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G.R. No.

125469 October 27, 1997


PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.

TORRES, JR., J.:


The Securities and Exchange Commission is the government agency, under
the direct general supervision of the Office of the President, 1 with the
immense task of enforcing the Revised Securities Act, and all other duties
assigned to it by pertinent laws. Among its inumerable functions, and one of
the most important, is the supervision of all corporations, partnerships or
associations, who are grantees of primary franchise and/or a license or
permit issued by the government to operate in the Philippines. 2 Just how far
this regulatory authority extends, particularly, with regard to the Petitioner
Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the
respondent Court of Appeals, dated June 27, 1996, which affirmed the
decision of the Securities and Exchange Commission ordering the petitioner
Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul
Land, Inc. to be listed in its stock market, thus paving the way for the public
offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had
sought to offer its shares to the public in order to raise funds allegedly to
develop its properties and pay its loans with several banking institutions. In
January, 1995, PALI was issued a Permit to Sell its shares to the public by the
Securities and Exchange Commission (SEC). To facilitate the trading of its
shares among investors, PALI sought to course the trading of its shares
through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed
with the said stock exchange an application to list its shares, with supporting
documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of


PALI's application, recommended to the PSE's Board of Governors the
approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board
of Governors of the PSE received a letter from the heirs of Ferdinand E.
Marcos, claiming that the late President Marcos was the legal and beneficial
owner of certain properties forming part of the Puerto Azul Beach Hotel and
Resort Complex which PALI claims to be among its assets and that the
Ternate Development Corporation, which is among the stockholders of PALI,
likewise appears to have been held and continue to be held in trust by one
Rebecco Panlilio for then President Marcos and now, effectively for his estate,
and requested PALI's application to be deferred. PALI was requested to
comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul
Beach Hotel and Resort Complex were not claimed by PALI as its assets. On
the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and
the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the
Ternate Development Corporation owns only 1.20% of PALI. The Marcoses
responded that their claim is not confined to the facilities forming part of the
Puerto Azul Hotel and Resort Complex, thereby implying that they are also
asserting legal and beneficial ownership of other properties titled under the
name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
Presidential Commission on Good Government (PCGG) requesting for
comments on the letters of the PALI and the Marcoses. On March 4, 1996, the
PSE was informed that the Marcoses received a Temporary Restraining Order
on the same date, enjoining the Marcoses from, among others, "further
impeding, obstructing, delaying or interfering in any manner by or any
means with the consideration, processing and approval by the PSE of the
initial public offering of PALI." The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561,
pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the
PSE reached its decision to reject PALI's application, citing the existence of
serious claims, issues and circumstances surrounding PALI's ownership over

its assets that adversely affect the suitability of listing PALI's shares in the
stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then
Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention the
action taken by the PSE in the application of PALI for the listing of its shares
with the PSE, and requesting that the SEC, in the exercise of its supervisory
and regulatory powers over stock exchanges under Section 6(j) of P.D. No.
902-A, review the PSE's action on PALI's listing application and institute such
measures as are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching
thereto the letter of PALI and directing the PSE to file its comments thereto
within five days from its receipt and for its authorized representative to
appear for an "inquiry" on the matter. On April 22, 1996, the PSE submitted a
letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision.
The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the
Commissioner's authority and jurisdiction under Section 3 of the
Revised Securities Act, in conjunction with Section 3, 6(j) and
6(m) of Presidential Decree No. 902-A, the decision of the Board
of Governors of the Philippine Stock Exchange denying the listing
of shares of Puerto Azul Land, Inc., is hereby set aside, and the
PSE is hereby ordered to immediately cause the listing of the
PALI shares in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it deems
necessary for the protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996,
which was, however denied by the Commission in its May 9, 1996 Order
which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to reconsider its order dated April 24, 1996,

and in the light of recent developments on the adverse claim


against the PALI properties, PSE should require PALI to submit full
disclosure of material facts and information to protect the
investing public. In this regard, PALI is hereby ordered to amend
its registration statements filed with the Commission to
incorporate the full disclosure of these material facts and
information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May
17, 1996 a Petition for Review (with Application for Writ of Preliminary
Injunction and Temporary Restraining Order), assailing the above mentioned
orders of the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE ACTED
IN AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND
VOID FOR ALLOWING FURTHER DISPOSITION OF
PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and
subsequently, a Comment and Motion to Dismiss. On June 10, 1996, PSE fled
its Reply to Comment and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing
the PSE's Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and
authority to look into the decision of the petitioner PSE, pursuant to Section
3 3 of the Revised Securities Act in relation to Section 6(j) and 6(m) 4 of P.D.
No. 902-A, and Section 38(b) 5 of the Revised Securities Act, and for the
purpose of ensuring fair administration of the exchange. Both as a
corporation and as a stock exchange, the petitioner is subject to public
respondent's jurisdiction, regulation and control. Accepting the argument
that the public respondent has the authority merely to supervise or regulate,
would amount to serious consequences, considering that the petitioner is a
stock exchange whose business is impressed with public interest. Abuse is
not remote if the public respondent is left without any system of control. If
the securities act vested the public respondent with jurisdiction and control
over all corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and the power to
alter and supplement rules of the exchange in the listing or delisting of
securities, then the law certainly granted to the public respondent the
plenary authority over the petitioner; and the power of review necessarily
comes within its authority.
All in all, the court held that PALI complied with all the requirements for
public listing, affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and
abusive manner in disapproving the application of PALI for listing
of its shares in the face of the following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules
and full disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as compared to the
IPOs of other companies similarly situated that were allowed
listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's
properties were even less serious than the claims against the
assets of the other companies in that, the assertions of the

Marcoses that they are owners of the disputed properties were


not substantiated enough to overcome the strength of a title to
properties issued under the Torrens System as evidence of
ownership thereof;
4. No action has been filed in any court of competent jurisdiction
seeking to nullify PALI's ownership over the disputed properties,
neither has the government instituted recovery proceedings
against these properties. Yet the import of PSE's decision in
denying PALI's application is that it would be PALI, not the
Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the
Military/Naval Reservation does not inspire belief. The point is, the PALI
properties are now titled. A property losses its public character the moment
it is covered by a title. As a matter of fact, the titles have long been settled
by a final judgment; and the final decree having been registered, they can no
longer be re-opened considering that the one year period has already
passed. Lastly, the determination of what standard to apply in allowing PALI's
application for listing, whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to the Securities
Commission, it being the government agency that exercises both supervisory
and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the
instant Petition for Review on Certiorari, taking exception to the rulings of the
SEC and the Court of Appeals. Respondent PALI filed its Comment to the
petition on October 17, 1996. On the same date, the PCGG filed a Motion for
Leave to file a Petition for Intervention. This was followed up by the PCGG's
Petition for Intervention on October 21, 1996. A supplemental Comment was
filed by PALI on October 25, 1997. The Office of the Solicitor General,
representing the SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG's motion for leave to file petition
for intervention, PALI filed its Comment thereto on January 17, 1997, whereas
the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments
of respondent PALI (October 17, 1996) and the Solicitor General (December

26, 1996). On May 16, 1997, PALI filed its Rejoinder to the said consolidated
reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had
authority to order the PSE to list the shares of PALI in the stock exchange.
Under presidential decree No. 902-A, the powers of the SEC over stock
exchanges are more limited as compared to its authority over ordinary
corporations. In connection with this, the powers of the SEC over stock
exchanges under the Revised Securities Act are specifically enumerated, and
these do not include the power to reverse the decisions of the stock
exchange. Authorities are in abundance even in the United States, from
which the country's security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in turn are
given more lee-way in making the decision whether or not to allow
corporations to offer their stock to the public through the stock exchange.
This is in accord with the "business judgment rule" whereby the SEC and the
courts are barred from intruding into business judgments of corporations,
when the same are made in good faith. the said rule precludes the reversal
of the decision of the PSE to deny PALI's listing application, absent a showing
of bad faith on the part of the PSE. Under the listing rules of the PSE, to
which PALI had previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer has complied
with the PSE listing rules and requirements, PSE retains the discretion to
accept or reject the issuer's listing application if the PSE determines that the
listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered
corporations, nor with corporations whose properties are under
sequestration. A reading of Republic of the Philippines vs. Sadiganbayan,
G.R. No. 105205, 240 SCRA 376, would reveal that the properties of PALI,
which were derived from the Ternate Development Corporation (TDC) and
the Monte del Sol Development Corporation (MSDC). are under sequestration
by the PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
This ruling of the Court is the "law of the case" between the Republic and
TDC and MSDC. It categorically declares that the assets of these corporations
were sequestered by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's
ownership over its properties can no longer be questioned, since certificates
of title have been issued to PALI and more than one year has since lapsed, is

erroneous and ignores well settled jurisprudence on land titles. That a


certificate of title issued under the Torrens System is a conclusive evidence
of ownership is not an absolute rule and admits certain exceptions. It is
fundamental that forest lands or military reservations are non-alienable.
Thus, when a title covers a forest reserve or a government reservation, such
title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the
alleged policy of "full disclosure" to uphold the listing of PALI's shares with
the PSE, in the absence of a clear mandate for the effectivity of such policy.
As it is, the case records reveal the truth that PALI did not comply with the
listing rules and disclosure requirements. In fact, PALI's documents
supporting its application contained misrepresentations and misleading
statements, and concealed material information. The matter of sequestration
of PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that
although it is clothed with the markings of a corporate entity, it functions as
the primary channel through which the vessels of capital trade ply. The PSE's
relevance to the continued operation and filtration of the securities
transactions in the country gives it a distinct color of importance such that
government intervention in its affairs becomes justified, if not necessarily.
Indeed, as the only operational stock exchange in the country today, the PSE
enjoys a monopoly of securities transactions, and as such, it yields an
immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has
seen it wise to give special treatment to the administration and regulation of
stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and
right of supervision and control over all corporations under Sec. 3 of P.D. 902A, give the SEC the special mandate to be vigilant in the supervision of the
affairs of stock exchanges so that the interests of the investing public may
be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to
uphold the SEC's challenged control authority over the petitioner PSE even
as it provides that "the Commission shall have absolute jurisdiction,
supervision, and control over all corporations, partnerships or associations,

who are the grantees of primary franchises and/or a license or permit issued
by the government to operate in the Philippines. . ." The SEC's regulatory
authority over private corporations encompasses a wide margin of areas,
touching nearly all of a corporation's concerns. This authority springs from
the fact that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be
implied from or be considered as necessary or incidental to the carrying out
of the SEC's express power to insure fair dealing in securities traded upon a
stock exchange or to ensure the fair administration of such exchange. 7 It is,
likewise, observed that the principal function of the SEC is the supervision
and control over corporations, partnerships and associations with the end in
view that investment in these entities may be encouraged and protected,
and their activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed
the decision of the PSE to deny the application for listing in the stock
exchange of the private respondent PALI. The SEC's action was affirmed by
the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be traded or not in
the stock exchange. This is in line with the SEC's mission to ensure proper
compliance with the laws, such as the Revised Securities Act and to regulate
the sale and disposition of securities in the country. 9 As the appellate court
explains:
Paramount policy also supports the authority of the public
respondent to review petitioner's denial of the listing. Being a
stock exchange, the petitioner performs a function that is vital to
the national economy, as the business is affected with public
interest. As a matter of fact, it has often been said that the
economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can
dictate which and how many users are allowed to sell securities
thru the facilities of a stock exchange, if allowed to interpret its
own rules liberally as it may please. Petitioner can either allow or
deny the entry to the market of securities. To repeat, the
monopoly, unless accompanied by control, becomes subject to

abuse; hence, considering public interest, then it should be


subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The
legislature, through the Revised Securities Act, Presidential Decree No. 902A, and other pertinent laws, has entrusted to it the serious responsibility of
enforcing all laws affecting corporations and other forms of associations not
otherwise vested in some other government office. 10
This is not to say, however, that the PSE's management prerogatives are
under the absolute control of the SEC. The PSE is, alter all, a corporation
authorized by its corporate franchise to engage in its proposed and duly
approved business. One of the PSE's main concerns, as such, is still the
generation of profit for its stockholders. Moreover, the PSE has all the rights
pertaining to corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts with third
persons, and to perform all other legal acts within its allocated express or
implied powers.
A corporation is but an association of individuals, allowed to transact under
an assumed corporate name, and with a distinct legal personality. In
organizing itself as a collective body, it waives no constitutional immunities
and perquisites appropriate to such a body. 11 As to its corporate and
management decisions, therefore, the state will generally not interfere with
the same. Questions of policy and of management are left to the honest
decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board
of directors. The board is the business manager of the corporation, and so
long as it acts in good faith, its orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the
resultant authority to reverse the PSE's decision in matters of application for
listing in the market, the SEC may exercise such power only if the PSE's
judgment is attended by bad faith. In Board of Liquidators vs. Kalaw, 13 it was
held that bad faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious doing of
wrong. It means a breach of a known duty through some motive or interest of
ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE
considered important facts, which, in the general scheme, brings to serious

question the qualification of PALI to sell its shares to the public through the
stock exchange. During the time for receiving objections to the application,
the PSE heard from the representative of the late President Ferdinand E.
Marcos and his family who claim the properties of the private respondent to
be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact,
an order of sequestration has been issued covering the properties of PALI,
and suit for reconveyance to the state has been filed in the Sandiganbayan
Court. How the properties were effectively transferred, despite the
sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the
private respondent PALI, in only a short span of time, are not yet explained to
the Court, but it is clear that such circumstances give rise to serious doubt as
to the integrity of PALI as a stock issuer. The petitioner was in the right when
it refused application of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised Securities Act,
after all, is to give adequate and effective protection to the investing public
against fraudulent representations, or false promises, and the imposition of
worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed
protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities"
Act, was designed not only to provide investors with adequate
information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to
obtain capital through honest presentation against competition
from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1)
prevention of excesses and fraudulent transactions, merely by
requirement of that their details be revealed; (2) placing the
market during the early stages of the offering of a security a
body of information, which operating indirectly through
investment services and expert investors, will tend to produce a
more accurate appraisal of a security, . . . Thus, the Commission
may refuse to permit a registration statement to become
effective if it appears on its face to be incomplete or inaccurate
in any material respect, and empower the Commission to issue a

stop order suspending the effectiveness of any registration


statement which is found to include any untrue statement of a
material fact or to omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name
and goodwill, and it has the right to protect such goodwill by maintaining a
reasonable standard of propriety in the entities who choose to transact
through its facilities. It was reasonable for the PSE, therefore, to exercise its
judgment in the manner it deems appropriate for its business identity, as
long as no rights are trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government
absolutism is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can
no longer be assailed is of no moment. At this juncture, there is the claim
that the properties were owned by TDC and MSDC and were transferred in
violation of sequestration orders, to Rebecco Panlilio and later on to PALI,
besides the claim of the Marcoses that such properties belong to the Marcos
estate, and were held only in trust by Rebecco Panlilio. It is also alleged by
the petitioner that these properties belong to naval and forest reserves, and
therefore beyond private dominion. If any of these claims is established to be
true, the certificates of title over the subject properties now held by PALI map
be disregarded, as it is an established rule that a registration of a certificate
of title does not confer ownership over the properties described therein to
the person named as owner. The inscription in the registry, to be effective,
must be made in good faith. The defense of indefeasibility of a Torrens Title
does not extend to a transferee who takes the certificate of title with notice
of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in
refusing the application of PALI, the true ownership of the properties of PALI
need not be determined as an absolute fact. What is material is that the
uncertainty of the properties' ownership and alienability exists, and this puts
to question the qualification of PALI's public offering. In sum, the Court finds
that the SEC had acted arbitrarily in arrogating unto itself the discretion of
approving the application for listing in the PSE of the private respondent
PALI, since this is a matter addressed to the sound discretion of the PSE, a

corporation entity, whose business judgments are respected in the absence


of bad faith.
The question as to what policy is, or should be relied upon in approving the
registration and sale of securities in the SEC is not for the Court to
determine, but is left to the sound discretion of the Securities and Exchange
Commission. In mandating the SEC to administer the Revised Securities Act,
and in performing its other functions under pertinent laws, the Revised
Securities Act, under Section 3 thereof, gives the SEC the power to
promulgate such rules and regulations as it may consider appropriate in the
public interest for the enforcement of the said laws. The second paragraph of
Section 4 of the said law, on the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold, transferred or in any other
manner conveyed to the public, unless registered in accordance with the
rules and regulations that shall be promulgated in the public interest and for
the protection of investors by the Commission. Presidential Decree No. 902A, on the other hand, provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over the securities market
as a whole, and as such, is given ample authority in determining appropriate
policies. Pursuant to this regulatory authority, the SEC has manifested that it
has adopted the policy of "full material disclosure" where all companies,
listed or applying for listing, are required to divulge truthfully and accurately,
all material information about themselves and the securities they sell, for the
protection of the investing public, and under pain of administrative, criminal
and civil sanctions. In connection with this, a fact is deemed material if it
tends to induce or otherwise effect the sale or purchase of its
securities. 15 While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities Act sets
substantial and procedural standards which a proposed issuer of securities
must satisfy. 16 Pertinently, Section 9 of the Revised Securities Act sets forth
the possible Grounds for the Rejection of the registration of a security:
The Commission may reject a registration statement and
refuse to issue a permit to sell the securities included in such
registration statement if it finds that
(1) The registration statement is on its face incomplete or
inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material fact

required to be stated therein or necessary to make the


statements therein not misleading; or
(2) The issuer or registrant
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the
provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission
may, in the public interest and for the protection of
investors, impose before the security can be
registered;
(iv) has been engaged or is engaged or is about to
engage in fraudulent transaction;
(v) is in any way dishonest or is not of good repute;
or
(vi) does not conduct its business in accordance with
law or is engaged in a business that is illegal or
contrary to government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to
be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or principal
stockholder of the issuer is disqualified to be such officer,
director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of
the Commission that the sale of its security would not work to
the prejudice of the public interest or as a fraud upon the
purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to
make the registration and issuance of securities dependent, to a certain

extent, on the merits of the securities themselves, and of the issuer, to be


determined by the Securities and Exchange Commission. This measure was
meant to protect the interests of the investing public against fraudulent and
worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute
reliance on the full disclosure method in the registration of securities is,
therefore, untenable. As it is, the Court finds that the private respondent
PALI, on at least two points (nos. 1 and 5) has failed to support the propriety
of the issue of its shares with unfailing clarity, thereby lending support to the
conclusion that the PSE acted correctly in refusing the listing of PALI in its
stock exchange. This does not discount the effectivity of whatever method
the SEC, in the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do so. However, the
SEC must recognize and implement the mandate of the law, particularly the
Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of arbitrariness and
whimsical animation on its part. Its action in refusing to allow the listing of
PALI in the stock exchange is justified by the law and by the circumstances
attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby
GRANTS the Petition for Review onCertiorari. The Decisions of the Court of
Appeals and the Securities and Exchange Commission dated July 27, 1996
and April 24, 1996 respectively, are hereby REVERSED and SET ASIDE, and a
new Judgment is hereby ENTERED, affirming the decision of the Philippine
Stock Exchange to deny the application for listing of the private respondent
Puerto Azul Land, Inc.
SO ORDERED.

G.R. No. 190071

August 15, 2012

UNION BANK OF THE PHILIPPINES, Petitioner,


vs.
MAUNLAD HOMES, INC. and all other persons or entities claiming
rights under it, Respondents.

VILLARAMA, JR.,*
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 under Rule 45 of the
Rules of Court filed by petitioner Union Bank of the Philippines (Union Bank),
assailing the decision dated October 28, 20092 of the Court of Appeals (CA)
in CA-G.R. SP No. 107772.
THE FACTS
Union Bank is the owner of a commercial complex located in Malolos,
Bulacan, known as the Maunlad Shopping Mall.
Sometime in August 2002, Union Bank, as seller, and respondent Maunlad
Homes, Inc. (Maunlad Homes), as buyer, entered into a contract to
sell3 involving the Maunlad Shopping Mall. The contract set the purchase
price atP 151 million, P 2.4 million of which was to be paid by Maunlad
Homes as down payment payable on or before July 5, 2002, with the balance
to be amortized over the succeeding 180-month period.4 Under the contract,
Union Bank authorized Maunlad Homes to take possession of the property
and to build or introduce improvements thereon. The parties also agreed that
if Maunlad Homes violates any of the provisions of the contract, all payments
made will be applied as rentals for the use and possession of the property,
and all improvements introduced on the land will accrue in favor of Union
Bank.5 In the event of rescission due to failure to pay or to comply with the
terms of the contract, Maunlad Homes will be required to immediately vacate
the property and must voluntarily turn possession over to Union Bank. 6
When Maunlad Homes failed to pay the monthly amortization, Union Bank
sent the former a Notice of Rescission of Contract7 dated February 5, 2003,
demanding payment of the installments due within 30 days from receipt;
otherwise, it shall consider the contract automatically rescinded. Maunlad
Homes failed to comply. Hence, on November 19, 2003, Union Bank sent
Maunlad Homes a letter demanding payment of the rentals due and requiring
that the subject property be vacated and its possession turned over to the
bank. When Maunlad Homes continued to refuse, Union Bank instituted an
ejectment suit before the Metropolitan Trial Court (MeTC) of Makati City,
Branch 64, on February 19, 2004. Maunlad Homes resisted the suit by

claiming, among others, that it is the owner of the property as Union Bank
did not reserve ownership of the property under the terms of the contract.8By
virtue of its ownership, Maunlad Homes claimed that it has the right to
possess the property.
On May 18, 2005, the MeTC dismissed Union Banks ejectment complaint.9 It
found that Union Banks cause of action was based on a breach of contract
and that both parties are claiming a better right to possess the property
based on their respective claims of ownership of the property.
The MeTC ruled that the appropriate action to resolve these conflicting
claims was an accion reivindicatoria, over which it had no jurisdiction.
On appeal, the Regional Trial Court (RTC) of Makati City, Branch 139, affirmed
the MeTC in its decision dated July 17, 2008;10 it agreed with the MeTC that
the issues raised in the complaint extend beyond those commonly involved
in an unlawful detainer suit. The RTC declared that the case involved a
determination of the rights of the parties under the contract. Additionally,
the RTC noted that the property is located in Malolos, Bulacan, but the
ejectment suit was filed by Union Bank in Makati City, based on the contract
stipulation that "the venue of all suits and actions arising out or in
connection with the Contract to Sell shall be in Makati City."11 The RTC ruled
that the proper venue for the ejectment action is in Malolos, Bulacan,
pursuant to the second paragraph of Section 1, Rule 4 of the Rules of Court,
which states:
Section 1. Venue of real actions. - Actions affecting title to or possession of
real property, or interest therein, shall be commenced and tried in the proper
court which has jurisdiction over the area wherein the real property involved,
or a portion thereof, is situated.
Forcible entry and detainer actions shall be commenced and tried in the
municipal trial court of the municipality or city wherein the real property
involved, or a portion thereof, is situated. [emphasis ours]
The RTC declared that Union Bank cannot rely on the waiver of venue
provision in the contract because ejectment is not an action arising out of or
connected with the contract.
Union Bank appealed the RTC decision to the CA through a petition for review
under Rule 42 of the Rules of Court. The CA affirmed the RTC decision in its

October 28, 2009 decision,12 ruling that Union Banks claim of possession is
based on its claim of ownership which in turn is based on its interpretation of
the terms and conditions of the contract, particularly, the provision on the
consequences of Maunlad Homes breach of contract. The CA determined
that Union Banks cause of action is premised on the interpretation and
enforcement of the contract and the determination of the validity of the
rescission, both of which are matters beyond the jurisdiction of the MeTC.
Therefore, it ruled that the dismissal of the ejectment suit was proper. The
CA, however, made no further ruling on the issue of venue of the action.
From the CAs judgment, Union Bank appealed to the Court by filing the
present petition for review on certiorariunder Rule 45 of the Rules of Court.
THE PARTIES ARGUMENTS
Union Bank disagreed with the CAs finding that it is claiming ownership over
the property through the ejectment action. It claimed that it never lost
ownership over the property despite the execution of the contract, since only
the right to possess was conceded to Maunlad Homes under the contract;
Union Bank never transferred ownership of the property to Maunlad Homes.
Because of Maunlad Homes failure to comply with the terms of the contract,
Union Bank believes that it rightfully rescinded the sale, which rescission
terminated Maunlad Homes right to possess the subject property. Since
Maunlad Homes failed to turn over the possession of the subject property,
Union Bank believes that it correctly instituted the ejectment suit.
The Court initially denied Union Banks petition in its Resolution dated March
17, 2010.13 Upon motion for reconsideration filed by Union Bank, the Court
set aside its Resolution of March 17, 2010 (in a Resolution dated May 30,
201114) and required Maunlad Homes to comment on the petition.
Maunlad Homes contested Union Banks arguments, invoking the rulings of
the lower courts. It considered Union Banks action as based on the propriety
of the rescission of the contract, which, in turn, is based on a determination
of whether Maunlad Homes indeed failed to comply with the terms of the
contract; the propriety of the rescission, however, is a question that is within
the RTCs jurisdiction. Hence, Maunlad Homes contended that the dismissal
of the ejectment action was proper.
THE COURTS RULING

We find the petition meritorious.


