INTERNATIONAL BUSINESS LAW of Atty.

Gaviola | EH404 SY 2017-2018

ANTI MONEY LAUNDERING ACT COVERED PERSONS

The original law is R.A. 9160. Congress passed an amendment

in the Anti Money Laundering Act and this law has actually Covered persons, natural or juridical, refer to:
“(1) banks, non-banks, quasi-banks, trust entities, foreign
undergone several amendments already.
exchange dealers, pawnshops, money changers, remittance
and transfer companies and other similar entities and all
The trigger for the current amendment is what happened to other persons and their subsidiaries and affiliates supervised
RCBC last year (Bangladesh fiasco). The money was funneled or regulated by the Bangko Sentral ng Pilipinas (BSP);
to RCBC , it was withdrawn and then it was used in Casinos. “(2) insurance companies, pre-need companies and all other
They were able to trace the money to RCBC but after that, they persons supervised or regulated by the Insurance
were not able to trace the money anymore once it was used in Commission (IC);
the casinos because casinos are not covered persons for anti- “(3) (i) securities dealers, brokers, salesmen, investment
houses and other similar persons managing securities or
money laundering. Because of that, Congress had to amend the
rendering services as investment agent, advisor, or
law and in the 2017 amendment, Casinos are now consultant,
considered as covered persons. (ii) mutual funds, close-end investment companies, common
trust funds, and other similar persons, and
Policy of the AMLA (iii) other entities administering or otherwise dealing in
currency, commodities or financial derivatives based
To ensure that the Philippines is not use as a laundering site for thereon, valuable objects, cash substitutes and other similar
the proceeds of any unlawful activity. But not all unlawful monetary instruments or property supervised or regulated
activities are covered by the AMLA, there are only certain by the Securities and Exchange Commission (SEC);
criminal acts which are considered as unlawful activities for
AMLA purposes.
Sec. 3 (a) “Covered Institution” refers to:
Essence of Money Laundering
(1) Banks, nonbanks, quasi-banks, trust entities and all
other institutions and their subsidiaries and affiliates
Using the proceeds from illegal activities, you enter into a series
supervised or regulated by the Banko Sentral ng
of transactions to make it appear that the money came from a
Pilipinas (BSP);
legitimate source such that at the end of the transaction, you
have money you can use for legitimate purposes. It’s from the
➢ Financial entities supervised and regulated by the BSP
term “laundry” which means to clean up the proceeds of illegal
are covered institutions. Not just banks but any other
activities.
entity regulated by BSP, including foreign currency
dealers and money changers.
Entities Covered by the AMLA
(2) Insurance companies and all other institutions
Not all persons have obligations under the AMLA, the entities
supervised or regulated by the Insurance Commission;
whether natural or juridical which has obligations under the
AMLA are what we call the “covered persons/institutions”.
➢ It has really been expanded from the last few years
There are only a limited number of these persons or entities.
because at first it was only banks and financial
institutions covered by the AMLA, but in the 2013
amendment the coverage of the AMLA has been
expanded to include insurance companies and other
entities supervised and regulated by the Insurance
commission (IC).

(3) (i) securities dealers, brokers, salesmen, investment

houses and other similar persons managing securities
or rendering services as investment agent, advisor, or
consultant, (ii) mutual funds, close-end investment
companies, common trust funds, and other similar
persons, and (iii) other entities administering or
otherwise dealing in currency, commodities or financial
derivatives based thereon, valuable objects, cash
substitutes and other similar monetary instruments or
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property supervised or regulated by the Securities and
Exchange Commission (SEC);
➢ SEC has a broad coverage of supervision and
regulation. All corporations are to some extent
supervised by SEC. However not all entities which are
supervised and regulated by the SEC are covered by
AMLA.
➢ Only those who are dealing with securities,
commodities, currency, cash substitutes and similar
monetary instruments. Examples are those broker
dealers, investment houses, security dealers. In
essence, these are the entities which have a
secondary license from the SEC. And their
secondary franchise deals with securities, commodities
and currencies.
(4) Jewelry dealers in precious metals, who, as a
business, trade in precious metals, for transactions in
excess of One million pesos (P1,000,000.00);
➢ Dealers dealing with precious metals, they are not
considered as financial institutions anymore but with
the 2013 amendment they are considered as covered
persons.
(5) Jewelry dealers in precious stones, who, as a
business, trade in precious stones, for transactions in
excess of One million pesos (P1,000,000.00);
➢ Dealers dealing with precious stones with transactions
exceeding P100,000,000.
6) Company service providers which, as a business,
provide any of the following services to third parties: (i)
acting as a formation agent of juridical persons; (ii)
acting as (or arranging for another person to act a s) a
director or corporate secretary of a company, a partner
of a
partnership, or a similar position in relation to other
juridical persons; (iii) providing a registered office,
business address or accommodation, correspondence
or administrative address for a company, a partnership
or any other legal person or arrangement; and (iv )
acting as (or arranging for another person to act as) a
nominee shareholder
for another person;
➢ Formation agents are actually persons engaged in the
service of incorporating or registering corporations. So
that means, lawyers are covered by the AMLA.
(7) Persons who provide any of the following services:
(i) managing of client money, securities or other assets;
(ii) management of bank, savings or securities
accounts;
(iii) organization of contributions for the creation,
operation or management of companies; and
(iv) creation, operation or management of juridical
persons or arrangements, and buying and selling
business entities.
"Notwithstanding the foregoing, the term 'covered
persons' shall exclude lawyers and accountants acting
as independent legal professionals in relation to
information concerning their clients or where disclosure
of information would compromise client confidences or
the attorney-client relationship: Provided, That these
lawyers and accountants are authorized to practice in
the Philippines and shall continue to be subject to the
provisions of their respective codes of conduct and/or
professional responsibility or any of its amendments."
➢ Lawyers and accountants are covered by the AMLA
except if the lawyer or accountant is acting as an
independent legal professional in relation to their
clients business. So this means, if you are a lawyer or
an accountant who works for a firm, acting as a
director, a nominee stockholder, secretary which is an
ordinary service given by an accounting or legal
person, you are an exempt covered person.
➢ But if you are a lawyer and you are not rendering any
independent legal services and you are employed by
a company, you are covered by the AMLA.
What if you are a retainer lawyer?
If you are a retainer lawyer that means you are an independent
practitioner so you are exempted.
8. Casinos, including internet and ship-based casinos
with respect to their casinos cash transactions related
to their gaming operations.
➢ With the enactment of RA 10927 which was signed on
July 2017, there is now an eighth covered person. And
that will be casinos and internet and ship based
casinos including cash transactions from their gaming
operations.
Is there any entity that is not a covered person but
required to report?
The Land Registration Authority can be required to report.
Technically, they are not covered person because it is a
government entity but AMLC require it to report all transactions
that exceeds P500,000. They are required under Section 7
paragraph 12.
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What is the significance of being a covered person?
These covered persons are tasked with the prevention of
Money Laundering. And how these covered persons prevent
money laundering? The first obligation of a covered person is
customer identification through Know your Client requirements
in the bank.
OBLIGATIONS OF A COVERED PERSON
SEC. 9. Prevention of Money Laundering; Customer
Identification Requirements and Record Keeping.
(a) Customer Identification. - Covered institutions shall
establish and record the true identity of its clients based on
official documents. They shall maintain a system of
verifying the true identity of their clients and, in case of
corporate clients, require a system of verifying their legal
existence and organizational structure, as well as the
authority and identification of all persons purporting to act
on their behalf. The provisions of existing laws to the
contrary notwithstanding, anonymous accounts, accounts
under fictitious names, and all other similar accounts shall
be absolutely prohibited. Peso and foreign currency non-
checking numbered accounts shall be allowed. The BSP
may conduct annual testing solely limited to the
determination of the existence and true identity of the
owners of such accounts.
(b) Record Keeping. - All records of all transactions of
covered institutions shall be maintained and safely stored
for five (5) years from the dates of transactions. With
respect to closed accounts, the records on customer
identification, account files and business correspondence,
shall be preserved and safely stored for at least five (5)
years from the dates when they were closed.
(c) Reporting of Covered Transactions. - Covered
institutions shall report to the AMLC all covered
transactions within five (5) working days from occurrence
thereof, unless the Supervising Authority concerned
prescribes a longer period not exceeding ten (10) working
days.
A. Customer Identification
This is you KYC requirements in banks. If you open an account
with a bank, it is very tedious to fill in several pages of forms.
B. Record Keeping
Does record keeping function pertain only
transactions in excess of P500,000?
➢ No. The law says, covered persons must keep records
of ALL transactions in covered institutions.
For how long?
➢ For 5 years from the date of the transactions.
It does not mean that just because your transaction is P500
only it will not be recorded by the bank or other covered
persons. Covered persons are required to keep records of ALL
transactions for a period of 5 years.
C. Reporting of Covered Transactions
Covered Transactions (RA 9194):
A transaction in cash or other equivalent monetary instrument
involving a total amount in excess of Five hundred thousand
pesos (P500,000.00) within one (1) banking day.|||
What happens if there is a covered transaction?
The covered person has the obligation to report this
transaction.
Does that mean that the person who transacted the
covered transaction is in violation of the AMLA?
No, transacting an amount more than P500,000 in one
banking day does not amount to a violation, it simply triggers
the obligation on the part of the covered person to report the
transaction to the AMLC.
RA 10927
A single casino cash transaction involving an amount in excess
of Five million pesos (P5,000,000.00) or its equivalent in any
other currency.
If you are in a casino and spend P1,000,000, another
P1,000,000, and another P1,000,000 until it amounted to
P10,000,0000 (P1,000,000 per transaction), in a single night
that is not a covered transaction. To be a covered transaction,
it must be a single casino cash transaction in excess of
P5,000,000.
Unlike the P500,000, it is in one banking day. Meaning, if you
deposit P300,000 in the morning and P300,000 in the
afternoon, that is considered as one. you will considered as
doing a covered transaction. For casinos, it has to be a single
cash transaction. It does not matter if you win or lose; it is
the transaction itself.
Two types of covered transactions:
to
1. In excess of P500,000 in one single banking
day- applies to covered persons no 1-7
2. Single cash transaction of P5,000,000- covers
covered person no.8
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If the transaction exceeds the threshold, it is not illegal. What
is illegal is if the covered person will not report because
breaching the threshold simply means an obligation to report
the covered transaction.
SUSPICIOUS TRANSACTIONS
Transactions with covered institutions, regardless of the
amounts involved, where any of the following circumstances
exist:
1. There is no underlying legal or trade obligation,
purpose or economic justification;
➢ Your transaction is P300,000, that’s not a covered
transaction but the covered person may still be
required to report if there is no underlying legal or
trade obligation to justify the transaction, then that
will make the transaction a suspicious transaction.
Even if it’s below P500,000, the covered person has to
report.
2. The client is not properly identified;
➢ If the name used in the transaction is not the same in
the ID given or corporation transacting is not a real
corporation or you cannot identify the officers and
directors of the corporation, then that transaction
becomes a suspicious transaction and it triggers the
reporting requirement.
3. The amount involved is not commensurate with the
business or financial capacity of the client;
4. Taking into account all known circumstances, it may
be perceived that the client’s transaction is structured
in order to avoid being the subject of reporting
requirements under the Act;
➢ When it is a covered transaction, the bank is required
to report it. Example you deposited 450k today and
another 450k tomorrow, that is a suspicious
transaction because you might have received 900k
and it would then have been subject to reporting
requirement but you deposited them in two to avoid
being considered a covered transaction.
5. Any circumstances relating to the transaction which
is observed to deviate from the profile of the client
and/or the client’s past transactions with the covered
institutions;
➢ Example, your client is depositing P20,000 per day,
that’s his usual transaction but suddenly he deposits
P100,000 a day, it doesn’t fit the client’s past
transactions. It will trigger a suspicious transaction
reporting requirement.
6. The transaction is in any way related to an unlawful
activity or offense under this Act that is about to be, is
being or has been committed; or
7. Any transaction that is similar or analogous to any of
the foregoing
Important: Just because your transaction triggered a
reporting, it does not mean you violated the AMLA. Triggering a
suspicious transaction only requires the covered person to
make a report. If it is found that it is a valid transaction (i.e a
donation), that is not considered a violation of the AMLA.
MONEY LAUNDERING OFFENSES
SEC. 4. Money Laundering Offense. – Money laundering is
committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the
proceeds of any unlawful activity:
(a) transacts said monetary instrument or property;
(b) converts, transfers, disposes of, moves, acquires, possesses or
uses said monetary instrument or property;
(c) conceals or disguises the true nature, source, location,
disposition, movement or ownership of or rights with respect to said
monetary instrument or property;
(d) attempts or conspires to commit money laundering offenses
referred to in paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the commission of the money
laundering offenses referred to in paragraphs (a), (b) or (c) above;
and
(f) performs or fails to perform any act as a result of which he
facilitates the offense of money laundering referred to in paragraphs
(a), (b) or (c) above.
Money Laundering is a criminal offense where the 1st element is
that the person must have knowledge that the money is a
proceed from an unlawful activity. And knowing that the money
relates to or is a proceed from an unlawful activity and if:
(a) Transacts said monetary instrument or property;
➢ You transact with the money knowing that it comes
from an unlawful activity. The money comes from an
unlawful activity and then you use it( i.e you buy a
house or car), transacting with the proceeds from an
unlawful activity, that is considered as money
laundering. Any person transacting with the proceeds
from an unlawful activity is liable for money
laundering.
(b) Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or
property;
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(c) Conceals or disguises the true nature, source,
location, disposition, movement or ownership of or
rights with respect to said monetary instrument or
property;
(d) Attempts or conspires to commit money laundering
offenses referred to in paragraphs (a), (b) or (c);
➢ Subsections a, b and c are the main money laundering
offenses.
➢ If you attempt or conspire to commit these mentioned
offenses, you are also guilty for money laundering.
(e) Aids, abets, assists in or counsels the commission of the
money laundering offenses referred to in paragraphs (a),
(b) or (c) above; and
(f) Performs or fails to perform any act as a result of which he
facilitates the offense of money laundering referred to in
paragraphs (a), (b) or (c) above.
• Not just the transaction, the conversion, concealment
or disguise proceeds from unlawful activities but the
failure of a covered person to report a covered or
suspicious transaction is also considered a money
laundering offense.
THINGS TO REMEMBER:
1. Suspicious or covered transactions per se are not
money laundering offenses, it just triggers a reporting
requirement.
2. A money laundering offense is when a person knowing
that the money comes from or is related to an
unlawful activity, he transacts with the money, he
converts, transfers or disposes the money or he tries
to conceal or disguise the true nature of the money,
those are the money laundering offenses.
3. Conspiring to do either of three is also a money
laundering offense.
4. Aiding or abetting is also a money laundering offense
5. Performing or failing to perform any act by which
facilitates the money laundering offense.
-If you do not do anything to prevent the money
laundering offense, it is also a violation.
Example: Somebody buys your house and you know
that the proceeds of that comes from an unlawful
activity, you are also considered guilty.
6. Covered persons who fail their reportorial requirement
is also considered in violation.
UNLAWFUL ACTIVITIES
Section 3B-(1) of the same Act is further amended to read as
follows:
(i) ‘Unlawful activity’ refers to any act or omission
or series or combination thereof involving or
having direct relation to the following:
(1) Kidnapping for ransom under Article 267 of Act No.
3815, otherwise known as the Revised Penal Code, as
amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic
Act No. 9165, otherwise known as the Comprehensive
Dangerous Drugs Act of 2002;
a. Sec 4 – Importation of Dangerous Drugs and/or Controlled
Precursors and Essential Chemicals
b. Sec 5 - Sale, Trading, Administration, Dispensation, Delivery,
Distribution and Transportation of Dangerous Drugs and/or
Controlled Precursors and Essential Chemicals
c. Sec 6 - Maintenance of a Den, Dive or Resort
d. Sec 8 - Manufacture of Dangerous Drugs and/or Controlled
Precursors and Essential Chemicals
e. Sec 9 - Illegal Chemical Diversion of Controlled Precursors
and Essential Chemicals
f. Sec 10 - Manufacture or Delivery of Equipment, Instrument,
Apparatus, and Other Paraphernalia for Dangerous Drugs
and/or Controlled Precursors and Essential Chemicals
g. Sec 12 - Possession of Equipment, Instrument, Apparatus
and Other Paraphernalia for Dangerous Drugs
h. Sec 13 - Possession of Dangerous Drugs During Parties,
Social Gatherings or Meetings
i. Sec 14 - Possession of Equipment, Instrument, Apparatus
and Other Paraphernalia for Dangerous Drugs During Parties,
Social Gatherings or Meetings
j. Sec 15 - Use of Dangerous Drugs
k. Sec 16 - Cultivation or Culture of Plants Classified as
Dangerous Drugs or are Sources Thereof
Important: So not all offenses under the Dangerous Drugs Act
are considered unlawful activities. Only those specified.
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(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No.
3019, as amended, otherwise known as the Anti-Graft and
Corrupt Practices Act;
a. Par B - Directly or indirectly requesting or receiving any gift,
present, share, percentage, or benefit, for himself or for any
other person, in connection with any contract or transaction
between the Government and any other party, wherein the
public officer in his official capacity has to intervene under the
law.
b. Par C - Directly or indirectly requesting or receiving any gift,
present or other pecuniary or material benefit, for himself or for
another, from any person for whom the public officer, in any
manner or capacity, has secured or obtained, or will secure or
obtain, any Government permit or license, in consideration for
the help given or to be given, without prejudice to Section
thirteen of this Act
c. Par E - Causing any undue injury to any party, including the
Government, or giving any private party any unwarranted
benefits, advantage or preference in the discharge of his official
administrative or judicial functions through manifest partiality,
evident bad faith or gross inexcusable negligence. This
provision shall apply to officers and employees of offices or
government corporations charged with the grant of licenses or
permits or other concessions
d. Par G - Entering, on behalf of the Government, into any
contract or transaction manifestly and grossly disadvantageous
to the same, whether or not the public officer profited or will
profit thereby
e. Par H - Director or indirectly having financing or pecuniary
interest in any business, contract or transaction in connection
with which he intervenes or takes part in his official capacity, or
in which he is prohibited by the Constitution or by any law from
having any interest
f. Par I - Directly or indirectly becoming interested, for
personal gain, or having a material interest in any transaction
or act requiring the approval of a board, panel or group of
which he is a member, and which exercises discretion in such
approval, even if he votes against the same or does not
participate in the action of the board, committee, panel or
group
(4) Plunder under Republic Act No. 7080, as amended;
(5) Robbery and extortion under Articles 294, 295, 296, 299,
300, 301 and 302 of the Revised Penal Code, as amended;
Art. 297 and 298 are not included, which refer to attempted
robbery. Only consummated robbery are included because if it’s
just attempted, there is nothing to launder there.
a. Art 294 - Robbery with Violence Against or Intimidation of
Persons
b. Art 295 - Robbery with Physical Injuries, Committed in an
Uninhabited Place and by a Band
c. Art 296 - Definition of a Band and Penalty Incurred by the
Members Thereof
d. Art 299 - Robbery in an Inhabited House or Public Building
or Edifice Devoted to Worship
e. Art 300 - Robbery in an Uninhabited Place and by a Band
f. Art 301 - What is an Inhabited House, Public Building or
Building Dedicated to Religious Worship and Their
Dependencies
g. Art 302 - Robbery in an Uninhabited Place or in a Private
Building
(6) Jueteng and Masiao punished as illegal gambling under
Presidential Decree No. 1602;
(7) Piracy on the high seas under the Revised Penal Code, as
amended and Presidential Decree No. 532;
(8) Qualified theft under Article 310 of the Revised Penal
Code, as amended;
(9) Swindling under Article 315 of the Revised Penal Code, as
amended;
(10) Smuggling under Republic Act Nos. 455 and 1937; SEID
a. RA 455- Revised Administrative Code
b. RA 1937 – Tariff and Customs Code
(11) Violations under Republic Act No. 8792, otherwise known
as the Electronic Commerce Act of 2000;
All violations of E-Commerce Act are unlawful
activities
Like the case of Bangladesh. This was an example of an E-
crime. The bank of New York was hacked and the funds were
funnelled to somewhere else.
(12) Hijacking and other violations under Republic Act No.
6235; destructive arson and murder, as defined under the
Revised Penal Code, as amended, including those perpetrated
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by terrorists against non-combatant persons and similar
targets;
(13) Terrorism and conspiracy to commit terrorism as
defined and penalized under Sections 3 and 4 of Republic Act
No. 9372 or The Human Security Act
(14) Financing of terrorism under Section 4 and offenses
punishable under Sections 5, 6, 7 and 8 of Republic Act No.
10168, otherwise known as the Terrorism Financing Prevention
and Suppression Act of 2012:
a) SEC. 4. Financing of Terrorism
b) SEC. 5. Attempt or Conspiracy to Commit the Crimes of
Financing of Terrorism and Dealing with Property or Funds of
Designated Persons.
If you pasture livestock land considered as forest land, that is
violation of sec 79. Any money that you profit from such act if
you attempt to launder it is a violation of the AMLA
(21) Violations of Sections 86 to 106 of Chapter VI, of Republic
Act No. 8550, otherwise known as the Philippine Fisheries Code
of 1998;
a. SECTION 86. Unauthorized Fishing or Engaging in Other
Unauthorized Fisheries Activities
b. SECTION 87. Poaching in Philippine Waters
c. SECTION 88. Fishing Through Explosives, Noxious or
Poisonous Substance, and/or Electricity
d. SECTION 89. Use of Fine Mesh Net

c) SEC. 6. Accomplice. e. SECTION 90. Use of Active Gear in the Municipal Waters and
Bays and Other Fishery Management Areas
d) SEC. 7. Accessory.
f. SECTION 91. Ban on Coral Exploitation and Exportation
e) SEC. 8. Prohibition Against Dealing with Property or Funds of
Designated Persons. g. SECTION 92. Ban on Muro-Ami Other Methods and Gear
Destructive to Coral Reefs and Other Marine Habitat
(15) Bribery under Articles 210, 211 and 211-A of the Revised
Penal Code, as amended, and Corruption of Public Officers h. SECTION 93. Illegal Use of Superlights
under Article 212 of the Revised Penal Code, as amended;
i. SECTION 94. Conversion of Mangroves
(16) Frauds and Illegal Exactions and Transactions under
j. SECTION 95. Fishing in Overfished Area and During Closed
Articles 213, 214, 215 and 216 of the Revised Penal Code, as
Season
amended;
k. SECTION 96. Fishing in Fishery Reserves, Refuge and
(17) Malversation of Public Funds and Property under
Sanctuaries
Articles 217 and 222 of the Revised Penal Code, as amended;
l. SECTION 97. Fishing Or Taking of Rare, Threatened or
(18) Forgeries and Counterfeiting under Articles 163, 166,
Endangered Species
167, 168, 169 and 176 of the Revised Penal Code, as amended;
m. SECTION 98. Capture of Sabalo and Other
(19) Violations of Sections 4 to 6 of Republic Act No. 9208,
Breeders/Spawners
otherwise known as the Anti-Trafficking in Persons Act of 2003;
n. SECTION 99. Exportation of Breeders, Spawners, Eggs or Fry
a) Section 4. Acts of Trafficking in Persons.
o. SECTION 100. Importation or Exportation of Fish or Fishery
b) Section 5. Acts that Promote Trafficking in Persons.
Species
c) Section 6. Qualified Trafficking in Persons
p. SECTION 101. Violation of Catch Ceilings
(20) Violations of Sections 78 to 79 of Chapter IV, of
q. SECTION 102. Aquatic Pollution
Presidential Decree No. 705, otherwise known as the Revised
Forestry Code of the Philippines, as amended;
r. SECTION 103. Other Violations: failure to comply with
minimum safety standards; failure to conduct yearly report on
a. Section 78 – Unlawful occupation or destruction of forest or
fishponds; gathering and marketing shell fishes; obstruction to
grazing lands
navigation or flow and ebb of tide in any stream, river, lake or
b. Section 79 – Pasturing livestock

