEC. 59. For Manipulation of Security Prices.
SEC. 60. On Commodity Futures Contracts and Pre-need Plans.
SEC. 61. On Account of Insider Trading.
Civil Liabilities
SEC. 62. Limitation of Actions. – within two (2) years after the
discovery of the facts constituting the cause of action and within
five (5) years after such cause of action accrued.
SEC. 63. Amount of Damages to be Awarded. – RTC shall have
exclusive jurisdiction to hear and decide such suits. The Court is
hereby authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.
63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61
shall be jointly and severally liable for the payment of damages.
Bar Trends
Define securities. (Bar Exam, 1996)
Stocks, bonds, notes, convertible debentures, warrants or other
documents that represent a share in a company or debt owed by a
company or government entity. Evidences of obligations to pay
money or rights to participate in earnings and distribution of
corporate assets. Instruments giving to their legal holders rights to
money or other property; they are therefore instruments which
have intrinsic value and are recognized and used as such in the
regular channels of commerce.
Bar Trends
X has the following plans:
A. Organized the Tagaytay Country Club, Inc.
B. Let the club buy a 10 hectare land for P10 M which will be developed into
a sports and health club.
C. P5M of the P10 M needed to develop the club will be raised thru the sale
of certificates of membership.
D. The certificate of membership gives the purchaser the right to use all club
facilities, and shall be transferable. It shall not, however, give the purchaser
any right in the income or assets of the club. The purchaser must also pay
monthly dues. (Bar Exam, 1982)
Bar Trends
X wants to know whether the certificate of membership is an
investment contract and hence, a security within the meaning
of the Revised Securities Act. What is your opinion? (Bar
Exam, 1982)
The certificate of membership, although not providing for a
right of income or right over club assets, gives, however, to the
holder thereof privileges on the use of club facilities, that are of
value and transferable. The certificate is thus a security within
the meaning of the Revised Securities Act. (Bar Exam, 1982)
Bar Trends
What are the so-called exempt securities under the SRC?
(Bar Exam, 2009)
(a) Security issued by the Government of the Philippines, or by any political
subdivision or agency
(b) Security issued by the government of any country with which the
Philippines maintains diplomatic relations
(c) Certificates issued by a receiver or trustee in bankruptcy
(d) Security sold under the supervision and regulation of the Office of the
Insurance Commission, HLURB, or BIR.
(e) Any security issued by a bank (Sec. 9)
Bar Trends
Assume that Greater Manila Telephone and Telegraph Company,
Incorporated has 10,000 employees. It has a policy of encouraging
stock ownership among its employees. Its Board of Directors,
intends to sell P2 M worth of common stocks to either (a) its
managerial employees only numbering about 1,000 or (b)
indiscriminately to all its 10,000 employees. In case it decides to
sell to its managerial employees only, does it have to register its
securities? How about if the intended sale is to all employees?
(Bar Exam, 1989)
Bar Trends
Exempt transactions are those that do not require registration either
because the law itself exempts them therefrom or the SEC finds that the
enforcement of the registration requirement is not necessary in the public
interest and for the protection of investors by reason of the amount
involved or the limited character of the public offering. The proposed sales
stated in the problem do not strictly fall under any of the exempt
transactions in the law itself. Accordingly, if the corporation would want to
exempt the sale from registration, it must file an application with the SEC
for such exemption which may then act in accordance with the rule above-
stated.
Bar Trends
Able Corporation sold securities to 21 non-qualified
buyers during a 15-month period, without registering the
securities with the Securities and Exchange Commission.
Did Able Corporation violate the Securities Regulation
Code? Explain. (Bar Exam, 2015)
Bar Trends
Yes because under the SRC securities shall not be sold or
offered to be sold to the public within the Philippines unless
the securities are registered with and approved by the SEC.
Public means 20 or more inventors. The fact that the
securities were sold during a 15 month period is immaterial.
However, the sale of securities to less than 20 investors if
done during a 12 month period is an exempt transaction
under the Securities Regulation Code.
Bar Trends
Securities issued by the Philippine government are “exempt securities”
and, therefore, need not be registered with the SEC. What is the
rationale? (Bar Exam, 2015)
Yes, the employees of the establishment handling the printing job of the
corporation are also liable for violation of the prohibition against insider
trading. These employees fall within the classification of an “insider”
under subsection 3.8 (c) of the SRC, to wit: “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.”
Bar Trends
You are a member of the legal staff of a law firm doing securities work for Coco
Products Inc., a listed company. A partner in the law firm, Atty. Buenexito, is
the Corporate Secretary of Coco Products. You have long been investing in
Coco Products stocks even before you became a lawyer.