The authority of the MeTC to
interpret contracts in an unlawful
detainer action
In any case involving the question of jurisdiction, the Court is guided by the
settled doctrine that the jurisdiction of a court is determined by the nature of
the action pleaded by the litigant through the allegations in his complaint.15
Unlawful detainer is an action to recover possession of real property from
one who unlawfully withholds possession after the expiration or termination
of his right to hold possession under any contract, express or implied. The
possession of the defendant in unlawful detainer is originally legal but
became illegal due to expiration or termination of the right to
possess.16 Under Section 1, Rule 70 of the Rules of Court, the action must be
filed "within one (1) year after the unlawful deprivation or withholding of
possession." Thus, to fall within the jurisdiction of the MeTC, the complaint
must allege that
1. the defendant originally had lawful possession of the property, either
by virtue of a contract or by tolerance of the plaintiff; 2. eventually, the
defendants possession of the property becameillegal or unlawful upon
notice by the plaintiff to defendant of the expiration or the termination
of the defendants right of possession;
3. thereafter, the defendant remained in possession of the property
and deprived the plaintiff the enjoyment thereof; and
4. within one year from the unlawful deprivation or withholding of
possession, the plaintiff instituted the complaint for ejectment.17
Contrary to the findings of the lower courts, all four requirements were
alleged in Union Banks Complaint. Union Bank alleged that Maunlad Homes
"maintained possession of the subject properties" pursuant to the Contract to
Sell.18 Maunlad Homes, however, "failed to faithfully comply with the terms of
payment," prompting Union Bank to "rescind the Contract to Sell in a Notice
of Rescission dated February 5, 2003."19 When Maunlad Homes "refused to
turn over and vacate the subject premises,"20 Union Bank sent another
Demand Letter on November 19, 2003 to Maunlad Homes requiring it (1)
"[t]o pay the equivalent rentals-in-arrears as of October 2003 in the amount

ofP 15,554,777.01 and monthly thereafter until the premises are fully
vacated and turned over" to Union Bank, and (2) to vacate the property
peacefully and turn over possession to Union Bank.21 As the demand went
unheeded, Union Bank instituted an action for unlawful detainer before the
MeTC on February 19, 2004, within one year from the date of the last
demand. These allegations clearly demonstrate a cause of action for
unlawful detainer and vested the MeTC jurisdiction over Union Banks action.
Maunlad Homes denied Union Banks claim that its possession of the
property had become unlawful. It argued that its failure to make payments
did not terminate its right to possess the property because it already
acquired ownership when Union Bank failed to reserve ownership of the
property under the contract. Despite Maunlad Homes claim of ownership of
the property, the Court rules that the MeTC retained its jurisdiction over the
action; a defendant may not divest the MeTC of its jurisdiction by merely
claiming ownership of the property.22 Under Section 16, Rule 70 of the Rules
of Court, "when the defendant raises the defense of ownership in his
pleadings and the question of possession cannot be resolved without
deciding the issue of ownership, the issue of ownership shall be resolved
only to determine the issue of possession." Section 18, Rule 70 of the Rules
of Court, however, states that "the judgment x x x shall be conclusive with
respect to the possession only and shall in no wise bind the title or affect the
ownership of the land or building."
The authority granted to the MeTC to preliminarily resolve the issue of
ownership to determine the issue of possession ultimately allows it to
interpret and enforce the contract or agreement between the plaintiff and
the defendant. To deny the MeTC jurisdiction over a complaint merely
because the issue of possession requires the interpretation of a contract will
effectively rule out unlawful detainer as a remedy. As stated, in an action for
unlawful detainer, the defendants right to possess the property may be by
virtue of a contract, express or implied; corollarily, the termination of the
defendants right to possess would be governed by the terms of the same
contract. Interpretation of the contract between the plaintiff and the
defendant is inevitable because it is the contract that initially granted the
defendant the right to possess the property; it is this same contract that the
plaintiff subsequently claims was violated or extinguished, terminating the
defendants right to possess. We ruled in Sps. Refugia v. CA23 that

where the resolution of the issue of possession hinges on a determination of


the validity and interpretation of the document of title or any other contract
on which the claim of possession is premised, the inferior court may likewise
pass upon these issues.
The MeTCs ruling on the rights of the parties based on its interpretation of
their contract is, of course, not conclusive, but is merely provisional and is
binding only with respect to the issue of possession.
Thus, despite the CAs opinion that Union Banks "case involves a
determination of the rights of the parties under the Contract to Sell,"24 it is
not precluded from resolving this issue. Having acquired jurisdiction over
Union Banks action, the MeTC can resolve the conflicting claims of the
parties based on the facts presented and proved.
The right to possess the property was
extinguished when the contract to
sell failed to materialize
Maunlad Homes acquired possession of the property based on its contract
with Union Bank. While admitting that it suspended payment of the
installments,25 Maunlad Homes contended that the suspension of payment
did not affect its right to possess the property because its contract with
Union Bank was one of sale and not to sell; hence, ownership of the
property has been transferred to it, allowing it to retain possession
notwithstanding nonpayment of installments. The terms of the contract,
however, do not support this conclusion.
Section 11 of the contract between Union Bank and Maunlad Homes provides
that "upon payment in full of the Purchase Price of the Property x x x, the
SELLER shall execute and deliver a Deed of Absolute Sale conveying the
Property to the BUYER."26 "Jurisprudence has established that where the
seller promises to execute a deed of absolute sale upon the completion by
the buyer of the payment of the price, the contract is only a contract to
sell."27 The presence of this provision generally identifies the contract as
being a mere contract to sell.28 After reviewing the terms of the contract
between Union Bank and Maunlad Homes, we find no reasonable ground to
exempt the present case from the general rule; the contract between Union
Bank and Maunlad Homes is a contract to sell.

In a contract to sell, the full payment of the purchase price is a positive


suspensive condition whose non-fulfillment is not a breach of contract, but
merely an event that prevents the seller from conveying title to the
purchaser. "The non-payment of the purchase price renders the contract to
sell ineffective and without force and effect."29Maunlad Homes act of
withholding the installment payments rendered the contract ineffective and
without force and effect, and ultimately deprived itself of the right to
continue possessing Maunlad Shopping Mall.
The propriety of filing the unlawful
detainer action in Makati City
pursuant to the venue stipulation in
the contract
Maunlad Homes questioned the venue of Union Banks unlawful detainer
action which was filed in Makati City while the contested property is located
in Malolos, Bulacan. Citing Section 1, Rule 4 of the Rules of Court, Maunlad
Homes claimed that the unlawful detainer action should have been filed with
the municipal trial court of the municipality or city where the real property
involved is situated. Union Bank, on the other hand, justified the filing of the
complaint with the MeTC of Makati City on the venue stipulation in the
contract which states that "the venue of all suits and actions arising out of or
in connection with this Contract to Sell shall be at Makati City."30
While Section 1, Rule 4 of the Rules of Court states that ejectment actions
shall be filed in "the municipal trial court of the municipality or city wherein
the real property involved x x x is situated," Section 4 of the same Rule
provides that the rule shall not apply "where the parties have validly agreed
in writing before the filing of the action on the exclusive venue thereof."
Precisely, in this case, the parties provided for a different venue. In
Villanueva v. Judge Mosqueda, etc., et al.,31 the Court upheld the validity of a
stipulation in a contract providing for a venue for ejectment actions other
than that stated in the Rules of Court. Since the unlawful detainer action is
connected with the contract, Union Bank rightfully filed the complaint with
the MeTC of Makati City.
WHEREFORE, we hereby GRANT the petition and SET ASIDE the decision
dated October 28, 2009 of the Court of Appeals in CA-G.R. SP No. 107772.
Respondent Maunlad Homes, Inc. is ORDERED TO VACATE the Maunlad
Shopping Mall, the property subject of the case, immediately upon the

finality of this Decision. Respondent Maunlad Homes, Inc. is


further ORDERED TO PAY the rentals-in-arrears, as well as rentals accruing
in the interim until it vacates the property.
The case is REMANDED to the Metropolitan Trial Court of Makati City,
Branch 64, to determine the amount of rentals due. In addition to the
amount determined as unpaid rent, respondent Maunlad Homes, Inc.
is ORDERED TO PAY legal interest of six percent (6o/o) per annum, from
November 19, 2003, when the demand to pay and to vacate was made, up
to the finality of this Decision. Thereafter, an interest of twelve percent
( 12%) per annum shall be imposed on the total amount due until full
payment is made.
SO ORDERED.

G.R. No. 86738 November 13, 1991


NESTLE PHILIPPINES, INC., petitioner,
vs.
COURT OF APPEALS and SECURITIES AND EXCHANGE
COMMISSION, respondents.
Nepomuceno, Hofilena & Guingona for petitioner.

FELICIANO, J.:p
Sometime in February 1983, the authorized capital stock of petitioner Nestle
Philippines Inc. ("Nestle") was increased from P300 million divided into 3
million shares with a par value of P100.00 per share, to P600 million divided
into 6 million shares with a par value of P100.00 per share. Nestle underwent
the necessary procedures involving Board and stockholders approvals and
effected the necessary filings to secure the approval of the increase of
authorized capital stock by respondent Securities and Exchange Commission
("SEC"), which approval was in fact granted. Nestle also paid to the SEC the
amount of P50,000.00 as filing fee in accordance with the Schedule of Fees
and Charges being implemented by the SEC under the Corporation Code. 1

Nestle has only two (2) principal stockholders: San Miguel Corporation and
Nestle S.A. The other stockholders, who are individual natural persons, own
only one (1) share each, for qualifying purposes, i.e., to qualify them as
members of the Board of Directors being elected thereto on the strength of
the votes of one or the other principal shareholder.
On 16 December 1983, the Board of Directors and stockholders of Nestle
approved resolutions authorizing the issuance of 344,500 shares out of the
previously authorized but unissued capital stock of Nestle, exclusively to San
Miguel Corporation and to Nestle S.A. San Miguel Corporation subscribed to
and completely paid up 168,800 shares, while Nestle S.A. subscribed to and
paid up the balance of 175,700 shares of stock.
On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate
Secretary, M.L. Antonio, with the SEC seeking exemption of its proposed
issuance of additional shares to its existing principal shareholders, from the
registration requirement of Section 4 of the Revised Securities Act and from
payment of the fee referred to in Section 6(c) of the same Act. In that letter,
Nestle requested confirmation of the correctness of two (2) propositions
submitted by it:
1. That there is no need to file a petition for exemption under
Section 6(b) of the Revised Securities Act with respect to the
issuance of the said 344,600 additional shares to our existing
stockholders out of our unissued capital stock; and
2. That the fee provided in Section 6(c) of [the Revised
Securities] Act is not applicable to the said issuance of additional
shares. 2
The principal, indeed the only, argument presented by Nestlewas that
Section 6(a) (4) of the Revised Securities Act which provides as follows:
Sec. 6. Exempt transactions. a) The requirement of
registration under subsection (a) of Section four of this Act shall
not apply to the sale of any security in any of the following
transactions:
xxx xxx xxx

(4) The distribution by a corporation, actively engaged in the


business authorized by its articles of incorporation, of securities
to its stockholders or other security holders as a stock dividend
or other distribution out of surplus; or the issuance of securities
to the security holder or other creditors of a corporation in the
process of a bona fide reorganization of such corporation made
in good faith and not for the purpose of avoiding the provisions
of this Act, either in exchange for the securities of such security
holders or claims of such creditors or partly for cash and partly in
exchange for the securities or claims of such security holders or
creditors; or the issuance of additional capital stock of a
corporation sold or distributed by it among its own stockholders
exclusively, where no commission or other remuneration is paid
or given directly or indirectly in connection with the sale or
distribution of such increased capital stock. (Emphasis supplied)
embraces "not only an increase in the authorized capital stock but also the
issuance of additional shares to existing stockholders of the unissued portion
of the unissued capital stock". 3 Nestle urged that interpretation upon the
following argument.
The use of the term "increased capital stock" should be
interpreted to refer to additional capital stockor equity
participation of the existing stockholders as a consequence of
either an increase of the authorized capital stock or the issuance
of unissued capital stock. If the intention of the pertinent legal
provision [were] to limit the exemption to subscription to
proposed increases in the authorized capital stock of a
corporation, we see no reason why the law should not have been
more specific or accurate about it. It certainly should have
mentioned "increase in the authorized capital stock of the
corporation" rather than merely the expression "the issuance of
additional capital stock 4 (Emphasis supplied)
Nestle expressly represented in the same letter that all the additional shares
proposed to be issued would be issued only to San Miguel Corporation and
Nestle S.A. and that no commission or other form of remuneration had been
given, directly or indirectly, in connection with the issuance or distribution of
such additional shares of stock.

In respect of its claimed exemption from the fee provided for in Section 6(c)
of the Revised Securities Act, Nestle contended that since Section 6 (a) (4) of
the statute declares (in Nestle's view) the proposed issuance of 344,500
previously authorized but unissued shares of Nestle's capital stock to its
existing shareholders as an exempt transaction, the SEC could not collect
fees for "the same transaction" twice. Nestle adverted to its payment back in
21 February 1983 of the amount of P50,000.00 as filing fees to the SEC when
it applied for and eventually received approval of the increase of its
authorized capital stock effected by Board and shareholder action last 16
December 1983.
In a letter dated 26 June 1986, the SEC through its then Chairman Julio A.
Sulit, Jr. responded adversely to petitioner's requests and ruled that the
proposed issuance of shares did not fall under Section 6 (a) (4) of the
Revised Securities Act, since Section 6 (a) (4) is applicable only where there
is an increase in the authorized capital stock of a corporation. Chairman Sulit
held, however, that the proposed transaction could be considered by the
Commission under the provisions of Section 6 (b) of the Revised Securities
Act which reads as follows:
(b) The Commission may, from time to time and subject to such
terms and conditions as it may prescribe, exempt transactions
other than those provided in the preceding paragraph, if it finds
that the enforcement of the requirements of registration under
this Act with respect to such transactions is not necessary in the
public interest and for the protection of the investors by reason
of the small amount involved or the limited character of the
public offering.
The Commission then advised petitioner to file the appropriate request for
exemption and to pay the fee required under Section 6 (c) of the statute,
which provides:
(c) A fee equivalent to one-tenth of one per centum of the
maximum aggregate price or issued value of the securities shall
be collected by the Commission for granting a general or
particular exemption from the registration requirements of this
Act.
Petitioner moved for reconsideration of the SEC ruling, without success.

On 3 July 1987, petitioner sought review of the SEC ruling before this Court
which, however, referred the petition to the Court of Appeals.
In a decision dated 13 January 1989, the Court of Appeals sustained the
ruling of the SEC.
Dissatisfied with the Decision of the Court of Appeals, Nestle is now before
this Court on a Petition for Review, raising the very same issues that it had
raised before the SEC and the Court of Appeals.
Examining the words actually used in Section 6 (a) (4) of the Revised
Securities Act, and bearing in mind common corporate usage in this
jurisdiction, it will be seen that the statutory phrase "issuance of additional
capital stock" is indeed infected with a certain degree of ambiguity. This
phrase may refer either to: a) the issuance of capital stock as part of and in
the course of increasing the authorized capital stock of a corporation; or (b)
issuance of already authorized but still unissued capital stock. By the same
token, the phrase "increased capital stock" found at the end of Section 6 (a)
(4), may refer either: 1) to newly or contemporaneously authorized capital
stock issued in the course of increasing the authorized capital stock of a
corporation; or 2) to previously authorized but unissued capital stock.
Under Section 38 of the Corporation Code, a corporation engaged in
increasing its authorized capital stock, with the required vote of its Board of
Directors and of its stockholders, must file a sworn statement of the
treasurer of the corporation showing that at least twenty-five percent (25%)
of "such increased capital stock" has been subscribed and that at least
twenty-five percent (25%) of the amount subscribed has been paid either in
actual cash or in property transferred to the corporation. In other words, the
corporation must issue at least twenty-five percent (25%) of the newly or
contemporaneously authorized capital stock in the course of complying with
the requirements of the Corporation Code for increasing its authorized
capital stock.
In contrast, after approval by the SEC of the increase of its authorized capital
stock, and from time to time thereafter, the corporation, by a vote of its
Board of Directors, and without need of either stockholder or SEC approval,
may issue and sell shares of its already authorized but still unissued capital
stock to existing shareholders or to members of the general public. 5

Both the SEC and the Court of Appeals resolved the ambiguity by construing
Section 6 (a) (4) as referring only to the issuance of shares of stock as part of
and in the course of increasing the authorized capital stock of Nestle. In the
case at bar, since the 344,500 shares of Nestle capital stock are proposed to
be issued from already authorized but still unissued capital stock and since
the present authorized capital stock of 6,000,000 shares with a par value of
P100.00 per share is not proposed to be further increased, the SEC and the
Court of Appeals rejected Nestle's petition.
We believe and so hold that the construction thus given by the SEC and the
Court of Appeals to Section 6 (a) (4) of the Revised Securities Act must be
upheld.
In the first place, it is a principle too well established to require extensive
documentation that the construction given to a statute by an administrative
agency charged with the interpretation and application of that statute is
entitled to great respect and should be accorded great weight by the courts,
unless such construction is clearly shown to be in sharp conflict with the
governing statute or the Constitution and other laws. As long ago as 1903,
this Court said in In re Allen 6 that
[t]he principle that the contemporaneous construction of a
statute by the executive officers of the government, whose duty
is to execute it, is entitled to great respect, and should ordinarily
control the construction of the statute by the courts, is so firmly
embedded in our jurisdiction that no authorities need be cited to
support it. 7
The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the
establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to accumulation of experience and
growth of specialized capabilities by the administrative agency charged with
implementing a particular statute. 8 In Asturias Sugar Central, Inc. v.
Commissioner of Customs 9 the Court stressed that executive officials are
presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The
courts give much weight to contemporaneous construction because of the
respect due the government agency or officials charged with the

implementation of the law, their competence, expertness, experience and


informed judgment, and the fact that they frequently are the drafters of the
law they interpret. 10
In the second place, and more importantly, consideration of the underlying
statutory purpose of Section 6(a) (4) compels us to sustain the view taken by
the SEC and the Court of Appeals. The reading by the SEC of the scope of
application of Section 6(a) (4) permits greater opportunity for the SEC to
implement the statutory objective of protecting the investing public by
requiring proposed issuers of capital stock to inform such public of the true
financial conditions and prospects of the corporation. By limiting the class of
exempt transactions contemplated by the last clause of Section 6(a) (4) to
issuances of stock done in the course of and as part of the process of
increasing the authorized capital stock of a corporation, the SEC is enabled
to examine issuances by a corporation of previously authorized but
theretofore unissued capital stock, on a case-to-case basis, under Section
6(b); and thereunder, to grant or withhold exemption from the normal
registration requirements depending upon the perceived level of need for
protection by the investing public in particular cases.
When capital stock is issued in the course of and in compliance with the
requirements of increasing its authorized capital stock under Section 38 of
the Corporation Code, the SEC as a matter of course examines the financial
condition of the corporation, and hence there is no real need for exercise of
SEC authority under the Revised Securities Act. Thus, one of the multiple
documentation requirements under the current regulations of the SEC in
respect of filing a certificate of increase of authorized capital stock, is
submission of "a financial statement duly certified by an independent
Certified Public Accountant (CPA) as of the latest date possible or as of the
date of the meeting when stockholders approved the increase/decrease in
capital stock or thereabouts. 11 When all or part of the newly authorized
capital stock is proposed to be issued as stock dividends, the SEC
requirements are even more exacting; they require, in addition to the regular
audited financial statements, the submission by the corporation of a
"detailed or Long Form Report of the certifying Auditor." Moreover, since
approval of an increase in authorized capital stock by the stockholders
holding two-thirds (2/3) of the outstanding capital stock is required by
Section 38 of the Corporation Code, at a stockholders meeting held for that
purpose, the directors and officers of the corporation may be expected to
take pains to inform the shareholders of the financial condition and prospects

of the corporation and of the proposed utilization of the fresh capital sought
to be raised.
Upon the other hand, as already noted, issuance of previously authorized but
theretofore unissued capital stock by the corporation requires only Board of
Directors approval. Neither notice to nor approval by the shareholders or the
SEC is required for such issuance. There would, accordingly, under the view
taken by petitioner Nestle, no opportunity for the SEC to see to it that
shareholders (especially the small stockholders) have a reasonable
opportunity to inform themselves about the very fact of such issuance and
about the condition of the corporation and the potential value of the shares
of stock being offered.
Under the reading urged by petitioner Nestle of the reach and scope of the
third clause of Section 6(a) (4), the issuance of previously authorized but
unissued capital stock would automatically constitute an exempt
transaction,without regard to the length of time which may have intervened
between the last increase in authorized capital stock and the proposed
issuance during which time the condition of the corporation may have
substantially changed, and without regard to whether the existing
stockholders to whom the shares are proposed to be issued are only two
giant corporations as in the instant case, or are individuals numbering in the
hundreds or thousands.
In contrast, under the ruling issued by the SEC, an issuance of previously
authorized but still unissued capital stock may, in a particular instance, be
held to be an exempt transaction by the SEC under Section 6(b) so long as
the SEC finds that the requirements of registration under the Revised
Securities Act are "not necessary in the public interest and for the protection
of the investors" by reason, inter alia, of the small amount of stock that is
proposed to be issued or because the potential buyers are very limited in
number and are in a position to protect themselves. In fine, petitioner
Nestle's proposed construction of Section 6(a) (4) would establish an
inflexible rule of automatic exemption of issuances of additional, previously
authorized but unissued, capital stock. We must reject an interpretation
which may disable the SEC from rendering protection to investors, in the
public interest, precisely when such protection may be most needed.
Petitioner Nestle's second claim for exemption is from payment of the fee
provided for in Section 6 (c) of the Revised Securities Act, a claim based

upon petitioner's contention that Section 6 (a) (4) covers both issuance of
stock in the course of complying with the statutory requirements of increase
of authorized capital stock and issuance of previously authorized and
unissued capital stock. Petitioner claims that to require it now to pay onetenth of one percent (1%) of the issued value of the 344,500 shares of stock
proposed to be issued, is to require it to pay a second time for the same
service on the part of the SEC. Since we have above rejected petitioner's
reading of Section 6 (a) (4), last clause, petitioner's claim about the
additional fee of one-tenth of one percent (1%) of the issue value of the
proposed issuance of stock (amounting to P34,450 plus P344.50 for other
fees or a total of P37,794.50) need not detain us for long. We think it clear
that the fee collected in 21 February 1983 by the SEC was assessed in
connection with the examination and approval of the certificate of increase
of authorized capital stock then submitted by petitioner. The fee, upon the
other hand, provided for in Section 6 (c) which petitioner will be required to
pay if it does file an application for exemption under Section 6 (b), is quite
different; this is a fee specifically authorized by the Revised Securities Act,
(not the Corporation Code) in connection with the grant of an exemption
from normal registration requirements imposed by that Act. We do not find
such fee either unreasonable or exorbitant.
WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is
hereby DENIED for lack of merit and the Decision of the Court of Appeals
dated 13 January 1989 in C.A.-G.R. No. SP-13522, is hereby AFFIRMED. Costs
against petitioner.
SO ORDERED.