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bay; construction and operation of fish corrals/traps, fish pens (f) collecting, hunting or possessing wildlife, their by-products
and fish cages and derivatives;

s. SECTION 104. Commercial Fishing Vessel Operators (g) gathering or destroying of active nests, nest trees, host
Employing Unlicensed Fisherfolk or Fishworker or Crew plants and the like;

t. SECTION 105. Obstruction of Defined Migration Paths (i) transporting of wildlife.

u. SECTION 106. Obstruction to Fishery Law Enforcement (24) Violation of Section 7(b) of Republic Act No. 9072,
Officer otherwise known as the National Caves and Cave
Resources Management Protection Act;
(22) Violations of Sections 101 to 107, and 110 of Republic Act
No. 7942, otherwise known as the Philippine Mining Act of Sec 7b - Gathering, collecting, possessing, consuming, selling,
1995; bartering or exchanging or offering for sale without authority
any cave resource
a. SECTION 101. False Statements
> If you go to the underground cave of Palawan and
b. SECTION 102. Illegal Exploration get a rock and sell it for P500, you are liable for Money
Laundering.
c. SECTION 103. Theft of Minerals
(25) Violation of Republic Act No. 6539, otherwise known as the
d. SECTION 104. Destruction of Mining Structures
Anti-Carnapping Act of 2002, as amended;
e. SECTION 105. Mines Arson
(26) Violations of Sections 1, 3 and 5 of Presidential Decree No.
1866, as amended, otherwise known as the decree Codifying
f. SECTION 106. Willful Damage to a Mine
the Laws on Illegal/Unlawful Possession, Manufacture,
g. SECTION 107. Illegal Obstruction to Permittees or Dealing In, Acquisition or Disposition of Firearms,
Contractors| Ammunition or Explosives;

h. SECTION 110. Other Violations. — Any other violation of this
Act and its implementing rules and regulations
(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic
Act No. 9147, otherwise known as the Wildlife Resources
Conservation and Protection Act;
Section 27. Illegal Acts.
(c) effecting any of the following acts in critical habitat(s)
(i) dumping of waste products detrimental to wildlife;
Section 1. Unlawful Manufacture, Sale, Acquisition, Disposition
or Possession of Firearms or Ammunition or Instruments Used
or Intended to be Used in the Manufacture of Firearms of
Ammunition.
Section 3. Unlawful Manufacture, Sales, Acquisition,
Disposition or Possession of Explosives.
Section 5. Tampering of Firearm's Serial Number
(27) Violation of Presidential Decree No. 1612, otherwise known
as the Anti-Fencing Law;

(ii) squatting or otherwise occupying any portion of the critical (28) Violation of Section 6 of Republic Act No. 8042, otherwise
habitat; known as the Migrant Workers and Overseas Filipinos Act
of 1995, as amended by Republic Act No. 10022;
(iii) mineral exploration and/or extraction;
Sec 6 – Illegal recruitment
(iv) burning;
(29) Violation of Republic Act No. 8293, otherwise known as the
(v) logging; and Intellectual Property Code of the Philippines;

