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Case 1 for Securities Regulation

PHILIPPINE STOCK EXCHANGE, INC. vs. THE HONORABLE COURT OF


APPEALS, SECURITIES AND EXCHANGE COMMISSION
and PUERTO AZUL LAND, INC.,1997 October 27

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.

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.PSE denied the
application of PALI

On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The
dispositive portion of the said order reads, in part:

"WHEREFORE, xxx 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 investing public.
Issue:
WHETHER OR NOT THE SEC COMMITTED SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN FINDING REVERSING THE DECISION OF
THE PSE.

Lower Courts’ Ruling:

The SEC has both jurisdiction and authority to look into the decision of the
petitioner PSE 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.

SC Ruling:

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 necessary. 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.

xxx 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. 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 pursued for the promotion of economic
development.

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. 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 PSE is, after 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.

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, 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.

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."

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.

xxx In resumé, 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 on Certiorari. 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.

Case 2 for Securities Regulation


NESTLE PHILIPPINES, INC. vs. COURT OF APPEALS
and SECURITIES AND EXCHANGE COMMISSION, 1991 Nov 13

Facts of the case:

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.

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 344,500 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

Court’s Ruling:

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.

SC Ruling:

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.

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. 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.

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. xxx

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.

SO ORDERED.. .

Case 3 for Securities Regulation


LOPEZ, LOCSIN, LEDESMA & CO., INC.vs. HON. COURT OF APPEALS
and CMS STOCK BROKERAGE, INC.,1988 Dec 8

Facts of the case:

On August 14 and 26, 1969 CMS Stock Brokerage, Inc. (CMS for short) sold to
Lopez, Locsin, Ledesma and Co., Inc., (LLL for short) on the floor of the Makati Stock
Exchange, among others, 2,650 Benguet Consolidated shares for the total price of
P297,650.00 on a ten (10) to twenty (20) days delayed delivery basis. The sale is
evidenced by Exchange Contracts Nos. B-11807 and B-11814 both dated August 14,
1969 and B-13084 dated August 26, 1969. Of these 2,650 shares, 500 shares were
purchased for and on orders of Jose Ma. Lopez; 1,600 shares for and on orders of Alfredo
Ramos; 275 shares for and on orders of Rene Ledesma; and 275 shares for and on orders
of Cesar A. Lopez, Jr.

CMS, however, failed to deliver to LLL the 2,650 Benguet Consolidated shares
within the ten (10) to twenty (20) days stipulated in the exchange contracts between them
alleging non-delivery as due to mere oversight owing to the huge volume of transactions.

On or about January 5, 1970 or four (4) months later, in the course of an audit of
CMS's books of accounts and other records by Sycip, Gorres Velayo & Co., the auditors
discovered that the 2,650 Benguet Consolidated shares which CMS sold to LLL still
remained undelivered and unpaid by LLL.

So CMS made known the LLL that it would effect delivery of said shares of
stocks the following day. LLL in its letter dated January 7, 1970, however, refused to
accept delivery at that late time since its clients for whom the purchases were made had
"elected to cancel" the orders.

On January 8, 1970, CMS replied that, pursuant to the Rules and Regulations of
the Makati Stock Exchange, LLL had no right to cancel its orders, nevertheless, made a
disposal in favor of LLL the next day.

On January 9, 1970, LLL refused to acknowledge receipt of and sign the covering
disposal letter. What CMS did was to deposit the letter with the Office of the Stock
Exchange's Executive Secretary with the notation: "Refused Acceptance pending decision
of the Exchange."

The foregoing dispute was referred to the Board of Governors of the Makati Stock
Exchange which rendered the following decision:

"RESOLVED, that (1) Messrs. Lopez, Locsin, Ledesma & Co., Inc., as buyer of
2,650 Benguet share per contracts executed August 14, 1969 for delivery within 10 to 20
days be held to have violated Section 1 of Article VI of the Rules and Regulations of the
Makati Stock Exchange for failure to advise the selling broker in writing within a
reasonable time; (2) CMS Stock Brokerage, Inc., be, as it is hereby held to have violated
Section 1 (5) of Article XI of the Rules and Regulations of the Makati Stock Exchange
for failure to give notice in writing on the agreed date of delivery of 2,650 Benguet shares
and even within a reasonable time from said agreed date of delivery; xxx

On March 15, 1971, CMS Stock Brokerage, Inc., filed a complaint docketed
as Civil Case No. 14518 in the Court of First Instance of Rizal against Lopez, Locsin,
Ledesma & Co., Inc., to compel the latter to accept the shares of stock in question.

"WHEREFORE, this Court hereby renders judgment as follows:

In favor of plaintiff on its complaint by


"(a) Compelling defendant Lopez, Locsin, Ledesma & Co., Inc., to accept delivery
from plaintiff of the 2,650 shares of Benguet Consolidated covered by the latter's disposal
letter of January 9, 1970 and to pay plaintiff the amount of P297,650.00 representing the
total price for which defendant purchased the said shares on the trading floor of the
Makati Stock Exchange on August 14 and 26, 1969, plus legal interest thereon from the
date of extra-judicial demand on January 9, 1970 until the said amount shall have been
fully paid, it being understood that the interest due from January 9, 1970 up to the filing
of the Complaint on March 15, 1971, shall be compounded and shall earn legal interest;
and

Consequently, Lopez, Locsin, Ledesma & Co., Inc., and third-party defendants
Jose Ma. Lopez and Cesar Lopez, Jr., and Alfredo Ramos appealed to the Court of
Appeals.

On June 5, 1975, the Court of Appeals affirmed the decision of the trial court.