G.R. No. 90707 February 1, 1993


ONAPAL PHILIPPINES COMMODITIES, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SUSAN CHUA, respondents.
Zosa & Quijano Law Offices for private respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Certiorari under Rule 45 of the Rules
of Court to annul and set aside the following actions of the Court of Appeals:
a) Decision * in Case CA-G.R. CV No. 08924; and
b) Resolution ** denying a Motion for Reconsideration
on the ground of grave abuse of discretion amounting to lack or excess
of jurisdiction and further ground that the decision is contrary to law
and evidence. The questioned decision upheld the trial court's findings
that the Trading Contract 1 on "futures" is a specie of gambling and
therefore null and void. Accordingly, the petitioner (as defendant in
lower court) was ordered to refund to the private respondent (as
plaintiff) the losses incurred in the trading transactions.
In support of the petition, the grounds alleged are:
1) Article 2018 of the New Civil Code is inapplicable to the factual milieu of
the instant case considering that in a commodity futures transaction the
broker is not the direct participant and cannot be considered as winner or
loser and the contract itself, from its very nature, cannot be considered as
gambling.
2) A commodity futures contract, being a specie of securities, is valid and
enforceable as its terms are governed by special laws, notably the Revised
Securities Act and the Revised Rules and Regulations on Commodity Futures
Trading issued by the Securities and Exchange Commission (SEC) and
approved by the Monetary Board of the Central Bank; hence, the Civil Code is
not the controlling piece of legislation.
From the records, We gather the following antecedent facts and proceedings.
The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly
organized and existing corporation, was licensed as commission
merchant/broker by the SEC, to engage in commodity futures trading in Cebu
City under Certificate of Registration No. CEB-182. On April 27, 1983,
petitioner and private respondent concluded a "Trading Contract". Like all
customers of the petitioner, private respondent was furnished regularly with
"Commodities Daily Quotations" showing daily movements of prices of
commodity futures traded and of market reports indicating the volume of
trade in different future exchanges in Hongkong, Tokyo and other centers.

Every time a customer enters into a trading transaction with petitioner as


broker, the trading order is communicated by telex to its principal, Frankwell
Enterprises of Hongkong. If the transaction, either buying or selling
commodity futures, is consummated by the principal, the petitioner issues a
document known as "Confirmation of Contract and Balance Sheet" to the
customer. An order of a customer of the petitioner is supposed to be
transmitted from Cebu to petitioner's office in Manila. From Manila, it should
be forwarded to Hongkong and from there, transmitted to the Commodity
Futures Exchange in Japan.
There were only two parties involved as far as the transactions covered by
the Trading Contract are concerned the petitioner and the private
respondents. We quote hereunder the respondent Court's detailed findings of
the transactions between the parties:
It appears from plaintiff's testimony that sometime in April of
1983, she was invited by defendant's Account Executive
Elizabeth Diaz to invest in the commodity futures trading by
depositing the amount of P500,000.00 (Exh. "A"); She was
further told that the business is "profitable" and that she could
withdraw her money anytime; she was furthermore instructed to
go to the Onapal Office where she met the Manager, Mr. Ciam,
and the Account Executive Elizabeth Diaz who told her that they
would take care of how to trade business and her account. She
was then made to sign the Trading Contract and other
documents without making her aware/understand the risks
involved; that at the time they let her sign "those papers" they
were telling her that those papers were for "formality sake"; that
when she was told later on that she made a profit of P20,480.00
in a span of three days in the first transaction, they told her that
the business is "very profitable" (tsn, Francisco, March 14, 1985,
p. 11).
On June 2, 1983, plaintiff was informed by Miss Diaz that she had
to deposit an additional amount of P300,000.00 "to pay the
difference" in prices, otherwise she will lose her original deposit
of P500,000.00; Fearing the loss of her original deposit, plaintiff
was constrained to deposit an additional amount of P300,000.00
(Exh. "B"); Since she was made to understand that she could
withdraw her deposit/investment anytime, she not knowing how

the business is operated/managed as she was not made to


understand what the business was all about, she wanted to
withdraw her investment; but Elizabeth Diaz, defendant's
Account Executive, told her she could not get out because there
are some accounts hanging on the transactions.
Plaintiff further testified that she understood the transaction of
buying and selling as speculating in prices, and her paying the
difference between gains and losses without actual delivery of
the goods to be gambling, and she would like to withdraw from
this kind of business, the risk of which she was not made aware
of. Plaintiff further testified that she stopped trading in
commodity futures in September, 1983 when she realized she
was engaged in gambling. She was able to get only P470,000.00
out of her total deposit of P800,000.00. In order to recover the
loss of P330,000.00, she filed this case and engaged the services
of counsel for P40,000.00 and expects to incur expenses of
litigation in the sum of P20,000.00." 2
A commodity futures contract is a specie of securities included in the broad
definition of what constitutes securities under Section 2 of the Revised
Securities Act. 3
Sec. 2 . . .:
(a) Securities shall include bonds, . . ., commodity futures
contracts, . . . .
The Revised Rules and Regulations on Commodity Futures Trading
issued by the SEC and approved by the Monetary Board of the Central
bank defines such contracts as follows:
"Commodity Futures Contract" shall refer to an agreement to buy
or sell a specified quantity and grade of a commodity at a future
date at a price established at the floor of the exchange.
The petitioner is a duly licensed commodity futures broker as defined
under the Revised Rules and Regulations on Commodity Futures
Trading as follows:

"Futures Commission Merchant/Broker" shall refer to a


corporation or partnership, which must be registered and
licensed as a Futures Commission Merchant/Broker and is
engaged in soliciting or in accepting orders for the purchase or
sale of any commodity for future delivery on or subject to the
rules of the contract market and that, in connection with such
solicitation or acceptance of orders, accepts any money,
securities or property (or extends credit in lieu thereof) to
margin, guarantee or secure any trade or contract that results or
may result therefrom.
At the time private respondent entered into the transaction with the
petitioner, she signed a document denominated as "Trading Contract"
in printed form as prepared by the petitioner represented by its Branch
Manager, Albert Chiam, incorporating the Rules for Commodity Trading.
A copy of said contract was furnished to the private respondent but the
contents thereof were not explained to the former, beyond what was
told her by the petitioner's Account Executive Elizabeth Diaz. Private
respondent was also told that the petitioner's principal was Frankwell
Enterprises with offices in Hongkong but the private respondent's
money which was supposed to have been transmitted to Hongkong,
was kept by petitioner in a separate account in a local bank.
Petitioner now contends that commodity futures trading is a legitimate
business practiced in the United States, recognized by the SEC and permitted
under the Civil Code, specifically Article 1462 thereof, quoted as follows:
The goods which form the subject of a contract of sale may be
either existing goods, owned or possessed by the seller, or goods
to be manufactured, raised or acquired by the seller after the
perfection of the contract of sale, in this Title called "future
goods".
There may be a contract of sale of goods, whose acquisition by
the seller depends upon a contingency which may or may not
happen.
Petitioner further argues that the SEC, in the exercise of its powers,
authorized the operation of commodity exchanges to supervise and regulate
commodity futures trading. 4

The contract between the parties falls under the kind commonly called
"futures". In the late 1880's, trading in futures became rampant in the
purchase and sale of cotton and grain in the United States, giving rise to
unregulated trading exchanges known as "bucket shops". These were
common in Chicago and New York City where cotton from the South and
grain from the Mid-west were constantly traded in. The name of the party to
whom the seller was to make delivery when the future contract of sale was
closed or from whom he was to receive delivery in case of purchase is not
given the memorandum (contract). The business dealings between the
parties were terminated by the closing of the transaction of purchase and
sale of commodities without directions of the buyer because his margins
were exhausted. 5 Under the rules of the trading exchanges, weekly
settlements were required if there was any difference in the prices of the
cotton between those obtaining at the time of the contract and at the date of
delivery so that under the contract made by the purchaser, if the price of
cotton had advanced, he would have received in cash from the seller each
week the advance (increase) in price and if cotton prices declined, the
purchaser had to make like payments to the seller. In the terminology of the
exchange, these payments are called "margins". 6 Either the seller or the
buyer may elect to make or demand delivery of the cotton agreed to be sold
and bought, but in general, it seems practically a uniform custom that
settlements are made by payments and receipts of difference in prices at the
time of delivery from that prevailing at the time of payment of the past
weekly "margins". These settlements are made by "closing out" the
contracts. 7 Where the broker represented the buyer in buying and selling
cotton for future delivery with himself extending credit margins, and some of
the transactions were closed at a profit while the others at a loss, payments
being made of the difference in prices arising out of their rise or fall above or
below the contract price, and the facts showed that no actual delivery of
cotton was contemplated, such contracts are of the kind commonly called
"futures". 8 Making contracts for the purchase and sale of commodities for
future delivery, the parties not intending an actual delivery, or contracts of
the kind commonly called futures, are unenforceable. 9
The term "futures" has grown out of those purely speculative transactions in
which there are nominal contracts to sell for future delivery, but where in fact
no delivery is intended or executed. The nominal seller does not have or
expect to have a stock of merchandise he purports to sell nor does the
nominal buyer expect to receive it or to pay for the price. Instead of that, a
percentage or margin is paid, which is increased or diminished as the market

rates go up and down, and accounted for to the buyer. This is simple
speculation, gambling or wagering on prices within a given time; it is not
buying and selling and is illegal as against public policy. 10
The facts as disclosed by the evidence on record show that private
respondent made arrangements with Elizabeth Diaz, Account Executive of
petitioner for her to see Mr. Albert Chiam, petitioner's Branch Manager. The
contract signed by private respondent purports to be for the delivery of
goods with the intention that the difference between the price stipulated and
the exchange or market price at the time of the pretended delivery shall be
paid by the loser to the winner. We quote with approval the following findings
of the trial court as cited in the Court of Appeals decision:
The evidence of the plaintiff tend to show that in her transactions
with the defendant, the parties never intended to make or accept
delivery of any particular commodity but the parties merely
made a speculation on the rise or fall in the market of the
contract price of the commodity, subject of the transaction, on
the pretended date of delivery so that if the forecast was correct,
one party would make a profit, but if the forecast was wrong, one
party would lose money. Under this scheme, plaintiff was only
able to recover P470,000.00 out of her original and "additional"
deposit of P800,000.00 with the defendant.
The defendant admits that in all the transactions that it had with
the plaintiff, there was (sic) no actual deliveries and that it has
made no arrangement with the Central Bank for the remittance
of its customer's money abroad but defendant contends in its
defense that the mere fact that there were no actual deliveries
made in the transactions which plaintiff had with the defendant,
did not mean that no such actual deliveries were intended by the
parties since paragraph 10 of the rules for commodity trading,
attached to the trading contract which plaintiff signed before she
traded with the defendant, amply provides for actual delivery of
the commodity subject of the transaction.
The court has, therefore, to find out from all the facts and
circumstances of this case, whether the parties really intended to
make or accept deliveries of the commodities traded or whether
the defendant merely placed a provision for delivery in its rules

for commodity futures trading so as to escape from being called


a bucket shop, . . .
xxx xxx xxx
. . . the court is convinced that the parties never really intended
to make or accept delivery of any commodity being trade as, in
fact, the unrebutted testimony of Mr. Go is to the effect that all
the defendant's customers were mere speculators who merely
forecast the rise or fall in the market of the commodity, subject
of the transaction, below or above the contract price on the
pretended date of delivery and, in fact, the defendant even
discourages its customers from taking or accepting delivery of
any commodity by making it hard, if not impossible, for them to
make or accept delivery of any commodity. Proof of this is
paragraph 10(d) of defendant's rules for commodity trading
which provides that the customer shall apply for the necessary
licenses and documents with the proper government agency for
the importation and exportation of any particular commodity. 11
The trading contract signed by private respondent and Albert Chiam,
representing petitioner, is a contract for the sale of products for future
delivery, in which either seller or buyer may elect to make or demand
delivery of goods agreed to be bought and sold, but where no such delivery
is actually made. By delivery is meant the act by which the res or subject is
placed in the actual or constructive possession or control of another. It may
be actual as when physical possession is given to the vendee or his
representative; or constructive which takes place without actual transfer of
goods, but includes symbolic delivery or substituted delivery as when the
evidence of title to the goods, the key to the warehouse or bill of
lading/warehouse receipt is delivered. 12 As a contract in printed form,
prepared by petitioner and served on private respondent, for the latter's
signature, the trading contract bears all the indicia of a valid trading contract
because it complies with the Rules and Regulations on Commodity Futures
Trading as prescribed by the SEC. But when the transaction which was
carried out to implement the written contract deviates from the true import
of the agreement as when no such delivery, actual or constructive, of the
commodity or goods is made, and final settlement is made by payment and
receipt of only the difference in prices at the time of delivery from that
prevailing at the time the sale is made, the dealings in futures become mere

speculative contracts in which the parties merely gamble on the rise or fall in
prices. A contract for the sale or purchase of goods/commodity to be
delivered at future time, if entered into without the intention of having any
goods/commodity pass from one party to another, but with an understanding
that at the appointed time, the purchaser is merely to receive or pay the
difference between the contract and the market prices, is a transaction
which the law will not sanction, for being illegal. 13
The written trading contract in question is not illegal but the transaction
between the petitioner and the private respondent purportedly to implement
the contract is in the nature of a gambling agreement and falls within the
ambit of Article 2018 of the New Civil Code, which is quoted hereunder:
If a contract which purports to be for the delivery of goods,
securities or shares of stock is entered into with the intention
that the difference between the price stipulated and the
exchange or market price at the time of the pretended delivery
shall be paid by the loser to the winner, the transaction is null
and void. The loser may recover what he has paid.
The facts clearly establish that the petitioner is a direct participant in the
transaction, acting through its authorized agents. It received the customer's
orders and private respondent's money. As per terms of the trading contract,
customer's orders shall be directly transmitted by the petitioner as broker to
its principal, Frankwell Enterprises Ltd. of Hongkong, being a registered
member of the International Commodity Clearing House, which in turn must
place the customer's orders with the Tokyo Exchange. There is no evidence
that the orders and money were transmitted to its principal Frankwell
Enterprises Ltd. in Hongkong nor were the orders forwarded to the Tokyo
Exchange. We draw the conclusion that no actual delivery of goods and
commodity was intended and ever made by the parties. In the realities of the
transaction, the parties merely speculated on the rise and fall in the price of
the goods/commodity subject matter of the transaction. If private
respondent's speculation was correct, she would be the winner and the
petitioner, the loser, so petitioner would have to pay private respondent the
"margin". But if private respondent was wrong in her speculation then she
would emerge as the loser and the petitioner, the winner. The petitioner
would keep the money or collect the difference from the private respondent.
This is clearly a form of gambling provided for with unmistakeable certainty
under Article 2018 abovestated. It would thus be governed by the New Civil

Code and not by the Revised Securities Act nor the Rules and Regulations on
Commodity Futures Trading laid down by the SEC.
Article 1462 of the New Civil Code does not govern this case because the
said provision contemplates a contract of sale of specific goods where one of
the contracting parties binds himself to transfer the ownership of and deliver
a determinate thing and the other to pay therefore a price certain in money
or its equivalent. 14 The said article requires that there be delivery of goods,
actual or constructive, to be applicable. In the transaction in question, there
was no such delivery; neither was there any intention to deliver a
determinate thing.
The transaction is not what the parties call it but what the law defines it to
be. 15
After considering all the evidence in this case, it appears that petitioner and
private respondent did not intend, in the deals of purchasing and selling for
future delivery, the actual or constructive delivery of the goods/commodity,
despite the payment of the full price therefor. The contract between them
falls under the definition of what is called "futures". The payments made
under said contract were payments of difference in prices arising out of the
rise or fall in the market price above or below the contract price thus making
it purely gambling and declared null and void by law. 16
In England and America where contracts commonly called futures originated,
such contracts were at first held valid and could be enforced by resort to
courts. Later these contracts were held invalid for being speculative, and in
some states in America, it was unlawful to make contracts commonly called
"futures". Such contracts were found to be mere gambling or wagering
agreements covered and protected by the rules and regulations of exchange
in which they were transacted under devices which rendered it impossible for
the courts to discover their true character. 17 The evil sought to be
suppressed by legislation is the speculative dealings by means of such
trading contracts, which degenerated into mere gambling in the future price
of goods/commodities ostensibly but not actually, bought or sold. 18
Under Article 2018, the private respondent is entitled to refund from the
petitioner what she paid. There is no evidence that the orders of private
respondent were actually transmitted to the petitioner's principal in
Hongkong and Tokyo. There was no arrangement made by petitioner with the
Central Bank for the purpose of remitting the money of its customers abroad.

The money which was supposed to be remitted to Frankwell Enterprises of


Hongkong was kept by petitioner in a separate account in a local bank.
Having received the money and orders of private respondent under the
trading contract, petitioner has the burden of proving that said orders and
money of private respondent had been transmitted. But petitioner failed to
prove this point.
For reasons indicated and construed in the light of the applicable rules and
under the plain language of the statute, We find no reversible error
committed by the respondent Court that would justify the setting aside of the
questioned decision and resolution. For lack of merit, the petition is
DISMISSED and the judgment sought to be reversed is hereby AFFIRMED.
With costs against petitioner.
SO ORDERED.

G.R. No. L-14441

December 17, 1966

PEDRO R. PALTING, petitioner,


vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9, 1958, of the
Securities and Exchange Commission denying the opposition to, and instead,
granting the registration, and licensing the sale in the Philippines, of
5,000,000 shares of the capital stock of the respondent-appellee San Jose
Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a
corporation organized and existing in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine
Securities and Exchange Commission a sworn registration statement, for the
registration and licensing for sale in the Philippines Voting Trust Certificates
representing 2,000,000 shares of its capital stock of a par value of $0.35 a
share, at P1.00 per share. It was alleged that the entire proceeds of the sale
of said securities will be devoted or used exclusively to finance the
operations of San Jose Oil Company, Inc. (a domestic mining corporation

hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum


exploration concessions covering an area of a little less than 1,000,000
hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La
Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of
the sale that every purchaser of the securities shall not receive a stock
certificate, but a registered or bearer-voting-trust certificate from the voting
trustees named therein James L. Buckley and Austin G.E. Taylor, the first
residing in Connecticut, U.S.A., and the second in New York City. While this
application for registration was pending consideration by the Securities and
Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement
on June 20, 1958, for registration of the sale in the Philippines of its shares of
capital stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this time the par
value of the shares has also been reduced from $.35 to $.01 per share. 1
Pedro R. Palting and others, allegedly prospective investors in the shares of
SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission
an opposition to registration and licensing of the securities on the grounds
that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian
corporation and SAN JOSE OIL, a domestic corporation, violates the
Constitution of the Philippines, the Corporation Law and the Petroleum Act of
1949; (2) the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent, and works or
tends to work a fraud upon Philippine purchasers; and (4) the issuer as an
enterprise, as well as its business, is based upon unsound business
principles. Answering the foregoing opposition of Palting, et al., the registrant
SAN JOSE PETROLEUM claimed that it was a "business enterprise" enjoying
parity rights under the Ordinance appended to the Constitution, which parity
right, with respect to mineral resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only through the medium of a
corporation organized under the laws of the Philippines. Thus, registrant
which is allegedly qualified to exercise rights under the Parity Amendment,
had to do so through the medium of a domestic corporation, which is the
SAN JOSE OIL. It refused the contention that the Corporation Law was being
violated, by alleging that Section 13 thereof applies only to foreign
corporations doing business in the Philippines, and registrant was not doing
business here. The mere fact that it was a holding company of SAN JOSE OIL
and that registrant undertook the financing of and giving technical
assistance to said corporation did not constitute transaction of business in
the Philippines. Registrant also denied that the offering for sale in the

Philippines of its shares of capital stock was fraudulent or would work or tend
to work fraud on the investors. On August 29, 1958, and on September 9,
1958 the Securities and Exchange Commissioner issued the orders object of
the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a "prospective
investor" in respondent's securities, has personality to file the present
petition for review of the order of the Securities and Exchange
Commission;
2. Whether or not the issue raised herein is already moot and
academic;
3. Whether or not the "tie-up" between the respondent SAN JOSE
PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC.,
a domestic mining corporation, is violative of the Constitution, the
Laurel-Langley Agreement, the Petroleum Act of 1949, and the
Corporation Law; and
4. Whether or not the sale of respondent's securities is fraudulent, or
would work or tend to work fraud to purchasers of such securities in
the Philippines.
1. In answer to the notice and order of the Securities and Exchange
Commissioner, published in 2 newspapers of general circulation in the
Philippines, for "any person who is opposed" to the petition for registration
and licensing of respondent's securities, to file his opposition in 7 days,
herein petitioner so filed an opposition. And, the Commissioner, having
denied his opposition and instead, directed the registration of the securities
to be offered for sale, oppositor Palting instituted the present proceeding for
review of said order.
Respondent raises the question of the personality of petitioner to bring this
appeal, contending that as a mere "prospective investor", he is not an
"Aggrieved" or "interested" person who may properly maintain the suit.
Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the
phrase "party aggrieved" used in the Securities Act3 and the Rules of
Court4 as having the right to appeal should refer only to issuers, dealers and
salesmen of securities.

It is true that in the cited case, it was ruled that the phrase "person
aggrieved" is that party "aggrieved by the judgment or decree where it
operates on his rights of property or bears directly upon his interest", that
the word "aggrieved" refers to "a substantial grievance, a denial of some
personal property right or the imposition upon a party of a burden or
obligation." But a careful reading of the case would show that the appeal
therein was dismissed because the court held that an order of registration
was not final and therefore not appealable. The foregoing pronouncement
relied upon by herein respondent was made in construing the provision
regarding an order of revocation which the court held was the one
appealable. And since the law provides that in revoking the registration of
any security, only the issuer and every registered dealer of the security are
notified, excluding any person or group of persons having no such interest in
the securities, said court concluded that the phrase "interested person"
refers only to issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State Court as
controlling on the issue in this case. Our Securities Act in Section 7(c)
thereof, requires the publication and notice of the registration statement.
Pursuant thereto, the Securities and Exchange Commissioner caused the
publication of an order in part reading as follows:
. . . Any person who is opposed with this petition must file his written
opposition with this Commission within said period (2 weeks). . . .
In other words, as construed by the administrative office entrusted with the
enforcement of the Securities Act, any person (who may not be "aggrieved"
or "interested" within the legal acceptation of the word) is allowed or
permitted to file an opposition to the registration of securities for sale in the
Philippines. And this is in consonance with the generally accepted principle
that Blue Sky Laws are enacted to protect investors and prospective
purchasers and to prevent fraud and preclude the sale of securities which are
in fact worthless or worth substantially less than the asking price. It is for this
purpose that herein petitioner duly filed his opposition giving grounds
therefor. Respondent SAN JOSE PETROLEUM was required to reply to the
opposition. Subsequently both the petition and the opposition were set for
hearing during which the petitioner was allowed to actively participate and
did so by cross-examining the respondent's witnesses and filing his
memorandum in support of his opposition. He therefore to all intents and
purposes became a party to the proceedings. And under the New Rules of

Court,5 such a party can appeal from a final order, ruling or decision of the
Securities and Exchange Commission. This new Rule eliminating the word
"aggrieved" appearing in the old Rule, being procedural in nature,6 and in
view of the express provision of Rule 144 that the new rules made effective
on January 1, 1964 shall govern not only cases brought after they took effect
but all further proceedings in cases then pending, except to the extent that
in the opinion of the Court their application would not be feasible or would
work injustice, in which event the former procedure shall apply, we hold that
the present appeal is properly within the appellate jurisdiction of this Court.
The order allowing the registration and sale of respondent's securities is
clearly a final order that is appealable. The mere fact that such authority
may be later suspended or revoked, depending on future developments,
does not give it the character of an interlocutory or provisional ruling. And
the fact that seven days after the publication of the order, the securities are
deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality
of the order. Rights and obligations necessarily arise therefrom if not
reviewed on appeal.
Our position on this procedural matter that the order is appealable and the
appeal taken here is proper is strengthened by the intervention of the
Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the
constitutional issues herein presented affect the validity of Section 13 of the
Corporation Law, which, according to the respondent, conflicts with the Parity
Ordinance and the Laurel-Langley Agreement recognizing, it is claimed, its
right to exploit our petroleum resources notwithstanding said provisions of
the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect 30 days from
September 3, 1958, and since no stay order has been issued by the Supreme
Court, respondent's shares became registered and licensed under the law as
of October 3, 1958. Consequently, it is asserted, the present appeal has
become academic. Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August 29 and that of
September 9, 1958 are not final orders and therefor are not appealable. Then
when these orders, according to its theory became final and were
implemented, it argues that the orders can no longer be appealed as the
question of registration and licensing became moot and academic.