(vi) quarrying All violations

(e) trading of wildlife; (30) Violation of Section 4 of Republic Act No. 9995, otherwise
known as the Anti-Photo and Video Voyeurism Act of
2009;
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Sec 4 – take photo or video coverage; copy or reproduce; sell
or distribute; publish or broadcast persons performing sexual
acts
(31) Violation of Section 4 of Republic Act No. 9775, otherwise
known as the Anti-Child Pornography Act of 2009;
Sec 4 – Unlawful or prohibited acts (e.g. hire a child to
perform pornography; produce or direct; publish or offer;
possess; provide a venue; to lure a child; to conspire to commit
any of the unlawful acts)
(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12
and 14 of Republic Act No. 7610, otherwise known as the
Special Protection of Children Against Abuse,
Exploitation and Discrimination;
a. SECTION 5. Child Prostitution and Other Sexual Abuse
b. SECTION 7. Child Trafficking
c. SECTION 8. Attempt to Commit Child Trafficking
d. SECTION 9. Obscene Publications and Indecent Shows
e. SECTION 10(c). Any person who shall induce, deliver or offer
a minor to any one prohibited by this Act to keep or have in his
company a minor|||
f. SECTION 10(D). Any person, owner, manager or one
entrusted with the operation of any public or private place of
accommodation, whether for occupancy, food, drink or
otherwise, including residential places, who allows any person
to take along with him to such place or places any minor herein
described
g. SECTION 10(E). Any person who shall use, coerce, force or
intimidate a street child or any other child to: beg or use
begging for a living; act as conduit or middlemen in drug
trafficking or pushing; conduct any illegal activities
h. SECTION 11. Sanctions for Establishments or Enterprises
which Promote, Facilitate, or Conduct Activities Constituting
Child Prostitution and Other Sexual Abuse, Child Trafficking,
Obscene Publications and Indecent Shows, and Other Acts of
Abuse
i. SECTION 12. Employment of Children
j. SECTION 14. Prohibition on the Employment of Children in
Certain Advertisements
(33) Fraudulent practices and other violations under Republic
Act No. 8799, otherwise known as the Securities Regulation
Code of 2000; and
(34) Felonies or offenses of a similar nature that are punishable
under the penal laws of other countries.”
If your criminal act is not among the list, even if you transact
with the proceeds of that criminal activity, that is not a money
laundering offense. There is only a money laundering offense if
the proceeds comes from the 34 acts under Section 6.
Does this mean that a person who transacts with the
proceeds from an anti-money laundering act has to first
be convicted for the unlawful activity before he can be
held liable for money laundering?
No, conviction is not a requirement before one may be held
liable for the money laundering offense as provided in Sec. 6.
SEC. 6.Prosecution of Money Laundering –
(a) Any person may be charged with and convicted of both
the offense of money laundering and the unlawful activity
as herein defined.
(b) The prosecution of any offense or violation under this
Act shall proceed independently of any proceeding relating
to the unlawful activity.
Does that mean that before a person can be convicted
with the money laundering offense that he has to have
participated in the unlawful activity?
No.
If for example my husband commits any of the unlawful
activity and me knowing that, I used the proceeds to
buy Hermes bag, does that mean I can be convicted of a
money laundering offense even if I did not participate?
Yes, because the proceeds you used to buy the bag is from the
unlawful activity.
You don’t need to participate in any unlawful activity in order to
be liable for money laundering. The prosecution of any unlawful
activity is separate and independent from the prosecution of
the money laundering offense.
What is necessary in the prosecution of the money laundering
offense, if you go back to Sec. 4 of the Act on the definition of
a money laundering offense is that you must have
KNOWLEDGE that the money comes from any of the unlawful
activity and you still transacted, converted, concealed or
disguised. It is not necessary that you have to be found guilty
first of the unlawful activity and it is not even necessary that
you have participated in such unlawful activity. The essence of
a money laundering offense is the knowledge that the proceeds
comes from an unlawful activity and you transacted.
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From the previous example, if you are a seller of a
house and someone bought it from you with no
sufficient income to buy a house, and there is suspicion
that he is dealing with drugs, can he be held liable still
under the Anti-Money Laundering Act?
It depends. Under Sec. 4, a person who commits an act or fails
to commit an act which facilitates the offense of money
laundering, can also be held liable for money laundering. But
the thing is, if you sell your house, you do not have an
obligation to report because you are not a covered person. You
do not have obligation to inquire where he got the money to
buy. But if it is found that you knew that the money was from
kidnapping, dealing drugs, etc. and you still sold to him your
house, you facilitated the offense because you allowed him to
transact and you will be held liable for money laundering even
if you did not participate in that crime.
Now, we already have the preventive measures, record
keeping, reporting. These are the preventive measures of
covered persons in order to prevent money laundering. Once
there is a suspected money laundering offense, the AMLC has
several instruments under the AMLA.
REMEDIES UNDER AMLC
1. Freezing of Monetary Instrument or Property
SEC. 10.Freezing of Monetary Instrument or Property.– Upon
a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in
any way related to an unlawful activity as defined in Section 3(i)
hereof, the Court of Appeals may issue a freeze order which
shall be effective immediately, and which shall not exceed six (6)
months depending upon the circumstances of the case: Provided,
That if there is no case filed against a person whose account has
been frozen within the period determined by the court, the freeze
order shall be deemed ipso facto lifted: Provided, further, That this
new rule shall not apply to pending cases in the courts. In any case,
the court should act on the petition to freeze within twenty-four (24)
hours from filing of the petition. If the application is filed a day
before a nonworking day, the computation of the twenty-four (24)-
hour period shall exclude the nonworking days.
A person whose account has been frozen may file a motion to lift the
freeze order and the court must resolve this motion before the
expiration of the freeze order.
No court shall issue a temporary restraining order or a writ of
injunction against any freeze order, except the Supreme Court.
What are the requirements for the AMLC to freeze
money or monetary instrument?
a. AMLC will file an application for ex parte petition for issuance
of freeze order with the Court of Appeals
b. If CA finds there is probable cause that the money subject of
the petition is related to an unlawful activity, then the CA will
issue the freeze order
This has to be done by an ex-parte petition - you file the
petition without necessarily giving notice to the other party or
furnishing the other party with a petition.
If you have to furnish a copy of the petition to the other party,
it gives opportunity for the other party to dissipate the funds or
hide the funds by the time you serve the freeze order.
This will be valid for 20 days.
2. Inquiry into Bank Deposits
SEC. 11.Authority to Inquire into Bank Deposits.– Notwithstanding
the provisions of Republic Act No. 1405, as amended; Republic Act No.
6426, as amended; Republic Act No. 8791; and other laws, the AMLC may
inquire into or examine any particular deposit or investment, including
related accounts, with any banking institution or non-bank financial
institution upon order of any competent court based on an ex parte
application in cases of violations of this Act, when it has been
established that there is probable cause that the deposits or investments,
including related accounts involved, are related to an unlawful activity as
defined in Section 3(i) hereof or a money laundering offense under Section
4 hereof; except that no court order shall be required in cases involving
activities defined in Section 3(i)(1), (2), and (12) hereof, and felonies or
offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and
(12), which are Punishable under the penal laws of other countries, and
terrorism and conspiracy to commit terrorism as defined and penalized
under Republic Act No. 9372.
The Court of Appeals shall act on the application to inquire into or
examine any deposit or investment with any banking institution or non-
bank financial institution within twenty-four (24) hours from filing of the
application.
To ensure compliance with this Act, the BangkoSentral ng Pilipinas may, in
the course of a periodic or special examination, check the compliance of a
Covered institution with the requirements of the AMLA and its
implementing rules and regulations.
For purposes of this section, ‘related accounts’ shall refer to accounts, the
funds and sources of which originated from and/or are materially linked to
the monetary instrument(s) or property(ies) subject of the freeze order(s).
A court order ex parte must first be obtained before the AMLC can inquire
into these related Accounts: Provided,That the procedure for the ex parte
application of the ex parte court order for the principal account shall be
the same with that of the related accounts."
The authority to inquire into or examine the main account and the related
accounts shall comply with the requirements of Article III, Sections 2 and
3 of the 1987 Constitution, which are hereby incorporated by reference.
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An exception to the Bank Secrecy Law, whether peso or
foreign currency deposit.
What is required before the AMLC can inquire into bank
deposits?
a. Order by the Court of Appeals allowing the inquiry
into the bank deposit
Through an EX-PARTE APPLICATION. Take note that in the first
AMLA law, it was not an ex-parte application. It was only an
application by the AMLC.
So in Republic v Eugenio, SC compared the provisions of the
freeze order and a bank inquiry order.
FREEZE ORDER: there is an ex parte application
BANK INQUIRY ORDER: no ex parte application
So this means that in order to get a bank inquiry order, you
have to inform the other party.
After that SC case, Congress amended the AMLA. Now, they
made the bank inquiry also ex-parte.
This Sec 10 (Freezing of Monetary Instrument or Property) is
further amended last July 2017 through RA 10297. Now, Sec.
10 is given a period of validity. This is not present before. It is
now valid for 20 DAYSbut not to exceed 6 MONTHSbut before it
was only valid for 6 months. During that 20-day period, the
AMLC through the CA is required to hold a summary hearing in
order to determine whether to extend the validity of the freeze
order.
What about the bank inquiry? A bank inquiry is an order
granted by the Court of Appeals EXCEPT:
a. Kidnapping for Ransom
b. Offenses under Dangerous Drugs Act
c. Hijacking
d. Terrorism and Conspiracy to Commit Terrorism
In these cases, there is no requirement for a Court Order.
The CA will have to an act on the application to inquire or
examine any bank deposit within 24 hours from the filing of the
application.
Is it necessary that a case for a violation of money
laundering be file before the CA can grant an order for
inquiry?
Republic v Eugenio
The SC said that the use of the phrase “in cases of” in Sec. 11
was unfortunate yet submitted that it should be interpreted to
mean in the event of violations of the AMLA and not that there
should be case pending in court.
Sec. 11 says, “Notwithstanding the provisions of Republic Act
No. 1405, as amended; Republic Act No. 6426, as amended;
Republic Act No. 8791; and other laws, the AMLC may inquire
into or examine any particular deposit or investment, including
related accounts, with any banking institution or non-bank
financial institution upon order of any competent court based
on an ex parte application in cases of violations of this
Act.
So in the Pantaleon Alvarez, when you say “in cases” there has
to be a case filed so the SC said it means in the event of any
violations not that there is a case filed.
So the Eugenio case tells us that you do not need to have a
pending case before you can look into the bank deposit under
the AMLA. The CA can issue the order even if there is no case
pending yet or violation of the AMLA.
2. Civil Forfeiture
Section 12 of the same Act is hereby amended to read as
follows:
(a) Civil Forfeiture. – Upon determination by the AMLC that
probable cause exists that any monetary instrument or property
is in any way related to an unlawful activity as defined in
Section 3(i) or a money laundering offense under Section 4
hereof, the AMLC shall file with the appropriate court through
the Office of the Solicitor General, a verified ex parte petition
for forfeiture, and the Rules of Court on Civil Forfeiture shall
apply.
The forfeiture shall include those other monetary instrument or
property having an equivalent value to that of the monetary
instrument or property found to be related in any way to an
unlawful activity or a money laundering offense, when with due
diligence, the former cannot be located, or it has been
substantially altered, destroyed, diminished in value or
otherwise rendered worthless by any act or omission, or it has
been concealed, removed, converted, or otherwise transferred,
or it is located outside the Philippines or has been placed or
brought outside the jurisdiction of the court, or it has been
commingled with other monetary instrument or property
belonging to either the offender himself or a third person or
entity, thereby rendering the same difficult to identify or be
segregated for purposes of forfeiture.
(b) Claim on Forfeited Assets. – Where the court has issued an
order of forfeiture of the monetary instrument or property in a
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criminal prosecution for any money laundering offense defined
under Section 4 of this Act, the offender or any other person
claiming an interest therein may apply, by verified petition, for
a declaration that the same legitimately belongs to him and for
segregation or exclusion of the monetary instrument or
property corresponding thereto. The verified petition shall be
filed with the court which rendered the judgment of forfeiture,
within fifteen (15) days from the date of the finality of the
order of forfeiture, in default of which the said order shall
become final and executor. This provision shall apply in both
civil and criminal forfeiture.
(c) Payment in Lieu of Forfeiture. – Where the court has issued
an order of forfeiture of the monetary instrument or property
subject of a money laundering offense defined under Section 4,
and said order cannot be enforced because any particular
monetary instrument or property cannot, with due diligence, be
located, or it has been substantially altered, destroyed,
diminished in value or otherwise rendered worthless by any act
or omission, directly or indirectly, attributable to the offender,
or it has been concealed, removed, converted, or otherwise
transferred to prevent the same from being found or to avoid
forfeiture thereof, or it is located outside the Philippines or has
been placed or brought outside the jurisdiction of the court, or
it has been commingled with other monetary instruments or
property belonging to either the offender himself or a third
person or entity, thereby rendering the same difficult to identify
or be segregated for purposes of forfeiture, the court may,
instead of enforcing the order of forfeiture of the monetary
instrument or property or part thereof or interest therein,
accordingly order the convicted offender to pay an amount
equal to the value of said monetary instrument or property.
This provision shall apply in both civil and criminal forfeiture.”
Republic v Glasgow
The SC said that you don’t need to be convicted of a crime
before you can have the freeze order or have the forfeiture
order. In the same way, you don’t need to be convicted of a
crime before you can be prosecuted for money laundering.
SECURITIES REGULATION CODE (RA 8799)
History
➢ In 1916, the first Securities Regulation law is enacted
and was called the “Blue Sky Law”. The name of this
law indicates the evil that the law was enacted against
which would be “speculative schemes” which have no
basis than the clear field of blue sky. That’s how the
name Blue Sky Law was derived because the aim of
that law was to protect the public from schemes which
have no more basis than air.
➢ In 1936, Congress saw the need to further regulate
the securities transaction in the Philippine and the
Congress enacted the Securities Act. It is the first
proof in Securities Law because the aim of the
Securities Act is the full and fair disclosure about the
issuer of the security and the securities itself. The aim
is to provide the public with sufficient information
about the securities they are investing in.
Two Types of securities under the Securities Act: (1)
Speculative Securities; (2) Non-Speculative Securities
What the law aimed for was to provide full disclosure about
speculative securities.
➢ In 1982, the Securities Act was further amended with
the Revised Securities Act. It removed the
distinction between the Speculative and Non-
speculative securities. All the securities transactions
were subject to the regulation.
➢ In 2000, along with the globalization, changes in the
market and creation of new, improved and different
forms of securities, Congress again saw the need to
further revise the Securities Regulation Law and this is
the RA 8799 or the Securities Regulation Code
(SRC). This is now the law governing securities
transaction in the Philippines. But similar to the
Securities Act and the Revised Securities Act, the SRC
also requires full and fair disclosure.
Sometimes the SRC is referred to as the “truth in securities”
law because its aim is to provide information to the public of
the full and fair disclosure of the material information regarding
the issuer of the security and the security itself to the
transacting public. It is similar to the previous Revised
Securities Act because it does not distinguish between
speculative and non-speculative securities meaning all securities
being transacted in the Philippines are covered by the SRC.
What is the policy under the SRC?
Sec 2.Declaration of State Policy – The State shall
establish a socially conscious, free market that regulates
itself, encourage the widest participation of ownership in
enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect
investors, ensure full and fair disclosure about securities,
minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which
create distortions in the free market. To achieve these ends,
this Securities Regulation Code is hereby enacted.
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➢ To establish a socially conscious, free market that
regulates itself
The SRC establishes the market for securities and stocks in the
Philippines. The market we have now is the PHILIPPINE
STOCK EXCHANGE (PSE). The aim of the SRC is to have a
socially-conscious, free market that regulates itself.
How does it regulate itself?
The operation of the SRC is free from the interference of the
government. It cannot dictate the PSE on the pricing of the
securities. The PSE can regulate itself by issuing regulations
governing the actions of its members (broker-dealers and listed
companies who list their shares to be traded in the PSE). The
PSE can issue regulations and it can penalize its members.
These types of market places are known as SELF-
REGULATORY ORGANIZATIONS (SROs). They are
regulated and their powers are granted under the SRC. The
markets that we have for trading securities are actually known
as the SROs. Unfortunately we only have one SRO and it is the
PSE. The PSE is a private entity and not a government-owned
entity. In fact, PSE shares are also traded in the stock
exchange. If you want to own a portion of the PSE, you can
actually buy PSE shares. It is made up of broker-dealers and it
regulates itself and the listed companies which trade their
shares in the market. This power to regulate itself and the right
to be free from the interference of the government is enshrined
in the SRC. It provides for the creation of SROs which should
be socially-conscious, free and self-regulatory. This first
objective of the policy is actualized through the creation of
SROs.
➢ To encourage the widest participation of ownership
in enterprises
The SRC requires that in every public offering of securities,
there should be minimum amount allotted for retail investors or
the Local Small Investors (LSI) or the public. The law requires a
certain percentage of the shares offered to the public should be
offered to small investors. You do not have to have millions of
pesos so that you can invest. This is how the law encourages
widest participation of the ownership of enterprises. If this is
not required in the law then only those big investors can buy
shares of big companies.
Let’s say there is a big company such as Globe that will sell
shares, knowing that Globe is a very profitable company, the
big investors would try to buy up all the shares of Globe and if
they would buy all the shares of Globe, nothing will be left for
small investors or the ordinary people like us. So, the SRC
ensures that the public or ordinary people can actually buy
shares and not just the big investors.
➢ Enhance the democratization of wealth
If there is a public offering for the shares of securities, the law
ensures that Local Small Investors can invest also so that
wealth can be distributed among them and they can share in
the wealth of the big companies.
If you are an investor in a big company, if these companies
declare dividend, you are able to share so now income of big
companies are no longer to be distributed only to the big
investors but also to the small-time investors who participated
in the offering.
➢ Promote the development of the capital market
The more people who participate in the trade of securities, our
capital market will develop.
➢ Protect investors, Ensure full and fair disclosure
about securities
The SRC ensures protection to investors by the (1) full and fair
disclosure of the securities traded. There is also a requirement
for companies to (2) report to the SEC and PSE all material
transactions.
Example: If you have a big company whose President died of
heart attack, if the company can keep that a secret and only a
few people will know. The tendency of those people is that they
will sell their shares because they are afraid that the company
will go down because the President died. They sell their shares
at the highest price and the public not knowing that this event
had occurred, will just buy the shares at a high price. The law
prohibits this from happening. So that the public will know and
when somebody will sell to me the shares at P100/share, then I
can decide whether or not to buy considering that there
President died and the status of the company.
➢ Minimize if not totally eliminate insider trading and
other fraudulent or manipulative devices and
practices which create distortions in the free
market
Why is the SRC called the “truth in securities” law?
It is called as such because the SRC requires that before any
shares can be sold in the Philippines, the shares will have to be
registered in the Securities and Exchange Commission (SEC). It
matters if it is registered in the SEC because the SEC before
allowing any issuer before selling their securities to the public,
they will ensure that there is full and fair disclosure of all
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material information relating to the company which means that
when the SEC allows a company to sell its shares to the public,
it means that the SEC has already determined that the
company has made sufficient disclosure.
It does not mean that when the SEC allows the company to sell
its shares to the public, it does not mean that the SEC will
guarantee that the shares of the company will never go down,
that the company will always have income, etc. This is not what
the registration is all about. What the registration requirement
does is just to ensure that the company has disclosed
everything.
Full and Fair Disclosure Approach v. Merit-based
Approach
Full and Fair Disclosure: Allows registration of securities if
the company has made a full and fair disclosure of the material
information regarding its status.
Merit-based Approach: It is a system of registration of
securities where the regulatory authority actually makes a
determination as to whether or not this security has value. It
approves based on the merits of the security. It will say, this
security is good or not, if it is not good then it will not allow
registration.
In the Philippines, we follow the full and fair disclosure system.
Whether the security is bad or good, SEC will allow registration
as long as the issuer does a full and fair disclosure about the
security.
These two approaches are basically at the point of the
registration only. So, when the SEC allows a company to sell to
the public, it does not mean that the SEC is indorsing the stock.
The SEC is only saying that these shares are available for sale
and you can read everything about these shares and the
company issuing it and its prospectus. The SEC will not make a
decision for you whether the stocks are good or bad. You
cannot blame the SEC if you didn’t earn because the approval
made by the SEC is not a merit-based approach on the
securities but rather on full and fair disclosure. So just because
the SEC approved the securities, it does not mean that it is
already a good investment.
Q: If there are two SROs in the country, can it be said that the
other SRO will not accept the security if it deems that it did not
comply with their own requirements even though it is
registered in the other SRO?
A: Yes, because the SEC has its own requirements to register
the shares. This allows you to sell securities to the public but it
doesn’t have to be in the PSE. Selling shares to the public
doesn’t have to be through the PSE. You can register your
securities without going through the PSE but if you want to list
your shares in the PSE and you want to use that market, the
PSE will conduct an evaluation. So you have to pass not just
the SEC but also you have to pass the PSE. If there are two
SROs, these two SROs have different criteria, it may be that
you did not pass the criteria of this SRO but you passed the
other one.
So, you do not have to list in the PSE in order to sell to the
public.
POWERS UNDER THE SEC
What is the agency which implements the SRC?
Securities and Exchange Commission (SEC)
Sec. 5 Powers and Functions of the Commission
(a) Have jurisdiction and supervision over all corporations,
partnership or associations who are the grantees of primary
franchises and/or a license or a permit issued by the
Government;
Who are these entities of primary franchises and/or
licenses?
The primary franchises are those issued by SEC the certificate
of incorporation. The primary franchises are those corporations
and partnerships. Under SRC, it gives the SEC the power of
jurisdiction and supervision over all partnerships and
corporations.
(b) Formulate policies and recommendations on issues
concerning the securities market, advise Congress and other
government agencies on all aspects of the securities market
and propose legislation and amendments thereto;
If Congress is about to pass a law concerning securities they
will first consult with the SEC and the SEC will be part of the
technical working group.
(c) Approve, reject, suspend, revoke or require amendments
to registration statements, and registration and licensing
applications;
This “registration statement” is a separate kind of registration
from the registration as a corporation. When we say
registration statement, that pertains to the registration that
allows you to sell securities to the public under Sec. 8 of the
SRC. Take note that not all corporations are authorized to sell
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their shares to the public, only those which are registered to
the SRC are authorized.
(d) Regulate, investigate or supervise the activities of
persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities
of exchanges, clearing agencies and other SROs;
We mentioned before that Self Regulatory Organizations
(SROs) are actually self-regulatory markets. But although the
SEC will not interfere with the operations of the SROs, the SEC
nevertheless supervises.
It monitors the operations of the SROs, to ensure that the SROs
would comply with its obligations under the SRC. Because the
SEC is the body, making sure that all provisions of the SRC are
complied with. Hence, SEC has the authority to ensure
compliance by the SROs of their obligations under the SEC.
(f) Impose sanctions for the violation of laws and the rules,
regulations and orders issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders,
and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all
enforcement agencies of the Government, civil or military as well as
any private institution, corporation, firm, association or person in the
implementation of its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the
investing public;
(j) Punish for contempt of the Commission, both direct and indirect,
in accordance with the pertinent provisions of and penalties
prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association
to call meetings of stockholders or members thereof under its
supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in
any proceedings of the Commission and in appropriate cases, order
the examination, search and seizure of all documents, papers, files
and records, tax returns, and books of accounts of any entity or
person under investigation as may be necessary for the proper
disposition of the cases before it, subject to the provisions of existing
laws;
(m) Suspend, or revoke, after proper notice and hearing the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law; an
(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.
JURISDICTION OF CASES
Section 5.2. The Commission’s jurisdiction over all cases
enumerated under section 5 of Presidential Decree No.
902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches
that shall exercise jurisdiction over the cases. The
Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year
from the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of
payment/rehabilitation cases filed as of 30 June 2000 until
finally disposed.
P.D. 902A is the law granting SEC the power to hear intra
corporate disputes, however with the enactment of the RA
8799 Securities Regulations Code, the SEC became a purely
administrative body. It no longer exercises quasi judicial
functions. Consequently, all intra corporate disputes were
transferred to the regular courts (RTC).
What were these cases transferred to the regular
courts?
PD No. 902-A. Section 5
a.) Devices or schemes employed by or any acts, of the
board of directors, business associates, its officers or
partnership, amounting to fraud and misrepresentation
which may be detrimental to the interest of the public
and/or of the stockholder, partners; members of
associations or organizations registered with the
Commission.
b.) Controversies arising out of intra-corporate or
partnership relations, between and among stockholders,
members, or associates; between any or all of them and the
corporation, partnership or association of which they are
stockholders, members or associates, respectively; and
between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or
right to exist as such entity;
The second provision is what we call the intra-corporate
disputes, its characteristics are:
a. Any disputes between the stock holders or among the
stockholders or members
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b. Between a stockholder and the corporation to which he
is a stockholder
c. The corporation and the state but only with respect to its
existence, so these refer to quo warranto proceedings.
What is the difference between an intra-corporate
dispute and an inter-corporate dispute?
Intra-corporate dispute means within the corporation itself;
it’s an internal dispute between the stockholders of the same
corporation or between the corporation and its own
stockholders.
Inter-corporate dispute means the other party is a third
person, not related to the corporation. That is the difference.
c.) Controversies in the election or appointments of
directors, trustees, officers or managers of such
corporations, partnerships or associations.
Controversies affecting the election of the trustees and offices,
directors or managers. These are now all under the jurisdiction
of the RTC, no longer with the SEC.
How to determine whether or not the controversy is an
intra-corporate dispute?
Relationship test- look at the relationship between the
parties. Whether its among stockholders, between stockholders
and the corporation, or the state regarding the franchise.
Nature test- the nature of the controversy test meaning if the
issue pertains to the enforcement of the rights and obligations
of the parties.
If these two elements are present, what you have is an intra-
corporate dispute.
SEC vs. Subic Bay Golf Country Club
Complainants Regina Filart (Filart) and Margarita Villareal
(Villareal) are stockholders of the Subic Bay Golf Country Club.
So based on the complaint filed to SEC, the SEC issued an
order requiring SBGCCI to refund the purchase price of the
shares. Secondly, it also required SBGCCI to amend their
prospectus because they were not able to deliver the
developments that was promised in their prospectus. They
required SBGCCI to amend and make the prospectus not
misleading. Lastly, they also required SBGCCI to stop selling the
shares. SEC cancelled their permit to shares and its certificate
of registration.
So three actions done by the SEC in one order, SC and the CA
ruled that this is a case between the stockholder and
corporation regarding the right of the stockholder to get a
refund of the shares. Hence it’s actually an intra-corporate
dispute.
Does that necessarily mean that if you have an intra-
corporate dispute it is now outside the jurisdiction of
the SEC?
The gist of this ruling is that even when what is involved in the
controversy is an intra-corporate dispute, based on the
relationship and the nature of controversy test. It does not
mean that the SEC no longer has jurisdiction over the case. It
still has jurisdiction but its LIMITED to its administrative and
regulatory powers.
SC clarified that the SEC’s regulatory and administrative power
is really akin to a police power for the protection of the public.
This is because when the SEC approves the registration
statement of an issuer, there is that semblance that the
registration statement and the prospectus are correct and its
not misleading.
Based on the fair and full disclosure, SEC basically says that
these statements are correct and they are true. So if those
statements are found to be misleading, the SEC as an exercise
of its administrative and regulatory power can still take
cognizance of the case but only limited to administrative and
regulatory jurisdiction. In other words, out of the 3 actions in
the order issued by the SEC:
• To require refund;
• Amend the prospectus;
• Cancel the certificate of registration.
In the case provided, only one out of the three is invalid, the
other two are actually valid acts of the SEC to require the
amendment and to cancel the certificate of registration. But the
act of requiring to refund, that is not within the administrative
and regulatory power of SEC.
Hence, just because the case involve has an intra-
corporate dispute, it does not automatically oust
jurisdiction from the SEC. The SEC can still hear the case
but its jurisdiction is limited to determining whether or not the
law (SRC) has been complied with. Administrative and
regulatory power only, no more adjudicatory power.
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TYPES OF SECURITIES
SEC. 3. Definition of Terms
3.1. “Securities” are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character. It
includes:
(a) Shares of stock, bonds, debentures, notes, evidences
of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or
participation in a profit sharing agreement, certificates of
deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other
mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates or
similar instruments;
(f) Proprietary or non proprietary membership certificates
incorporations; and
(g) Other instruments as may in the future be determined
by the Commission.
Two major types of securities are:
1. Equity Securities
Securities which represents participation or ownership in an
enterprise.
2. Debt Securities
Include any evidence of indebtedness such as bonds, notes,
debentures, commercial papers, treasury bills, treasury bonds
and other similar instruments as may be determined by the
Commission.
Discussion: This definition under the SRC is not complete, if
you read that sentence alone it would seem that securities
under SRC are only equity securities. But that’s not the case,
because if you go through the enumeration you’ll see that
those items enumerated are not just equity securities but also
debt securities.
Hence, that definition is not really reliable, what is more reliable
is take a look at the items enumerated.
Shares of Stocks
Shares of stock are the proof of your percentage of interest or
ownership in a corporation.
Bonds
A long term debt security. It normally takes more than 3 years.
1980 BAR Q: What are coupon bonds?
There are different kinds of bonds in the same way that there
are different kinds of shares of stock: common, preferred. But
generally bonds are long term evidence of indebtedness. It’s
like a promissory note but with a longer term.
Debentures
It’s a medium term evidence of indebtedness.
Commercial Papers
It’s a debt security. It’s evidence of indebtedness but with a
longer term than a promissory note. Normally the term of a
commercial paper is 365 days or less.
Notes and other evidences of indebtedness
Notes are debt securities with the shortest terms, then you
have commercial papers, then debentures and then bonds.
Caveat: These are not really strict technical terms but these
are all evidences of indebtedness.
Asset-backed securities
Asset backed securities are created under RA 9627,
Securitization Act of 2004, under this law it creates a Special
Purpose Entity (SPE).
Discussion: This is how the securitization act works,
these SPE will purchase long term debt securities (bonds,
debentures, etc) in bulk. Normally, these types of entities will
buy these type of securities in bulk or of big amounts.
Let’s say a minimum amount of 100 million pesos. These debt
securities are not normally accessible to the public because you
need a large investment. So the Securitization Act allows for
these types of securities to be purchased by the SPE.
Let’s say for example the SPE now has a total asset of 1Billion
because it purchased debt instruments worth 1 billion pesos.
Now the SPE can turn around and issue to the public what we
call as asset-backed securities. Asset backed securities are still
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securities which are backed by the assets purchased by the
SPE. So now the SPE can issue bonds or debentures to the
public in a lesser amount like for example with a face amount
of worth 1 thousand pesos only.
So the total asset backed securities that it can issue is worth
1billion pesos. Because it’s backed by the assets that it hold,
assets in the form of debt securities.
TN: This is basically that this SPE buys wholesale, turn around
and sells retail to the public. What it is selling are not goods but
rather debt securities. Because of this transaction allowed
under the Securitization Act, the public which normally cannot
participate in issuances which is priced in big amounts, can now
participate. The wholesale issuance are now cut into small
pieces and sold for retail prices. It allows the public to
participate in large, heavily capitalized issuances like this.
What will the SPE get from those transactions?
The SPEs will earn because these debt securities when bought
will also earn interest.
What is an example of SPE?
Unfortunately there is none yet, this law allows it but it has not
yet been implemented.
(b) Investment Contracts, certificates of interest or
participation in a profit sharing agreement, certificates of
deposit for a future description
What is a deposit for future subscription?
It’s your investment in a corporation that is not yet registered.
It’s not yet a subscription because it’s not yet registered, it’s
not an entity yet so it’s a future subscription. Participation in a
profit sharing is also a security.
What is an investment contract?
It’s a contract, transaction or scheme (collectively “contract”)
whereby a person invests his money in a common enterprise
and is led to expect profits primarily from the efforts of others.
What is the test used?
Howey-test.
SEC v. Prosperity
For example, I invested $200, I basically purchase a website.
By paying $200, I get a website and it entitles me to get
downlines or make referrals. I also earn commission from the
payment made from my referrals.
What are the elements of the Howey test?
(1) a contract, transaction, or scheme;
(2) an investment of money;
(3) investment is made in a common enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of others.
“Common enterprise” means 2 or more persons pull their
resources together.
An investment contract is basically, you put in your money, you
expect money from putting in that investment but you don’t do
anything else. You just put in the money. Profits are derived
primarily from the efforts of other people. That’s the essence of
an investment contract. You just put your money there and you
expect to derive profits from it without doing anything else.
So was the arrangement in Prosperity, an investment
contract?
No, the money you pay is not really an investment but a
purchase price for the website. According to the SC, in an
investment contract, you derive primarily from the efforts of
others. In this case, it’s not primarily from the efforts of others
since you derive from the income by using your website to sell
whatever product you want. You earn by your own effort and
not from the efforts of others. So it fails 2 elements form the
Howey test; one, the money you gave was not an investment
but a purchase price and second, you don’t earn income from
the efforts of others rather you earn income from operating
your own website. If it’s not an investment contract, that
means it’s not a security, so it’s not covered under the SRC and
does not need registration.
(c) Fractional undivided interests in oil, gas or other mineral
rights;
(d) Derivatives like option and warrants;
What are Derivatives?
Derivative is a financial instrument whose value changes in
response to changes in a specified interest rate, security price,
commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index, or similar variable or
underlying factor It is settled at a future date. This term shall
include, but not limited, to the following:
3.1.9. I. Options or contracts that give the buyer the right,
but not the obligation, to buy or sell an underlying security at a
predetermined price called the exercise or strike price, on or
before a predetermined date, called the expiry date; and
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3.1.9.2. Warrants or rights to subscribe or purchase new or it’s not just an option to buy, you have a price. It’s an option to
existing shares in a company on or before a predetermined buy at a fixed price on a fixed date. So how does it work?
date.
It means if I buy the option at P5 per option per security, I now
There are 2 kinds of derivatives recognized under the SRC: have the right to buy the shares at P20 per security. That is
what the option entitles me. What makes the option a
1. Options derivative?
2. Warrants
Because its value changes depending on the underlying
What characterizes them as derivatives? security.

Under the law, derivatives are those instruments whose values Example: I anticipate at the exercise date, let’s say, the option
changes in response to a specified change in an underlying is issued on January 2, 2017 and exercise date is March 1,
security. 2017. So meaning this is the date you can buy the shares at
P20 per share. I anticipate that on March 1, the shares will be
Two kinds of Options:
selling at P100 per share. Will you buy the option at P5 per
share? Yes.
Call option- option to buy
Will you buy the option at P30 per share? Yes
Put option- option to sell
P40- yes
How do options work?
P50- yes
As a derivative, the value of an option is determined by the
value of the underlying security.
Because even if you’re paying at least P20 or P50 for that
option, when you buy the shares at P20 and then you sell it on
When you’re saying a stock option, we are talking about
the same day at P100, how much is your profit? P30.
how many securities here?
Step by Step Process:
Two. You have the option itself which is a security as a
derivative and an underlying security which is the stock. So you
Options at P50, I buy the shares at P20. So my total cost will be
are talking about two securities. So when we talk about
P70 but I know that on this day (March 1), it’s P100 so if I sell
derivatives, we are talking about more than 1 security involve.
it on the same day, it cost me P70 and I sell it at P100, I get a
So you have the option to buy (call option).
profit of P30.
So how does this option as a derivative relate to its
So I will buy this option even if it’s P50, P60 or P70 because I
underlying security?
can buy shares at a lower market price.
Let’s say an option to buy, how does that work?
But for example, I anticipate that on March 27, 2017, the
shares will now be selling at P10. Will you buy the option at P5?
Does the option as a security have a value? Yes.
No, because at P5 then you buy P20, total cost is P25. But you
So let’s say that the option has a value of P5, what does that cannot sell the share not higher than P10 so you lose P15.
option entitle you to do? To buy the stocks. To buy the stocks,
Will you buy the options at P3? No.
there is the price, you have the option to buy at a certain price.
Let’s say you can buy stocks with the option at P20.
How about P1? No.
So this is the entire option:
You can buy shares in the market at a lower price.
The option at P5.00 which 1 option allows you to buy 1 share of
This is a kind of speculative security. So this is why we call
stock at P20 per share. So you have the option and the
options as a derivative because based on the value of the
underlying security. What makes this option a derivative?
underlying security, its value can go up or down.
The 20 is not the value of the stock, that’s the purchase price
The put option and call option does not work together. It’s just
of the stock at which the option entitles you to buy. Because
that in our example, we’re talking about a call option.