Issue:

WHETHER OR NOT LLL SHOULD BE COMPELLED TO ACNOWLEDGE


DELIVERY OF THE SUBJECT STOCKS.

Sc Ruling:

It is the petitioner's main contention that the law on contracts is controlling in this
case: Hence, CMS' failure to deliver the 2,650 Benguet Consolidated shares of stocks
within the stipulated time of ten (10) to twenty (20) days warrants the rescission of the
exchange contracts in question. The petitioner states that it cannot, therefore, be
compelled to accept the belated delivery of these shares of stocks about four (4) months
after they were ordered. To resolve the issues raised by the parties, we first examine
the nature and purposes of an exchange

"An exchange is a voluntary association or corporation organized for the


purpose of furnishing to its members a convenient and suitable place to transact
their business of promoting uniformity in the customs and usages of merchants, of
inculcating principles of justice and equity in trade, of facilitating the speedy
adjustment of business disputes, of acquiring and disseminating valuable
commercial and economic information and generally of securing to its members the
benefits of co-operation in the furtherance of their legitimate pursuits."(See Nicole
v. Ames, 173 US 509, 43 L Ed 786, 19 S Ct 522)

There is no dispute that the exchange contracts in question were drawn up on the
floor of the Makati Stock Exchange between two (2) member stockbrokers, CMS as the
seller and LLL, as the buyer for and on orders of the third parties. As members of the
stock exchange, they are bound by the rules and by-laws of the exchange. We agree with
the observation of the respondent court that:
xxx xxx xxx

". . . in every stock exchange contract, time is of the essence. We believe, however, that it
is precisely for this reason why the Makati Stock Exchange, Inc., and the members
thereof agreed to have a set of Rules and Regulations which shall govern the members in
dealings and transactions with one another.”

The rule at issue in the instant case is Section I, Article V of the Rules and
Regulations. It reads:

"In the event of a Selling Member failing to make delivery within a reasonable
period of time of shares sold under delayed delivery contract, it shall be the Buying
Member's duty to advise the Selling Member in writing giving him full business day
from the time of receipt of said letter of demand to make delivery.

"The Buying Member shall obtain a written receipt from the Selling Member on
the duplicate copy of the letter of demand. This receipt must state the time of delivery of
the letter of demand to the Selling Member.”

"Fifteen days shall be considered a reasonable period of time within which to


effect delivery unless otherwise stated in the sales contract.

"In the event a Selling Member is unable to make delivery within said period, the
Buying Member shall deliver a copy of his letter of demand to the Chairman of the Floor
Trading & Arbitration Committee who may purchase the shares for the Selling Member's
Account."

xxx More than any person, it is the buyer who should be aware whether or not
what he purchased has been delivered to him. Because of this awareness, the Exchange
imposes upon him the primary obligation of giving notice.

We agree that time is of the essence in these particular contracts because of the
speculative and fluctuating value of stocks. Delivery four (4) months after purchase is
obviously not within the contemplation of the sale of shares in question. Because of the
peculiarity of the business involved in a stock exchange, rules were adopted to govern not
only the members but the transactions between the members as well. (Pacaud v. Waite,
218 I11. 138, 75 NE 779). And as long as these rules are not contrary to law, then the
courts will not interfere to control their enforcement. (In re Rosenbaum Grain
Corporation, D.C. I11. 13 F Supp. 601; Walsh v. New Orleans Cotton Exchange, 177 So
68, 188 La 338) Under the applicable rule, the failure of the seller to deliver the stocks
does not give the buying member the right to rescind the contract. If the selling member
fails or refuses to deliver, it may be compelled through the Chairman of the Floor Trading
and Arbitration Committee to purchase the same for the selling member's account. There
being a special remedy agreed upon by the members, the right of rescission under the
New Civil Code as invoked by the petitioner is inapplicable. On this point, we adopt the
lower court's conclusions as it states:

xxx xxx xxx

"Basic is the rule that in the interpretation of rules, regulations or statutes, the
interpretation that should be adopted is the one which would subserve the ends of justice
and equity. To interpret now Article V, Section 1 of the Exchange Rules the way
defendant would like this Court to do would result in the anomalous situation in which
defendant would have the sole say on whether or not to accept delivery. If the price of
Benguet Consolidated shares were up, it could demand delivery; but if the price were
down, it need not make such a demand and would even have the right to rescind. This is
practically allowing defendant to have its cake and eat it, too. This Court, nay, any court,
cannot give its imprimatur to such heads-I-win-tails-you-lose interpretation.

"Furthermore, exchange contracts are peculiar in certain ways. Firstly, they are
affected with public interest. The business of stock exchange is fueled by the money
of the investing public and, therefore, they are, or should be, clothed with greater
sanctity than ordinary contracts between private persons. "Secondly, exchange
contracts are entered into with speed. They can be closed in less than ten seconds flat
even if they involve thousands of pesos. Therefore, the Exchange Rules must be
interpreted to assure enforcement.xxx

xxx xxx xxx

"Thirdly, the stockbrokers usually do not invest their own money but their clients'.
Thus, the investor is practically dealing, through his broker, with people who are
complete strangers to him. He most probably has not even heard of them. Consequently,
exchange contracts, although entered into by stockbrokers, are practically between people
unknown to each other. The inviolability of exchange contracts and their enforcement
must, therefore, be guaranteed or else no stock exchange is possible. That is why
when Article V of the Exchange Rules on delayed delivery transactions was amended by
the addition of Section 5 thereunder, the said section, in a language clear and
unmistakable, stated that 'the contract must be enforced by compelling the broker to
accept and pay for them.

WHEREFORE, the petition is hereby DISMISSED for lack of merit. The


questioned decision of the respondent court is AFFIRMED.

SO ORDERED.