But the fact is that because of the authority to sell, the securities are, in all
probabilities, still being traded in the open market. Consequently the issue is
much alive as to whether respondent's securities should continue to be the
subject of sale. The purpose of the inquiry on this matter is not fully served
just because the securities had passed out of the hands of the issuer and its
dealers. Obviously, so long as the securities are outstanding and are placed
in the channels of trade and commerce, members of the investing public are
entitled to have the question of the worth or legality of the securities
resolved one way or another.
But more fundamental than this consideration, we agree with the late
Senator Claro M. Recto, who appeared asamicus curiae in this case, that
while apparently the immediate issue in this appeal is the right of respondent
SAN JOSE PETROLEUM to dispose of and sell its securities to the Filipino
public, the real and ultimate controversy here would actually call for the
construction of the constitutional provisions governing the disposition,
utilization, exploitation and development of our natural resources. And
certainly this is neither moot nor academic.
3. We now come to the meat of the controversy the "tie-up" between SAN
JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its
associates, on the other. The relationship of these corporations involved or
affected in this case is admitted and established through the papers and
documents which are parts of the records: SAN JOSE OIL, is a domestic
mining corporation, 90% of the outstanding capital stock of which is owned
by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation,
the majority interest of which is owned by OIL INVESTMENTS, Inc., another
foreign (Panamanian) company. This latter corporation in turn is wholly
(100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL
PETROLEUM COMPANY, C.A., both organized and existing under the laws of
Venezuela. As of September 30, 1956, there were 9,976 stockholders of
PANCOASTAL PETROLEUM found in 49 American states and U.S. territories,
holding 3,476,988 shares of stock; whereas, as of November 30, 1956,
PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373
stockholders scattered in 49 American state. In the two lists of stockholders,
there is no indication of the citizenship of these stockholders,7 or of the total
number of authorized stocks of each corporation, for the purpose of
determining the corresponding percentage of these listed stockholders in
relation to the respective capital stock of said corporation.

Petitioner, as well as the amicus curiae and the Solicitor General8 contend
that the relationship between herein respondent SAN JOSE PETROLEUM and
its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the
Philippine Constitution, and Section 13 of the Corporation Law, which inhibits
a mining corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far from
violating the Constitution; such relationship between the two corporations is
in accordance with the Laurel-Langley Agreement which implemented the
Ordinance Appended to the Constitution, and that Section 13 of the
Corporation Law is not applicable because respondent is not licensed to do
business, as it is not doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all forces of
potential energy, and other natural resources of the Philippines belong
to the State, and their disposition, exploitation, development, or
utilization shall be limited to citizens of the Philippines, or to
corporations or associations at least sixty per centum of the capital of
which is owned by such citizens, subject to any existing right, grant,
lease or concession at the time of the inauguration of this Government
established under this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to utilize and
exploit our natural resources) was extended to citizens of the United States,
thus:
Notwithstanding the provisions of section one, Article Thirteen, and
section eight, Article Fourteen, of the foregoing Constitution, during the
effectivity of the Executive Agreement entered into by the President of
the Philippines with the President of the United States on the fourth of
July, nineteen hundred and forty-six, pursuant to the provisions of
Commonwealth Act Numbered Seven hundred and thirty-three, but in
no case to extend beyond the third of July, nineteen hundred and
seventy-four, the disposition, exploitation, development, and utilization
of all agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all forces of
potential energy, and other natural resources of the Philippines, and
the operation of public utilities shall, if open to any person, be open to

citizens of the United States, and to all forms of business enterprises


owned or controlled, directly or indirectly, by citizens of the United
States in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the
Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded between the United States
and the Philippines, also known as the Laurel-Langley Agreement, embodied
in Republic Act 1355, the following provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and utilization of all
agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum and other mineral oils, all forces and sources
of potential energy, and other natural resources of either Party, and the
operation of public utilities, shall, if open to any person, be open to
citizens of the other Party and to all forms of business enterprise
owned or controlled, directly or indirectly, by citizens of such other
Party in the same manner as to and under the same conditions
imposed upon citizens or corporations or associations owned or
controlled by citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be exercised, . . . in the
case of citizens of the United States, with respect to natural resources
in the public domain in the Philippines, only through the medium of a
corporation organized under the laws of the Philippines and at least
60% of the capital stock of which is owned or controlled by citizens of
the United States. . . .
3. The United States of America reserves the rights of the several
States of the United States to limit the extent to which citizens or
corporations or associations owned or controlled by citizens of the
Philippines may engage in the activities specified in this Article. The
Republic of the Philippines reserves the power to deny any of the
rights specified in this Article to citizens of the United States who are
citizens of States, or to corporations or associations at least 60% of
whose capital stock or capital is owned or controlled by citizens of
States, which deny like rights to citizens of the Philippines, or to

corporations or associations which are owned or controlled by citizens


of the Philippines. . . . (Emphasis supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural resources
of this country was granted, by Article XIII of the Constitution, to
Filipino citizens or to corporations or associations 60% of the capital of which
is owned by such citizens. With the Parity Amendment to the Constitution,
the same right was extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly, by citizens of the
United States.
There could be no serious doubt as to the meaning of the word "citizens"
used in the aforementioned provisions of the Constitution. The right was
granted to 2 types of persons: natural persons (Filipino or American citizens)
and juridical persons (corporations 60% of which capital is owned by Filipinos
and business enterprises owned or controlled directly or indirectly, by
citizens of the United States). In American law, "citizen" has been defined as
"one who, under the constitution and laws of the United States, has a right to
vote for representatives in congress and other public officers, and who is
qualified to fill offices in the gift of the people. (1 Bouvier's Law Dictionary, p.
490.) A citizen is
One of the sovereign people. A constituent member of the sovereignty,
synonymous with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15
L. Ed. 691.)
A member of the civil state entitled to all its privileges. (Cooley, Const.
Lim. 77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v.
Happersett 21 Wall. [U.S.] 162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE PETROLEUM an
American business enterprise entitled to parity rights in the Philippines? The
answer must be in the negative, for the following reasons:
Firstly It is not owned or controlled directly by citizens of the United
States, because it is owned and controlled by a corporation, the OIL
INVESTMENTS, another foreign (Panamanian) corporation.
Secondly Neither can it be said that it is indirectly owned and controlled
by American citizens through the OIL INVESTMENTS, for this latter
corporation is in turn owned and controlled, not by citizens of the United

States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL
COMPANY and PANCOASTAL PETROLEUM.
Thirdly Although it is claimed that these two last corporations are owned
and controlled respectively by 12,373 and 9,979 stockholders residing in the
different American states, there is no showing in the certification furnished
by respondent that the stockholders of PANCOASTAL or those of them
holding the controlling stock, are citizens of the United States.
Fourthly Granting that these individual stockholders are American citizens,
it is yet necessary to establish that the different states of which they are
citizens, allow Filipino citizens or corporations or associations owned or
controlled by Filipino citizens, to engage in the exploitation, etc. of the
natural resources of these states (see paragraph 3, Article VI of the LaurelLangley Agreement, supra). Respondent has presented no proof to this
effect.
Fifthly But even if the requirements mentioned in the two immediately
preceding paragraphs are satisfied, nevertheless to hold that the set-up
disclosed in this case, with a long chain of intervening foreign corporations,
comes within the purview of the Parity Amendment regarding business
enterprises indirectly owned or controlled by citizens of the United States, is
to unduly stretch and strain the language and intent of the law. For, to what
extent must the word "indirectly" be carried? Must we trace the ownership or
control of these various corporationsad infinitum for the purpose of
determining whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock of the
PANTEPEC and PANCOASTAL which are allegedly owned or
controlled directly by citizens of the United States, are traded in the stock
exchange in New York, and you have a situation where it becomes a practical
impossibility to determine at any given time, the citizenship of the controlling
stock required by the law. In the circumstances, we have to hold that the
respondent SAN JOSE PETROLEUM, as presently constituted, is not a business
enterprise that is authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up
with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock
is owned by SAN JOSE PETROLEUM? This is a query which we need not
resolve in this case as SAN JOSE OIL is not a party and it is not necessary to

do so to dispose of the present controversy. But it is a matter that probably


the Solicitor General would want to look into.
There is another issue which has been discussed extensively by the parties.
This is whether or not an American mining corporation may lawfully "be in
anywise interested in any other corporation (domestic or foreign) organized
for the purpose of engaging in agriculture or in mining," in the Philippines or
whether an American citizen owning stock in more than one corporation
organized for the purpose of engaging in agriculture or in mining, may own
more than 15% of the capital stock then outstanding and entitled to vote, of
each of such corporations, in view of the express prohibition contained in
Section 13 of the Philippine Corporation Law. The petitioner in this case
contends that the provisions of the Corporation Law must be applied to
American citizens and business enterprise otherwise entitled to exercise the
parity privileges, because both the Laurel-Langley Agreement (Art. VI, par. 1)
and the Petroleum Act of 1948 (Art. 31), specifically provide that the
enjoyment by them of the same rights and obligations granted under the
provisions of both laws shall be "in the same manner as to, and under the
same conditions imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines." The
petitioner further contends that, as the enjoyment of the privilege of
exploiting mineral resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the Philippines (which
corporation must necessarily be organized under the Corporation Law), is
made subject to the limitations provided in Section 13 of the Corporation
Law, so necessarily the exercise of the parity rights by citizens of the United
States or business enterprise owned or controlled, directly or indirectly, by
citizens of the United States, must equally be subject to the same limitations
contained in the aforesaid Section 13 of the Corporation Law.
In view of the conclusions we have already arrived at, we deem it not
indispensable for us to pass upon this legal question, especially taking into
account the statement of the respondent (SAN JOSE PETROLEUM) that it is
essentially a holding company, and as found by the Securities and Exchange
Commissioner, its principal activity is limited to the financing and giving
technical assistance to SAN JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of stock were allowed
registration for sale in the Philippines, was incorporated under the laws of
Panama in April, 1956 with an authorized capital stock of $500,000.00,

American currency, divided into 50,000,000 shares at par value of $0.01 per
share. By virtue of a 3-party Agreement of June 14, 1956, respondent was
supposed to have received from OIL INVESTMENTS 8,000,000 shares of the
capital stock of SAN JOSE OIL (at par value of $0.01 per share), plus a note
for $250,000.00 due in 6 months, for which respondent issued in favor of OIL
INVESTMENTS 16,000,000 shares of its capital stock, at $0.01 per share or
with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years
at 6% per annum interest,9 and the assumption of payment of the unpaid
price of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased
from $500,000.00 to $17,500,000.00 by increasing the par value of the same
50,000,000 shares, from $0.01 to $0.35. Without any additional
consideration, the 16,000,000 shares of $0.01 previously issued to OIL
INVESTMENTS with a total value of $160,000.00 were changed with
16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received for these reissued 16,000,000 shares, the board of directors of respondent corporation
placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE OIL
(still having par value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per
share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE
OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged
difference between the "value" of the said shares and the subscription price
thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00,
the subscription price of the SAN JOSE OIL shares, the amount of
$319,702.03 was deducted, as allegedly unpaid subscription price, thereby
giving a difference of $480,297.97, which was placed as the amount
allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS,
for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE
PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN
JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00 the
valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no
basis for such valuation other than belief by the board of directors of

respondent that "should San Jose Oil Company be granted the bulk of the
concessions applied for upon reasonable terms, that it would have a
reasonable value of approximately $10,000,000." 10 Then, of this amount, the
subscription price of $800,000.00 was deducted and called it "difference
between the (above) valuation and the subscription price for the 8,000,000
shares." Of this $800,000.00 subscription price, they deducted the sum of
$480,297.97 and the difference was placed as the unpaid portion of the
subscription price. In other words, it was made to appear that they paid in
$480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS for
7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement, and
a sum of $230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among
respondent's liabilities, for $230,297.97 appearing as note payable to Oil
Investments, maturing in two (2) years at six percent (6%) per annum. 11 As
far as it appears from the records, for the 16,000,000 shares at $0.35 per
share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM
received from OIL INVESTMENTS only the note for $250,000.00 plus the
8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a
total of $1,050,000.00 the only assets of the corporation. In other words,
respondent actually lost $4,550,000.00, which was received by OIL
INVESTMENTS.
But this is not all. Some of the provisions of the Articles of Incorporation of
respondent SAN JOSE PETROLEUM are noteworthy; viz:
(1) the directors of the Company need not be shareholders;
(2) that in the meetings of the board of directors, any director may be
represented and may vote through a proxy who also need not be a
director or stockholder; and
(3) that no contract or transaction between the corporation and any
other association or partnership will be affected, except in case of
fraud, by the fact that any of the directors or officers of the corporation
is interested in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of the corporation
with any other person or persons, firm, association or partnership shall
be affected by the fact that any director or officer of the corporation is
a party to or has an interest in, such contract or transaction, or has in

anyway connected with such other person or persons, firm, association


or partnership; and finally, that all and any of the persons who may
become director or officer of the corporation shall be relieved from all
responsibility for which they may otherwise be liable by reason of any
contract entered into with the corporation, whether it be for his benefit
or for the benefit of any other person, firm, association or partnership
in which he may be interested.
These provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would outlaw any
corporation locally organized or doing business in this jurisdiction. Consider
the unique and unusual provision that no contract or transaction between
the company and any other association or corporation shall be affected
except in case of fraud, by the fact that any of the directors or officers of the
company may be interested in or are directors or officers of such other
association or corporation; and that none of such contracts or transactions of
this company with any person or persons, firms, associations or corporations
shall be affected by the fact that any director or officer of this company is a
party to or has an interest in such contract or transaction or has any
connection with such person or persons, firms associations or corporations;
and that any and all persons who may become directors or officers of this
company are hereby relieved of all responsibility which they would otherwise
incur by reason of any contract entered into which this company either for
their own benefit, or for the benefit of any person, firm, association or
corporation in which they may be interested.
The impact of these provisions upon the traditional judiciary relationship
between the directors and the stockholders of a corporation is too obvious to
escape notice by those who are called upon to protect the interest of
investors. The directors and officers of the company can do anything, short
of actual fraud, with the affairs of the corporation even to benefit themselves
directly or other persons or entities in which they are interested, and with
immunity because of the advance condonation or relief from responsibility by
reason of such acts. This and the other provision which authorizes the
election of non-stockholders as directors, completely disassociate the
stockholders from the government and management of the business in which
they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the
management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS,

as holder of the only subscribed stock of the former corporation and acting
"on behalf of all future holders of voting trust certificates," entered into a
voting trust agreement12 with James L. Buckley and Austin E. Taylor, whereby
said Trustees were given authority to vote the shares represented by the
outstanding trust certificates (including those that may henceforth be issued)
in the following manner:
(a) At all elections of directors, the Trustees will designate a suitable
proxy or proxies to vote for the election of directors designated by the
Trustees in their own discretion, having in mind the best interests of
the holders of the voting trust certificates, it being understood that any
and all of the Trustees shall be eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees shall
designate a suitable proxy or proxies to vote for or against such
proposition as the Trustees in their own discretion may
determine, having in mind the best interest of the holders of the voting
trust certificates;
(c) With respect to all other matters arising at any meeting of
stockholders, the Trustees will instruct such proxy or proxies attending
such meetings to vote the shares of stock held by the Trustees in
accordance with the written instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be binding upon
the parties thereto, their successors, and upon all holders of voting trust
certificates.
And these are the voting trust certificates that are offered to investors as
authorized by Security and Exchange Commissioner. It can not be doubted
that the sale of respondent's securities would, to say the least, work or tend
to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to
dismiss this appeal, is denied and the orders of the Securities and Exchange
Commissioner, allowing the registration of Respondent's securities and
licensing their sale in the Philippines are hereby set aside. The case is
remanded to the Securities and Exchange Commission for appropriate action
in consonance with this decision. With costs. Let a copy of this decision be

furnished the Solicitor General for whatever action he may deem advisable
to take in the premises. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P.,
Zaldivar and Sanchez, JJ., concur.
Castro, J., took no part.

G.R. No. 191995

August 3, 2011

PHILIPPINE VETERANS BANK, Petitioner,


vs.
JUSTINA CALLANGAN, in her capacity as Director of the Corporation
Finance Department of the Securities and Exchange Commission
and/or the SECURITIES AND EXCHANGE COMMISSION,Respondent.
RESOLUTION
BRION, J.:
We resolve the motion for reconsideration1 filed by petitioner Philippine
Veterans Bank (the Bank) dated August 5, 2010, addressing our June 16,
2010 Resolution that denied the Banks petition for review on certiorari.
Factual Antecedents
On March 17, 2004, respondent Justina F. Callangan, the Director of the
Corporation Finance Department of the Securities and Exchange Commission
(SEC), sent the Bank a letter, informing it that it qualifies as a "public
company" under Section 17.2 of the Securities Regulation Code (SRC) in
relation with Rule 3(1)(m) of the Amended Implementing Rules and
Regulations of the SRC. The Bank is thus required to comply with the
reportorial requirements set forth in Section 17.1 of the SRC.2
The Bank responded by explaining that it should not be considered a "public
company" because it is a private company whose shares of stock are
available only to a limited class or sector, i.e., to World War II veterans, and
not to the general public.3

In a letter dated April 20, 2004, Director Callangan rejected the Banks
explanation and assessed it a total penalty of One Million Nine Hundred
Thirty-Seven Thousand Two Hundred Sixty-Two and 80/100 Pesos
(P1,937,262.80) for failing to comply with the SRC reportorial requirements
from 2001 to 2003. The Bank moved for the reconsideration of the
assessment, but Director Callangan denied the motion in SEC-CFD Order No.
085, Series of 2005 dated July 26, 2005.4 When the SEC En Banc also
dismissed the Banks appeal for lack of merit in its Order dated August 31,
2006, prompting the Bank to file a petition for review with the Court of
Appeals (CA).5
On March 6, 2008, the CA dismissed the petition and affirmed the assailed
SEC ruling, with the modification that the assessment of the penalty be
recomputed from May 31, 2004.6
The CA also denied the Banks motion for reconsideration,7 opening the way
for the Banks petition for review on certiorari filed with this Court. 8
On June 16, 2010, the Court denied the Banks petition for failure to show
any reversible error in the assailed CA decision and resolution.9
The Motion for Reconsideration
The Bank reiterates that it is not a "public company" subject to the
reportorial requirements under Section 17.1 of the SRC because its shares
can be owned only by a specific group of people, namely, World War II
veterans and their widows, orphans and compulsory heirs, and is not open to
the investing public in general. The Bank also asks the Court to take into
consideration the financial impact to the cause of "veteranism"; compliance
with the reportorial requirements under the SRC, if the Bank would be
considered a "public company," would compel the Bank to spend
approximately P40 million just to reproduce and mail the "Information
Statement" to its 400,000 shareholders nationwide.
The Courts Ruling
We DENY the motion for reconsideration for lack of merit.
To determine whether the Bank is a "public company" burdened with the
reportorial requirements ordered by the SEC, we look to Subsections 17.1
and 17.2 of the SRC, which provide:

Section 17. Periodic and Other Reports of Issuers.


17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof shall
file with the Commission:
a) Within one hundred thirty-five (135) days, after the end of the
issuers fiscal year, or such other time as the Commission may
prescribe, an annual report which shall include, among others, a
balance sheet, profit and loss statement and statement of cash flows,
for such last fiscal year, certified by an independent certified public
accountant, and a management discussion and analysis of results of
operations; and
b) Such other periodical reports for interim fiscal periods and current
reports on significant developments of the issuer as the Commission
may prescribe as necessary to keep current information on the
operation of the business and financial condition of the issuer.
17.2. The reportorial requirements of Subsection 17.1 shall apply to the
following:
xxxx
c) An issuer with assets of at least Fifty million pesos
(P50,000,000.00) or such other amount as the Commission shall prescribe,
and having two hundred (200) or more holders each holding at least
one hundred (100) shares of a class of its equity securities: Provided,
however, That the obligation of such issuer to file reports shall be terminated
ninety (90) days after notification to the Commission by the issuer that the
number of its holders holding at least one hundred (100) shares is reduced to
less than one hundred (100). (emphases supplied)
We also cite Rule 3(1)(m) of the Amended Implementing Rules and
Regulations of the SRC, which defines a "public company" as "any
corporation with a class of equity securities listed on an
Exchange or with assets in excess of Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least one
hundred (100) shares of a class of its equity securities."

From these provisions, it is clear that a "public company," as contemplated


by the SRC, is not limited to a company whose shares of stock are publicly
listed; even companies like the Bank, whose shares are offered only to a
specific group of people, are considered a public company, provided they
meet the requirements enumerated above.
The records establish, and the Bank does not dispute, that the Bank has
assets exceeding P50,000,000.00 and has 395,998 shareholders.10 It is thus
considered a public company that must comply with the reportorial
requirements set forth in Section 17.1 of the SRC.
The Bank also argues that even assuming it is considered a "public
company" pursuant to Section 17 of the SRC, the Court should interpret the
pertinent SRC provisions in such a way that no financial prejudice is done to
the thousands of veterans who are stockholders of the Bank. Given that the
legislature intended the SRC to apply only to publicly traded companies, the
Court should exempt the Bank from complying with the reportorial
requirements.
On this point, the Bank is apparently referring to the obligation set forth in
Subsections 17.5 and 17.6 of the SRC, which provide:
Section 17.5. Every issuer which has a class of equity securities satisfying
any of the requirements in Subsection 17.2 shall furnish to each holder of
such equity security an annual report in such form and containing such
information as the Commission shall prescribe.
Section 17.6. Within such period as the Commission may prescribe preceding
the annual meeting of the holders of any equity security of a class entitled to
vote at such meeting, the issuer shall transmit to such holders an annual
report in conformity with Subsection 17.5. (emphases supplied)
In making this argument, the Bank ignores the fact that the first and
fundamental duty of the Court is to apply the law.11 Construction and
interpretation come only after a demonstration that the application of the
law is impossible or inadequate unless interpretation is resorted to.12 In this
case, we see the law to be very clear and free from any doubt or ambiguity;
thus, no room exists for construction or interpretation.
Additionally, and contrary to the Banks claim, the Banks obligation to
provide its stockholders with copies of its annual report is actually for the

benefit of the veterans-stockholders, as it gives these stockholders access to


information on the Banks financial status and operations, resulting in greater
transparency on the part of the Bank. While compliance with this
requirement will undoubtedly cost the Bank money, the benefit provided to
the shareholders clearly outweighs the expense. For many stockholders,
these annual reports are the only means of keeping in touch with the state of
health of their investments; to them, these are invaluable and continuing
links with the Bank that immeasurably contribute to the transparency in
public companies that the law envisions.
WHEREFORE, premises considered, petitioner Philippine Veterans Banks
motion for reconsideration is hereby DENIED with finality.
SO ORDERED.

G.R. No. 171815

August 7, 2007

CEMCO HOLDINGS, INC., Petitioner,


vs.
NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES,
INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
This Petition for Review under Rule 45 of the Rules of Court seeks to reverse
and set aside the 24 October 2005 Decision1 and the 6 March 2006
Resolution2 of the Court of Appeals in CA-G.R. SP No. 88758 which affirmed
the judgment3 dated 14 February 2005 of the Securities and Exchange
Commission (SEC) finding that the acquisition of petitioner Cemco Holdings,
Inc. (Cemco) of the shares of stock of Bacnotan Consolidated Industries, Inc.
(BCI) and Atlas Cement Corporation (ACC) in Union Cement Holdings
Corporation (UCHC) was covered by the Mandatory Offer Rule under Section
19 of Republic Act No. 8799, otherwise known as the Securities Regulation
Code.
The Facts
Union Cement Corporation (UCC), a publicly-listed company, has two
principal stockholders UCHC, a non-listed company, with shares amounting
to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHCs stocks

were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the other
hand, owned 9% of UCHC stocks.
In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock
Exchange (PSE) that it and its subsidiary ACC had passed resolutions to sell
to Cemco BCIs stocks in UCHC equivalent to 21.31% and ACCs stocks in
UCHC equivalent to 29.69%.
In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated
that as a result of petitioner Cemcos acquisition of BCI and ACCs shares in
UCHC, petitioners total beneficial ownership, direct and indirect, in UCC has
increased by 36% and amounted to at least 53% of the shares of UCC, to
wit4 :
Particulars
Existing shares of Cemco in UCHC

Percentag
e
9%

Acquisition by Cemco of BCIs and ACCs shares


in UCHC

51%

Total stocks of Cemco in UCHC

60%

Percentage of UCHC ownership in UCC

60%

Indirect ownership of Cemco in UCC

36%

Direct ownership of Cemco in UCC

17%

Total ownership of Cemco in UCC

53%

As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15


July 2004, inquired as to whether the Tender Offer Rule under Rule 19 of the
Implementing Rules of the Securities Regulation Code is not applicable to the
purchase by petitioner of the majority of shares of UCC.
In a letter dated 16 July 2004, Director Justina Callangan of the SECs
Corporate Finance Department responded to the query of the PSE that while
it was the stance of the department that the tender offer rule was not
applicable, the matter must still have to be confirmed by the SEC en banc.
Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan
confirmed that the SEC en banc had resolved that the Cemco transaction
was not covered by the tender offer rule.
On 28 July 2004, feeling aggrieved by the transaction, respondent National
Life Insurance Company of the Philippines, Inc., a minority stockholder of

UCC, sent a letter to Cemco demanding the latter to comply with the rule on
mandatory tender offer. Cemco, however, refused.
On 5 August 2004, a Share Purchase Agreement was executed by ACC and
BCI, as sellers, and Cemco, as buyer.
On 12 August 2004, the transaction was consummated and closed.
On 19 August 2004, respondent National Life Insurance Company of the
Philippines, Inc. filed a complaint with the SEC asking it to reverse its 27 July
2004 Resolution and to declare the purchase agreement of Cemco void and
praying that the mandatory tender offer rule be applied to its UCC shares.
Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC, which
were then required by the SEC to file their respective comment on the
complaint. In their comments, they were uniform in arguing that the tender
offer rule applied only to a direct acquisition of the shares of the listed
company and did not extend to an indirect acquisition arising from the
purchase of the shares of a holding company of the listed firm.
In a Decision dated 14 February 2005, the SEC ruled in favor of the
respondent by reversing and setting aside its 27 July 2004 Resolution and
directed petitioner Cemco to make a tender offer for UCC shares to
respondent and other holders of UCC shares similar to the class held by
UCHC in accordance with Section 9(E), Rule 19 of the Securities Regulation
Code.
Petitioner filed a petition with the Court of Appeals challenging the SECs
jurisdiction to take cognizance of respondents complaint and its authority to
require Cemco to make a tender offer for UCC shares, and arguing that the
tender offer rule does not apply, or that the SECs re-interpretation of the
rule could not be made to retroactively apply to Cemcos purchase of UCHC
shares.
The Court of Appeals rendered a decision affirming the ruling of the SEC. It
ruled that the SEC has jurisdiction to render the questioned decision and, in
any event, Cemco was barred by estoppel from questioning the SECs
jurisdiction. It, likewise, held that the tender offer requirement under the
Securities Regulation Code and its Implementing Rules applies to Cemcos
purchase of UCHC stocks. The decretal portion of the said Decision reads:
IN VIEW OF THE FOREGOING, the assailed decision of the SEC is AFFIRMED,
and the preliminary injunction issued by the Court LIFTED.5
Cemco filed a motion for reconsideration which was denied by the Court of
Appeals.