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Now, the call option entitles you to buy shares at a certain price
on a certain day. The put option has nothing to do with selling
your shares on the same day. Because it’s a play market,
because you can buy in one second and sell in another. There’s
no minimum.
Example:
I’m a stockholder of company A, I can sell options for my share
in company A. I can sell the option. I can announce “hey
people, I’m selling the option of my shares to company A for P1
per share, who wants to buy?” There’s no restriction. Which is
the difference between an option and warrant. Although a
warrant works like an option, it allows you to purchase a
particular security for a particular price on particular day but it
differs from an option is that a warrant is issued by the issuer.
And you’re underlying security from the warrants comes from
your unissued shares.
So what about a put option?
I sell options and the buyer of that option will have the right to
compel me to sell. In a call option, the holder has a right to buy
but has no obligation to buy. A put option on the other hand, is
an option which are rights to sell. So the person who acquires a
put option, has the right to compel the selling of a security.
There’s also a third option, the straddle option. The straddle
has both rights, the right to buy and the right to compel the
sell.
WARRANTS
-always issued by the issuer.
Two kinds:
1. Detachable
2. Non-detachable
How does this work?
Among the difference of an option or warrant aside from the
fact, warrants are issued by the issuing company, an option has
two securities (option and underlying security). Warrants on the
other hand has 3 securities (Warrant, underlying security and
beneficiary security).
Because warrants are issued with beneficiary securities.
Meaning warrants are not sold by themselves, they are sold
and issued with the beneficiary security. So meaning when a
beneficiary security issues warrants, it cannot issue warrants to
anyone but issue to those who are already holders of its own
stock. So you issue it with a beneficiary security.
How does it work?
I’m the issuer. I issue shares for P50 per share and as an
enticement a warrant. A warrant will entitle the holder to
purchase the shares at another P50 per share. If the underlying
security will be traded at P60, you can purchase it at P50. So
your beneficiary security benefits from the presence of the
warrant because some people thinking they can use that
warrant in the future will buy now.
If for example, with the presence of the warrant, the price
became P55 which allows you to purchase the underlying
security for P50. If you anticipate that underlying security will
be at P60, will you buy this? Yes because the P55 plus P50, you
paid P105. Without the warrant, P50 +P60, it would be P110.
So divided by 2 shares, P55 per share.
Detachable Warrant
Non-detachable
• Both pertains to the sale of the warrant
If I already have a warrant, now whether the warrant is
detachable or non-detachable, matters when I sell my warrant.
Because if it’s detachable, I can sell my warrant without selling
my shares.
If non-detachable, I can’t sell my warrant without selling my
shares.
REGISTRATION OF SECURITIES
Requirement of Registration of Securities
SECTION 8. Requirement of Registration of Securities. —
8.1. Securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration
statement duly filed with and approved by the Commission.
Prior to such sale, information on the securities, in such
form and with such substance as the Commission may
prescribe, shall be made available to each prospective
purchaser. DCTSEA
8.2. The Commission may conditionally approve the
registration statement under such terms as it may deem
necessary.
8.3. The Commission may specify the terms and conditions
under which any written communication, including any
summary prospectus, shall be deemed not to constitute an
offer for sale under this Section.
8.4. A record of the registration of securities shall be
kept in a Register of Securities in which shall be
recorded orders entered by the Commission with
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respect to such securities. Such register and all
documents or information with respect to
the securities registered therein shall be open to
public inspection at reasonable hours on business
days.
8.5. The Commission may audit the financial
statements, assets and other information of a firm
applying for registration of its securities whenever it
deems the same necessary to insure full disclosure
or to protect the interest of the investors and the
public in general.
_________________________________________________
What is the requirement under the SRC about
securities?
Before securities can be sold or offered for sale in the
Philippines, it needs to be registered with the SEC.
Are we talking about any type of sale or offer?
In order for the requirement under Sec. 8 to apply, the sale or
offer has to be a public offering.
Example: there are 5 people (A, B, C, D, E) who wants to form
a corporation, they are issued common shares from their
corporation. Do they need to register the securities with
the SEC?
No. this is just a private transaction among the 5 of them.
PUBLIC OFFERING
3.1.17. Public offering is any offering of securities
to the public or to anyone, whether solicited or unsolicited.
Any solicitation or presentation of securities for sale through
any of the following modes shall be presumed to be a public
offering:
3.1.17.1. Publication in any newspaper, magazine or
printed reading material which is distributed within the
Philippines; 3.1.17.2. Presentation in any public or
commercial place;
3.1.17.3. Advertisement or announcement on radio,
television, telephone, electronic communications, information
communication technology or any other forms of
communication; or
3.1.17.4. Distribution and/or making available flyers,
brochures or any offering material in a public or commercial
place or to prospective purchasers through the postal system,
information communication technology and other means of
information distribution.
When you register your corporation with the SEC, that is
different from registering the securities. Just because you
registered your corporation in the SEC and you are issued a
Certificate of Registration, it does not mean that your securities
are already registered as required under the SRC. Those are
two separate things. The Certificate of Registration under the
Corporation Code is your Certificate of Incorporation that gives
you your primary franchise. The Certificate of Registration that
we are talking about under the SRC, is your permit to sell
your securities.
Example: If the 5 (from the previous example) will say that
they need more capital from more stockholders. They put an ad
in the newspaper saying “whoever wants to buy shares at 1
peso per share of our company ….” That makes it a public
offering because it is an offer to sell shares to anyone,
indiscriminately. This is not an offer to sell to specific
persons only. Even if only one person buys your share, that still
makes it a public offering as long as you made the offer open
to anyone.
How do you do a public offering?
1. Publication or advertisement through a newspaper or
magazine.
2. Announcement in radio or television
3. Presentation in any public place
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Example: if you book a conference room in Marco
Polo and you conduct a seminar to tell people about
your shares, that is a public offering.
4. distribution of flyers, brochure,etc
Basically, any indiscriminate offer to sell securities to the public
(anyone is welcome to buy), that makes it a public offering. If
your transaction is a public offering, you are covered under the
requirement in section 8 of the SRC.
How do you register securities?
A preview of the Corporation Code:
When you incorporate, its that you immediately have assets, or
you’ll know how much you will own. When you incorporate, you
have to set an authorized capital in your Articles of
Incorporation (AOI).
Authorized capital stock (ACS): any random amount. There is
no maximum, but there is a minimum on your paid up capital,
P5,000. In effect, if your paid up capital cannot be below 5K, it
follows that your authorized capital cannot also be less than
P5K.

File a registration statement with SEC Does that mean that your asset have to be equal to your ACS?
NO.
What is the purpose of the registration of securities?
25% of ACS has to be subscribed.
The company can comply with the full and fair disclosure. The
SEC will determine if the company has disclosed everything that 25% of the subscribed has to be paid up
it needs to disclose to the public.

What is the SEC trying to tell the public if it renders the Authorized Subscribed Stocks (25% of Paid Up Capital
Capital Stock ACS) (25% of the
registration effective? Subscribed)
P1,000,000 250,000 shares 62,500
The registration requirement under Sec 8 does not mean that shares @ 1
your security is meritorious because the SRC does not follow peso/share *the law says you cannot *because this is
incorporate unless 25% of paid up, this will
the merit based approach, rather we are only following the full
Total ACS: your ACS is subscribed. be the first asset
and fair disclosure. P1,000,000 of the
*you need not less than 5 corporation, this
When the SRC renders the registration effective, the SEC has *there is no persons to incorporate, so this will be your cash.
determined that the issuer has disclosed all material limit on setting can be shared among the 5 *This can now be
your par value incorporators. used to build your
information regarding that security in its registration statement. (1 peso/share). If only 1 persons is the owner business but it
It does not say whether the investment is good or will You can choose of the corp, but you need 5 does not mean
guarantee income, it’s only saying that the company has now any amount. persons to incorporate: that your capital
will always equate
disclosed all the material information regarding that security. A(owner): 249,996 to your assets.
B: 1 *assets can build
What document gives you the material information? C: 1 up through
D: 1 retained earnings
Prospectus. E: 1 or through
liabilities.
This is possible as long as
When you file a registration statement, you also need to file a each has their own share. A: 62,496
prospectus. The prospectus will give you information about the Note: this is the mistake of B: 1
issuer, its directors, its stockholders, and everything about the other lawyers because they C: 1
think all the incorporators D: 1
operations of the issuer and the security.
should have equal shares. It’s E: 1
possible that only one will hold
Documents submitted to SEC: the majority. What the law
requires is that at least 1 share
1. Registration statement AND for each incorporator.
2. Prospectus

If the company offers to sell to the public without registration, However, if you need P1,000,000 for you initial working capital,
you are considered to be in violation of the SRC. then nothing will stop you from subscribing all of your ACS and
pay all. The 25% subscribed and 25% paid up are just
minimum requirements.

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If your capital are subscribed, that means the stocks already
have owners (stockholders).
Even you still have unpaid subscription (because the minimum
paid up capital is just 25%), as long as you are not delinquent
in payment, you can exercise all the rights of a stock holder
through your total subscribed shares. You still own your
corporation the difference between subscribed stock and paid
up capital.
e.g A still owns the company the difference between his
62,496 paid up and 249,996 subscribed or 187,500.
The
187,500 will be recorded as a receivable of the
corporation.
The remaining 750,000 is your unsubscribed shares. No one
owns it yet. This is what you can use later to invest again, or if
you like to have a new investor, you can issue from here if the
new investor what’s to purchase directly form the corporation.
But if would like to maintain at 250,000 the issued and
subscribed, you can sell your own shares to the new investor.
Rather than the corporation getting the money, you will be the
one to get the money because you sold your share. Now, you
only have 200,000 shares.
If you want to increase your ACS, you will have to go back to
the SEC and amend your articles of incorporation. In the
amendment, of the increase, 25% must be subscribed and 25%
must also be paid up.
But if you only need 500,000 more, you just issue from your
remaining ACS (750,000). But if you need a bigger amount,
P5M, your ACS is no longer enough. You go back to the SEC,
and amend for you to add additional capital.
It is not easy to amend your AOI and it is also expensive. You
have to pay filing fee to the SEC of ½ of 1% of your increase.
If you change your par value, that will still be considered as an
amendment. Whatever is already in your article, it cannot be
changed without going to the SEC. The AOI is your contract
with the SEC.
If your want to sell your remaining ACS of 750,000 to a single
person: that is not a public offering. No need to register your
securities.
If you want to sell the 750,000 to the public (shares are
considered as securities): you have to go to the SEC and
register your securities.
Elements of the Howie Test:
1. Makes an investment of money;
2. In a common enterprise;
3. With the expectation of profits;
4. To be derived primarily from the efforts of others.
Power Homes Unlimited Corp. V. SEC
Petitioner is a domestic corporation registered with SEC.
Respondent Manero requested public respondent SEC to
investigate petitioner’s business as he attended a seminar
conducted by such petitioner where it claimed to sell properties
that were inexistent, without any broker’s license and to inquire
whether or not it involves “legitimate network marketing”. The
relevant issue is whether petitioner’s business constitutes an
investment contract which should be registered with SEC before
its sale or offer for sale or distribution to the public.
RULING: An investment contract is defined in the amended IRR
(R.A. 8799) as a “contract, transaction or scheme (collectively
contract) whereby a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts
of others”. One test to determine whether a transaction falls as
an investment contract is the Howey Test which requires a
transaction whereby a person (1) makes an investment of
money, (2) in a common enterprise, (3) with the
expectation of profits, (4) to be derived primarily from
the efforts of others.
SEC found the petitioner as a marketing company that
promotes and facilitates sales of real properties and other
related products of real estate developers through effective
leverage marketing. SC ruled that the business operation of
petitioners constitutes an investment contract that is a security
and as such, it must be registered with the SEC, otherwise SEC
cannot protect the investing public from fraudulent activities.
Discussion:
How does the business of the petitioner fit the Howey
Test?
Applying the facts to Howey Test,
(1) There is an investment of money or scheme – is there? YES,
because there is a scheme that is being utilized by Power
Homes by giving the public a chance to invest and there is
investment of money.
(2) In a common enterprise? – YES, because it is invested in
Power Homes together with the investment of other people.
There is pooling of funds.
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(3) Expectation of profits? – YES, the profit is in the form of
commission.
(4) Primarily from the efforts of others – it is like a networking
scheme and based from the efforts of your downlines.
That investment of money, what does that entitle you?
The right to recruit downlines and accept the investments of
your downlines and in turn once your downlines made their
investment, they can also recruit and from their recruitment
you earn a commission. There is an investment in money which
allows you to recruit downlines and then you expect profits,
how? Through the downlines because your downlines are also
expected to recruit other people and so this is from the effort of
other people.
So is it from your own effort or the efforts of other
people?
From the effort of other people but it does not mean you don’t
exert any effort because you also need to recruit downlines. It
does not mean that it is not an investment contract anymore
just because you exerted effort because it is not “solely” but
PRIMARILY from the efforts of others. Just because you have
exertion of effort in recruiting your downline, it does not mean
that it is not an investment contract but the more important
thing is lower downlines, you earn from their efforts. The bulk
of your earnings comes from the recruitment of the downlines.
What is the difference between the POWER HOMES
SCHEME (Power Homes case) and the PCI SCHEME (PCI
case)?
PCI case: The SC said this is not an investment contract so no
need to register. The registration entitles you to purchase a
website, and in you can sell things on your website. It’s up to
you how you sell it through your website. The profit that you
earn here does not come primarily from others because it is
primarily from your efforts, because the things that you sell on
your website is your own effort. It allows you to earn your own
money.
Applying the Howey test in this case, it is not considered an
investment contract so there is no need to register.
POWER HOMES case: The investment only allows you to
recruit. It allows you to earn from the people whom you
recruited.
Applying the Howey Test, it is an investment contract and
Power Homes is in violation of Sec 8 of the SRC because what
they are doing is an investment contract and being an
investment contract and it should’ve been registered with the
SEC.
Pyramiding/Ponzi Schemes
So those pyramiding schemes or Ponzi schemes, these are
actually investment contracts and should be registered with the
SEC but the difference is that if you are engaged in purely
Ponzi scheme, it will never be approved by the SEC. Although
we are following the Full and Fair Disclosure Approach, in the
evaluation of your registration, the SEC will take a look at your
past performance, if the company is stable, etc. In the Ponzi
Scheme, you do not have that track record so it will never get
approved but if you do a Ponzi Scheme, you will be in violation
of Sec. 8 and Sec. 12 of the SRC because those are investment
contracts which you need to register.
Is it possible that to avoid or skirt that provision
requiring myself to register, that I will offer products
also and not just recruitment?
A lot of people are doing that like UNO, Herbalife, NUskin, etc.
As long as you are selling a product, that is not an investment
contract because that is not primarily from the efforts of others,
that is from your own efforts even if you are allowed to recruit
and have downlines because the scheme can be actually made
by only selling products. Example if I just want to earn from the
efforts of my downlines and maglingkod2x langko and
dawatlangsaila, that is not still an investment contract because
again, you can still own from your own efforts by selling
products. You are not required to register in the SEC.
The Ponzi scheme is considered as an investment contract so
there is a law governing it and that is SRC. A lot of those
nganasakpan, are considered as criminal violations of the SRC
because they are not registered but still they cannot be
registered because as I said, it is not easy to register because
you have to prove track record, etc.
PROCESS FOR REGISTRATION OF SECURITIES
1. PRE-REGISTRATION PHASE
At this stage, you are still preparing for your documents
(Registration Statement and Prospectus)
• No sale of securities and dissemination of information
are allowed.
At this stage, the issuer needs to find an underwriter or
engages into an underwriting agreement, audit your financial
statements and preparing your prospectus. This can take 1
year. You get a legal team and finance team.
Under the current IRR, you cannot register if you do not have
an underwriter.
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Sec 12.1.1.Underwriting Requirement for Registered
Securities - Issuers of Registered Securities shall enter into
an underwriting agreement with a universal bank, investment
house or any other financial institution duly licensed under
the Investment Houses Law; Provided, that if the underwriter
is part of a group composed of such institutions, the group
shall agree on a syndicate manager that shall act on behalf
of, and be responsible to, the group and whose actions shall
be binding on the members of the group.
No underwriting agreement shall be required for issuers of
proprietary/non-proprietary securities and timeshares.
Who can be an underwriter?
Must be duly licensed under the Investment Houses Law.
(Investment House License)
Who can apply for Investment House license?
Universal banks, investment houses or any other financial
institutions duly licensed under the Investment Houses Law and
those entities solely providing services as underwriter.
What is the job of the underwriter?
Ensures that all securities issued will be sold to the public and
in such case when not all securities are sold to the public, they
undertake to buy these securities themselves.
At this point, everything is confidential so you are not allowed
to advertise that you are preparing for an IPO. The moment
that the SEC finds out that you are disclosing information that
you will be selling securities and you allow someone to reserve
for their purchase of shares then they will penalize you.
2. PRE-OFFERING PHASE
You can now file an application in the SEC.
1. File Registration Statement and Prospectus
2. Pay the filing fee then publish notice of filing of registration
statement
At this stage:
• Not allowed to sell because the registration statement
has not been rendered effective
• But can advertise because in fact you already
published your Registration Statement and Preliminary
Prospectus (not final prospectus) in a newspaper of
general circulation (not all of the prospectus because it
is very long just post something which will direct the
readers to a website for the complete prospectus)
Preliminary Prospectus (aka Red Herring Prospectus) –
where a registration has been filed but not yet rendered
effective
Red Herring because it is not final, there may still be changes
required by the SEC. It is just a Preliminary Prospectus wherein
a registration statement has been filed but not yet rendered
effective by the SEC.
At this stage you are allowed to advertise but it must be very
specific, it should only talk about the company but there should
not be an offer to sell.
Tombstone Advertisements – dead advertising because you
are not allowed to sell yet just advertise about the company.
IRR Sec 12.6. Within forty-five (45) days after the date of
filing of the registration statement, or by such later date to
which the issuer has consented, the Commission shall
declare the registration statement effective or rejected,
unless the applicant is allowed to amend the registration
statement as provided in Section 14 hereof. The Commission
shall enter an order declaring the registration statement to
be effective if it finds that the registration statement
together with all the other papers and documents attached
thereto, is on its face complete and that the requirements
have been complied with.
The Commission may impose such terms and conditions as
may be necessary or appropriate for the protection of the
investors.
Now the SEC will evaluate, under the law the SEC supposedly
has within 45 days to say whether the application is rejected or
rendered effective.
OFFERING PERIOD
Once the SEC has rendered the registration effective, now the
securities can be offered.
IRR Sec 8.1.1.5. The sale of the securities subject of the
registration statement shall commence within ten (10)
business days from the date of the effectivity of the
registration statement' and shall continue until the end of
the offering period or until the sale is terminated by the
Issuer. If the sale is not commenced within ten (10)
business days, the RS shall be cancelled and all fees paid
thereon forfeited.
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The SEC will issue the permit to sell, it will tell you that your
offer period should start on this and end on that date, hence its
not forever. Its only up to a certain number of days. During
that time you’re allowed to accept payments for your security.
But if you intend to list you security in the Philippine Stock
Exchange (PSE) , your period is different from your listing date.
So you do your offer period first and then you do your listing
date with PSE.
Your applications in the SEC and PSE are done simultaneously if
you want to be listed. Not all public offerings have to be listed
in the PSE. Remember the Subic Bay case? They did a public
offering but they were not listed in the PSE, its not necessary.
But listing in the PSE necessarily is a public offering.
TN: Not all public offerings are listings in the PSE, but listings in
the PSE are all public offerings. So before you can list, you
need to register. However, you can register without listing.
SHELF REGISTRATION
Now there are instances where you want to register your
securities but you don’t want to sell everything yet. Is that
allowed? Yes, that is what we call as “shelf registration”
Shelf registration - you register your securities but you sell
them by tranches.
• Previous IRR
Shelf registration was that if you register securities, lets say you
offer 1M shares to the public. But only 800k was sold, the
remaining 200k shares can be subject to shelf registration.
Hence, if at the end of the offer period you still have a balance
of remaining shares, you can just sell it at a later time. All you
need to do is to update your registration statement, you don’t
need to register all over again. But that is no longer
applicable under the current rule. Why?
Because now, all offerings require underwriters. In our example
above, if there’s a remaining 200k shares that wasn’t sold, the
underwriter buys it. Hence there’s nothing left to be shelved.
The previous definition of shelf registration is no longer
applicable.
• Current IRR
Now is shelf registration allowed? Yes. But you have to do it
DELIBERATELY. It shouldn’t just depend on what’s left of your
shares after the offering period. You have to say in your
registration beforehand that for this offer period I’m offering
1M shares, in the next year I’m going to do another offer
period, another 1M shares. Under the law, that’s allowed.
You’re allowed to offer on a continuous or delayed basis but not
exceeding 3 years. You’re allowed to offer by tranches or
delayed basis and that is what we call as shelf registration.
So there are requirements under rule 8 on shelf registration, it’s
basically just updating of your registration statement.
Sec. 8.1.2. Delayed and Continuous Offering and Sale of
Securities (Shelf Registration) - Securities, which are
intended to be issued in tranches at more than one
instance after the registration statement has been
rendered effective by the Commission, may be registered
for an offering to be made on a continuous or delayed
basis in the future, for a period not exceeding three (3)
years from the effective date of the registration statement
under which they are being offered and sold.
Pre-registration
this is where you’re preparing for the filing of your registration
statement. You’re doing all the preparation etc. this stage is
where you need to hire an underwriter. No sale, no advertising
allowed. But it doesn’t mean that you’re not allowed to issue
more shares, as long as its not to the public. Remember the
registration requirement only means public offering. So if within
the pre-registration period, you sell shares as long as its not to
the public then its allowed.
Pre-offering stage
You file your registration statement and prospectus to SEC.
Upon filing you pay your registration fee, and then you publish.
In this stage you can now start advertising. You can start
disseminating your preliminary prospectus or red-herring
prospectus which is your prospectus for which a registration
statement has been filed and not yet rendered effective. So
now you can advertise but the advertising should not be “offers
for sale”, you have to be clear that this is not an offer for sale.
The registration statement has not yet been rendered effective.
That has to be stated in the prospectus you’re going to
distribute.
Offering Period
Once the SEC approves that’s the time that you can start selling
to the public. It doesn’t necessarily mean that it should be
listed in the PSE. Its just allowed to sell to the public. If you
want to list, that’s another application with PSE. Furthermore,
you’re allowed to do a continuous offering and that’s what we
call as a shelf registration. But it has to be done deliberately,
from the very beginning you have to disclose your intention.
Once that’s done, you’re ready to sell your securities.
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EXEMPT SECURITIES
There are instances where your securities are not required to
be registered, we said that only securities for public offering are
considered as registrable. There are those securities which can
be sold without registration:
Sec 9. Exempt Securities
9.1. The requirement of registration under Subsection 8.1
shall not as a general rule apply to any of the following
classes of securities:
(a) Any security issued or guaranteed by the Government
of the Philippines, or by any political subdivision or agency
thereof, or by any person controlled or supervised by, and
acting as an instrumentality of said Government.
Securities issued by the government or any of its
instrumentalities, these are not required to be registered. It’s
because the law considers those securities as safe or non-risk
securities.
(b) Any security issued or guaranteed by the government of
any country with which the Philippines maintains diplomatic
relations, or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and
content of disclosures the Commission may prescribe.
As long as its issued by a government, Philippine or foreign,
there’s no registration required. But in a foreign government,
its subject to the rule of reciprocity. It means that the law in
that country must also exempt securities issued by the
Philippine government.
(c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
Securities or certificates issued by receivers or trustees in
bankruptcy cannot be issued without court approval because
these assets under bankruptcy proceedings are deemed to be
in custodia legis.
If the receiver or the trustee does not want to sell the assets
per piece, for example it’s a resort that’s undergoing
bankruptcy. You cannot sell the assets of that company,
piecemeal. So what you do is you issue certificates, you keep
the assets as a whole but you issue certificates of participation.
So those securities issued need not be registered. Why?
because they cannot be sold without court approval. Hence,
since they’re already approved by the court, its superfluous if
you also have it approved by the SEC.
(d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation of
the Office of the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal
Revenue.
These are the decree approved by the Insurance Commission
(IC), by Housing and Land Use Regulatory Board (HLURB), by
Bureau of Internal Revenue (BIR). For the same reason that
the certificate of bankruptcy in sub paragraph c) is approved by
the court, these securities are already approved by other
government agencies namely IC, HLURB and BIR. Hence, no
need for registration with the SEC.
Differentiate sub paragraph a) with sub paragraph d) of
Sec. 9?
In subpar a), it is issued or guaranteed by the government
itself or any of its instrumentalities or divisions.
In subpar b), the securities are not issued by the government
but by a private entity, however these are already subject to
pre-approval and supervision of the three agencies namely, IC,
HLURB and BIR. Hence, no need to register again with SEC.
(e) Any security issued by a bank except its own shares of
stock.
Any securities issued by the bank. The issuer is the bank. These
are exempt securities, except if what was issued are own
shares of the bank. If the bank issues bonds or UITF,
investment trust funds or investment contracts they’re not
subject to registration with the SEC. But if the bank sells its
common shares or preferred shares or any other equity
security, that is subject to registration.
Student question: (inaudible huhu)
Gavi answer: When you say issue, that means for example
capital stocks or shares, Its you yourself that issued from your
capital stocks or shares. You’re the ISSUER of that share, which
is different from being the OWNER of that share. If the bank
acting as an underwriter purchases securities, its not the issuer
of that security. It is the owner of that security. The issuer is
the one where the security is primarily from.
If the bank acts as an underwriter for a security, does
that mean that that security is an exempt security?
Of course not, because the bank is not the issuer.
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When will it be exempt?
If it is a debt security and the issuer is the bank.
Example:
Company A wants to do an public offering. So of course
company a will issue securities for the IPO. Company A would
need an underwriter, lets say BPI bank. Now there are leftover
shares, now it will be purchased by BPI. In turn BPI will sell
these shares to other stockholders namely A,B,C,D. Does that
mean na this transaction here need not be registered with the
Sec? No, it’s not an exempt security. Why? Because in order to
be an exempt security, the issuer has to be the bank. In this
instance who’s the issuer? Its Company A. The person who
primarily issued the share, BPI here is not the issuer. It is the
owner because its BPI who bought the shares.
But if BPI by itself wants to issue bonds. For example It issues
bonds to the public, A,B, C until Z. This security issued by BPI is
an exempt security. What is the rationale behind the law?
Because BPI cannot issue these bonds without the approval of
the BSP.
Whereas with BPI’s underwriting activity, its not pre-approved
by BSP. BSP doesn’t care about it, because underwriting
services falls under the jurisdiction of the SEC. Its not the BSP
that gives you the underwriter or investment house license, it’s
the SEC. However, if the bank will issue certificates of
indebtedness, its under the supervision of the BSP.
So if BPI issues bonds or promissory notes to the public, it is an
exempt security. No need to register. But if BPI is selling its
shares to the public, its own common shares, then that now
requires registration.
What about if the issuing entity is not a universal bank
but a commercial bank? Is it exempt?
The law does not distinguish, it only says “bank”. Any securities
issued by a bank. It does not matter whether its universal or
commercial bank.
2015 IRR Sec. 9.1 Exempt Securities
9.1.1. Any evidence of indebtedness issued by a
financial institution that has been licensed by the BSP to
engage in banking or quasi-banking shall be exempt
from registration under Section 8.1 of the Code.
What about if it’s not a bank but a quasi bank?
So in SRC code, only banks are covered by the law. Quasi-bank
is an addition by the SEC. hence, evidence of indebtedness
issue by a quasi bank is also exempt. But only for debt
securities.
Sec 9.1.2. The registration requirements shall not likewise
apply to the following:
9.1.2.1. Evidence of indebtedness issued to the BSP under its
open market and/or rediscounting operations;
9.1.2.2. Bills of exchange arising from a bona fide sale of goods
and services that are distributed and/or traded by banks or
investment houses duly licensed by the Commission and BSP
through an organized market that is operated under the rules
approved by the Commission;
9.1.2.3. Any security issued or guaranteed by multilateral
financial entities established through a treaty or any other
binding agreement to which the Philippines is a party or
subsequently becomes a member (hereinafter referred as
Multilateral Financial Entities or MFE), e.g., international
financial institutions, multilateral development banks,
development finance institutions or any other similar entities; or
by facilities or funds established, administered, and supported
by MFEs; Provided, that the issuer shall file an offering circular/
memorandum in a format prescribed by the Commission and
containing among others; (1) information about the issuer and
the security to be issued, (2) information about the MFE, and
(3) information about the guarantee.
9.1.2.4. The registration requirements shall not likewise apply
to evidence of indebtedness, e.g., commercial papers, that
meet the following conditions:
9.1.2.4.1. Issued to not more than nineteen (19) non-
institutional lenders;
9.1.2.4.2. Payable to a specific person;
9.1.2.4.3. Neither negotiable nor assignable and held on to
maturity; and
9.1.2.4.4. In an amount not exceeding One Hundred Fifty
Million Pesos (PhP 150,000,000.00) or such higher amount as
the Commission may prescribe.
________________________________________________
What is the significance of not more than 19, what does
that limitation signify?
It’s not a public sale, because a public sale is 20 or more. The
19 or less non-institutional lenders is basically a private
issuance.
So this is called a private placement , and its not subject to
registration as long as they comply with the aforesaid
requirements.
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proceeding, it’s an exempt transaction because the transaction