While working with Atty. Buenixito on another file, he accidentally gave you
the Coco products file containing the company’s planned corporate financial
rehabilitation. While you knew you had the wrong file, your curiosity prevailed
and you browsed through the file before returning it. Thus, you learned that a
petition for financial rehabilitation is imminent, as the company could no
longer meet its obligations as they fell due. (Bar Exam, 2013)
Bar Trends
Soon after, your mother is rushed to the hospital for an emergency operation, and you
have to raise money for her hospital bills. An immediate option for you is to sell your Coco
Products shares. The sale would be very timely because the price of the company’s stocks
are still high. Would you sell the shares to raise the needed funds for your mother’s
hospitalization? Take into account legal and ethical considerations.
Answer:
It would be unethical to sell the shares. Rule 1.01 of the Code of Professional
Responsibility provides, “A lawyer shall not engage in unlawful, dishonest,
immoral or deceitful conduct.”
Bar Trends
A. What is a tender offer? (Bar Exam, 2002)
Tender offer is a publicly announced intention of a person acting
alone or in concert with other persons to acquire equity
securities of a public company. It may also be defined as a
method of taking over a company by asking stockholders to sell
their shares at a price higher that the current market price and
on a particular date.
Bar Trends
In what instances is a tender offer required to be made? (Bar Exam, 2002)
The person intends to acquire 15% or more of the equity share of a public
company pursuant to an agreement made between or among the person
and one or more sellers. The person intends to acquire 30% or more of the
equity shares of a public company within a period of 12 months.
The person intends to acquire equity shares of a public company that
would result in ownership of more than 50% of the said shares.
NB Under SEC regulations, the threshold number for mandatory tender offer is 35% of
the equity share of a public company.
Bar Trends
Union Mines, Inc. has a total asset of P60 M with 210 stockholders holding at
least 100 shares each. The company has two principal stockholders, ABC which
owns 60% of the shares of stock, and XYZ which owns 17%.
ABC in turn is owned to the extent of 21.31% by Acme, Inc.; 29.69% by Golden
Boy, Inc; 9% by XYZ; and the rest by individual stockholders.
None of the parties is a publicly-listed company.
XYZ now proposes to buy Acme’s and Golden Boy’s shares in ABC, which would
give it direct control of ABC and indirect control of Union Mines.
Is the proposed acquisition by XYZ subject to the mandatory tender offer and
when is it mandatory? (Bar Exam, 2010)
Bar Trends
Yes, the proposed acquisition is subject to mandatory tender offer rule.
Under the SRC and its implementing rules, a mandatory tender offer is
required:
When at least 35% of the outstanding shares of a public company is to be
acquired in one transaction or a series of transaction during a 12-month
period, or even if any acquisition is less than 35% threshold but the result
thereof is the ownership of more than 51% of the total outstanding shares
of a public company. The mandatory offer rule also applies to share
acquisition meeting the threshold, which is done at the level of the holding
or parent corporation controlling a public company
Bar Trends
In this case, Union Mines is clearly a public company, since it has a total asset of
P60 M with 210 stockholders holding at least 100 shares each. A public
company is defined as a corporation listed on the stock exchange, or a
corporation with assets exceeding P50 M and with 200 or more stockholders at
least 200 of them holding not less than 100 share of such corporation.
XYZ’s acquisition of shares of Acme, Inc. and Golden Boy, Inc., taken separately,
does not reach 35% threshold. If taken collectively, the two acquisitions total
only 50%. However, when the acquisitions are added to XYZ’s existing shares in
Union Mines, they meet the more-than-51% threshold for mandatory tender
offer.
Bar Trends
Mr. and Mrs. Reyes invested their hard-earned savings in
securities issued by LEAD Bank. After discovering that the
securities sold to them were not registered with the SEC in
violation of the SRC, the spouses Reyes filed a complaint for
nullity of contract and for recovery of a sum of money with the
RTC. LEAD Bank moved to dismiss the case on the ground that it
is the SEC that has primary jurisdiction over actions involving
violations of the Securities Regulation Code. If you were the
judge, how would you rule on the motion to dismiss? (Bar Exam,
2015)
Bar Trends
Pua vs Citibank (2013) - The motion should be denied. Civil
suits falling under the SRC (like liability for selling
unregistered securities) are under the exclusive original
jurisdiction of the RTC and hence, need not be first filed
before the SEC unlike criminal cases, wherein the latter
body exercises primary jurisdiction
Thank you!
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