Hence, the instant petition.


In its memorandum, petitioner Cemco raises the following issues:
I.
ASSUMING ARGUENDO THAT THE SEC HAS JURISDICTION OVER
NATIONAL LIFES COMPLAINT AND THAT THE SECS REINTERPRETATION OF THE TENDER OFFER RULE IS CORRECT, WHETHER
OR NOT THAT REINTERPRETATION CAN BE APPLIED RETROACTIVELY TO
CEMCOS PREJUDICE.
II.
WHETHER OR NOT THE SEC HAS JURISDICTION TO ADJUDICATE THE
DISPUTE BETWEEN THE PARTIES A QUO OR TO RENDER JUDGMENT
REQUIRING CEMCO TO MAKE A TENDER OFFER FOR UCC SHARES.
III.
WHETHER OR NOT CEMCOS PURCHASE OF UCHC SHARES IS SUBJECT
TO THE TENDER OFFER REQUIREMENT.
IV.
WHETHER OR NOT THE SEC DECISION, AS AFFIRMED BY THE CA
DECISION, IS AN INCOMPLETE JUDGMENT WHICH PRODUCED NO
EFFECT.6
Simply stated, the following are the issues:
1. Whether or not the SEC has jurisdiction over respondents complaint
and to require Cemco to make a tender offer for respondents UCC
shares.
2. Whether or not the rule on mandatory tender offer applies to the
indirect acquisition of shares in a listed company, in this case, the
indirect acquisition by Cemco of 36% of UCC, a publicly-listed
company, through its purchase of the shares in UCHC, a non-listed
company.
3. Whether or not the questioned ruling of the SEC can be applied
retroactively to Cemcos transaction which was consummated under
the authority of the SECs prior resolution.

On the first issue, petitioner Cemco contends that while the SEC can take
cognizance of respondents complaint on the alleged violation by petitioner
Cemco of the mandatory tender offer requirement under Section 19 of
Republic Act No. 8799, the same statute does not vest the SEC with
jurisdiction to adjudicate and determine the rights and obligations of the
parties since, under the same statute, the SECs authority is purely
administrative. Having been vested with purely administrative authority, the
SEC can only impose administrative sanctions such as the imposition of
administrative fines, the suspension or revocation of registrations with the
SEC, and the like. Petitioner stresses that there is nothing in the statute
which authorizes the SEC to issue orders granting affirmative reliefs. Since
the SECs order commanding it to make a tender offer is an affirmative relief
fixing the respective rights and obligations of parties, such order is void.
Petitioner further contends that in the absence of any specific grant of
jurisdiction by Congress, the SEC cannot, by mere administrative regulation,
confer on itself that jurisdiction.
Petitioners stance fails to persuade.
In taking cognizance of respondents complaint against petitioner and
eventually rendering a judgment which ordered the latter to make a tender
offer, the SEC was acting pursuant to Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Regulation Code, to
wit:
13. Violation
If there shall be violation of this Rule by pursuing a purchase of equity shares
of a public company at threshold amounts without the required tender offer,
the Commission, upon complaint, may nullify the said acquisition and direct
the holding of a tender offer. This shall be without prejudice to the imposition
of other sanctions under the Code.
The foregoing rule emanates from the SECs power and authority to regulate,
investigate or supervise the activities of persons to ensure compliance with
the Securities Regulation Code, more specifically the provision on mandatory
tender offer under Section 19 thereof.7
Another provision of the statute, which provides the basis of Rule 19(13) of
the Amended Implementing Rules and Regulations of the Securities
Regulation Code, is Section 5.1(n), viz:
[T]he Commission shall have, among others, the following powers and
functions:

xxxx
(n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws.
The foregoing provision bestows upon the SEC the general adjudicative
power which is implied from the express powers of the Commission or which
is incidental to, or reasonably necessary to carry out, the performance of the
administrative duties entrusted to it. As a regulatory agency, it has the
incidental power to conduct hearings and render decisions fixing the rights
and obligations of the parties. In fact, to deprive the SEC of this power would
render the agency inutile, because it would become powerless to regulate
and implement the law. As correctly held by the Court of Appeals:
We are nonetheless convinced that the SEC has the competence to render
the particular decision it made in this case. A definite inference may be
drawn from the provisions of the SRC that the SEC has the authority not only
to investigate complaints of violations of the tender offer rule, but to
adjudicate certain rights and obligations of the contending parties and grant
appropriate reliefs in the exercise of its regulatory functions under the SRC.
Section 5.1 of the SRC allows a general grant of adjudicative powers to the
SEC which may be implied from or are necessary or incidental to the carrying
out of its express powers to achieve the objectives and purposes of the SRC.
We must bear in mind in interpreting the powers and functions of the SEC
that the law has made the SEC primarily a regulatory body with the
incidental power to conduct administrative hearings and make decisions. A
regulatory body like the SEC may conduct hearings in the exercise of its
regulatory powers, and if the case involves violations or conflicts in
connection with the performance of its regulatory functions, it will have the
duty and authority to resolve the dispute for the best interests of the public.8
For sure, the SEC has the authority to promulgate rules and regulations,
subject to the limitation that the same are consistent with the declared
policy of the Code. Among them is the protection of the investors and the
minimization, if not total elimination, of fraudulent and manipulative devises.
Thus, Subsection 5.1(g) of the law provides:
Prepare, approve, amend or repeal rules, regulations and orders, and issue
opinions and provide guidance on and supervise compliance with such rules,
regulations and orders.
Also, Section 72 of the Securities Regulation Code reads:

72.1. x x x To effect the provisions and purposes of this Code, the


Commission may issue, amend, and rescind such rules and regulations
and orders necessary or appropriate, x x x.
72.2. The Commission shall promulgate rules and regulations providing
for reporting, disclosure and the prevention of fraudulent, deceptive or
manipulative practices in connection with the purchase by an issuer,
by tender offer or otherwise, of and equity security of a class issued by
it that satisfies the requirements of Subsection 17.2. Such rules and
regulations may require such issuer to provide holders of equity
securities of such dates with such information relating to the reasons
for such purchase, the source of funds, the number of shares to be
purchased, the price to be paid for such securities, the method of
purchase and such additional information as the Commission deems
necessary or appropriate in the public interest or for the protection of
investors, or which the Commission deems to be material to a
determination by holders whether such security should be sold.
The power conferred upon the SEC to promulgate rules and regulations is a
legislative recognition of the complexity and the constantly-fluctuating
nature of the market and the impossibility of foreseeing all the possible
contingencies that cannot be addressed in advance. As enunciated in
Victorias Milling Co., Inc. v. Social Security Commission9 :
Rules and regulations when promulgated in pursuance of the procedure or
authority conferred upon the administrative agency by law, partake of the
nature of a statute, and compliance therewith may be enforced by a penal
sanction provided in the law. This is so because statutes are usually couched
in general terms, after expressing the policy, purposes, objectives, remedies
and sanctions intended by the legislature. The details and the manner of
carrying out the law are often times left to the administrative agency
entrusted with its enforcement. In this sense, it has been said that rules and
regulations are the product of a delegated power to create new or additional
legal provisions that have the effect of law.
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It
must be pointed out that petitioner had participated in all the proceedings
before the SEC and had prayed for affirmative relief. In fact, petitioner
defended the jurisdiction of the SEC in its Comment dated 15 September
2004, filed with the SEC wherein it asserted:
This Honorable Commission is a highly specialized body created for the
purpose of administering, overseeing, and managing the corporate industry,
share investment and securities market in the Philippines. By the very nature
of its functions, it dedicated to the study and administration of the corporate
and securities laws and has necessarily developed an expertise on the

subject. Based on said functions, the Honorable Commission is necessarily


tasked to issue rulings with respect to matters involving corporate matters
and share acquisitions. Verily when this Honorable Commission rendered the
Ruling that " the acquisition of Cemco Holdings of the majority shares of
Union Cement Holdings, Inc., a substantial stockholder of a listed company,
Union Cement Corporation, is not covered by the mandatory tender offer
requirement of the SRC Rule 19," it was well within its powers and expertise
to do so. Such ruling shall be respected, unless there has been an abuse or
improvident exercise of authority.10
Petitioner did not question the jurisdiction of the SEC when it rendered an
opinion favorable to it, such as the 27 July 2004 Resolution, where the SEC
opined that the Cemco transaction was not covered by the mandatory tender
offer rule. It was only when the case was before the Court of Appeals and
after the SEC rendered an unfavorable judgment against it that petitioner
challenged the SECs competence. As articulated in Ceroferr Realty
Corporation v. Court of Appeals11 :
While the lack of jurisdiction of a court may be raised at any stage of an
action, nevertheless, the party raising such question may be estopped if he
has actively taken part in the very proceedings which he questions and he
only objects to the courts jurisdiction because the judgment or the order
subsequently rendered is adverse to him.
On the second issue, petitioner asserts that the mandatory tender offer rule
applies only to direct acquisition of shares in the public company.
This contention is not meritorious.
Tender offer is a publicly announced intention by a person acting alone or in
concert with other persons to acquire equity securities of a public
company.12 A public company is defined as a corporation which is listed on an
exchange, or a corporation with assets exceeding P50,000,000.00 and with
200 or more stockholders, at least 200 of them holding not less than 100
shares of such company.13 Stated differently, a tender offer is an offer by the
acquiring person to stockholders of a public company for them to tender
their shares therein on the terms specified in the offer.14 Tender offer is in
place to protect minority shareholders against any scheme that dilutes the
share value of their investments. It gives the minority shareholders the
chance to exit the company under reasonable terms, giving them the
opportunity to sell their shares at the same price as those of the majority
shareholders.15
Under Section 19 of Republic Act No. 8799, it is stated:

Tender Offers. 19.1. (a) Any person or group of persons acting in concert who
intends to acquire at least fifteen percent (15%) of any class of any equity
security of a listed corporation or of any class of any equity security of a
corporation with assets of at least Fifty million pesos (P50,000,000.00) and
having two hundred (200) or more stockholders with at least one hundred
(100) shares each or who intends to acquire at least thirty percent (30%) of
such equity over a period of twelve (12) months shall make a tender offer to
stockholders by filing with the Commission a declaration to that effect; and
furnish the issuer, a statement containing such of the information required in
Section 17 of this Code as the Commission may prescribe. Such person or
group of persons shall publish all requests or invitations for tender, or
materials making a tender offer or requesting or inviting letters of such a
security. Copies of any additional material soliciting or requesting such
tender offers subsequent to the initial solicitation or request shall contain
such information as the Commission may prescribe, and shall be filed with
the Commission and sent to the issuer not later than the time copies of such
materials are first published or sent or given to security holders.
Under existing SEC Rules,16 the 15% and 30% threshold acquisition of shares
under the foregoing provision was increased to thirty-five percent (35%). It is
further provided therein that mandatory tender offer is still applicable even if
the acquisition is less than 35% when the purchase would result in ownership
of over 51% of the total outstanding equity securities of the public
company.17
The SEC and the Court of Appeals ruled that the indirect acquisition by
petitioner of 36% of UCC shares through the acquisition of the non-listed
UCHC shares is covered by the mandatory tender offer rule.
This interpretation given by the SEC and the Court of Appeals must be
sustained.
The rule in this jurisdiction is that the construction given to a statute by an
administrative agency charged with the interpretation and application of that
statute is entitled to great weight by the courts, unless such construction is
clearly shown to be in sharp contrast with the governing law or statute.18 The
rationale for this rule relates not only to the emergence of the multifarious
needs of a modern or modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying those needs; it also
relates to accumulation of experience and growth of specialized capabilities
by the administrative agency charged with implementing a particular
statute.19
The SEC and the Court of Appeals accurately pointed out that the coverage
of the mandatory tender offer rule covers not only direct acquisition but also
indirect acquisition or "any type of acquisition." This is clear from the

discussions of the Bicameral Conference Committee on the Securities Act of


2000, on 17 July 2000.
SEN. S. OSMEA. Eto ang mangyayari diyan, eh. Somebody controls 67% of
the Company. Of course, he will pay a premium for the first 67%. Control yan,
eh. Eh, kawawa yung mga maiiwan, ang 33% because the value of the stock
market could go down, could go down after that, because there will (p. 41)
be no more market. Wala nang gustong bumenta. Wala nang I mean
maraming gustong bumenta, walang gustong bumili kung hindi yung
majority owner. And they will not buy. They already have 67%. They already
have control. And this protects the minority. And we have had a case in Cebu
wherein Ayala A who already owned 40% of Ayala B made an offer for
another 40% of Ayala B without offering the 20%. Kawawa naman yung
nakahawak ngayon ng 20%. Ang baba ng share sa market. But we did not
have a law protecting them at that time.
CHAIRMAN ROCO. So what is it that you want to achieve?
SEN. S. OSMEA. That if a certain group achieves a certain amount of
ownership in a corporation, yeah, he is obligated to buy anybody who wants
to sell.
CHAIRMAN ROCO. Pro-rata lang. (p. 42).
xxxx
REP. TEODORO. As long as it reaches 30, ayan na. Any type of acquisition just
as long as it will result in 30 (p.50) reaches 30, ayan na. Any type of
acquisition just as long as it will result in 30, general tender, prorata.20(Emphasis supplied.)
Petitioner counters that the legislators reference to "any type of acquisition"
during the deliberations on the Securities Regulation Code does not indicate
that congress meant to include the "indirect" acquisition of shares of a public
corporation to be covered by the tender offer rule. Petitioner also avers that
it did not directly acquire the shares in UCC and the incidental benefit of
having acquired the control of the said public company must not be taken
against it.
These arguments are not convincing. The legislative intent of Section 19 of
the Code is to regulate activities relating to acquisition of control of the listed
company and for the purpose of protecting the minority stockholders of a
listed corporation. Whatever may be the method by which control of a public
company is obtained, either through the direct purchase of its stocks or
through an indirect means, mandatory tender offer applies. As appropriately
held by the Court of Appeals:

The petitioner posits that what it acquired were stocks of UCHC and not UCC.
By happenstance, as a result of the transaction, it became an indirect owner
of UCC. We are constrained, however, to construe ownership acquisition to
mean both direct and indirect. What is decisive is the determination of the
power of control. The legislative intent behind the tender offer rule makes
clear that the type of activity intended to be regulated is the acquisition of
control of the listed company through the purchase of shares. Control may
[be] effected through a direct and indirect acquisition of stock, and when this
takes place, irrespective of the means, a tender offer must occur. The
bottomline of the law is to give the shareholder of the listed company the
opportunity to decide whether or not to sell in connection with a transfer of
control. x x x.21
As to the third issue, petitioner stresses that the ruling on mandatory tender
offer rule by the SEC and the Court of Appeals should not have retroactive
effect or be made to apply to its purchase of the UCHC shares as it relied in
good faith on the letter dated 27 July 2004 of the SEC which opined that the
proposed acquisition of the UCHC shares was not covered by the mandatory
offer rule.
The argument is not persuasive.
The action of the SEC on the PSE request for opinion on the Cemco
transaction cannot be construed as passing merits or giving approval to the
questioned transaction. As aptly pointed out by the respondent, the letter
dated 27 July 2004 of the SEC was nothing but an approval of the draft letter
prepared by Director Callanga. There was no public hearing where interested
parties could have been heard. Hence, it was not issued upon a definite and
concrete controversy affecting the legal relations of parties thereby making it
a judgment conclusive on all the parties. Said letter was merely advisory.
Jurisprudence has it that an advisory opinion of an agency may be stricken
down if it deviates from the provision of the statute.22 Since the letter dated
27 July 2004 runs counter to the Securities Regulation Code, the same may
be disregarded as what the SEC has done in its decision dated 14 February
2005.
Assuming arguendo that the letter dated 27 July 2004 constitutes a ruling,
the same cannot be utilized to determine the rights of the parties. What is to
be applied in the present case is the subsequent ruling of the SEC dated 14
February 2005 abandoning the opinion embodied in the letter dated 27 July
2004. In Serrano v. National Labor Relations Commission,23 an argument was
raised similar to the case under consideration. Private respondent therein
argued that the new doctrine pronounced by the Court should only be
applied prospectively. Said postulation was ignored by the Court when it
ruled:

While a judicial interpretation becomes a part of the law as of the date that
law was originally passed, this is subject to the qualification that when a
doctrine of this Court is overruled and a different view is adopted, and more
so when there is a reversal thereof, the new doctrine should be applied
prospectively and should not apply to parties who relied on the old doctrine
and acted in good faith. To hold otherwise would be to deprive the law of its
quality of fairness and justice then, if there is no recognition of what had
transpired prior to such adjudication.
It is apparent that private respondent misconceived the import of the ruling.
The decision in Columbia Pictures does not mean that if a new rule is laid
down in a case, it should not be applied in that case but that said rule should
apply prospectively to cases arising afterwards. Private respondents view of
the principle of prospective application of new judicial doctrines would turn
the judicial function into a mere academic exercise with the result that the
doctrine laid down would be no more than a dictum and would deprive the
holding in the case of any force.
Indeed, when the Court formulated the Wenphil doctrine, which we reversed
in this case, the Court did not defer application of the rule laid down
imposing a fine on the employer for failure to give notice in a case of
dismissal for cause. To the contrary, the new rule was applied right then and
there. x x x.
Lastly, petitioner alleges that the decision of the SEC dated 14 February
2005 is "incomplete and produces no effect."
This contention is baseless.
The decretal portion of the SEC decision states:
In view of the foregoing, the letter of the Commission, signed by Director
Justina F. Callangan, dated July 27, 2004, addressed to the Philippine Stock
Exchange is hereby REVERSED and SET ASIDE. Respondent Cemco is hereby
directed to make a tender offer for UCC shares to complainant and other
holders of UCC shares similar to the class held by respondent UCHC, at the
highest price it paid for the beneficial ownership in respondent UCC, strictly
in accordance with SRC Rule 19, Section 9(E).24
A reading of the above ruling of the SEC reveals that the same is complete. It
orders the conduct of a mandatory tender offer pursuant to the procedure
provided for under Rule 19(E) of the Amended Implementing Rules and
Regulations of the Securities Regulation Code for the highest price paid for
the beneficial ownership of UCC shares. The price, on the basis of the SEC
decision, is determinable. Moreover, the implementing rules and regulations

of the Code are sufficient to inform and guide the parties on how to proceed
with the mandatory tender offer.
WHEREFORE, the Decision and Resolution of the Court of Appeals dated 24
October 2005 and 6 March 2006, respectively, affirming the Decision dated
14 February 2005 of the Securities and Exchange Commission En Banc, are
hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 165272

September 13, 2007

SERGIO R. OSMEA III, JUAN M. FLAVIER, RODOLFO G. BIAZON,


ALFREDO S. LIM, JAMBY A.S. MADRIGAL, LUIS F. SISON, AND
PATRICIA C. SISON, Petitioners,
vs.
SOCIAL SECURITY SYSTEM OF THE PHILIPPINES, SOCIAL SECURITY
COMMISSION, CORAZON S. DELA PAZ, THELMO Y. CUNANAN,
PATRICIA A. STO. TOMAS, FE TIBAYAN-PANLILEO, DONALD DEE,
SERGIO R. ORTIZ-LUIS, JR., EFREN P. ARANZAMENDEZ, MARIANITA O.
MENDOZA, and RAMON J. JABAR, in their capacities as Members of
the Social Security Commission, AND BDO CAPITAL & INVESTMENT
CORPORATION, Respondents.
DECISION
GARCIA, J.:
Senator Sergio R. Osmea III1 and four (4) other members2 of the Philippine
Senate, joined by Social Security System (SSS) members Luis F. Sison and
Patricia C. Sison, specifically seek in this original petition for certiorari and
prohibition the nullification of the following issuances of respondent Social
Security Commission (SSC):
1) RESOLUTION No. 4283 dated July 14, 2004; and
2) RESOLUTION No. 4854 dated August 11, 2004.
The first assailed resolution approved the proposed sale of the entire equity
stake of the SSS in what was then the Equitable PCI Bank, Inc. (EPCIB or

EPCI), consisting of 187,847,891 common shares, through the Swiss


Challenge bidding procedure, and authorized SSS President Corazon S. Dela
Paz (Dela Paz) to constitute a bidding committee that would formulate the
terms of reference of the Swiss Challenge bidding mode. The second
resolution approved the Timetable and Instructions to Bidders.
Petitioners5 also ask that a prohibitive writ issue to permanently enjoin public
respondents from implementing Res. Nos. 428 and 485 or otherwise
proceeding with the sale of subject shares through the Swiss Challenge
method.
By Resolution6 dated October 5, 2004, the Court en banc required the parties
to observe the status quo ante the passage of the assailed resolutions. In the
same resolution, the Court noted the motion of respondent BDO Capital and
Investment Corporation (BDO Capital) to admit its Opposition to the Petition.
The relevant factual antecedents:
Sometime in 2003, SSS, a government financial institution (GFI) created
pursuant to Republic Act (RA) No. 11617and placed under the direction and
control of SSC, took steps to liquefy its long-term investments and diversify
them into higher-yielding and less volatile investment products. Among its
assets determined as needing to be liquefied were its shareholdings in EPCIB.
The principal reason behind the intended disposition, as explained by
respondent Dela Paz during the February 4, 2004 hearing conducted by the
Senate Committee on Banks, Financial Institutions and Currencies, is that the
shares in question have substantially declined in value and the SSS could no
longer afford to continue holding on to them at the present level of EPCIBs
income.
Some excerpts of what respondent Dela Paz said in that hearing:
The market value of Equitable-PCI Bank had actually hovered at P34.00 since
July 2003. At some point after the price went down to P16 or P17 after the
September 11 , it went up to P42.00 but later on went down to P34.00.
xxx. We looked at the prices in about March of 2001 and noted that the trade
prices then ranged from P50 to P57.
xxx

xxx

xxx

I have to concede that [EPCIB] has started to recover, .