EXEMPT TRANSACTIONS is supervised by the courts.

(b) By or for the account of a pledge holder, or mortgagee

What’s the difference between an exempt security in or any other similar lien holder selling or offering for sale or
Section 9 and an exempt transaction in Section 10? delivery in the ordinary course of business and not for the
purpose of avoiding the provisions of this Code, to liquidate
The difference between an exempt security and an exempt
a bona fide debt, a security pledged in good faith as security
transaction is that if it’s an exempt security, the security is
for such debt.
always exempt no matter how many times you transfer it. Each
time you transfer it, it’s always exempt. An exempt transaction
So same as a judicial sale, foreclosure sale is under the
on the other hand, the exemption is only on that particular
supervision of a court. So you have to report the sale, that
transaction. If you do another transfer which does not fall
you’re doing an extrajudicial sale. So this one is also an exempt
within any of the exempt transactions, that security may be
transaction.
subject to registration requirement under Section 8.
Example, you have San Miguel shares that you pledged and you
What are the exempt transactions?
weren’t able to pay your obligation, you sell the shares in
Sec. 10. Exempt Transactions. - 10.1. The requirement of payment of your debt. That is an exempt transaction. Any other
registration under Subsection 8.1. shall not apply to the sale or subsequent sale of that security, you already need to
sale of any security in any of the following transactions: register because it’s only for that particular foreclosure sale that
is exempt.
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in insolvency
(c) An isolated transaction in which any security is sold,
or bankruptcy.
offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s account,
Take note class, aside from this, Section 9 applies to a receiver
such sale or offer for sale, subscription or delivery not being
or a trustee in bankruptcy. Section 10 applies to judicial sale
made in the course of repeated and successive transactions
which means it can be a judgment sale, that’s not applicable to
of a like character by such owner, or on his account by such
Section 9. It can be a sale of a administrator or executor of an
representative and such owner or representative not being
estate, that does not apply on Section 9. Because Section 9
the underwriter of such security.
only applies to a bankruptcy proceeding. Section 10 is broader,
it also includes bankruptcy proceeding but it’s not just that. It
So for example, you have Corporation A, it issues common
can be a settlement of an estate, it can be a judicial sale.
shares to X. Is this an isolated transaction? Is this an exempt
transaction under this section?
For example, Mr. A he is undergoing a bankruptcy proceeding,
he has assets and among his assets are San Miguel shares.
Corporation A is the issuer. (TN: Issuer is different from
That is a security. Now in order to do away with his debts, he
owner). This transaction is not exempt under Subsection C. It
has to sell his assets, so his receiver sells the San Miguel
may or may not be exempt if it falls under sections but not on
shares. Where does this fall? That is an exempt transaction.
Subsection C.
If for example, the receiver collates all the assets of Mr. A and
What falls under Subsection C?
rather selling the assets piecemeal, he creates one entity and
divides it in shares or certificates, sells a portion of that If X being the subsequent holder of the security(now he is the
certificate. That certificate is exempt under Section 9. owner of such security), would sell to another person in an
isolated transaction. Meaning it’s not in the ordinary course of
In Section 9, it’s the receiver or trustee who creates and issues
business for X to sell.
the assets under bankruptcy. Under Section 10, the receiver or
trustee merely sells an existing security. He does not issue a
(d) The distribution by a corporation, actively engaged in
new security. There’s already an existing security issued by San
the business authorized by its articles of incorporation, of
Miguel, issued by Globe and he sells it in a bankruptcy
securities to its stockholders or other security holders as a
proceeding.
stock dividend or other distribution out of surplus.
So this is exempt because the sale is subject to court approval.
Whether it’s a judicial sale, settlement of estate or bankruptcy

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Dividend-is a distribution by a corporation of its earnings to its
stockholders and this is called a dividend distribution.
Three forms of dividends:
1. Cash –if the corporation declares cash dividend, the
stockholders who hold the shares will get cash. This is
not a security.
2. Property
3. Stocks
Property Dividends
Corporation A owns shares of stocks in Corporation B, meaning
this is an investment of Corporation A. It is not its own shares,
it is the shares of Corporation B but it’s an asset because it’s an
investment to Corporation B. This can also be considered as a
dividend because it’s the investment of Corporation A.
So let’s say Corporation A transfers the shares to Company One
and the latter transfers to Company Two, this may be already
subject to the registration requirement because the exemption
pertains only to the distribution of income or property dividend
distribution.
Stock Dividends
You have corporation A and it has 30 stockholders. Corporation
A wants to distribute dividends to its stockholders. Shares of
Corporation A that it distributes to stockholders. If the issuer
issues its own shares to its holders, it is a stock dividend. This
is an exempt transaction under Subparagraph D.
So if Corporation A will distribute income in the form of its own
securities only (Corporation A shares), that’s a stock dividend.
This is allowed. No need to register because this is an exempt
transaction, the distribution of a corporation of securities to its
stockholders as a stock dividend.
(e) The sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
SALE TO OWN STOCKHOLDERS
If Company XYZ shares its stocks to A and A is already an
existing stockholder of Company XYZ (already owning shares
and this current transaction is an additional purchase of stocks
on top of what he already owns), it is an exempt transaction.
A sale of a corporation to its own stockholders is an exempt
transaction. Even if Company XYZ sells it to 30 persons, as long
as all these 30 persons are stockholders of Company XYZ, then
it is an exempt transaction.
Reason for the exemption: The guiding principle on the
requirement of registration is “full and fair disclosure” to protect
the public, ensuring that they have all the material information
on the security before purchasing. The reason of this
exemption is that the stockholders are presumed to know
the material information about the corporation with
whom they are already stockholders and the shares it
issues.
SIDE CORPO LAW DISCUSSION
Are all authorized stocks of a company registered
securities?
When a corporation registered in the SEC, it is not the
registration under Sec 8 of SRC. The registration of the
corporation under the SEC is a registration under the
Corporation Code, not under the SRC.
When you register your corporation, you need to have your
Articles of Incorporation (AOI). In your AOI, you need to
declare your Authorized Capital Stocks (ACS). Let’s say ACS is
100M at P1.00 per share (par value), this must be stated in
your AOI. You must also have at leasr 5 incorporators, each of
them owning at least one share.
So, your ACS is 100M. Does this mean that this 100M
shares are already registered securities?
No, because again the registration you made in the SEC for
incorporation is under the Corporation Code, not an SRC
registration.
Does the ACS of the corporation need to be fully
subscribed?
No. Law only provides at least 25% of the ACS to be fully
subscribed.
In our situation, we only need 25M shares to be fully
subscribed. Let’s just say that the 25M shares are distributed to
the 5 incorporators (at 5M shares each). Does this mean that
this 25M fully subscribed shares are registered under
SRC?
No. Because remember, not all issuances, not all acquisition of
securities is registrable. You only need to register if it is a public
offering. All instances under Sec10 are not considered public
offering.
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If the corporation intends to hold an initial public offering
(IPO)(meaning it wants to sell to the public, it wants to list its
shares in the PSE)what does it need to do?
Apply for registration.
We have now 25M shares fully subscribed and 7 unsubscribed.
In your IPO, you intend to offer 50M.Which of these
securities must the company register so it may hold an
IPO?
IRR provides that you must register your existing shares
(25M)and your offer shares (50M). The remaining 25M is not
for registration yet because in the first place, these are not yet
issued. If later on, you want to offer the remaining 25M for
IPO, that is when you register these shares.
IMPORTANT:
1. It doesn’t mean that just because you are incorporated, your
securities are automatically registered.
2. It does not mean that just because these are ACS, it is
already registered.
3. Only when you do a public offering is when you register
it.
In fact, a lot of corporations do not have registered securities.
When you become lawyers, almost all lawyers will experience
registering a corporation in the SEC under the Corporation Code
(for incorporation). Only very few lawyers can experience
registering securities in the SEC under the SRC.
(f) The issuance of bonds or notes secured by mortgage
upon real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a
single sale.
BONDS OR NOTES SECURED BY MORTGAGE SOLD TO AS
SINGLE PURCHASER
This is not a public offering.
Does this pertain to a scenario where I offer the bond to
everyone, so I advertise and only 1 bought? Can I claim that
my transaction is exempt? NO.
The important thing here is that before you issue the
security, you already have that buyer in mind. And you
issue the security particularly for that buyer alone, and not just
anyone.
(g) The issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right of
conversion entitling the holder of the security surrendered in
exchange to make such conversion: Provided, That the
security so surrendered has been registered under this Code
or was, when sold, exempt from the provisions of this Code,
and that the security issued and delivered in exchange, if sold
at the conversion price, would at the time of such conversion
fall within the class of securities entitled to registration under
this Code. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange
are sold.
CONVERTED SECURITIES
What is the right of conversion?
Here we talk about convertible securities. Right of conversion
does not only apply to shares but also to debt securities.
For example, you have one preferred voting shares,
convertible. If a share is convertible, it means that from the
time it was issued, it comes with it a right to convert it to a
common share. Thus, when you buy the shares, you’ll know
that there is a right to convert that comes along with it.
When you exercise your right to convert, from preferred to
common, you need not anymore register the common share
because it is a result of a right of conversion.
Does the law require that the preferred share be
registered?
No, this exemption will apply even if the share prior to being
converted was either registered or an exempted
security/transaction.
If the original share was bought by an already existing
shareholder of the company = EXEMPT therefore not
registered. The moment the share was converted, the
converted share is also EXEMPT under Sec10(g) even if the
original share was not registered.
If the company issues bonds in a private placement (19 or less
persons), EXEMPT transaction. If that bond is convertible and
you exercise the right of conversion, the converted bond is still
EXEMPT under Sec10(g) because it is issued under the right of
conversion.
(h) Broker’s transactions, executed upon customer’s orders,
on any registered Exchange or other trading market.
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No, provided that it is only for the purpose of complying with

LISTED SECURITIES the minimum subscribed requirements under the law.

If example, these 30 persons were willing to subscribe up to

This talks about listed shares in the PSE. 500M, only the first 250M (minimum) can avail of the
exemption. The excess of the 250M (minimum) shall be subject
Remember, not all shares are listed. Not all publicly offered
to registration UNLESS, these shares likewise falls under some
shares/registered shares are listed. But if you are listed, you
other type of exemption.
are always registered.
The exemption here is only up to the minimum required by the
PSE is a market where people buy and sell shares there. If you
law. Any excess will require registration.
register your shares and then list it in the PSE, subsequent
transactions you have in the PSE no longer have to be
registered. (j) The exchange of securities by the issuer with its
existing security holders exclusively, where no commission
Reason of the law: The purpose of listing in the PSE is to or other remuneration is paid or given directly or indirectly
hasten the buying and purchasing of shares. If you require for soliciting such exchange.
each and every transaction there to be registered, it will take at
least one year for each transaction to consummate, which
defeats the purpose of the stock market.
EXCHANGED SECURITIES

(i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital
stock under the Corporation Code, when no expense is
incurred, or no commission, compensation or remuneration
is paid or given in connection with the sale or disposition of
such securities, and only when the purpose for soliciting,
giving or taking of such subscriptions is to comply with the
requirements of such law as to the percentage of the capital
stock of a corporation which should be subscribed before it
can be registered and duly incorporated, or its authorized
capital increased.
SUBSCRIPTIONS TO COMPLY MINIMUM
REQUIREMENTS
If you recruit investors because you are about to incorporate,
GENERAL RULE: Exempted from registration PROVIDED their
investments is only to comply with the general requirements
provided under the law.
Conversion – The convertibility of the security exists from the
moment it is issued. From the beginning, you know that you
have the right to convert this share. Whether the company likes
it or not, you can convert the share.
Exchange - If you have a preferred share without the right to
convert in a company and this company, upon its
reorganization, decides that it will no longer have preferred
shares and all shares are to become common shares, this is
exchange. There is a change in the character of the share but
such was not a product of a conversion because the right to
change the character did not exist from the start.
This exemption provides that if a security is exchanged to
another type of security, it does not need registration even if
the change was not from a right of conversion, AS LONG AS the
security is with its existing security holders.
(k) The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any twelve-
month period.

What is the minimum requirement?

That 25% of the ACS must be subscribed.

If you have 10B ACS, you need at least 25% of 250M of these
shares to be subscribed. And out of these 250M, you need 25%
of these or 62.5M to be paid up. It is difficult for just one
person to give you this much. Let’s say you found 30 persons
who are willing to subscribe to a total of 250M shares, do you
need to register?

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PRIVATE PLACEMENTS
(l) The sale of securities to any number of the following
If company X:
qualified buyers:

Feb 2017 Issues to Mr. A, EXEMPT, (k) less Bank;

not existing than 20 persons Registered investment house;
shareholder Insurance company;
If Mr. A was an EXEMPT, (e) Pension fund or retirement plan maintained by the
existing existing Government of the Philippines or any political
shareholder shareholder subdivision thereof or managed by a bank or other
Mar 2017 Issues to Mr. B, EXEMPT, (k) less persons authorized by the Bangko Sentral to
not an existing than 20 persons engage in trust functions;
shareholder Investment company; or
Jun 2017 Issues to Mr. C EXEMPT, (k) less
than 20 persons Such other person as the Commission may by rule
Aug 2017 Issues to 5 more EXEMPT,(k) less determine as qualified buyers, on the basis of such factors
persons than 20 persons
as financial sophistication, net worth, knowledge, and
Dec 2017 Issue to another 5 EXEMPT, (k) less
persons than 20 persons experience in financial and business matters, or amount of
Jan 2018 Issue to 10 more FOR assets under management.
persons REGISTRATION.
The 20 persons is
counted over a 12- QUALIFIED BUYERS
month period, not
calendar year. So, Qualified buyers are those persons who are determined by the
you start counting
law to already have knowledge, know-how and experience
12 months from
the month of the regarding investments so they do not need to be protected.
first transaction.
TAKE NOTE: Just because a security does not fall into one
exemption, it does not automatically make the security
registrable because it may still fall under another exemption.
What if in January, it was not Company X who issues to 10
more persons, is it subject to exemption? Example, If Company Z sells to Mr X, not an existing
stockholder. So you cannot use the exemption on existent
If you look at the law, it say that the sale is by the issuer. But stockholders Sec10(e). But you can use the exemption on
if we look at the IRR: private placements Sec10(j).