Perhaps the fact that there had been this improved situation in the bank that
attracted Banco de Oro . xxx. I wouldnt know whether the prices would
eventually go up to 60 of (sic) 120. But on the basis of my being the vicechair on the bank, I believe that this is the subject of a lot of conjecture. It
can also go down . So, in the present situation where the holdings of SSS in
[EPCIB] consists of about 10 percent of the total reserve fund, we cannot
afford to continue holding it at the present level of income .xxx. And
therefore, on that basis, an exposure to certain form of assets whose price
can go down to 16 to 17 which is a little over 20 percent of what we have in
our books, is not a very prudent way or conservative way of handling those
funds. We need not continue experiencing opportunity losses but have an
amount that will give us a fair return to that kind of value (Words in bracket
added.)
Albeit there were other interested parties, only Banco de Oro Universal Bank
(BDO) and its investment subsidiary, respondent BDO Capital,8 appeared in
earnest to acquire the shares in question. Following talks between them,
BDO and SSS signed, on December 30, 2003, a Letter- Agreement,9 for the
sale and purchase of some 187.8 million EPCIB common shares (the Shares,
hereinafter), at P43.50 per share, which represents a premium of 30% of the
then market value of the EPCIB shares. At about this time, the Shares were
trading at an average ofP34.50 @ share.
In the same Letter-Agreement,10 the parties agreed "to negotiate in good
faith a mutually acceptable Share Sale and Purchase Agreement and execute
the same not later than thirty (30) business days from [December 30,
2003]."
On April 19, 2004, the Commission on Audit (COA),11 in response to
respondent Dela Pazs letter-query on the applicability of the public bidding
requirement under COA Circular No. 89-29612 on the divestment by the SSS
of its entire EPICB equity holdings, stated that the "circular covers all assets
of government agencies except those merchandize or inventory held for sale
in the regular course of business." And while it expressed the opinion13that
the sale of the subject Shares are "subject to guidelines in the Circular," the
COA qualified its determination with a statement that such negotiated sale
would partake of a stock exchange transaction and, therefore, would be
adhering to the general policy of public auction. Wrote the COA:

Nevertheless, since activities in the stock exchange which offer to the


general public stocks listed therein, the proposed sale, although
denominated as "negotiated sale" substantially complies with the general
policy of public auction as a mode of divestment. This is so for shares of
stocks are actually being auctioned to the general public every time that the
stock exchanges are openly operating.
Following several drafting sessions, SSS and BDO Capital, the designated
buyers of the Banco de Oro Group, agreed on a final draft version of the
Share Purchase Agreement14 (SPA). In it, the parties mutually agreed to the
purchase by the BDO Capital and the sale by SSS of all the latters EPCIB
shares at the closing date at the specified price of P43.50 per share or a total
of P8,171,383,258.50.
The proposed SPA, together with the Letter-Agreement, was then submitted
to the Department of Justice (DOJ) which, in an Opinion15 dated April 29,
2004, concurred with the COAs opinion adverted to and stated that it did not
find anything objectionable with the terms of both documents.
On July 14, 2004, SSC passed Res. No. 42816 approving, as earlier stated, the
sale of the EPCIB shares through the Swiss Challenge method. A month later,
the equally assailed Res. No. 48517 was also passed.
On August 23, 24, and 25, 2004, SSS advertised an Invitation to Bid18 for the
block purchase of the Shares. The Invitation to Bid expressly provided that
the "result of the bidding is subject to the right of BDO Capital to match
the highest bid." October 20, 2004 was the date set for determining the
winning bid.
The records do not show whether or not any interested group/s submitted
bids. The bottom line, however, is that even before the bid envelopes, if any,
could be opened, the herein petitioners commenced the instant special civil
action for certiorari, setting their sights primarily on the legality of the Swiss
Challenge angle and a provision in the Instruction to Bidders under which the
SSS undertakes to offer the Shares to BDO should no bidder or prospective
bidder qualifies. And as earlier mentioned, the Court, via a status quo
order,19 effectively suspended the proceedings on the proposed sale.
Under the Swiss Challenge format, one of the bidders is given the option or
preferential "right to match" the winning bid.

Petitioners assert, in gist, that a public bidding with a Swiss Challenge


component is contrary to COA Circular No. 89-296 and public policy which
requires adherence to competitive public bidding in a government-contract
award to assure the best price possible for government assets. Accordingly,
the petitioners urge that the planned disposition of the Shares through a
Swiss Challenge method be scrapped. As argued, the Swiss Challenge
feature tends to discourage would-be-bidders from undertaking the expense
and effort of bidding if the chance of winning is diminished by the
preferential "right to match" clause. Pushing the point, petitioners aver that
the Shares are in the nature of long-term or non-current assets not regularly
traded or held for sale in the regular course of business. As such, their
disposition must be governed by the aforementioned COA circular which,
subject to several exceptions, prescribes "public auction" as a primary mode
of disposal of GFIs assets. And obviously finding the proposed purchase
price to be inadequate, the petitioners expressed the belief that "if properly
bidded out in accordance with [the] COA Circular , the Shares could be sold
at a price of at least Sixty Pesos (P60.00) per share." Other supporting
arguments for allowing certiorari are set forth in some detail in the basic
petition.
Against the petitioners stance, public respondents inter alia submit that the
sale of subject Shares is exempt from the tedious public bidding requirement
of COA. Obviously stressing the practical side of the matter, public
respondents assert that if they are to hew to the bidding requirement in the
disposition of SSSs Philippine Stock Exchange (PSE)-listed stocks, it would
place the System at a disadvantage vis--vis other stock market players who
certainly enjoy greater flexibility in reacting to the vagaries of the market
and could sell their holdings at a moments notice when the price is right.
Public respondents hasten to add, however, that the bidding-exempt status
of the Shares did not prevent the SSS from prudently proceeding with the
bidding as contemplated in the assailed resolutions as a measure to validate
the adequacy of the unit price BDO Capital offered therefor and to possibly
obtain a higher price than its definitive offer of P43.50 per share.20 Public
respondents also advanced the legal argument, also shared by their corespondent BDO Capital, in its Comment,21 that the proposed sale is not
covered by COA Circular No. 89-296 since the Shares partake of the nature of
merchandise or inventory held for sale in the regular course of SSSs
business.

Pending consideration of the petition, supervening events and corporate


movements transpired that radically altered the factual complexion of the
case. Some of these undisputed events are detailed in the petitioners
separate Manifestation & Motion to Take Judicial Notice22 and their respective
annexes. To cite the relevant ones:
1. In January 2006, BDO made public its intent to merge with EPCIB.
Under what BDO termed as "Merger of Equals", EPCIB shareholders
would get 1.6 BDO shares for every EPCIB share.23
2. In early January 2006, the GSIS publicly announced receiving from
an undisclosed entity an offer to buy its stake in EPCIB 12% of the
banks outstanding capital stock at P92.00 per share.24
3. On August 31, 2006, SM Investments Corporation, an affiliate of
BDO and BDO Capital, in consortium with Shoemart, Inc. et
al., (collectively, the SM Group) commenced, through the facilities of
the PSE and pursuant to R.A. No. 879925 , a mandatory tender offer
(Tender Offer) covering the purchase of the entire outstanding
capital stock of EPCIB at P92.00 per share. Pursuant to the terms
of the Tender Offer, which was to start on August 31, 2006 and end on
September 28, 2006 the Tender Offer Period all shares validly
tendered under it by EPCIB shareholders of record shall be deemed
accepted for payment on closing date subject to certain
conditions.26 Among those who accepted the Tender Offer of the SM
Group was EBC Investments, Inc., a subsidiary of EPCIB.
4. A day or two later, BDO filed a Tender Offer Report with the
Securities and Exchange Commission (SEC) and the PSE.27
Owing to the foregoing developments, the Court, on October 3, 2006, issued
a Resolution requiring the parties to CONFIRM news reports that price of
subject shares has been agreed upon at P92; and if so, to MANIFEST whether
this case has become moot."
First to comply with the above were public respondents SSS et al., by filing
their Compliance and Manifestation,28therein essentially stating that the case
is now moot in view of the SM-BDO Groups Tender Offer at P92.00 @ unit
share, for the subject EPCIB common shares, inclusive of the SSS shares
subject of the petition. They also stated the observation that the petitioners
Manifestation and Motion to Take Judicial Notice,29 never questioned the

Tender Offer, thus confirming the dispensability of a competitive public


bidding in the disposition of subject Shares.
For perspective, a "tender offer" is a publicly announced intention by a
person acting alone or in concert with other persons to acquire equity
securities of a public company, i.e., one listed on an exchange, among
others.30The term is also defined as "an offer by the acquiring person to
stockholders of a public company for them to tender their shares therein on
the terms specified in the offer"31 Tender offer is in place to protect the
interests of minority stockholders of a target company against any scheme
that dilutes the share value of their investments. It affords such minority
shareholders the opportunity to withdraw or exit from the company under
reasonable terms, a chance to sell their shares at the same price as those of
the majority stockholders.32
Next to comply with the same Resolution of the Court was respondent BDO
Capital via its Compliance,33thereunder practically reiterating public
respondents position on the question of mootness and the need, under the
premises, to go into public bidding. It added the arguments that the BDO-SM
Groups Tender Offer, involving as it did a general offer to buy all EPCIB
common shares at the stated price and terms, were inconsistent with the
idea of public bidding; and that the Tender Offer rules actually provide for an
opportunity for competing groups to top the Tender Offer price.
On the other hand, petitioners, in their Manifestation,34 concede the huge
gap between the unit price stated in the Tender Offer and the floor price
of P43.50 per share stated in the Invitation to Bid. It is their posture,
however, that unless SSS withdraws the sale of the subject shares by way of
the Swiss Challenge, the offer price of P92 per share cannot render the case
moot and academic.
Meanwhile, the positive response to the Tender Offer enabled the SM-BDO
Group to acquire controlling interests over EPCIB and paved the way for a
BDO-EPCIB merger. The merger was formalized by subsequent submission of
the necessary merger documents35 to the SEC.
On May 25, 2007, the SEC issued a Certificate of Filing of the Article and Plan
of Merger36 approving the merger between BDO and EPCIB, relevant portions
of which are reproduced hereunder:

THIS IS TO CERTIFY that the Plan and Articles of Merger


executed on December 28, 2006 by and between:
BANCO DE ORO UNIVERSAL BANK,
Now BANCO DE ORO-EPCI, INC.
(Surviving Corporation)
and
EQUITABLE PCI BANK, INC.
(Absorbed Corporation)
approved by a majority of the Board of Directors on November 06, 2006
and by a vote of the stockholders owning or representing at least two-thirds
of the outstanding capital stock of constituent corporations on December 27,
2006, signed by the Presidents, certified by their respective Corporate
Secretaries, whereby the entire assets of [EPCI] Inc. will be transferred to and
absorbed by [BDO] UNIVERSAL BANK now BANCO DE ORO-EPCI, INC. was
approved by this Office on this date but which approval shall be effective on
May 31, 2007 pursuant to the provisions of (Word in bracket added;
emphasis in the original)
In line with Section 80 of the Corporation Code and as explicitly set forth in
Article 1.3 of the Plan of Merger adverted to, among the effects of the BDOEPCIB merger are the following:
a. BDO and EPCI shall become a single corporation, with BDO as the
surviving corporation. [EPCIB] shall cease to exist;
xxx

xxx

xxx

c. All the rights, privileges, immunities, franchises and powers of EPCI


shall be deemed transferred to and possessed by the merged Bank;
and
d. All the properties of EPCI, real or personal, tangible or intangible
shall be deemed transferred to the Merged Bank without further act or
deed.
Per Article 2 of the Plan of Merger on the exchange of shares mechanism, "all
the issued and outstanding common stock of [EPCIB] (EPCI shares) shall be

converted into fully-paid and non assessable common stock of BDO (BDO
common shares) at the ratio of 1.80 BDO Common shares for each issued
[EPCIB] share (the Exchange Ratio)." And under the exchange
procedure, "BDO shall issue BDO Common Shares to EPCI stockholders
corresponding to each EPCI Share held by them in accordance with the
aforesaid Exchange Ratio."
It appears that BDO, or BDO-EPCI, Inc. to be precise, has since issued BDO
common shares to respondent SSS corresponding to the number of its former
EPCIB shareholdings under the ratio and exchange procedure prescribed in
the Plan of Merger. In net effect, SSS, once the owner of a block of EPCIB
shares, is now a large stockholder of BDO-EPCI, Inc.
On the postulate that the instant petition has now become moot and
academic, BDO Capital supplemented its earlier Compliance and
Manifestation37 with a formal Motion to Dismiss.38
By Resolution dated July 10, 2007, the Court required petitioners and
respondent SSS to comment on BDO Capitals motion to dismiss "within ten
(10) days from notice."
To date, petitioners have not submitted their compliance. On the other hand,
SSS, by way of comment, reiterated its position articulated in respondents
Compliance and Motion39 that the SM-BDO Group Tender Offer at the price
therein stated had rendered this case moot and academic. And respondent
SSS confirmed the following: a) its status as BDO-EPCIB stockholder; b) the
Tender Offer made by the SM Group to EPCIB stockholders, including SSS, for
their shares at P92.00 per share; and c) SSS acceptance of the Tender Offer
thus made.
A case or issue is considered moot and academic when it ceases to present a
justiciable controversy by virtue of supervening events, 40 so that an
adjudication of the case or a declaration on the issue would be of no practical
value or use.41 In such instance, there is no actual substantial relief which a
petitioner would be entitled to, and which would be negated by the dismissal
of the petition.42 Courts generally decline jurisdiction over such case or
dismiss it on the ground of mootness -- save when, among others, a
compelling constitutional issue raised requires the formulation of controlling
principles to guide the bench, the bar and the public; or when the case is
capable of repetition yet evading judicial review.43

The case, with the view we take of it, has indeed become moot and
academic for interrelated reasons.
We start off with the core subject of this case. As may be noted, the LetterAgreement,44 the SPA,45 the SSC resolutions assailed in this recourse, and
the Invitation to Bid sent out to implement said resolutions, all have a
common subject: the Shares the 187.84 Million EPCIB common shares. It
cannot be overemphasized, however, that the Shares, as a necessary
consequence of the BDO-EPCIB merger46 which saw EPCIB being absorbed by
the surviving BDO, have been transferred to BDO and converted into BDO
common shares under the exchange ratio set forth in the BDO-EPCIB Plan of
Merger. As thus converted, the subject Shares are no longer equity security
issuances of the now defunct EPCIB, but those of BDO-EPCI, which, needless
to stress, is a totally separate and distinct entity from what used to be EPCIB.
In net effect, therefore, the 187.84 Million EPCIB common shares are now lost
or inexistent. And in this regard, the Court takes judicial notice of the
disappearance of EPCIB stocks from the local bourse listing. Instead, BDOEPCI Stocks are presently listed and being traded in the PSE.
Under the law on obligations and contracts, the obligation to give a
determinate thing is extinguished if the object is lost without the fault of the
debtor.47 And per Art. 1192 (2) of the Civil Code, a thing is considered lost
when it perishes or disappears in such a way that it cannot be recovered.48 In
a very real sense, the interplay of the ensuing factors: a) the BDO-EPCIB
merger; and b) the cancellation of subject Shares and their replacement by
totally new common shares of BDO, has rendered the erstwhile 187.84
million EPCIB shares of SSS "unrecoverable" in the contemplation of the
adverted Civil Code provision.
With the above consideration, respondent SSS or SSC cannot, under any
circumstance, cause the implementation of the assailed resolutions, let alone
proceed with the planned disposition of the Shares, be it viathe traditional
competitive bidding or the challenged public bidding with a Swiss
Challenge feature.1wphi1
At any rate, the moot-and-academic angle would still hold sway even if it
were to be assumed hypothetically that the subject Shares are still existing.
This is so, for the supervening BDO-EPCIB merger has so effected changes in
the circumstances of SSS and BDO/BDO Capital as to render the fulfillment of
any of the obligations that each may have agreed to undertake under either

the Letter-Agreement, the SPA or the Swiss Challenge package legally


impossible. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties,49 total or partial release from a
prestation and from the counter-prestation is allowed.
Under the theory of rebus sic stantibus,50 the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist.51 Upon the facts obtaining in this case, it is
abundantly clear that the conditions in which SSS and BDO Capital and/or
BDO executed the Letter-Agreement upon which the pricing component
at P43.50 per share of the Invitation to Bid was predicated, have ceased to
exist. Accordingly, the implementation of the Letter- Agreement or of the
challenged Res. Nos. 428 and 485 cannot plausibly push through, even if the
central figures in this case are so minded.
Lest it be overlooked, BDO-EPCI, in a manner of speaking, stands now as the
issuer52 of what were once the subject Shares. Consequently, should SSS opt
to exit from BDO and BDO Capital, or BDO Capital, in turn, opt to pursue
SSSs shareholdings in EPCIB, as thus converted into BDO shares, the salepurchase ought to be via an Issuer Tender Offer -- a phrase which means a
publicly announced intention by an issuer to acquire any of its own class of
equity securities or by an affiliate of such issuer to acquire such
securities.53 In that eventuality, BDO or BDO Capital cannot possibly exercise
the "right to match" under the Swiss Challenge procedure, a tender offer
being wholly inconsistent with public bidding. The offeror or buyer in an issue
tender offer transaction proposes to buy or acquire, at the stated price and
given terms, its own shares of stocks held by its own stockholder who in turn
simply have to accept the tender to effect the sale. No bidding is involved in
the process.
While the Court ends up dismissing this petition because the facts and legal
situation call for this kind of disposition, petitioners have to be commended
for their efforts in initiating this proceeding. For, in the final analysis, it was
their petition which initially blocked implementation of the assailed SSC
resolutions, and, in the process, enabled the SSS and necessarily their
members to realize very much more for their investments.
WHEREFORE, the instant petition is DISMISSED.
No costs.

SO ORDERED.

G.R. Nos. 106425 & 106431-32 July 21, 1995


SECURITIES AND EXCHANGE COMMISSION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, CUALOPING SECURITIES
CORPORATION AND FIDELITY STOCK TRANSFERS, INC., respondents.

VITUG, J.:
The Securities and Exchange Commission ("SEC") has both regulatory and
adjudicative functions.
Under its regulatory responsibilities, the SEC may pass upon applications for,
or may suspend or revoke (after due notice and hearing), certificates of
registration of corporations, partnerships and associations (excluding
cooperatives, homeowners' associations, and labor unions); compel legal and
regulatory compliances; conduct inspections; and impose fines or other
penalties for violations of the Revised Securities Act, as well as implementing
rules and directives of the SEC, such as may be warranted.
Relative to its adjudicative authority, the SEC has original and exclusive
jurisdiction to hear and decide controversies and cases involving
a. Intra-corporate and partnership relations between or among
the corporation, officers and stockholders and partners, including
their elections or appointments;
b. State and corporate affairs in relation to the legal existence of
corporations, partnerships and associations or to their franchises;
and
c. Investors and corporate affairs, particularly in respect of
devices and schemes, such as fraudulent practices, employed by
directors, officers, business associates, and/or other

stockholders, partners, or members of registered firms; as well


as
d. Petitions for suspension of payments filed by corporations,
partnerships or associations possessing sufficient property to
cover all their debts but which foresee the impossibility of
meeting them when they respectively fall due, or possessing
insufficient assets to cover their liabilities and said entities are
upon petition or motu proprio, placed under the management of
a Rehabilitation Receiver or Management Committee.
The petition before this Court relates to the exercise by the SEC of its powers
in a case involving a stockbroker (CUALOPING) and a stock transfer agency
(FIDELITY).
For the factual backdrop, we adopt the findings of the Court of Appeals; we
quote:
Cualoping Securities Corporation (CUALOPING for brevity) is a
stockbroker, Fidelity Stock Transfer, Inc. (FIDELITY for brevity), on
the other hand, is the stock transfer agent of Philex Mining
Corporation (PHILEX for brevity).
On or about the first half of 1988, certificates of stock of PHILEX
representing one million four hundred [thousand] (1,400,000)
shares were stolen from the premises of FIDELITY. These stock
certificates consisting of stock dividends of certain PHILEX
shareholders had been returned to FIDELITY for lack of
forwarding addresses of the shareholders concerned.
Later, the stolen stock certificates ended in the hands of a
certain Agustin Lopez, a messenger of New World Security Inc.,
an entirely different stock brokerage firm. In the first half of
1989, Agustin Lopez brought the stolen stock certificates to
CUALOPING for trading and sale with the stock exchange. When
the said stocks were brought to CUALOPING, all of the said stock
certificates bore the "apparent" indorsement (signature) in
blank of the owners (the stockholders to whom the stocks were
issued by PHILEX) thereof. At the side of these indorsements
(signatures), the words "Signature Verified" apparently of
FIDELITY were stamped on each and every certificate. Further, on

the words "Signature Verified" showed the usual initials of the


officers of FIDELITY.
Upon receipt of the said certificates from Agustin Lopez,
CUALOPING stamped each and every certificate with the words
"Indorsement Guaranteed," and thereafter traded the same with
the stock exchange.
After the stock exchange awarded and confirmed the sale of the
stocks represented by said certificates to different buyers, the
same were delivered to FIDELITY for the cancellation of the
stocks certificates and for issuance of new certificates in the
name of the new buyers. Agustin Lopez on the other hand was
paid by CUALOPING with several checks for Four Hundred
Thousand (P400,000.00) Pesos for the value of the stocks.
After acquiring knowledge of the pilferage, FIDELITY conducted
an investigation with assistance of the National Bureau of
Investigation (NBI) and found that two of its employees were
involved and signed the certificates.
After two (2) months from receipt of said stock certificates,
FIDELITY rejected the issuance of new certificates in favor of the
buyers for reasons that the signatures of the owners of the
certificates were allegedly forged and thus the cancellation and
new issuance thereof cannot be effected. 1
On 11 August 1988, FIDELITY sought an opinion on the matter from SEC,
which, on 06 October 1988, summoned FIDELITY and CUALOPING to a
conference. In this meeting, the parties stipulated, among other things,
thusly:
1. That the normal procedure followed by Fidelity Stock Transfers,
Inc. as transfer agent is that before stamping compares the
signatures on the certificates with the specimen signature on file
with it.
2. That there is an endorsement guaranty stamp made by
Cualoping Securities Corporation.

3 That the checks of Cualoping Securities Corporation were made


out payable to Agustin Lopez on the dates specified therein. 2
On 26 October 1988, the Brokers and Exchange Department ("BED") of the
SEC disposed of the matter in this manner:
WHEREFORE, Fidelity Stock Transfers, Inc., is hereby ordered to
replace all the subject shares and to cause the transfer thereof in
the names of the buyers within ten days from actual receipt
hereof.
Cualoping Securities, INC., for having violated Section 29 a(3) of
the Revised Securities Act is hereby ordered to pay a fine of
P50,000.00 within five (5) days from actual receipt hereof.
Henceforth, all brokers are required to make out checks in
payment of shares transacted only in the name of the registered
owners thereof. 3
From the above resolution, as well as that which denied a motion for
reconsideration, both CUALOPING and FIDELITY appealed to the
Commission En Banc.
On 14 December 1989, the Commission rendered its decision and concluded:
WHEREFORE, premises considered, the Commission en
banc finding both Cualoping Securities Corporation and Fidelity
Stock Transfers, Inc. equally negligent in the performance of their
duties hereby orders them to (1) jointly replace the subject
shares and for Fidelity to cause the transfer thereof in the names
of the buyers and (2) to pay a fine of P50,000,00 each for
hav[ing] violated Section 29 (a) of the Revised Securities Act. 4
The decision was appealed to the Court of Appeals (CA-G.R. SP No. 19585;
CA-G.R. SP No. 19659; and CA-G.R. SP No. 19660). In a consolidated decision,
dated 22 July 1992, the appellate court reversed the SEC and set aside SEC's
order "without prejudice to the right of persons injured to file the proper
action for damages."
The Commission has brought the case to this Court in the instant petition for
review on certiorari, contending that the appellate court erred in setting

aside the decision of the SEC which had (a) ordered the replacement of the
certificates of stock of Philex and (b) imposed fines on both FIDELITY and
CUALOPING.
There is partial merit in the petition.
The first aspect of the SEC decision appealed to the Court of Appeals, i.e.,
that portion which orders the two stock transfer agencies to "jointly replace
the subject shares and for FIDELITY to cause the transfer thereof in the
names of the buyers" clearly calls for an exercise of SEC's adjudicative
jurisdiction. This case, it might be recalled, has started only on the basis of a
request by FIDELITY for an opinion from the SEC. The stockholders who have
been deprived of their certificates of stock or the persons to whom the
forged certificates have ultimately been transferred by the supposed
indorsee thereof are yet to initiate, if minded, an appropriate adversarial
action. Neither have they been made parties to the proceedings now at
bench. A justiciable controversy such as can occasion an exercise of SEC's
exclusive jurisdiction would require an assertion of a right by a proper party
against another who, in turn, contests it. 5 It is one instituted by and against
parties having interest in the subject matter appropriate for judicial
determination predicated on a given state of facts. That controversy must be
raised by the party entitled to maintain the action. He is the person to whom
the right to seek judicial redress or relief belongs which can be enforced
against the party correspondingly charged with having been responsible for,
or to have given rise to, the cause of action. A person or entity tasked with
the power to adjudicate stands neutral and impartial and acts on the basis of
the admissible representations of the contending parties.
In the case at bench, the proper parties that can bring the controversy and
can cause an exercise by the SEC of its original and exclusive jurisdiction
would be all or any of those who are adversely affected by the transfer of the
pilfered certificates of stock. Any peremptory judgment by the SEC, without
such proceedings having first been initiated, would be precipitate. We thus
see nothing erroneous in the decision of the Court of Appeals, albeit not for
the reason given by it, to set aside the SEC's adjudication "without prejudice"
to the right of persons injured to file the necessary proceedings for
appropriate relief.
The other issue, i.e., the question on the legal propriety of the imposition by
the SEC of a P50,000 fine on each of FIDELITY and CUALOPING, is an entirely

different matter. This time, it is the regulatory power of the SEC which is
involved. When, on appeal to the Court of Appeals, the latter set aside the
fines imposed by the SEC, the latter, in its instant petition, can no longer be
deemed just a nominal party but a real party in interest sufficient to pursue
an appeal to this Court.
The Revised Securities Act (Batas Pambansa Blg. 178) is designed, in main,
to protect public investors from fraudulent schemes by regulating the sale
and disposition of securities, creating, for this purpose, a Securities and
Exchange Commission to ensure proper compliance with the law. Here, the
SEC has aptly invoked the provisions of Section 29, in relation to Section 46,
of the Revised Securities Act. This law provides:
Sec. 29. Fraudulent transactions. (a) It shall be unlawful for
any person, directly or indirectly, in connection with the purchase
or sale of any securities
xxx xxx xxx
(3) To engage in any act, transaction practice, or course of
business which operates or would operate as a fraud or deceit
upon any person.
Sec. 46. Administrative sanctions. If, after proper notice and
hearing, the Commission finds that there is a violation of this
Act, its rules, or its orders or that any registrant has, in a
registration statement and its supporting papers and other
reports required by law or rules to be filed with the Commission,
made any untrue statement of a material fact, or omitted to
state any material fact required to be stated therein or necessary
to make the statements therein not misleading, or refused to
permit any unlawful examination into its affairs, it shall, in its
discretion, impose any or all of the following sanctions:
(a) Suspension, or revocation of its certificate of registration and
permit to offer securities;
(b) A fine of no less than two hundred (P200.00) pesos nor more
than fifty thousand (P50,000.00) pesos plus not more than five
hundred (P500.00) pesos for each day of continuing violation.
(Emphasis supplied.)

There is, to our mind, no question that both FIDELITY and CUALOPING have
been guilty of negligence in the conduct of their affairs involving the
questioned certificates of stock. To constitute, however, a violation of the
Revised Securities Act that can warrant an imposition of a fine under Section
29(3), in relation to Section 46 of the Act, fraud or deceit, not mere
negligence, on the part of the offender must be established. Fraud here is
akin to bad faith which implies a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity; it is unlike that of the
negative idea of negligence in that fraud or bad faith contemplates a state of
mind affirmatively operating with furtive objectives. Given the factual
circumstances found by the appellate court, neither FIDELITY nor
CUALOPING, albeit indeed remiss in the observance of due diligence, can be
held liable under the above provisions of the Revised Securities Act. We do
not imply, however, that the negligence committed by private respondents
would not at all be actionable; upon the other hand, as we have earlier
intimated, such an action belongs not to the SEC but to those whose rights
have been injured.
Our attention is called by the Solicitor General on the violation by FIDELITY of
SEC-BED Memorandum Circular No. 9, series of 1987, which reads:
To expedite the release of Certificates of Securities to the buyers,
the Commission reiterates the following rules in delivery of stock
certificates:
1. Deadlines for Delivery of Documents All requirements must
be complied with the certificates of stock, as well as necessary
documents required for the transfer of shares shall be delivered
within the following periods:
xxx xxx xxx
d. From transfer agent back to clearing house and/or broker
not longer than ten (10) days from receipt of documents
provided there is a "good delivery," where there is no "good
delivery," the certificate and the accompanying documents shall
be returned to the clearing house or broker not later than two (2)
days after receipt thereof, except when defects can be readily
remedied, in which case the clearing house or the broker shall
instead be notified of the requirements within the same period.
The notice to the clearing house or broker shall indicate that the

Securities and Exchange Commission has been notified of such


defective delivery. 6
FIDELITY is candid enough to admit that it has truly failed to promptly notify
CUALOPING and the clearing house of the pilferage of the certificates of
stock (pp. 225, 239-240, Rollo). FIDELITY strongly asserts, however, that it
has been fined by the SEC not by virtue of Memorandum Circular No. 9 but
for a violation of Section 29(a)(3) of the Revised Securities Act, and that the
memorandum circular is only now being raised for the first time in the
instant petition.
In Insular Life Assurance Co., Ltd., Employees Association-NATU vs. Insular
Life Assurance Co., Ltd., 7 this Court has ruled that when issues are not
specifically raised but they bear relevance and close relation to those
properly raised, a court has the authority to include all such issues in passing
upon and resolving the controversy. In Bank of America, NT & SA vs. Court of
Appeals, 228 SCRA 357, we have said that "the rule that only issues or
theories raised in the initial proceedings may be taken up by a party thereto
on appeal should only refer to independent, not concomitant matters, to
support or oppose the cause of action or defense." In this case at bench,
particularly, it is not a new issue that is being raised but a memorandumcircular having the force and effect of law that has been cited to support a
position that relates to the very subject matter of the controversy. On this
point, accordingly, we must rule in favor of petitioner SEC.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED except the
portion thereof which sets aside the imposition by the Securities and
Exchange Commission of a fine on FIDELITY which is hereby REINSTATED. No
costs.
SO ORDERED.

[G.R. No. 122857. March 27, 1998]


ROY NICOLAS, petitioner, vs. THE HONORABLE COURT OF APPEALS
(Sixth Division) and BLESILO F.B. BUAN, respondents.
DECISION

ROMERO, J.:
The issue in this petition is whether the Court of Appeals committed
reversible error in its decision[1] dated August 16, 1995 overturning the
decision[2] dated May 31, 1993 of the Regional Trial Court of Pasig, Branch
165, by ordering the dismissal of petitioners complaint against private
respondent for lack of merit.
On February 19, 1987, petitioner Roy Nicolas and private respondent
Blesito Buan entered into a Portfolio Management Agreement, [3] wherein the
former was to manage the stock transactions of the latter for a period of
three months with an automatic renewal clause. However, upon the initiative
of the private respondent the agreement was terminated on August 19,
1987, and thereafter he requested for an accounting of all transactions made
by the petitioner.
Three weeks after the termination of the agreement, petitioner
demanded from the private respondent the amount of P68,263.67
representing his alleged management fees covering the periods of June 30,
July 31 and August 19, 1987 as provided for in the Portfolio Management
Agreement. But the demands went unheeded, much to the chagrin of the
petitioner.
Rebuffed, petitioner filed a complaint[4] for collection of sum of money
against the private respondent before the trial court. In his answer,[5] private
respondent contended that petitioner mismanaged his transactions resulting
in losses, thus, he was not entitled to any management fees.
After hearing, the trial court rendered its decision in favor of plaintiff,
herein petitioner, thus:
In View Of All The Foregoing, judgment is hereby rendered ordering
the defendant to pay plaintiff as follows:
1. The amount of P68,263.67 for the management fees of plaintiff.
2. The amount of P8,000.00 as and for attorneys fees and expenses of
litigation.
3. Costs of suit.

SO ORDERED.
Dismayed, private respondent appealed the decision to the Court of
Appeals. Finding merit in his case, the appellate court reversed the trial
courts finding and ruled against the petitioner, to wit:
WHEREFORE, the appealed decision should be, as it is hereby
REVERSED and SET ASIDE, and as a consequence thereof, appellees
complaint is hereby DISMISSED. No costs.
SO ORDERED.
Petitioners motion for reconsideration was denied by the Court of Appeals
on November 29, 1995.[6]
Due to the sudden reversal of events, petitioner is now before us
assailing the Court of Appeals ruling alleging that it misappreciated the
evidence he presented before the trial court.
In reversing the trial courts decision, the Court of Appeals opined that:
The lower court simply made a sweeping statement that the profits
were generated by appellees (Petitioner herein) transactions, making
appellant (Private respondent herein) liable for the payment of the
money demanded by appellee on the basis of self-serving profit and
loss statements submitted as evidence by appellee. Other than these
pieces of evidence, the trial court offered no satisfactory reason why
the sum demanded by appellee be paid.
We affirm the ruling of the Court of Appeals.
Under the Portfolio Management Agreement, it was agreed that private
respondent would pay the petitioner 20% of all realized profits every end of
the month as his management fees.The exact wording of the provision reads:
xxxxxxxxx
3. For his services, the INVESTOR agrees to pay the PORTFOLIO
MANAGER 20% of all realized profits every end of the month.

Evidently, the key word in the provision is profits. Simply put, profit has
been defined as the excess of return over expenditure in a transaction or
series of transactions[7] or the series of an amount received over the amount
paid for goods and services.[8]
To begin with, petitioner has the burden to prove that the transaction
realized gains or profits to entitle him to said management fees, as provided
in the Agreement. Accordingly, petitioner submitted the profit and loss
statements[9] for the period of June 30, July 31 and August 19, 1987, showing
a total profit of P341,318.34, of which 20% would represent his management
fees amounting to P68,263.70.
For clarity these documents are reproduced hereunder:
Profit & Loss Statement
of
Atty. Blesilo Buan
for the Period Ended June 30, 1987
Shares Issue Profit Loss
1,500 PLDT P 7,265.62
5,000 ATLAS 4,609.38
2,000 SMC 11,477.50
5,000 ATLAS 1,450.00
5,000 ATLAS 3,906.25
5,000,000 SEAFRONT 11,487.50
1,000 SMC 5,247.50
2,000 SMC 5,895.00
1,000 SMC 12,242.50

-------------- ------------P 36,351.87 P 27,229.38


Trading Profit P 9,122.49
x .2
------------P 1,824.50[10]
- oOo Profit & Loss Statement
of
Atty. Blesilo Buan
for the Period Ended July 31, 1987
Shares Issue Profit Loss
22,300,000 BASIC P 222,963.75
400 PLDT 35,372.50
5,700 GLO 32,347.50
1,700 SMC 9,350.00
27,000 AC 16,216.87
-------------- ------------P 306,900.62 P 9,350.00
Net Trading Profit P 297,550.62
x .2
------------- P 59,510.12[11]

- oOo Profit & Loss Statement


of
Atty. Blesilo Buan
for the Period Ended August 19, 1987
Shares Issue Proceeds Cost Profit (Loss)
6,000 BENGUET P 754,560.00 706,440.00 P 48,120.00
5,000 GLO 189,131.25 202,606.02 (13,474.77)
-------------Net Profit P 34,645.23
x .2
-------------P 6,929.05[12]
In according no probative value to these documents, the Court of Appeals
declared that:
Exhibits C, D and E likewise cannot be relied upon to prove that profits
were indeed realized. At most, these are self-serving evidence which
do not carry much weight. There is no question that the profit and loss
statements are relevant to the issue at hand. But as to whether or not
these statements induce belief as to the existence or non-existence of
profits generated by appellee, call for a minute examination of these
documents. It should be emphasized that the fees being collected by
appellee does not only spring from the rendition of services per
se. The Portfolio Management Agreement requires that service fees be
based on the profits realized out of the stock transactions of appellee
in behalf of appellant.The profit and loss statements presented do not
sufficiently prove the existence of such profits.

The mere fact that evidence is admissible does not necessarily mean
that it is also credible (People vs. Agripa, 208 SCRA 589). The
statements, covering the months of June, July and up to 19 August
1987, simply tabulate the number of shares acquired from each
company, a column for profit and the last column for loss. The
statements were not authenticated by an auditor, nor by the person
who caused the preparation of the same.[13]
The analysis of the evidence made by the Court of Appeals deserves our
concurrence. A cursory reading of these purported profit and loss statements
immediately raises doubts as to the veracity of the entries stated therein.
Admittedly, like any services rendered or performed, stock brokers are
entitled to commercial fees or compensation pursuant to the Revised
Securities Act Rule 19-13, which reads:
RSA Rule 19-13. Charges for Services Performed.
Charges by brokers or dealers, if any, for service performed, including
miscellaneous services such as collection of monies due for principal,
dividends, interests, exchange or transfer of securities, appeals,
safekeeping or custody of securities, and other services, shall be
reasonable and not unfairly discriminatory between customers. [14]
Moreover, the same law provides that any fee or commission must be
with due regard to relevant circumstances.[15]
Unfortunately, the profit and loss statements presented by the petitioner
are nothing but bare assertions, devoid of any concrete basis or specifics as
to the method of arriving at the amounts indicated in the documents. In fact,
it did not even state when the stocks were purchased, the type of stocks
(whether Class A or B or common or preferred) bought, when the stocks were
sold, the acquisition and selling price of each stock, when the profits, if any,
were delivered to the private respondent, the cost of safekeeping or custody
of the stocks, as well as the taxes paid for each transaction. With respect to
the alleged losses, it has been held that where a profit or loss statement
shows a loss, the statement must show income and items of expense to
explain the method of determining such loss. [16] However, in the instant
petition, petitioner hardly elucidated the reasons and the factors behind the
losses incurred in the course of the transactions.

In short, no evidentiary value can be attributed to the profit and loss


statements submitted by the petitioner. These documents can hardly be
considered a credible or true reflection of the transactions. It is an
incomplete record yielding easily to the inclusion or deletion of certain
matters. The contents are subject to suspicion since they are not reflective of
all pertinent and relevant data. Thus, even assuming the admissibility of
these alleged profit and loss statements, they are devoid of any evidentiary
weight, for the amounts are conclusions without premises, its bases left to
speculation, conjectures, assertions and guesswork.
As regards Exhibit B,[17] we quote with approval the Court of Appeals
finding, thus:
There is no question that appellant secured the services of appellee as
portfolio manager, evidenced by the Portfolio Management Agreement
(Exh. A). Pursuant to the Agreement, appellee entered into several
transactions from 19 February 1987 up to 19 August 1987 or a period
of six months. Thereafter, the agreement was not renewed by
appellant. The ledger of accounts (Exhibit B) presented by appellee as
proof of the transactions entered into only shows the following data:
(1) dates in which the stocks were acquired; (2) classified the acquired
stocks to be in long or short term trading; (3) the price of each stock;
(4) which companys stocks were acquired; and, (5) the total amount
paid for each stock.It does not show how much profit was realized
from each transaction.
In sum, we find that petitioner has not proven the amounts indicated
adequately. His testimony explaining the bases for the management fees
demanded by him are nothing more than a self-serving exercise which lacks
probative value. There were no credible documentary evidence (e.g. receipts
of the transactions, order ticket, certificate of deposit; whether the stock
certificates were deposited in a bank or professional custodian, and others)
to support his claim that profits were indeed realized. At best, his assertions
are founded on mere inferences and generalities. There must be more
convincing proof which in this case is wanting.
To our mind, petitioners complaint is similar to an action for damages,
wherein the general rule is that for the same to be recoverable it must not
only be capable of proof but must actually be proved with a reasonable
degree of certainty, and courts, in making the awards, must posit specific

facts which could afford sufficient basis for measuring compensatory or


actual damages.[18] Since petitioner could not present any credible evidence
to substantiate his claims, the Court of Appeals was correct in ordering the
dismissal of his complaint.
Lastly, the futility of petitioners action became more pronounced by the
fact that he traded securities for the account of others without the necessary
license from the Securities and Exchange Commission (SEC). Clearly, such
omission was in violation of Section 19 of the Revised Securities Act which
provides that no broker shall sell any securities unless he is registered with
the SEC. The purpose of the statute requiring the registration of brokers
selling securities and the filing of data regarding securities which they
propose to sell, is to protect the public and strengthen the securities
mechanism.[19]
American jurisprudence emphasizes the principle that:
x x x, an unlicensed person may not recover compensation for
services as a broker where a statute or ordinance requiring a license is
applicable and such statute or ordinance is of a regulatory nature, was
enacted in the exercise of the police power for the purpose of
protecting the public, requires a license as evidence of qualification
and fitness, and expressly precludes an unlicensed person from
recovering compensation by suit, or at least manifests an intent to
prohibit and render unlawful the transaction of business by an
unlicensed person.[20]
We see no reason not to apply the same rule in our jurisdiction. Stock
market trading, a technical and highly specialized institution in the
Philippines, must be entrusted to individuals with proven integrity,
competence and knowledge, who have due regard to the requirements of the
law.
WHEREFORE, in view of the foregoing, the assailed decision of the Court
of Appeals dated August 16, 1995 as well as the Resolution dated November
29, 1995 are herebyAFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 160016

February 27, 2006

ABACUS SECURITIES CORPORATION, Petitioner,


vs.
RUBEN U. AMPIL, Respondent.
DECISION
PANGANIBAN, CJ:
Stock market transactions affect the general public and the national
economy. The rise and fall of stock market indices reflect to a considerable
degree the state of the economy. Trends in stock prices tend to herald
changes in business conditions. Consequently, securities transactions are
impressed with public interest, and are thus subject to public regulation. In
particular, the laws and regulations requiring payment of traded shares
within specified periods are meant to protect the economy from excessive
stock market speculations, and are thus mandatory.
In the present case, respondent cannot escape payment of stocks validly
traded by petitioner on his behalf. These transactions took place before both
parties violated the trading law and rules. Hence, they fall outside the
purview of the pari delicto rule.
The Case
Before the Court is a Petition for Review1 under Rule 45 of the Rules of Court,
challenging the March 21, 2003 Decision2 and the September 19, 2003
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 68273. The assailed
Decision disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE THUS, this appeal is hereby
DISMISSED. With costs."4
The CA denied reconsideration in its September 19, 2003 Resolution.
The Facts
The factual antecedents were summarized by the trial court (and reproduced
by the CA in its assailed Decision) in this wise:

"Evidence adduced by the [petitioner] has established the fact that


[petitioner] is engaged in business as a broker and dealer of securities of
listed companies at the Philippine Stock Exchange Center.
"Sometime in April 1997, [respondent] opened a cash or regular account with
[petitioner] for the purpose of buying and selling securities as evidenced by
the Account Application Form. The parties business relationship was
governed by the terms and conditions [stated therein] x x x.
"Since April 10, 1997, [respondent] actively traded his account, and as a
result of such trading activities, he accumulated an outstanding obligation in
favor of [petitioner] in the principal sum of P6,617,036.22 as of April 30,
1997.
"Despite the lapse of the period within which to pay his account as well as
sufficient time given by [petitioner] for [respondent] to comply with his
proposal to settle his account, the latter failed to do so. Such that [petitioner]
thereafter sold [respondents] securities to set off against his unsettled
obligations.
"After the sale of [respondents] securities and application of the proceeds
thereof against his account, [respondents] remaining unsettled obligation to
[petitioner] was P3,364,313.56. [Petitioner] then referred the matter to its
legal counsel for collection purposes.
"In a letter dated August 15, 1997, [petitioner] through counsel demanded
that [respondent] settle his obligation plus the agreed penalty charges
accruing thereon equivalent to the average 90-day Treasury Bill rate plus 2%
per annum (200 basis points).
"In a letter dated August [26], 1997, [respondent] acknowledged receipt of
[petitioners] demand [letter] and admitted his unpaid obligation and at the
same time request[ed] for 60 days to raise funds to pay the same, which was
granted by [petitioner].
"Despite said demand and the lapse of said requested extension,
[respondent] failed and/or refused to pay his accountabilities to [petitioner].
"For his defense, [respondent] claims that he was induced to trade in a stock
security with [petitioner] because the latter allowed offset settlements
wherein he is not obliged to pay the purchase price. Rather, it waits for the

customer to sell. And if there is a loss, [petitioner] only requires the payment
of the deficiency (i.e., the difference between the higher buying price and
the lower selling price). In addition, it charges a commission for brokering the
sale.
"However, if the customer sells and there is a profit, [petitioner] deducts the
purchase price and delivers only the surplus after charging its commission.
"[respondent] further claims that all his trades with [petitioner] were not paid
in full in cash at anytime after purchase or within the T+4 [4 days
subsequent to trading] and none of these trades was cancelled by
[petitioner] as required in Exhibit A-1. Neither did [petitioner] apply with
either the Philippine Stock Exchange or the SEC for an extension of time for
the payment or settlement of his cash purchases. This was not brought to his
attention by his broker and so with the requirement of collaterals in margin
account. Thus, his trade under an offset transaction with [petitioner] is
unlimited subject only to the discretion of the broker. x x x [Had petitioner]
followed the provision under par. 8 of Exh. A-1 which stipulated the
liquidation within the T+3 [3 days subsequent to trading], his net deficit
would only be P1,601,369.59. [respondent] however affirmed that this is not
in accordance with RSA [Rule 25-1 par. C, which mandates that if you do not
pay for the first] order, you cannot subsequently make any further order
without depositing the cash price in full. So, if RSA Rule 25-1, par. C, was
applied, he was limited only to the first transaction. That [petitioner] did not
comply with the T+4 mandated in cash transaction. When [respondent]
failed to comply with the T+3, [petitioner] did not require him to put up a
deposit before it executed its subsequent orders. [Petitioner] did not likewise
apply for extension of the T+4 rule. Because of the offset transaction,
[respondent] was induced to [take a] risk which resulted [in] the filing of the
instant suit against him [because of which] he suffered sleepless nights, lost
appetite which if quantified in money, would amount toP500,000.00 moral
damages and P100,000.00 exemplary damages."5
In its Decision6 dated June 26, 2000, the Regional Trial Court (RTC) of Makati
City (Branch 57) held that petitioner violated Sections 23 and 25 of the
Revised Securities Act (RSA) and Rule 25-1 of the Rules Implementing the Act
(RSA Rules) when it failed to: 1) require the respondent to pay for his stock
purchases within three (T+3) or four days (T+4) from trading; and 2) request
from the appropriate authority an extension of time for the payment of
respondents cash purchases. The trial court noted that despite respondents

non-payment within the required period, petitioner did not cancel the
purchases of respondent. Neither did it require him to deposit cash payments
before it executed the buy and/or sell orders subsequent to the first
unsettled transaction. According to the RTC, by allowing respondent to trade
his account actively without cash, petitioner effectively induced him to
purchase securities thereby incurring excessive credits.
The trial court also found respondent to be equally at fault, by incurring
excessive credits and waiting to see how his investments turned out before
deciding to invoke the RSA. Thus, the RTC concluded that petitioner and
respondent were in pari delicto and therefore without recourse against each
other.
Ruling of the Court of Appeals
The CA upheld the lower courts finding that the parties were in pari delicto.
It castigated petitioner for allowing respondent to keep on trading despite
the latters failure to pay his outstanding obligations. It explained that "the
reason [behind petitioners act] is elemental in its simplicity. And it is not
exactly altruistic. Because whether [respondents] trading transaction would
result in a surplus or deficit, he would still be liable to pay [petitioner] its
commission. [Petitioners] cash register will keep on ringing to the sound of
incoming money, no matter what happened to [respondent]."7
The CA debunked petitioners contention that the trial court lacked
jurisdiction to determine violations of the RSA. The court a quo held that
petitioner was estopped from raising the question, because it had actively
and voluntarily participated in the assailed proceedings.
Hence, this Petition.8
Issues
Petitioner submits the following issues for our consideration:
"I.
Whether or not the Court of Appeals ruling that petitioner and respondent
are in pari delicto which allegedly bars any recovery, is in accord with law
and applicable jurisprudence considering that respondent was the first one

who violated the terms of the Account Opening Form, [which was the]
agreement between the parties.
"II.
Whether or not the Court of Appeals ruling that the petitioner and
respondent are in pari delicto is in accord with law and applicable
jurisprudence considering the Account Opening Form is a valid agreement.
"III.
Whether or not the Court of Appeals ruling that petitioner cannot recover
from respondent is in accord with law and applicable jurisprudence since the
evidence and admission of respondent proves that he is liable to petitioner
for his outstanding obligations arising from the stock trading through
petitioner.
"IV.
Whether or not the Court of Appeals ruling on petitioners alleged violation
of the Revised Securities Act [is] in accord with law and jurisprudence since
the lower court has no jurisdiction over violations of the Revised Securities
Act."9
Briefly, the issues are (1) whether the pari delicto rule is applicable in the
present case, and (2) whether the trial court had jurisdiction over the case.
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Applicability of the
Pari Delicto Principle
In the present controversy, the following pertinent facts are undisputed: (1)
on April 8, 1997, respondent opened a cash account with petitioner for his
transactions in securities;10 (2) respondents purchases were consistently
unpaid from April 10 to 30, 1997;11 (3) respondent failed to pay in full, or
even just his deficiency,12 for the transactions on April 10 and 11, 1997;13 (4)

despite respondents failure to cover his initial deficiency, petitioner


subsequently purchased and sold securities for respondents account on April
25 and 29;14 (5) petitioner did not cancel or liquidate a substantial amount of
respondents stock transactions until May 6, 1997.15
The provisions governing the above transactions are Sections 23 and 25 of
the RSA16 and Rule 25-1 of the RSA Rules, which state as follows:
"SEC. 23. Margin Requirements.
xxxxxxxxx
(b) It shall be unlawful for any member of an exchange or any broker or
dealer, directly or indirectly, to extend or maintain credit or arrange for the
extension or maintenance of credit to or for any customer
(1) On any security other than an exempted security, in contravention of the
rules and regulations which the Commission shall prescribe under subsection
(a) of this Section;
(2) Without collateral or on any collateral other than securities, except (i) to
maintain a credit initially extended in conformity with the rules and
regulations of the Commission and (ii) in cases where the extension or
maintenance of credit is not for the purpose of purchasing or carrying
securities or of evading or circumventing the provisions of subparagraph (1)
of this subsection.
x x x x x x x x x"
"SEC. 25. Enforcement of margin requirements and restrictions on
borrowings. To prevent indirect violations of the margin requirements under
Section 23 hereof, the broker or dealer shall require the customer in
nonmargin transactions to pay the price of the security purchased for his
account within such period as the Commission may prescribe, which shall in
no case exceed three trading days; otherwise, the broker shall sell the
security purchased starting on the next trading day but not beyond ten
trading days following the last day for the customer to pay such purchase
price, unless such sale cannot be effected within said period for justifiable
reasons. The sale shall be without prejudice to the right of the broker or
dealer to recover any deficiency from the customer. x x x."