RR 10.1.2.2If the original purchaser/s shall resell said
securities resulting in more than nineteen (19) holders,
Sections 8 and 12 of the SRC shall apply, notwithstanding
the exemption of their issuances, unless such succeeding
sale shall qualify as an exempt transaction
Meaning, if any one of the persons which bought the share
from Company X sells his share which resulted to a sale to
more than 19 holders (compute 19 persons together those who
actually bought from the company), it shall require registration.
Corporation Law Review
When you incorporate, you apply with the SEC, you file your
articles of Incorporation. In your Articles of Incorporation, you
need to specify your authorized capital stock (ACS). Let’s say
10 Million pesos. 10 million pesos at 10 million shares at 1 peso
per share. So you have to specify that. 10 million shares at 1
peso per share, this is your ACS. The Corporation Code requires
that at least 25% of your ACS has to be subscribed. That would
mean P2,500,000 has to be subscribed. When you subscribe,
that means you already own the shares. So you can already
exercise all the rights of a stockholder even if this is not fully
paid-up yet because your subscription, that is not required to
be fully paid-up for you to be able to incorporate. What the law
requires is that, of the subscribed, at least 25% has to be paid
up. So P625,000 has to be paid-up. At this stage, once you’re
done with the SEC, you’ll be issued a Certificate of
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Incorporation. This is the proof of the registration of your
corporation under the Corporation Code. This is separate and
distinct with your registration under the Securities Regulation
Code (SRC).
Once you’re incorporated, do you need to register with
the SRC? Or before incorporation, do you need to
register with the SRC?
It depends.
Because remember, as a general rule, before you issue shares
in a public offering, you need to register those shares. That
share registration is the SRC registration. Separate and distinct
the corporation registration. So general rule, you issue shares
in the Philippines, you are required to register, that is Section 8
of the SRC. But this rule only applies in a public offering, which
means that exempt securities and exempt transactions are not
required to be registered.
One of the exemption transactions is issuance of shares for the
purpose of corporation or increase in your ACS. But the
exemption will only apply if the issuance is for the purpose of
meeting minimum subscribe requirement of the law. So in this
particular situation, you won’t need to register with the SRC.
Because the purpose of your subscription is to meet the
minimum subscribe. So it doesn’t matter if you issue the shares
to the public, even if you advertise it but if you are clear that
the purpose for your invitation to subscribe is only for the
purpose of meeting the minimum subscription.
But for example, you didn’t set the limit. Let’s say 5 million is
subscribed. So for the first 2.5 million, this is exempt but for
the subsequent 2.5 that’s no longer exempt, at least for that
particular exemption. But it may still be exempt for another
type of exemption. So let’s say you have 5 shareholders, you
didn’t do a public offering but rather, invited 5 people to be
your stockholders and each of them subscribed 1 million each.
So you don’t fall with that exemption on incorporation to meet
the minimum requirement of the law but you meet that
exemption of having 19 or less stockholders. So less than 20
investors. So more or less, by the time of incorporation,
generally, it’s always an exempt transaction.
So let’s say 5 million was his subscribed shares and this
corporation decides to issue new shares, general rule when you
issue new shares, you follow the SRC and you need to register
except if you fall with the exempt transactions/securities. Like if
you just issue for stock dividend or issue shares to your own
stockholders or if you issue shares to 1 person, these are all
exempt.
TN: Just because you don’t fall with one exemption, meaning
you issued a share to a 3rd party, meaning you cannot use the
exemption on stockholders but you can use the exemption that
19 or less investors. But if you issue to the public, this is
through a public offering, which is you advertise (indiscriminate
offering or invitation to invest), if you do that now you fall
within the requirement of Section 8 and you need to register
the security.
So which securities need to be registered? As a rule, you only
need to register those securities you issued pursuant to the
public offering. So let’s say additional to the 5 million you
already had subscribed, you issued an additional 3 million
through a public offering, this one you need to register (the 3
million). Except if you’re doing a listing in the Stock Exchange
because if you list with the Stock Exchange, you need to
register all securities.
What about the 2 million you didn’t issue yet? You cannot
register that because those shares are not yet existing, these
are still with the issuer.
Again, how do you distinguish an exempt security from an
exempt transaction?
An exempt security is always exempt no matter how many
times you’ve transacted with it.
But an exempt transaction is only exempt for that particular
transaction. The next time you transact with that security, you
may no longer be exempt unless you fall under another
paragraph of the exempt transactions.
(k) The sale of securities by an issuer to fewer than twenty
(20) persons in the Philippines during any twelve-month
period.
Subparagraph K says that a sale of securities by an issuer to
fewer than 20 people in the Philippines during a 12-month
period, so you get the impression that the investor who sold
the securities, let’s say you have 19 investors in a 1-year
period. You are still covered by the exempt transaction, so if
one investor will sell half his shares to another person, that
makes 20 investors within a 1-year period. You don’t
supposedly fall under subparagraph A anymore but if you read
subparagraph K, it says issuer (sale of issuer) but don’t be
confused cause under the new IRR, the SEC clarified that even
if it’s a secondary transaction, meaning it’s the stockholder who
sells it, as long as you are more than 19 investors in a 12
month period, that already falls under the registration
requirement. So the sale is not limited to issuer only. If the sale
is done by the investor and not the issuer, then you can still be
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required to register. If the sale that breached the 19, even if it’s
not the issuer who does the sale, you can still be held liable for
failure to register because SRC Rule 10. 1.2.2 says, if the
original purchaser(the investor), should re-sell said securities
resulting to more than 19 holders, SRC shall apply
notwithstanding the exemption of their issuances UNLESS
succeeding sale shall qualify as an exempt transaction.
So if the 19th person shall sell his shares, that takes you out of
the subparagraph K exemption unless that 19th person is doing
an isolated transaction sale, in which case, that sale is also an
exempt transaction. Via the owner of the securities in an
isolated transaction.
TN: If mu sell ang investor to someone (so more than 19), you
cannot use subparagraph K anymore. But if it falls under any
other exemption, didto ka magpalaban na exemption, don’t use
subparagraph K anymore.
But before that, what else can the SEC do before they
reject your application?
Amend based on Section 14 (please refer to Rule 14 in the
Implementing Rules)
What’s the ground for requiring the issuer to amend his
registration?
So before rejection or revocation of your registration statement,
the less drastic move of the SEC will be just to require an
amendment of your registration. Remember, that was one of
the orders of the SEC in the Subic Bay case. The SEC issued an
order of suspension, in the meantime requiring the issuer to
amend its prospectus and registration. So this is one of the
powers of the SEC, to have you amend your registration
statement if they find that your registration statement is
inaccurate or is incomplete in any material respects.

Q: The 625,000 paid-up capital, is that per share? Now if the issuer does not amend the registration
statement, what else can the SEC do?
A: You’ll learn in your Corporation Code that your paid-up
capital, you don’t divide it over the number of shares. It’s a They can reject.
whole obligation.
What are the grounds for rejection or revocation?
Example: You have 1 million shares that you bought. And
SEC. 13
imong gibayran 500,000 ra. So, if mao ni, you don’t say you
only have 500,000 shares. Dili nimo ingnon na just because you
(a) The issuer:
only have 500,000 paid-up, you apply that to 500k shares lang.
(i) Has been judicially declared insolvent;
What will happen here, you have 1 million shares paid-up at 50
(ii) Has violated any provision of this Code;
cents per share. Because your subscription is indivisible. So dili
(iii) Has been or is engaged or is about to engage in
nimo ingna na “ah dili nako bayran ang other 500,000, ako lang
fraudulent transactions;
ning 500k shares. Di ni pwede.” Because the moment mu call
(iv) Has made any false or misleading representation
ang directors na bayron na nimo, dili ka pwede mu ingon na
of material facts in any prospectus concerning the
“oy ako nalang ni kwaon ang 500, dili nako bayron”, you can’t
issuer or its securities;
do that. If you don’t pay the balance, the corporation has the
(v) Has failed to comply with any requirements that
right to sell all your shares in a public auction.
the Commission may impose as a condition of the
security for which the registration statement has
This is why I told you before, that even if your shares are not
been filed.
fully paid-up, you are already entitled to all the rights of a
(b) The registration statement on its face incomplete or
shareholder, not to your paid-up shares but to your subscribed
inaccurate in any material respect or includes untrue
shares. Your subscription is indivisible. That’s why your
statements of a material fact required to be stated
Corporation Code says that you’re not allowed to sell your
therein or necessary to make the statement therein
shares when you have not fully paid. Kay naa may lien ang
not misleading; or
Corporation to all your shares because sila tanan ni share man
(c) The issuer, any officer, director or controlling person
sa unpaid portion. (Wa ni apil sa iyang topic but fyi lang for
performing similar functions, or any under writer has
next sem).
been convicted, by a competent judicial or
(Gi binisaya para sure kasabot) administrative body, upon plea of guilty, or otherwise,
of an offense involving moral turpitude and/or fraud or
If the SEC finds that your registration statement and prospectus is enjoined or restrained by the Commission or other
does not contain all relevant and material information, the SEC competent or administrative body for violations of
has the power to reject your application. securities, commodities, and other related laws.

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Can the SEC also prohibit an issuer from selling its
securities without actually having to revoking its
registration?
Section 15. Suspension of Registration
15.1. If, at any time, the information contained in the
registration statement filed is or has become misleading,
incorrect, inadequate or incomplete in any material respect, or
the sale or offering for sale of the security registered
thereunder may work or tend to work a fraud, the Commission
may require from the issuer such further information as may in
its judgment be necessary to enable the Commission to
ascertain whether the registration of such security should be
revoked on any ground specified in the Code. The Commission
may also suspend the right to sell and offer for sale such
security pending further investigation, by entering an order
specifying the grounds for such action, and by notifying the
issuer, underwriter, dealer or broker known as participating in
such offering.
_______________________________________________
The measures done by the SEC to enforce its powers or its
duties under the SRC, in the first place, if the SEC finds that
your registration is incomplete or inaccurate, it can require the
issuer to amend.
If the SEC finds that the registration statement is misleading or
incorrect or inadequate, incomplete in any respect or the sale
of the security may work or tend to work a fraud on the public,
the SEC can also suspend your registration while it is
conducting an investigation.
But if the SEC finds that the issuer is declared insolvent or has
been found to actually violated a provision of the code or any
other grounds under Section 13 a, b and c, the SEC has now
the power to revoke the registration statement.
Let’s say that the registration was rendered effective and the
issuer is already selling it securities, what are the obligations of
an issuer whose shares are being publicly traded?
REPORTORIAL REQUIREMENTS
Let’s say that the registration was rendered effective and the
issuer is already selling its securities.
What are the obligations of the issuer whose shares are
publicly traded?
The issuer has the obligation of filing a periodic and other
reports because the Full and Fair Disclosure Approach operates
not only at the beginning of the corporation’s life but also
during its existence.
What are the kinds of reports that the issuer is required
to file? (SEC 17, SRC)
1. Annual Report – filed every year or once a year (135
days after the end of period)
2. Quarterly Report – filed 3 times a year, every
quarter; no need for a 4th quarter report because it is
already included in the annual report (45 days after
the end of each quarter)
3. Current Reports – reports on material transactions
or material events that affect the issuer and actually
these are required to be filed 10 minutes after the
happening of the event.
Example: the BoD of a Corp approves a merger and after such
approval, you have to make a report in 10 mins.
What is the purpose of requiring the filing these
reports?
It is because of the Full and Fair Disclosure Approach so that
any possible buyers of shares would have full knowledge before
they buy the shares.
Example: in a Merger, it is a material event which can affect
one’s decision whether or not to buy or sell a particular security
or to buy or sell at a particular price. This must be reported
immediately because if it is not reported immediately it would
work at the disadvantage of the investing public.
Say I have shares of CEMCO (Cement Company) if I did not
know that CEMCO is entering into a merger with HOLCIM
(another cement company) and I bought my share at P8 and if
somebody wants to buy my share at P10 because it is a good
deal but if I knew that CEMCO and HOLCIM are merging then I
will not sell my shares at P10 because the merger will tend to
increase the price so if I did not know that they are merging
and the corporation did not report that transaction right away
then this will work at the disadvantage of the public.
The Annual and Quarterly reports are also important but they
are already past events. The Current reports are the one really
affecting investor’s decision. So, Annual and Quarterly Reports
these are required to be filed by the issuers.
OTHER REPORTS TO BE FILED
1. Changes in the Beneficial Ownership of the
Stockholders of the company (Sec. 23)– applies
to Directors, Officers and Principal Stockholders
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SECTION 23. Transactions of Directors, Officers and
Principal Stockholders. —
23.1. Every person who is directly or indirectly the beneficial
owner of more than ten per centum (10%) of any class of any
equity security which satisfies the requirements of Subsection
17.2, or who is a director or an officer of the issuer of such
security, shall file, at the time either such requirement is
satisfied or within ten days after he becomes such a beneficial
owner, director, or officer, a statement with the Commission
and, if such security is listed for trading on an Exchange, also
with the Exchange, of the amount of all equity securities of
such issuer of which he is the beneficial owner, and within ten
(10) days after the close of each calendar month thereafter, if
there has been a change in such ownership during such
month, shall file with the Commission, and if such security is
listed for trading on an Exchange, shall also file with the
Exchange, a statement indicating his ownership at the close of
the calendar month and such changes in his ownership as have
occurred during such calendar month.
Principal stockholders - those who own 10% or more of the
total outstanding capital stock of the company either DIRECTLY
or INDIRECTLY.
What is beneficial ownership?
Sec. 3.1.2 of SRC IRR, Beneficial ownership/owner
means any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship or
otherwise, has or shares voting power (which includes the
power to vote or direct the voting of such security) and/or
investment returns or power (which includes the power to
dispose of, or direct the disposition of such security)provided,
that a person shall be deemed to have an indirect beneficial
ownership interest in any security which is:
3.1.2.1. held by members of his immediate family sharing
the same household;
Example: You are stockholder 8% of the stock of the issuer
then your wife owns 5% so individually you are not principal
stockholders but the law says that it can be directly or
indirectly. This is not direct but taken together with a member
of your immediate family living in the same household, you can
be a principal stockholder. (8% + 5% = 13%)
3.1.2.2. held by a partnership in which he is a general
partner;
3.1.2.3. held by a corporation in which he is a controlling
shareholder; or
3.1.2.4. subject to any contract, arrangement or
understanding which gives him voting power or investment
power with respect to such securities; provided, that the
following persons or institutions shall not be deemed to be
beneficial owners of securities held by them for the benefit
of third parties or in customer or fiduciary accounts in the
ordinary course of business, as long as such shares were
acquired by such persons or institutions without the definite
and/or clear intention of effecting a change or influencing
the control of the Issuer:
3.1.2.4.1. A broker dealer;
3.1.2.4.2. An investment house registered under the
Investment Houses Law;
3.1.2.4.3. A bank authorized to operate by the Bangko
Sentral ng Pilipinas ("BSP");
3.1.2.4.4. A duly-registered insurance company;
3.1.2.4.5. An investment company registered under the
Investment Company Act;
3.1.2.4.6. A pension plan registered with and regulated by
the Bureau of Internal Revenue, Insurance Commission or
any other regulatory authority; and
3.1.2.4.7. An entity whose members are the persons
specified above.
What is an example of a contract which gives you
voting power over a security?
A Voting Trust Agreement or an Irrevocable Proxy.
These contracts allow you to vote the shares subject of those
agreements even if you don’t own the shares but if you have
the power to vote those shares you are considered as a
beneficial owner of the shares. Therefore, these will be counted
whether you are a principal stockholder.
What is the relevance of being a director, officer or
principal stockholder? What is required of them under
Sec. 23?
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There should be an initial report to the SEC (FORM 23-A) of
the stockholdings of your directors, officers and principal
stockholders. The moment they become a director, officer and
stockholder then they should be required to make this report.
If there are any changes in the stockholdings, you are required
to make a report to the SEC 10 days after the end of the month
when the change occurred. (FORM 23-B)
Example: I became a stockholder on January so the issuer is
required to file an initial report (Form 23-A) to the SEC by
January. In March, I purchased another shares from another
issuer, so there is a change in stockholdings, so not later than
April 10, I should file Form 23-B for the changes in the
stockholdings for directors, officers and principal stockholdings.
2. Information Statement (Sec. 20)
It is basically an updated prospectus. It talks about the
operations of the issuer.
Annual report = audited financial statements
Quarterly report = financial statements which are not required
to be audited
3. Any person who acquires in any manner the
beneficial ownership of five percent (5%) of any
class of equity securities of a company that satisfies
the requirements of Section 17.2 of the Code (Sec.
18)
Requires any person who acquires 5% or more of the
stockholdings of an issuer even if the 5% is not actually a
principal stockholder yet. If you are 5% but still less than 10%
then apply Sec. 18 (FORM 18) but if you are 10% or more
then the form is FORM 23.
All in all, these reports are all required in order to ensure full
and fair disclosure of the activities not just of the issuer but
also its directors, officers and principal stockholders.
What happens if there is a failure to report?
SEC v Universal Rightfield
URPH alleged that SEC violated the due process clause because
it did not give notice or conduct a hearing when it revoked the
registration of URPH. There was only notice of hearing when
the SEC suspended the right to sell, but there was no more
notice of hearing when the SEC revoked. It was done
automatically.
Only substantial compliance is required for due process because
the SEC was only exercising regulatory and not quasi-judicial
powers. The SEC can actually shortcut the proceedings.
According to the SC, when you already had notice but you still
did not comply, your registration can be revoked. There is no
need for additional notice. Because being an administrative and
regulatory body, it only needs to comply with the substantive
requirement of due process. It does not exercise quasi-judicial
power. It is exercising regulatory & law enforcement powers. It
is not a strict compliance of due process.
Discussion: The SEC in 2003 informed URPH that it failed to
submit its annual and quarterly requirements. They asked them
to explain why they should not revoke the registration
statement of URPH. URPH came back to SEC because they are
having problems due to the global market problems, etc. and
they are having issues with their auditors and the accounting
staff resigned. The SEC gave them a chance to just submit all
required reports. But come 2004, URPH still has not complied
with the reportorial requirements. So on July 4, 2004, after the
hearing, the SEC issued an order not to revoke but merely to
suspend the right of URPH to sell its securities.
SEC suspended URPH’s permit to sell or its certificate of
registration to sell its securities. In that same July 2004 order,
the SEC said that the suspension is effective for 60 days or until
reporting requirements are complied with otherwise the
Commission shall proceed with the revocation of the company’s
registration of securities.
After July 2004, URPH again filed a letter with the SEC in
September asking for an extension to file their reports in
November 15. The 60 days suspension has already lapsed, and
the URPH has not yet filed its reportorial requirements instead
they asked for extension. After November 15, 2004, they still
failed to file their reports. They were able to file on December
1, 2004 and the others December 10, 2004.
The SEC came out with an order on December 8, 2004, this
time revoking the certificate of registration of URPH.
The issue of URPH was that when you issued your order
revoking our Cert of Registration, you did not grant us notice
and hearing so there was a violation of due process.
Does the law require notice and hearing before the SEC
can revoke a registration statement?
The law requires that there should be notice and hearing under
Sec. 13 before the SEC can revoke a registration statement.
There was notice and hearing in this case and the SC further
said that that notice and hearing where the SEC issued a
Suspension Order is already sufficient notice and hearing for
the SEC to issue a Revocation Order. There was a sufficient
notice and hearing because in July 2004 order, the SEC said
they will be suspended but if you do not comply we will revoke.
The SC said that it was already sufficient due process.
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In revocation of the Registration Statement, the SEC is not
exercising a quasi-judicial power instead it is exercising its
administrative/ regulatory power or police power. The law is
not so strict on the due process requirement because it is not a
quasi-judicial power but a regulatory power. One notice and
hearing for the suspension and revocation is sufficient due
process.
If you fail to file your reportorial requirements with SEC, the
SEC can revoke your registration. Failure to file is a violation of
the provision of the SRC.
PERSONS REQUIRED TO FILE REPORTS
1. An issuer with a class of securities registered under
Section 12 – does not mean you are registered that you are
also listed
2. An issuer with a class of securities listed for trading
on the Philippine Stock Exchange
3. An issuer with assets of at least Php 50,000,000.00 or
such other amount as the Commission shall prescribe,
and having 200 ormore stockholders each holding at
least 100 shares, even if the issuer is not listed in the
exchange and no registered securities – these are what
call “public companies”
If a company has more than 50 million assets, it has 200 more
stockholders each holding at least 100 shares, that company
even if it is not registered or it did not register its securities are
still required to file the reports under Sec. 17.
Philippine Veterans Bank v. Justina Callangan
In this case, the SEC cited Philippine Veterans Bank for violation
of Sec. 17 of the SRC for failure to file its Sec. 17(a) and Sec.
17(q) requirements. Philippine Veterans Bank contended that
we are not a Public Company, our shares are not listed in the
exchange and our stockholders are not the public because we
are limiting our stockholders only to the veterans and their
family members. It did not want to comply.
SC said that Philippine Veterans Bank should comply because it
falls under the definition of a public company because:
• its assets exceeded 50M
• it had more than 200 stockholders
• each of the stockholders owns at least 100 shares
According to the SC, it does not matter whether you are only
selling to a specific class of persons because the law does not
distinguish. Once you meet with the requirements (assets,
stockholders and stockholding), you become a public company
and covered by the reportorial requirements under Sec. 17. It is
not just the listed companies, which are required under Sec.
17.
TENDER OFFERS
Section 19. Tender Offers. – Any person or group of persons
acting in concert who intends to acquire at least 15% of any
class of any equity security of a listed corporation of any class
of any equity security of a corporation with assets of at least
fifty million pesos (50,000,000.00) and having two
hundred(200) or more stockholders at least one hundred shares
each or who intends to acquire at least thirty percent(30%) of
such equity over a period of twelve months(12) shall make a
tender offer to stockholders by filling 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 request or
invitations or tender offer 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 alter
than the time copies of such materials are first published or
sent or given to security holders.
a) Any solicitation or recommendation to the holders of such a
security to accept or reject a tender offer or request or
invitation for tenders shall be made in accordance with such
rules and regulations as may be prescribe.
b) Securities deposited pursuant to a tender offer or request or
invitation for tenders may be withdrawn by or on behalf of the
depositor at any time throughout the period that tender offer
remains open and if the securities deposited have not been
previously accepted for payment, and at any time after sixty
(60) days from the date of the original tender offer to request
or invitation, except as the Commission may otherwise
prescribe.
c) Where the securities offered exceed that which person or
group of persons is bound or willing to take up and pay for, the
securities that are subject of the tender offers shall be taken up
us nearly as may be pro data, disregarding fractions, according
to the number of securities deposited to each depositor. The
provision of this subject shall also apply to securities deposited
within ten (10) days after notice of increase in the
consideration offered to security holders, as described in
paragraph (e) of this subsection, is first published or sent or
given to security holders.
d) Where any person varies the terms of a tender offer or
request or invitation for tenders before the expiration thereof
by increasing the consideration offered to holders of such
securities, such person shall pay the increased consideration to
each security holder whose securities are taken up and paid for
whether or not such securities have been taken up by such
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person before the variation of the tender offer or request or
invitation.
19.2. It shall be lawful for any person to make any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements made in the light of
the circumstances under which they are made, not misleading,
or to engaged to any fraudulent, deceptive or manipulative acts
or practices, in connection with any tender offer or request or
invitation for tenders, or any solicitation for any security holders
in opposition to or in favor of any such favor of any such offer,
request, or invitation. The Commission shall, for the purposes
of this subsection, define and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent,
deceptive and manipulative.
_________________________________________
What is a Tender Offer?
It is a public announcement by a person or a group of persons
who intend to acquire equity securities of a public company or
outstanding equity securities of an associate or related
company of such public company which controls the said public
company.
Sec. 19.1.8 “Tender Offer” means a publicly announced
intention by a person acting alone or in concert with
other persons (hereinafter referred to as "person") to
acquire outstanding equity securities of a public company
as defined in SRC Rule 3, or outstanding equity securities
of an associate or related company of such public
company which controls the said public company.
It is not just the listed companies but public companies as well
are covered by the tender offer rule.
Elements of Tender Offer Rule:
1. Intention to acquire by a person or group of persons –
purchase transactions
2. Acquire equity securities
• Equity securities – shares of stocks or securities
which represent ownership in an enterprise as
opposed to debt securities which do not trigger
tender offer rules.
3. Of a public company or an associate of a public company
which associate controls the public company.
Discussion:
A tender of offer is a publicly announced intention by a person
or a group of persons who intend to acquire equity securities of
a public company.
Furthermore under the SRC, tender offer rule now extends to
acquiring equity securities to an associate or related company
which controls the public company.
TN: Not just any securities, only equity securities. If its debt
securities, tender offer rule will NOT apply.
What are covered by the tender offer rules?
1. Public company
Rule 3.1.16. Public company means any corporation
with a class of equity securities listed on an Exchange, OR
with assets in excess of Fifty Million Pesos
(PhP50,000,000.00) and has two hundred (200) or more
holders each holding at least one hundred (100) shares of
a class of its equity securities.
a. A listed a company in the PSE OR
b. Even those not listed in PSE but companies with assets of at
least 50M with more than 200 stockholders each owning at
least 100 shares.
Hence, all listed companies are public companies but not all
public companies are listed.
TN: Public companies are covered by the tender rule not just
listed companies.
Gavi tip: I’m very specific in using the right term. In your
answers for exams, please be careful.
2. Even if not a public company but it is a related party
to that public company such that it controls the public
company
How does a tender offer work?
A tender offer is used when a person wants to acquire the
shares of a public company or a related company to that public
company which controls the public company.
The acquirer make a public offer or a published offer to all the
holders of the shares of a public company or its associate
saying that “I intend to buy the shares of this Corporation,
anyone who wants to sell their shares please offer your shares.
I’m buying at 5pesos per share”. So it’s basically an invitation to
buy the shares. You’re inviting people to offer their shares to
you so you can buy it.
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TN: The issue in tender offer is always control. Whether its
direct or indirect control as long as there is control to the
company, you do a tender offer. Provided you meet the
threshold.
Are all acquisitions of equity securities of a public
company or its associate which controls the public
company trigger the tender offer rules?
No, because you have the threshold
MANDATORY TENDER OFFERS
Rule 19.2.1. Any person or group of persons acting in concert,
who intends to acquire fifteen percent (15 %) of equity
securities in a public company in one or more transactions
within a period of twelve (12) months, shall file a declaration to
that effect with the Commission.
Rule 19.2.2. Any person or group of persons acting in concert,
who intends to acquire thirty five percent (35%) of the
outstanding voting shares or such outstanding voting shares
that are sufficient to gain control of the board in a public
company in one or more transactions within a period of twelve
(12) months, shall disclose such intention and
contemporaneously make a tender offer for the percentage
sought to all holders of such securities within the said period.
If the tender offer is oversubscribed, the aggregate amount of
securities to be acquired at the close of such tender offer shall
be proportionately distributed across selling shareholders with
whom the acquirer may have been in private negotiations and
other shareholders. For purposes of SRC Rule 19.2.2, the last
sale that meets the threshold shall not be consummated until
the closing and completion of the tender offer.
______________________________________________
TN: the law says 15% for single transaction and 35% for
creeping transaction, but it has now been MODIFIED by the
SRC Rules.
Tender offer is MANDATORY in some instances:
CREEPING TRANSACTION ( at least 15%)
Rule 19.2.1 IRR SRC - One who intends to acquire at
least 15% of the equity securities of a public company in
one time or creeping transaction.
Creeping transaction- a series of transaction over a period of
12 months.
If you’re acquiring only 15% of EQUITY SECURITIES whether
one-time transaction or over a period of 12 months. In this
instance, you don’t need to do a tender offer. Only file a
declaration of your intention with the SEC. No need to publish
or invite sellers to share their shares to you, you just let the
SEC know.
Subject matter of tender offer:
Total outstanding equity securities, it doesn’t matter whether is
voting or non- voting shares.
CREEPING TRANSACTION (at least 35%)
Rule 19.2.2 IRR SRC - One who intends to acquire at
least 35% or more of the outstanding voting shares of stock,
in ONE OR MORE transactions within a period of 12 months.
if you’re acquiring 35% or more of the OUTSTANDING VOTING
SHARES. In one or more transactions over the period of 12
months, you’re required to do a tender offer. This is a creeping
transaction. You’re required to disclose intention and make a
tender offer to all holders of security.
The law says that if you’re OVERSUBSCRIBED which means
there are more offers than your actual intention to buy, then
you just PRORATE. You only have to buy up to that percentage
that you’re offering.
Subject matter of tender offer:
Outstanding voting shares of stock
Example: if you want to buy a 5M shares and there’s Offeror A
offering 5M and there’s Offeror B offering also 5M, you cannot
just buy from Offeror A and not buy from Offeror B. You need
to pro-rate the shares that you want to acquire in both offerors.
So, 5/10 x 5M (shares you want to acquire) = 2.5M from
Offeror A and 2.5M from Offeror B.
- If you are oversubscribed, you have to apportion the
number of shares based on the offers.
What happens when no one offers a sufficient number
of share?
Example: You are offering for 10M shares but the offers are
only up to 7M, so you’re lacking 3M. What you do is increase
your offer, instead of P10/share, you can say you’ll buy P11 per
share. You already received 7M at your offer of P10/share but
you are still lacking 3M, so you increase your offer, so that
many will sell, you make it P11/share.
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Now, you received additional offer, say the exact 3M, so how
much are going to pay for this 3M shares? 11M because that is
what you offered already. What about the 7M? It will be 11M.
So, if there are any changes in the offer, that will apply to all
offerors.
PSE TRADING SYSTEM TRANSACTION
Rule 19.2.3 IRR SRC
Any person or group of persons acting in concert, who
intends to acquire thirty five percent (35%) of the
outstanding voting shares or such outstanding voting
shares that are sufficient to gain control of the board in a
public company through the Exchange trading system shall
not be required to make a tender offer even if such person
or group of persons acting in concert acquire the
remainder through a block sale if, after acquisition through
the Exchange trading system, they fail to acquire their
target of thirty five percent (35%) or such outstanding
voting shares that is sufficient to gain control of the board.
If it’s a PSE trading system transaction, even if you buy more
than 35% or such number of shares sufficient to get you
control over the board. There’s no need for tender offer.
Subject matter of tender offer:
Outstanding voting shares of stock
General rule: If you’re acquiring 35% or more of the
outstanding voting shares whether it’s a one time or a creeping
transaction of voting shares. You’re required to do a tender
offer.
Exception: If you’re acquiring the shares through the
Exchange (PSE) then you’re not required to do a tender offer.
BLOCK SALE
Rule 19.2.4.
Any person or group of persons acting in concert, who
intends to acquire thirty five percent (35%) of the
outstanding voting shares or such outstanding voting
shares that are sufficient to gain control of the board in a
public company directly from one or more stockholders
shall be required to make a tender offer for all the
outstanding voting shares. The sale of shares pursuant to
the private transaction or block sale shall not be
completed prior to the closing and completion of the
tender offer.
Block sale- it’s a privately arranged transaction. you already
know from whom you want to buy the shares. It’s a one-time
transaction.
One intends to buy 35% or more of the outstanding voting
shares at ONE TIME not through the exchange but in a private
sale. The acquirer is required to do tender offer immediately
since one intends to buy the 35% share one time unlike in Sec.
19.2.2 you just make a tender offer when you reach the
threshold.
You are required to buy all the outstanding voting shares, not
just for the percentage you want to acquire. This is a pre-
arranged transaction.
Subject matter of tender offer:
Outstanding voting shares of stock
What is the difference between Sec.19.2.2 and
Sec.19.2.4?
For Sec. 19.2.2. it’s a creeping transaction. You acquire 35% of
outstanding voting shares in one or more transaction over a
period of 12 months, you need to do a tender offer to all
holders of voting shares BUT you’re offer is only up to the
percentage to be acquired. So if you’re acquiring 35% you
should only say ”I want to buy 35%, so I’m only accepting up
to 35% once I reach that limit I’m no longer required to buy”
that is if it’s a creeping transaction.
For Sec. 19.2.4, it’s a private or block sale. You acquire 35% of
outstanding voting shares in a privately arranged transaction.
Whereas in the creeping transaction the offer is its only up to
the percentage required, here in the block sale it’s to ALL
outstanding voting shares.
Example: You want to acquire 35% and for example its
equivalent to 500k shares. And then you received two offers.
A and B offered to you, each offering 500k shares. You’re not
required to buy all offers. You’re only required to buy 500k.
How do you buy? You prorate. So you buy half which is 250k
shares from A and 250k shares from B. you’re only required to
buy up to the percentage to be acquired. That is if it’s a
creeping transaction.
If you’re doing a private or block sale, you have to offer to all
the outstanding voting shares which means that if A and B offer
500k shares each. Even if you offer to acquire only 35% which
in our example is equivalent to only 500k shares, but since A
and B offer 500k shares each then you are required to get all
the 1M shares.
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TN: If a creeping transaction you don’t know who the seller
would be yet, so you’re only required to purchase up to the
percentage that you want, the percentage of your offer. But if
you’re doing a block sale, the rule says that you have to extend
your offer to all of the outstanding voting shares.
ANY OTHER TYPE OF TRANSACTION
Rule 19.2.5.
If any acquisition that would result in ownership of over
fifty percent (50%) of the total outstanding equity
securities of a public company, the acquirer shall be
required to make a tender offer under this Rule for all the
outstanding equity securities to all remaining stockholders
of the said company at a price supported by a fairness
opinion provided by an independent financial advisor or
equivalent third party. The acquirer in such a tender offer
shall be required to accept all securities tendered.
If one acquires 50% of total outstanding equity securities of a
public company. Acquirer shall be required to do a tender offer
to all outstanding shares.
Subject matter of tender offer:
Total outstanding equity securities, it doesn’t matter whether is
voting or non- voting shares. You need to buy all outstanding
equity securities.
IMPORTANT NOTES:
Distinguish and be careful with the subject matter of the tender
offer, whether its total outstanding securities or outstanding
voting shares.
Total outstanding securities- it’s the sum of both voting and
non-voting shares.
Outstanding voting shares- are shares that give the
stockholder the right to vote on matters of corporate policy
making as well as who will compose the members of the board
of directors.
Example: Corporation A, it has 1M voting shares and another
1M non-voting shares. So in order for the requirement in
Sec.19.2.1 to apply, you have to acquire 15% of TOTAL
EQUITY SECURITIES, so it would 15% of 2Million. Which is
300k shares.
If you’re acquiring 15% of the 1Mvoting shares only which is
150k shares, are you required to do a declaration? No. are you
required to do a tender offer? No, because you don’t meet the
threshold. So for the 15% threshold, you look at total equity
securities. If that’s just 15% of the voting shares then that falls
short of the 15% requirement of the total equity securities so
no need of declaration.
Gavi tip: Learn to distinguish that, I’m very particular with the
wordings, the law is very specific. These securities and
commercial laws are very specific. If you want to be a
commercial lawyer, you need to be specific and detail oriented.
Rationale for requiring for a tender offer
In any type of acquisition which the acquirer will get control of
an issuer of the corporation , the law requires that the acquirer
must make a tender offer. It is in order to mitigate any
disadvantage to the minority stockholder and allow them to get
out of the corporation at the same price as the majority
stockholder.
Discussion:
The majority holders are more valuable because the holding of
the majority shares is sufficient to take control of the company.
For example I’d be willing to pay 50pesos per share for majority
shareholders but id be willing to pay 30pesos only per share for
the minority shareholding because the minority shareholdings
will not give me control of the company. However, that kind of
thinking is detrimental to the minority stockholders. So in that
case no one would want to be a minority stockholder anymore,
because your share would be deemed less valuable than
majority shareholders.
In fact if I were an unscrupulous investor, I’d buy majority
shareholders at a premium price and then I’ll try to squeeze the
minority shareholders out of the corporation. How can I do
that? I can try to dilute their shares by issuing more shares to
myself at par because to issue more shares I only need control
of the board and as long as the corporation still has
unsubscribed shares OR I can withhold in declaring dividends
because again that’s the power of the board to declare
dividends. Hence, a majority stockholder can actually squeeze a
minority stockholder out.
I could tell the minority stockholders, I bought the shares of
majority shareholder for P50 per share. However since you’re
just a minority, you sell to me at 10 pesos for share. If you
don’t sell, I’ll dilute your shares in the corporation. Such that to
the point that the minority shareholders will have no choice but
to share to me their shares.
That is the danger there that a tender offer is trying to
mitigate, For example, if I intend to acquire 35% or such
number of shares to control the board of directors, and then
I’m offering to buy for 50 pesos to acquire control. Then I have
to offer to all the stockholders of the company whether they’re
minority or majority stockholders.
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The tender offer rule allows the minority to get out of the Minority stockholder can be voting or non-voting. You are
corporation at the same price as the majority stockholder. considered a majority stockholder if you can elect the majority
Because in the tender offer whether you’re buying from a of the board members.
majority or minority stockholder, you have to pay the same
price. However if there’s no requirement for a tender offer, EXEMPTIONS TO THE TENDER OFFER RULE
then I’ll won’t offer to the minority anymore. I’ll just offer for
the majority, because their shares are sufficient to give me
control. 1. Rule 19.3.1.1.Any purchase of securities from the
unissued capital stock; Provided, the acquisition will not
The rationale for the tender offer rule is to allow the minority
result to a fifty percent (50%) or more ownership of
stockholders to exit the corporation. What if there is a change
securities by the purchaser or such percentage that is
in the majority stockholders and the minority and the majority
sufficient to gain control of the board;
stockholders cannot understand each other? So, of course as a
minority stockholder, I don’t know how thismajority stockholder
run the company, so I want I should have the option to exit the
corporation. But at the same time I don’t want be at the Take note that the tender offer rule applies only to a secondary
disadvantage. So I want to exit the company, at the same price purchase meaning you are not purchasing directly from the
of the previous majority. That is why the law provides for the issuer. It is not a primary issuance. You are buying from
tender offer rule. existing stockholders.

Because of that requirement, the tender offer just recently in
2015 was amended before the tender offer rule was only for
the shares of a public company. So if A, B, C are stockholders
of a public company. Here comes X wanting to buy the
majority, then you do tender offer.
If you are buying directly from the issuer as in this case, from
the unsubscribed share of the issuer, that is not subject to the
tender offer rule because ordinarily if the corporation issues its
unissued capital stock, the existing stockholders will be given a
pre-emptive right.

But what happened in the CEMCO CASE, A for example was Pre-emptive Right - a right given under the Corporation
owned by X1 and X2. B wants to buy the shares not of the Code in case of issuance of new shares by the corporation. It is
public company but of A, owned by X1 and X2. What was sold a right to the existing shareholders to purchase such number of
was not the shares of the public company but the shares of A. shares to maintain the percentage ownership in the
So, C even though he’s not the holder of the shares of A, he’s corporation.
the holder of the shares of the public company. C, the National
The rule is if the corporation issues new shares, first preference
Life Insurance in this case, said you also have to buy my shares
is given to existing stockholders to buy such number of shares
since you are now holding the majority of the corporation.
to maintain their percentage.
When you acquired the shares of A, you basically hold the
majority shares of the company. But then B said that is not
Example: Company has 3 stockholders – A (50%), B (30%)
what the tender offer rule says. Because the tender offer rule
and C (20%). If the corporation issues P10, 000 shares,
will only apply if you were buying the shares of a public
preference is given to A, B and C to buy the shares. So, A will
company. A is not a public company then why should I do a
have 50% preference, B -30% and C – 20%. So that at the end
tender offer?
of the day, after the issuance, they will retain their percentage
ownership, that is the pre-emptive right.
But the SC and the SEC said it does not matter because the
essence of the tender offer rule is change in control. So
So the concept of this rule is that if a third person buys from
whether that control is direct. You are buying directly the
the unissued capital stock, the presumption is that the other
shares of the public company or indirect you are buying the
stockholders have already been made aware and have waived
shares of the company indirectly that controls the company,
their pre-emptive rights. In fact, the SEC will not allow the
you are required to do a tender offer.
purchase of unissued shares without the waiver from the
existing stockholders of their pre-emptive rights. So you cannot
So the 2015 amendment made it more clear, because now the
say that the existing stockholders are blind-sided by the
2015 amendment says you have to do a tender offer when you
acquisition, in fact they are fully aware. I
are buying shares of a public company or its related company
or associate that controls the public company. Do a Tender
GR: If the acquisition is from the unissued capital stock of the
Offer.
issuer, it is an exemption from the Tender Offer Rule

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XPN: If the acquisition is 50% or more of the total outstanding

PROHIBITIONS OF FRAUD, MANIPULATIONS, AND
equity securities of the issuer or will gain the control of the BoD
INSIDER TRADING
of the issuer so it will need to make tender offer.
MANIPULATIVE PRACTICES
2.Rule 9.3.1.2. Any purchase of securities from an
increase in authorized capital stock;
Section 24. Manipulation of Security Prices; Devices
and Practices. – 24.1 It shall be unlawful for any person
No exception to this, any increase in the authorized capital
acting for himself or through a dealer or broker, directly
stock is exempt from the tender offer rule.
or indirectly
What is the difference between exemption 1 and 2?
(a) To create a false or misleading appearance of
active trading in any listed security traded in an
In the second exemption, there is a need to amend the Articles
Exchange of any other trading market
of Incorporation because there is a change in the authorized
(hereafter referred to purposes of this Chapter
capital stock.
as "Exchange")
Reason for exemption: Once there is an amendment of the
AOI, all the Board of Directors and stockholders will have to
decide and they will now be notified. So active trading, create an appearance of active trading. Why
is it prohibited? Because it is deceptive. When the shares are
Exemption #1: Once a corporation is issuing from its
actively traded it means that it is being bought and sold in the
unissued capital stock, the requirement is Board Approval and
stock exchange. If the shares are being actively traded there is
pre-emptive rights. This is implicit on your pre-emptive right
a chance that more people will be interested in the shares
that you are made aware because you are required to waive.
because they think that they can readily sell it.
Exemption #2: f the corporation increases its authorized
So if the shares are not actively traded in the stock exchange, it
capital stock, the requirement is approval of the majority of the
will not move in the stock market. No one will buy the share
Board and approval by 2/3 of the outstanding capital stock so it
because the impression, that what if I need the money already,
is not just Board approval but also stockholders approval. There
I can’t sell the shares because there is no ready buyer.
is no waiver, only 2/3 of the outstanding capital stock must
approve the amendments of the AOI. That is why it is considered as a manipulative practice to make
the shares as if it is actively traded.
Rule 19.3.1.3. Purchase in connection with foreclosure
proceedings involving a duly constituted pledge or security So how do you create an appearance of active trading when it
arrangement where the acquisition is made by the debtor fact there’s none?
or creditor;

Rule 19.3.1.4. Purchases in connection with a WASH SALES

privatization undertaken by the government of the
Philippines;
Rule 9.3.1.5. Purchases in connection with corporate
rehabilitation undercourt supervision;
Rule 19.3.1 .6. Purchases in the open market at the
prevailing market price;
Rule 19.3.1.7. Merger or consolidation
Rule 19.3.1.6- same as buying in the Exchange
Rule 19.3.1.7- requires 2/3 of the outstanding capital stock to
approve merger and consolidation.
Rule 24.1.5. Set forth below are examples of prohibited
conduct:
xxx
24.1.5.5. Engaging in transactions in which there is no
change in beneficial ownership of a security
First one is one we call a washed sale. It means a buying and
selling transaction in which there is no change in the beneficial
ownership of the share, how does that work?
For example, I own shares. I’ll tell one of my brokers to sell this
share, then I’ll tell my other broker that he’ll buy that share. So
the share is being sold and bought without the change of
ownership. Because the public will not know who sold and

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bought the shares, they will only see that the shares are being
MARKING THE CLOSE
bought and sold.