"RSA RULE 25-1


"Purchases and Sales in Cash Account
"(a) Purchases by a customer in a cash account shall be paid in full within
three (3) business days after the trade date.
"(b) If full payment is not received within the required time period, the broker
or dealer shall cancel or otherwise liquidate the transaction, or the unsettled
portion thereof, starting on the next business day but not beyond ten (10)
business days following the last day for the customer to pay, unless such
sale cannot be effected within said period for justifiable reasons.
"(c) If a transaction is cancelled or otherwise liquidated as a result of nonpayment by the customer, prior to any subsequent purchase during the next
ninety (90) days, the customer shall be required to deposit sufficient funds in
the account to cover each purchase transaction prior to execution.
xxxxxxxxx
"(f) Written application for an extension of the period of time required for
payment under paragraph (a) be made by the broker or dealer to the
Philippine Stock Exchange, in the case of a member of the Exchange, or to
the Commission, in the case of a non-member of the Exchange. Applications
for the extension must be based upon exceptional circumstances and must
be filed and acted upon before the expiration of the original payment period
or the expiration of any subsequent extension."
Section 23(b) above -- the alleged violation of petitioner which provides the
basis for respondents defense -- makes it unlawful for a broker to extend or
maintain credit on any securities other than in conformity with the rules and
regulations issued by Securities and Exchange Commission (SEC). Section 25
lays down the rules to prevent indirect violations of Section 23 by brokers or
dealers. RSA Rule 25-1 prescribes in detail the regulations governing cash
accounts.
The United States, from which our countrys security policies are
patterned,17 abound with authorities explaining the main purpose of the
above statute on margin18 requirements. This purpose is to regulate the
volume of credit flow, by way of speculative transactions, into the securities

market and redirect resources into more productive uses. Specifically, the
main objective of the law on margins is explained in this wise:
"The main purpose of these margin provisions xxx is not to increase the
safety of security loans for lenders. Banks and brokers normally require
sufficient collateral to make themselves safe without the help of law. Nor is
the main purpose even protection of the small speculator by making it
impossible for him to spread himself too thinly although such a result will
be achieved as a byproduct of the main purpose.
xxxxxxxxx
"The main purpose is to give a [g]overnment credit agency an effective
method of reducing the aggregate amount of the nations credit resources
which can be directed by speculation into the stock market and out of other
more desirable uses of commerce and industry x x x."19
A related purpose of the governmental regulation of margins is the
stabilization of the economy.20 Restrictions on margin percentages are
imposed "in order to achieve the objectives of the government with due
regard for the promotion of the economy and prevention of the use of
excessive credit."21
Otherwise stated, the margin requirements set out in the RSA are primarily
intended to achieve a macroeconomic purpose -- the protection of the overall
economy from excessive speculation in securities. Their recognized
secondary purpose is to protect small investors.
The law places the burden of compliance with margin requirements primarily
upon the brokers and dealers.22Sections 23 and 25 and Rule 25-1, otherwise
known as the "mandatory close-out rule,"23 clearly vest upon petitioner the
obligation, not just the right, to cancel or otherwise liquidate a customers
order, if payment is not received within three days from the date of
purchase. The word "shall" as opposed to the word "may," is imperative and
operates to impose a duty, which may be legally enforced. For transactions
subsequent to an unpaid order, the broker should require its customer to
deposit funds into the account sufficient to cover each purchase transaction
prior to its execution. These duties are imposed upon the broker to ensure
faithful compliance with the margin requirements of the law, which forbids a
broker from extending undue credit to a customer.

It will be noted that trading on credit (or "margin trading") allows investors to
buy more securities than their cash position would normally allow.24 Investors
pay only a portion of the purchase price of the securities; their broker
advances for them the balance of the purchase price and keeps the
securities as collateral for the advance or loan.25 Brokers take these
securities/stocks to their bank and borrow the "balance" on it, since they
have to pay in full for the traded stock. Hence, increasing margins26 i.e.,
decreasing the amounts which brokers may lend for the speculative purchase
and carrying of stocks is the most direct and effective method of
discouraging an abnormal attraction of funds into the stock market and
achieving a more balanced use of such resources.
"x x x [T]he x x x primary concern is the efficacy of security credit controls in
preventing speculative excesses that produce dangerously large and rapid
securities price rises and accelerated declines in the prices of given
securities issues and in the general price level of securities. Losses to a given
investor resulting from price declines in thinly margined securities are not of
serious significance from a regulatory point of view. When forced sales occur
and put pressures on securities prices, however, they may cause other
forced sales and the resultant snowballing effect may in turn have a general
adverse effect upon the entire market."27
The nature of the stock brokerage business enables brokers, not the clients,
to verify, at any time, the status of the clients account.28 Brokers, therefore,
are in the superior position to prevent the unlawful extension of
credit.29 Because of this awareness, the law imposes upon them the primary
obligation to enforce the margin requirements.
Right is one thing; obligation is quite another. A right may not be exercised; it
may even be waived. An obligation, however, must be performed; those who
do not discharge it prudently must necessarily face the consequence of their
dereliction or omission.30
Respondent Liable for the First,
But Not for the Subsequent Trades
Nonetheless, these margin requirements are applicable only to transactions
entered into by the present parties subsequent to the initial trades of April
10 and 11, 1997. Thus, we hold that petitioner can still collect from
respondent to the extent of the difference between the latters outstanding

obligation as of April 11, 1997 less the proceeds from the mandatory sell out
of the shares pursuant to the RSA Rules. Petitioners right to collect is
justified under the general law on obligations and contracts.31
Article 1236 (second paragraph) of the Civil Code, provides:
"Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the
debtor." (Emphasis supplied)
Since a brokerage relationship is essentially a contract for the employment of
an agent, principles of contract law also govern the broker-principal
relationship.32
The right to collect cannot be denied to petitioner as the initial transactions
were entered pursuant to the instructions of respondent. The obligation of
respondent for stock transactions made and entered into on April 10 and 11,
1997 remains outstanding. These transactions were valid and the obligations
incurred by respondent concerning his stock purchases on these dates
subsist. At that time, there was no violation of the RSA yet. Petitioners fault
arose only when it failed to: 1) liquidate the transactions on the fourth day
following the stock purchases, or on April 14 and 15, 1997; and 2) complete
its liquidation no later than ten days thereafter, applying the proceeds
thereof as payment for respondents outstanding obligation.33
Elucidating further, since the buyer was not able to pay for the transactions
that took place on April 10 and 11, that is at T+4, the broker was duty-bound
to advance the payment to the settlement banks without prejudice to the
right of the broker to collect later from the client.34
In securities trading, the brokers are essentially the counterparties to the
stock transactions at the Exchange.35Since the principals of the broker are
generally undisclosed, the broker is personally liable for the contracts thus
made.36 Hence, petitioner had to advance the payments for respondents
trades. Brokers have a right to be reimbursed for sums advanced by them
with the express or implied authorization of the principal,37 in this case,
respondent.
It should be clear that Congress imposed the margin requirements to protect
the general economy, not to give the customer a free ride at the expense of

the broker.38 Not to require respondent to pay for his April 10 and 11 trades
would put a premium on his circumvention of the laws and would enable him
to enrich himself unjustly at the expense of petitioner.
In the present case, petitioner obviously failed to enforce the terms and
conditions of its Agreement with respondent, specifically paragraph 8
thereof, purportedly acting on the plea39 of respondent to give him time to
raise funds therefor. These stipulations, in relation to paragraph
4,40 constituted faithful compliance with the RSA. By failing to ensure
respondents payment of his first purchase transaction within the period
prescribed by law, thereby allowing him to make subsequent purchases,
petitioner effectively converted respondents cash account into a credit
account. However, extension or maintenance of credits on nonmargin
transactions, are specifically prohibited under Section 23(b). Thus, petitioner
was remiss in its duty and cannot be said to have come to court with "clean
hands" insofar as it intended to collect on transactions subsequent to the
initial trades of April 10 and 11, 1997.
Respondent Equally Guilty
for Subsequent Trades
On the other hand, we find respondent equally guilty in entering into the
transactions in violation of the RSA and RSA Rules. We are not prepared to
accept his self-serving assertions of being an "innocent victim" in all the
transactions. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large
profits with low -- or no -- capital outlay, as he pictures himself to be. Rather,
he is an experienced and knowledgeable trader who is well versed in the
securities market and who made his own investment decisions. In fact, in the
Account Opening Form (AOF), he indicated that he had excellent knowledge
of stock investments; had experience in stocks trading, considering that he
had similar accounts with other firms.41 Obviously, he knowingly speculated
on the market, by taking advantage of the "no-cash-out" arrangement
extended to him by petitioner.
We note that it was respondent who repeatedly asked for some time to pay
his obligations for his stock transactions. Petitioner acceded to his requests.
It is only when sued upon his indebtedness that respondent raised as a
defense the invalidity of the transactions due to alleged violations of the
RSA. It was respondents privilege to gamble or speculate, as he apparently

did so by asking for extensions of time and refraining from giving orders to
his broker to sell, in the hope that the prices would rise. Sustaining his
argument now would amount to relieving him of the risk and consequences
of his own speculation and saddling them on the petitioner after the result
was known to be unfavorable.42 Such contention finds no legal or even moral
justification and must necessarily be overruled. Respondents conduct is
precisely the behavior of an investor deplored by the law.
In the final analysis, both parties acted in violation of the law and did not
come to court with clean hands with regard to transactions subsequent to
the initial trades made on April 10 and 11, 1997. Thus, the peculiar facts of
the present case bar the application of the pari delicto rule -- expressed in
the maxims "Ex dolo malo non oritur action" and "In pari delicto potior est
conditio defendentis" -- to all the transactions entered into by the parties.
The pari delecto rule refuses legal remedy to either party to an illegal
agreement and leaves them where they were.43In this case, the pari delicto
rule applies only to transactions entered into after the initial trades made on
April 10 and 11, 1997.
Since the initial trades are valid and subsisting obligations, respondent is
liable for them. Justice and good conscience require all persons to satisfy
their debts. Ours are courts of both law and equity; they compel fair dealing;
they do not abet clever attempts to escape just obligations. Ineludibly, this
Court would not hesitate to grant relief in accordance with good faith and
conscience.
Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction
(sold the stocks) on the fourth day following the transaction (T+4) and
completed its liquidation not later than ten days following the last day for the
customer to pay (effectively T+14). Respondents outstanding obligation is
therefore to be determined by using the closing prices of the stocks
purchased at T+14 as basis.
We consider the foregoing formula to be just and fair under the
circumstances. When petitioner tolerated the subsequent purchases of
respondent without performing its obligation to liquidate the first failed
transaction, and without requiring respondent to deposit cash before
embarking on trading stocks any further, petitioner, as the broker, violated
the law at its own peril. Hence, it cannot now complain for failing to obtain
the full amount of its claim for these latter transactions.

On the other hand, with respect to respondents counterclaim for damages


for having been allegedly induced by petitioner to generate additional
purchases despite his outstanding obligations, we hold that he deserves no
legal or equitable relief consistent with our foregoing finding that he was not
an innocent investor as he presented himself to be.
Second Issue:
Jurisdiction
It is axiomatic that the allegations in the complaint, not the defenses set up
in the answer or in the motion to dismiss determine which court has
jurisdiction over an action.44 Were we to be governed by the latter rule, the
question of jurisdiction would depend almost entirely upon the defendant.45
The instant controversy is an ordinary civil case seeking to enforce rights
arising from the Agreement (AOF) between petitioner and respondent. It
relates to acts committed by the parties in the course of their business
relationship. The purpose of the suit is to collect respondents alleged
outstanding debt to petitioner for stock purchases.
To be sure, the RSA and its Rules are to be read into the Agreement entered
into between petitioner and respondent. Compliance with the terms of the
AOF necessarily means compliance with the laws. Thus, to determine
whether the parties fulfilled their obligations in the AOF, this Court had to
pass upon their compliance with the RSA and its Rules. This, in no way,
deprived the Securities and Exchange Commission (SEC) of its authority to
determine willful violations of the RSA and impose appropriate sanctions
therefor, as provided under Sections 45 and 46 of the Act.
Moreover, we uphold the SEC in its Opinion, thus:
"As to the issue of jurisdiction, it is settled that a party cannot invoke the
jurisdiction of a court to secure affirmative relief against his opponent and
after obtaining or failing to obtain such relief, repudiate or question that
same jurisdiction.
"Indeed, after voluntarily submitting a cause and encountering an adverse
decision on the merits, it is too late for petitioner to question the
jurisdictional power of the court. It is not right for a party who has affirmed
and invoked the jurisdiction of a court in a particular matter to secure an

affirmative relief, to afterwards deny that same jurisdiction to escape a


penalty."46
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals
are hereby MODIFIED. Respondent is ordered to pay petitioner the difference
between the formers outstanding obligation as of April 11, 1997 less the
proceeds from the mandatory sell out of shares pursuant to the RSA Rules,
with interest thereon at the legal rate until fully paid.
The RTC of Makati, Branch 57 is hereby directed to make a computation of
respondents outstanding obligation using the closing prices of the stocks at
T+14 as basis -- counted from April 11, 1997 and to issue the proper order
for payment if warranted. It may hold trial and hear the parties to be able to
make this determination.
No finding as to costs in this instance.
SO ORDERED.

G.R. No. 183050

January 25, 2012

ADVENT CAPITAL AND FINANCE CORPORATION, Petitioner,


vs.
NICASIO I. ALCANTARA and EDITHA I. ALCANTARA, Respondents.
DECISION
ABAD, J.:
This case is about the validity of a rehabilitation courts order that compelled
a third party, in possession of money allegedly belonging to the debtor of a
company under rehabilitation, to deliver such money to its court-appointed
receiver over the debtors objection.
The Facts and the Case
On July 16, 2001 petitioner Advent Capital and Finance Corporation (Advent
Capital) filed a petition for rehabilitation1 with the Regional Trial Court (RTC)
of Makati City.2 Subsequently, the RTC named Atty. Danilo L. Concepcion as
rehabilitation receiver.3 Upon audit of Advent Capitals books, Atty.

Concepcion found that respondents Nicasio and Editha Alcantara


(collectively, the Alcantaras) owed Advent Capital P27,398,026.59,
representing trust fees that it supposedly earned for managing their several
trust accounts.4
Prompted by this finding, Atty. Concepcion requested Belson Securities, Inc.
(Belson) to deliver to him, as Advent Capitals rehabilitation receiver,
the P7,635,597.50 in cash dividends that Belson held under the Alcantaras
Trust Account 95-013. Atty. Concepcion claimed that the dividends, as trust
fees, formed part of Advent Capitals assets. Belson refused, however, citing
the Alcantaras objections as well as the absence of an appropriate order
from the rehabilitation court.5
Thus, Atty. Concepcion filed a motion before the rehabilitation court to direct
Belson to release the money to him. He said that, as rehabilitation receiver,
he had the duty to take custody and control of Advent Capitals assets, such
as the sum of money that Belson held on behalf of Advent Capitals Trust
Department.6
The Alcantaras made a special appearance before the rehabilitation court7 to
oppose Atty. Concepcions motion. They claimed that the money in the trust
account belonged to them under their Trust Agreement8 with Advent Capital.
The latter, they said, could not claim any right or interest in the dividends
generated by their investments since Advent Capital merely held these in
trust for the Alcantaras, the trustors-beneficiaries. For this reason, Atty.
Concepcion had no right to compel the delivery of the dividends to him as
receiver. The Alcantaras concluded that, under the circumstances, the
rehabilitation court had no jurisdiction over the subject dividends.
On February 5, 2007 the rehabilitation court granted Atty. Concepcions
motion.9 It held that, under Rule 59, Section 6 of the Rules of Court, a
receiver has the duty to immediately take possession of all of the
corporations assets and administer the same for the benefit of corporate
creditors. He has the duty to collect debts owing to the corporation, which
debts form part of its assets. Complying with the rehabilitation courts order
and Atty. Concepcions demand letter, Belson turned over the subject
dividends to him.
Meanwhile, the Alcantaras filed a special civil action of certiorari before the
Court of Appeals (CA), seeking to annul the rehabilitation courts order. On
January 30, 2008 the CA rendered a decision,10 granting the petition and

directing Atty. Concepcion to account for the dividends and deliver them to
the Alcantaras. The CA ruled that the Alcantaras owned those dividends.
They did not form part of Advent Capitals assets as contemplated under the
Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules).
The CA pointed out that the rehabilitation proceedings in this case referred
only to the assets and liabilities of the company proper, not to those of its
Trust Department which held assets belonging to other people. Moreover,
even if the Trust Agreement provided that Advent Capital, as trustee, shall
have first lien on the Alcantaras financial portfolio for the payment of its
trust fees, the cash dividends in Belsons care cannot be summarily applied
to the payment of such charges. To enforce its lien, Advent Capital has to file
a collection suit. The rehabilitation court cannot simply enforce the latters
claim by ordering Belson to deliver the money to it.11
The CA denied Atty. Concepcion and Advent Capitals motion for
reconsideration,12 prompting the filing of the present petition for review
under Rule 45.
The Issue Presented
The sole issue in this case is whether or not the cash dividends held by
Belson and claimed by both the Alcantaras and Advent Capital constitute
corporate assets of the latter that the rehabilitation court may, upon motion,
require to be conveyed to the rehabilitation receiver for his disposition.
Ruling of the Court
Advent Capital asserts that the cash dividends in Belsons possession formed
part of its assets based on paragraph 9 of its Trust Agreement with the
Alcantaras, which states:
9. Trust Fee: Other Expenses As compensation for its services hereunder,
the TRUSTEE shall be entitled to a trust or management fee of 1 (one) % per
annum based on the quarterly average market value of the Portfolio or a
minimum annual fee of P5,000.00, whichever is higher. The said trust or
management fee shall automatically be deducted from the Portfolio at the
end of each calendar quarter. The TRUSTEE shall likewise be reimbursed for
all reasonable and necessary expenses incurred by it in the discharge of its
powers and duties under this Agreement, and in all cases, the TRUSTEE shall

have a first lien on the Portfolio for the payment of the trust fees and other
reimbursable expenses.
According to Advent Capital, it could automatically deduct its management
fees from the Alcantaras portfolio that they entrusted to it. Paragraph 9 of
the Trust Agreement provides that Advent Capital could automatically deduct
its trust fees from the Alcantaras portfolio, "at the end of each calendar
quarter," with the corresponding duty to submit to the Alcantaras a quarterly
accounting report within 20 days after.13
But the problem is that the trust fees that Advent Capitals receiver was
claiming were for past quarters. Based on the stipulation, these should have
been deducted as they became due. As it happened, at the time Advent
Capital made its move to collect its supposed management fees, it neither
had possession nor control of the money it wanted to apply to its claim.
Belson, a third party, held the money in the Alcantaras names. Whether it
should deliver the same to Advent Capital or to the Alcantaras is not clear.
What is clear is that the issue as to who should get the same has been
seriously contested.
The practice in the case of banks is that they automatically collect their
management fees from the funds that their clients entrust to them for
investment or lending to others. But the banks can freely do this since it
holds or has control of their clients money and since their trust agreement
authorized the automatic collection. If the depositor contests the deduction,
his remedy is to bring an action to recover the amount he claims to have
been illegally deducted from his account.
Here, Advent Capital does not allege that Belson had already deducted the
management fees owing to it from the Alcantaras portfolio at the end of
each calendar quarter. Had this been done, it may be said that the money in
Belsons possession would technically be that of Advent Capital. Belson
would be holding such amount in trust for the latter. And it would be for the
Alcantaras to institute an action in the proper court against Advent Capital
and Belson for misuse of its funds.
But the above did not happen. Advent Capital did not exercise its right to
cause the automatic deduction at the end of every quarter of its supposed
management fee when it had full control of the dividends. That was its fault.
For their part, the Alcantaras had the right to presume that Advent Capital

had deducted its fees in the manner stated in the contract. The burden of
proving that the fees were not in fact collected lies with Advent Capital.
Further, Advent Capital or its rehabilitation receiver cannot unilaterally
decide to apply the entire amount of cash dividends retroactively to cover
the accumulated trust fees. Advent Capital merely managed in trust for the
benefit of the Alcantaras the latters portfolio, which under Paragraph 214 of
the Trust Agreement, includes not only the principal but also its income or
proceeds. The trust property is only fictitiously attributed by law to the
trustee "to the extent that the rights and powers vested in a nominal owner
shall be used by him on behalf of the real owner."15
The real owner of the trust property is the trustor-beneficiary. In this case,
the trustors-beneficiaries are the Alcantaras. Thus, Advent Capital could not
dispose of the Alcantaras portfolio on its own. The income and principal of
the portfolio could only be withdrawn upon the Alcantaras written instruction
or order to Advent Capital.16 The latter could not also assign or encumber the
portfolio or its income without the written consent of the Alcantaras.17 All
these are stipulated in the Trust Agreement.
Ultimately, the issue is what court has jurisdiction to hear and adjudicate the
conflicting claims of the parties over the dividends that Belson held in trust
for their owners. Certainly, not the rehabilitation court which has not been
given the power to resolve ownership disputes between Advent Capital and
third parties. Neither Belson nor the Alcantaras are its debtors or creditors
with interest in the rehabilitation.
Advent Capital must file a separate action for collection to recover the trust
fees that it allegedly earned and, with the trial courts authorization if
warranted, put the money in escrow for payment to whoever it rightly
belongs. Having failed to collect the trust fees at the end of each calendar
quarter as stated in the contract, all it had against the Alcantaras was a
claim for payment which is a proper subject for an ordinary action for
collection. It cannot enforce its money claim by simply filing a motion in the
rehabilitation case for delivery of money belonging to the Alcantaras but in
the possession of a third party.
Rehabilitation proceedings are summary and non-adversarial in nature, and
do not contemplate adjudication of claims that must be threshed out in
ordinary court proceedings. Adversarial proceedings similar to that in
ordinary courts are inconsistent with the commercial nature of a

rehabilitation case. The latter must be resolved quickly and expeditiously for
the sake of the corporate debtor, its creditors and other interested parties.
Thus, the Interim Rules "incorporate the concept of prohibited pleadings,
affidavit evidence in lieu of oral testimony, clarificatory hearings instead of
the traditional approach of receiving evidence, and the grant of authority to
the court to decide the case, or any incident, on the basis of affidavits and
documentary evidence."18
Here, Advent Capitals claim is disputed and requires a full trial on the
merits.1wphi1 It must be resolved in a separate action where the
Alcantaras claim and defenses may also be presented and heard. Advent
Capital cannot say that the filing of a separate action would defeat the
purpose of corporate rehabilitation. In the first place, the Interim Rules do
not exempt a company under rehabilitation from availing of proper legal
procedure for collecting debt that may be due it. Secondly, Court records
show that Advent Capital had in fact sought to recover one of its assets by
filing a separate action for replevin involving a car that was registered in its
name.19
WHEREFORE, the petition is DENIED for lack of merit and the assailed
decision and resolution of the Court of Appeals in CA-G.R. SP 98692 are
AFFIRMED, without prejudice to any action that petitioner Advent Capital and
Finance Corp. or its rehabilitation receiver might institute regarding the trust
fees subject of this case.
SO ORDERED.