Rule 24.1.5. Set forth below are examples of prohibited

IMPROPER MATCHED ORDERS
Section 24. Manipulation of Security Prices; Devices and
Practices. – 24.1 It shall be unlawful for any person
acting for himself or through a dealer or broker, directly
or indirectly:
a) To create a false or misleading appearance of active
trading in any listed security traded in an Exchange of any
other trading market (hereafter referred to purposes of
this Chapter as "Exchange"):
xxx
ii. By entering an order or orders for the purchase or sale
of such security with the knowledge that a simultaneous
order or orders of substantially the same size, time and
price, for the sale or purchase of any such security, has or
will be entered by or for the same or different parties; or
Another type of making an appearance of active trading is what
we call improperly matched orders. This type instead that
you’re the only one you collude with another person. So here
there is a simultaneous order or orders of substantially the
same size, time and price, for the sale or purchase of any such
security, has or will be entered by or for the same or different
parties.
But really they have no obligation of buying and selling the
security. So for example I approached X to buy my shares. I’ll
be the one who will give him the money. So it’s not a real
transaction. The difference with improperly matched orders and
washed sale, in a washed sale, you are the only person, in
improperly matched orders you collude with another person to
make it appear that the shares are being bought and sold.
conduct:
xxx
24.1.5.2. Buying and selling securities at the close of the
market in an effort to alter the closing price of the
security (marking the close);
So you focus your transaction towards the closing. Why?
Because the closing is the price that gets published. So if you
want to influence the price. You affect the price that is
published.
So how do you do that you mark the close. It affects the
public’s impression of your shares. Example you want to affect
the price of the share so at the end of the day you kept on
buying shares, if you kept on buying the demand will increase.
If the demand will increase, the price of the shares will also
increase. At the very next day you will sell it at the highest
price. So you have profit by manipulating the market price.
PAINTING THE TAPE
Rule 24.1.5. Set forth below are examples of prohibited
conduct:
24.1.5.1. Engaging in a series of transactions in securities
that are reported publicly to give the impression of activity
or price movement in a security
Same as marking the close but this time you publicize your
transaction.

(a) To affect, alone or with others, a securities or HYPE AND DUMP

transactions in securities that: (I) Raises their price to
induce the purchase of a security, whether of the
24.1.5.4. Engaging in buying activity at increasingly higher
same or a different class of the same issuer or of
prices and then selling securities in the market at the higher
controlling, controlled, or commonly controlled
prices or vice versa (i.e. selling activity at lower prices and
company by others; or (iii) Creates active trading to
then buying at such lower prices);
induce such a purchase or sale through manipulative
devices such as marking the close, painting the tape,
squeezing the float, hype and dump, boiler room
For example, I bought 1000 shares, 1 peso each then I’ll buy
operations and such other similar devices.
another 1000 shares 1.50 each. Then I’ll buy another 1000
shares for 2 pesos. Then another 1000 shares for 3 pesos.

Then after I drive up the price to 5 pesos. I’ll sell everything for
5 pesos. You have profit because you bought the shares for 1
peso, 2 peso etc.

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Or vice versa, I’ll sell my shares at increasingly low prices. So
today I’ll sell at 10 pesos 1000 shares, then tomorrow I’ll sell at
9, 8, 7, 6. Then I’ll buy it all at 5 pesos. But later on the price
will normalize at 10 pesos, then I’ll sell it at 10 pesos. So I have
profit.
SQUEEZING THE FLOAT
24.1.5.6. Taking advantage of a shortage of securities in
the market by controlling the demand side and exploiting
market congestion during such shortages in a way as to
create artificial prices
Example: People are holding on to their shares. You keep on
bidding so that the price will increase, even if there is no one is
buying.
OTHER
24.1.5.7. Disseminating false or misleading market
information through media, including the internet, or any
other means to move the price of a security in a direction
that is favourable to a position held or a transaction;
You make predictions on the price of the share and you
publicize that.
(b) To circulate or disseminate information that the price
of any security listed in an Exchange will or is likely to
rise or fall because of manipulative market operations
of any one or more persons conducted for the purpose
of raising or depressing the price of the security for
the purpose of inducing the purpose of sale of such
security. (d) To make false or misleading statement
with respect to any material fact, which he knew or
had reasonable ground to believe was so false or
misleading, for the purpose of inducing the purchase
or sale of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of
transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose of
pegging, fixing or stabilizing the price of such security;
unless otherwise allowed by this Code or by rules of
the Commission.
SQUEEZING THE FLOAT
24.2. No person shall use or employ, in connection with the
purchase or sale of any security any manipulative or
deceptive device or contrivance. Neither shall any short sale
be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security except
in accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in
the public interest for the protection of investors
Don’t confuse short sale with washed sale. Washed sale is a
manipulative practice where there is no change in the beneficial
ownership of the shares.
A short sale on the other hand, is a situation where I speculate
that price of this sale will go down in the next fifteen days. I
don’t have shares in that company, so what I’ll do is I’ll borrow
shares then I’ll sell it at the high price.
Then 15 days after, true enough the price of the shares did go
down so I bought the same number of sales in the market and
I returned the share to the owner of the share. So you get
profit without owning shares.
Short sale is allowed, but it is regulated. It is not a manipulative
practice but it is speculation. It is a speculative practice subject
to the regulation of the SEC.
For example, I borrowed shares. Today the price of the shares
is 10 pesos per share. I borrowed 1000 shares, then promised
him that after 15 days, I’ll return the security. Is that allowed?
Yes it’s allowed.
So I sold the 1000 shares for 10,000 pesos. Then 15 days after,
since I speculate that the price will go down. True enough it
was 7 pesos per share. So I’ll buy 7, 7 times 1000 shares
7,000. So I’ll return to him the 1000 shares that caused me
7,000. I gained 3,000 shares without actually owning the
shares.
It’s allowed since its speculative but it can go either way. Short
sale when you sell a security that you do not own or a
borrowed security.
Brokers are willing to lend to you your shares. Since they can
get commission from it. It’s gambling for them.
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Short sale is allowed except: on short sale transactions. Another is it’s not technically a
manipulative practice but you are not allowed to profit from it.

23.3. It shall be unlawful for any such beneficial owner,

director or officer, directly or indirectly, to sell any equity
security of such issuer if the person selling the principal: (a)
Does not own the security sold: or (b) If owning the
security, does not deliver not deliver it against such sale
within 20 days thereafter, or does not within five days after
such sale deposit in the mails or the unusual channels of
transportation; but no person shall be deemed to have
violated this subsection if he proves not withstanding the
exercise of good faith he was unable to make such delivery
in such time, or that to do so would cause undue
inconvenience or expense.
SHORT SWING TRANSACTION OR PROFIT
Short Swing Transaction or profit which should not be confused
with short sale. Short sale is you are selling shares that do not
belong to you. Short swing transaction or profit , a director,
officer or principal stockholder cannot do a buy and sale
transaction or a sale transaction less than 6 months
If I’m a director and I buy shares in January, I buy shares in
February, I buy shares in March. That okay even it is within 6
months because that is buy buy buy that is not prohibited

General Rule: Short sales are allowed once you comply with
the regulation of the SEC and the PSE.
Exception: if the person doing the short sale, is a director,
officer or principal stockholder.
Reason: As we mentioned short sale is a speculative
transaction but if the transaction is by the director, officer or
principal stockholder. It cannot be considered as speculation
anymore since they can be privy to some information. The
information could not be material but it can influence the price
of the shares later on.
Latest rule on Short Sale
24.2-2.5. Execution of Short Sale Uptick Rule. No broker
or dealer shall use any facility of a securities exchange to
effect a short sale of any security unless (I) at a price
higher than the last sale or (2) at the price of the sale if
that price is above the next preceding different sale price
on such day.
But the moment that I sell in April, that is now a buy and sell
transaction which makes it a short swing transaction. Any profit
derived from that transaction belongs to the issuer.
Why? Because this is a form of speculative practice. The
director, officer, principal stockholder, they are deemed to have
knowledge that is generally not available to the public.
For example, these people have the knowledge let’s say a
company installed some labor saving device. This information is
not material to report under 17C. It is within the normal course
of business. So to prevent abuse of their knowledge, they are
not allowed to profit.
You are basically subject to a holding period to your shares
Example you bought shares in March, then sold it by August.
That is not allowed because it is within 6 month period. It
must be combination buy and sell or sell and buy.

Unless otherwise provided by the Commission, this price

requirement shall not apply to a sale due to a bona fide
market-making or arbitrage activity executed by a broker
dealer authorized to engage in such activities.

The tendency with short sale, is that since your speculation is

that the price of the share will go down in the next few days, if
a lot of people will do short sale it will drive the shares to go
down further. Since they want to buy shares at the lowest
price.

So the rule says that if your transaction is short sale, you

cannot buy it at the price lower that the market price. So if the
last independent transaction, not a short sale is at 5 pesos, You
cannot go lower at 5 pesos. That is the uptick rule applicable
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INSIDER TRADING
3.8. “Insider” means: (a) the issuer; (b) a director or
officer (or person performing similar functions) of, or a
person controlling the issuer; (c) a person whose
relationship or former relationship to the issuer gives or
gave him access to material information about the issuer or
the security that is not generally available to the public; (d)
a government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information about
an issuer or a security that is not generally available to the
public; or (e) a person who learns such information by a
communication from any of the foregoing insiders.
Insider Trading- an illegal practice where an insider transacts
a security while holding material non-public information and
without disclosing it to the other party.
Who are considered insiders?
a. Issuer
b. Director, officer or principal stockholder
c. Government employee who has access to
material-non public information
d. Any person who learns such information by a
communication from any of the foregoing
e. A person whose relationship or former relationship to
the issuer gives or gave him access to material
information about the issuer or the security that is not
generally available to the public;
Discussion: Being an insider per se is not illegal. Transacting
as an insider is technically not illegal.
We learned in Section 23 that the principal stockholder can buy
or sell the securities of your issuer. It’s allowed. In fact, SRC
says if there are changes in the stockholdings of the director,
officer or principal stockholder, you just need to report it to the
SEC. Every end of the month you report all the buying and
selling transactions of your officers, directors, principal
stockholders so that shows you its not illegal for these people
to transact.
What makes it illegal is when these people transact while in
possession of material non-public information.
27.2. For purposes of this Section, information is “material
non-public” if: (a) It has not been generally disclosed to the
public and would likely affect the market price of the security
after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or
(b) would be considered by a reasonable person important
under the circumstances in determining his course of action
whether to buy, sell or hold a security.
Two types of material information:
a. If it can potentially affect the market price of the
security being transacted
b. Of it affects the decision to buy or sell or hold the
security
Hence, not any information is considered material.
Example:
A branch manager of a universal bank operating in the
Philippines has resigned. Is that material information?
➢ Not really, because it has no lasting impact on the
operations of the bank.
But if it’s the president of the bank that died, is that material
information?
➢ Yes. That is now a material information because that
information has an impact on the operation of the
issuer. It may be that because the president died, the
securities will now be selling at a lower price since a
lot are selling their shares since they don’t know who’ll
the replace the president of the corporation.
When is information considered “non-public”?
1. If it’s not yet disclosed
Remember the disclosure rule in Sec.17, C. if there’s a material
event. The issuer is required to disclose it within 10minutes
from the happening of the event. Why? because that disclosure
rule will tend to restrict or prohibit insider trading.
Example: if bank president dies and if the director, officer or
principal stockholder transacts the shares. While the event of
the death of the president has not yet been disclosed, he can
be held guilty of insider trading.
2. If it’s already disclosed but reasonable time has not
yet lapsed for the public to digest the information and
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analyze what that particular information means for the
issuer.
Q: Now let’s say it was disclosed at 10:50am and then he
transacts at 10:51am, is that still considered as insider trading?
A: Yes, it is because you’ve not yet given the public ample time
to know the information and to analyze what it means.
Q: What if you transact at 11am on the same day?
A: Yes, because it’s still not yet sufficient time
Q: What if you transact 11am on the next day?
A: We don’t know for sure. That’s why the Philippine Stock
Exchange (PSE) has a rule that if an issuer gives out or
discloses material information. Insiders are prohibited to
transact within 2 trading days.
BLOCK-OFF PERIOD
Two-day Block off Period
General Rule: If a corporation discloses the material information to
the public, all the insiders are prohibited from transacting the
shares for 2 days. Two days is considered as sufficient time for the
public to absorb the information.
The information is still considered non-public from the time it arose
until two-days after it is disclosed.
EXEMPTIONS:
Where the insider is allowed to transact or his possible defences:
1. When the insider did not gain the information from his
relationship with the issuer; or
2. Insider disclosed the information to the other party or he had
reason to be believe that other party has already that information
Persons that are also covered in the prohibition of engaging
insider trading:
1. The insider’s spouse;
2. Insider’s relatives by affinity or consanguinity within the second
degree, legitimate or common-law
Discussion: For two trading days, the insiders are not allowed
to transact from the time that the information has been
disclosed. The PSE rules consider two trading days as sufficient
time for the market to absorb the information.
But if the information is NOT YET DISCLOSED, even if 1 week
has lapsed from the time that the information happened. You’re
absolutely prohibited to transact because it will only lose its
non-public character from the time of disclosure.
TN: Block-off period is not found in the SEC rules but its in the
PSE rules.
Example of Insider Trading:
An issuer plans to declare dividends but before it declares its
dividends, the issuer had it approved by its Audit committee.
The Audit committee consists of finance officers, independent
directors and some non-executive directors. However from the
time that its approved by the audit committee, it won’t be
official yet until approved by the board.
So the board meeting was scheduled one week after the audit
committee approved it. But in the meantime, those members of
the audit committee who approved the dividend declaration
already had knowledge that the company is going to declare
cash dividends.
Q: Is that material information?
A: Yes, because if you know that a company intends to declare
dividends which is payable on a certain day after declaration,
you’ll start buying the securities. On the other hand, if you’re
the one selling the securities, you’ll sell it at a higher price in
anticipation that your shares would receive dividends.
Q: Is knowledge of the audit committee, public or non-public?
A: Non-public, because the corporation has not yet disclosed it.
It was set to be disclosed once approved by the board since
that’s the time that the liability starts to run.
If approved by the audit committee, there’s still a possibility
that the board wouldn’t approve it. So it’s still “soft
information”, which is non-public.
Discussion: Hence, if the audit committee members start
buying shares in anticipation of the approval by the board of
the dividend declaration. Those audit committee members are
liable for insider trading.
Now after approval by the board, by virtue of the 10 minute
rule that information would be disclosed. However, the
members of the board and officers of the corporation cannot
buy the shares because its still considered non-public. So its
already disclosed but no sufficient time yet for the public to
absorb and analyze the information. They’re only allowed buy
two days after the disclosure of the declaration.
What kind of “information” are we talking about?
It may either be Intrinsic or Extrinsic information.
Ongpin Case (SEC decision)
Facts: Ongpin is one of the stockholders of Felix Mining, he’s a
member of the board. Then came the First Pacific group of
Manny Pangilinan, he wanted to acquire control of Felix Mining.
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So First Pacific made a declaration that they intend to acquire
40% of the shares of Felix Mining.
Consequently, Ongpin ,around November 28, sold shares to
Pangilinan at the price of P21 per share. At that time however
the Felix Mining shares were trading at only P19. But Pangilinan
told him that he still needs to buy more in order to acquire 40%
of the shares. Pangilinan said he’s willing to buy on December
2, Felix Mining shares still at P21.
So what Ongpin did is that from November 28 until December
2, he bought Felix Mining shares at P19 then on December 2 he
sold them all to Pangilinan at P21 per share. He transacted 174
times over the period of 2-3 days.
So now when the transactions were disclosed, it said what what
was done by Ongpin is insider trading because he knew from
Nov. 28 that Pangilinan was willing to buy at P21 and so he
purchased shares at P19 from the public knowing on Dec.2,
Pangilinan would buy it at P21.
Let’s go the elements of insider trading.
Was Ongpin an INSIDER?
- Yes, he was a director of Felix Mining.
Did he TRANSACT?
- Yes, he bought and sold securities.
Was the information that he possessed MATERIAL?
- Yes. Because you wouldn’t sell your shares at P19
now, if you knew that somebody was willing to
buy your shares at P21, three days from now.
Is it NON-PUBLIC?
- Yes because the arrangement between Ongpin
and Pangilinan was a private transaction. That’s
when Pangilinan told him he’s willing to buy at
P21 per share on December 2.
Is it PERTINENT INFORMATION?
Ongpin’s argument: It’s not the information covered by
insider trading because the information does not pertain to the
issuer itself. It’s not about the operations or the officers of the
issuer. It is not an INTRINSIC information, it is an EXTRINSIC
information. Hence, it cannot be considered insider trading
because it’s not something about the issuer. It’s something
about the market, the private transaction.
SEC Ruling: SEC says, it doesn’t matter. Insider trading
information may either be:
Intrinsic information- it’s an information about the
operations, directors officers of the issuer.
Extrinsic information- the information does not have to
pertain to the issuer but it affects the particular security that
you’re transacting with or the market.
So since the information is extrinsic and covered by the insider
trading so SEC said Ongpin is guilty of insider trading and and
fined him for 1M per transaction plus imprisonment.
(But now its pending in the CA for appeal and then CA issued a
TRO on it so we’re not yet sure what the actual outcome)
SEC 27.1. It shall be unlawful for an insider to sell or buy a
security of the issuer, while in possession of material
information with respect to the issuer or the security that is
not generally available to the public, unless: (a) The insider
proves that the information was not gained from such
relationship; or (b) If the other party selling to or buying
from the insider (or his agent) is identified, the insider
proves: (i) that he disclosed the information to the other
party, or (ii) that he had reason to believe that the other
party otherwise is also in possession of the information. A
purchase or sale of a security of the issuer made by an
insider defined in Subsection 3.8, or such insider’s spouse or
relatives by affinity or consanguinity within the second
degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-
public information if transacted after such information came
into existence but prior to dissemination of such information
to the public and the lapse of a reasonable time for the
market to absorb such information: Provided, however, That
this presumption shall be rebutted upon a showing by the
purchaser or seller that he was not aware of the material
non-public information at the time of the purchase or sale.
Is it possible that you have the elements and still no
violation?
Yes, you put up possible defenses provided by the law:
1. When the insider did not gain the information from his
relationship with the issuer; or
2. Insider disclosed the information to the other party or he had
reason to believe that other party has already that information.
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Discussion: What makes the transaction illegal is if you did
not disclose to the other party whom you’re transacting with
the material non-public information.
Hence it’s okay if you’re an insider and you transact while
possessing material non-public information but you TOLD the
other party.
Example: Hey I’ll buy your shares at P19 but honestly 3 days
from now Pangilinan would buy that same share at P21. And
the other party still agreed t do the transaction, then you’re not
liable for insider trading.
That is the essence of an insider trading.
SEC 27.3. It shall be unlawful for any insider to
communicate material non-public information about the
issuer or the security to any person who, by virtue of the
communication, becomes an insider as defined in
Subsection 3.8, where the insider communicating the
information knows or has reason to believe that such
person will likely buy or sell a security of the issuer while in
possession of such information.
Can an insider still be liable for insider trading even if
he does not transact?
Yes. He may be liable if the insider gives the information to
another person (second-hand insider) and the second-hand
insider uses the information and transacts with it.
The first insider in order to be liable must give the information
and he knows or has reason to believe that such person
(second hand insider) will likely buy or sell a security of the
issuer while in possession of such information.
Example: If you gossip to your neighbor that this mining
company, which you’re a stockholder of, has hit a new mining
site which has a lot of gold. That’s not yet public information
and you gossiped about it. Is that illegal? Technically gossiping
is not illegal.
But if you know that the person that you disclose the
information to will use that information to transact securities.
Then that becomes illegal, the person you told the information
to is also an insider. And both of you are liable for insider
trading.
Q: How does one say that you’d know that person would use
the information you disclosed?
A: if that person regularly engages in the stock market or you
know that in the past he has acquired and sold shares of that
particular issuer.
Q: The block off period is found in the PSE rules, so if the
company is not publicly listed, we don’t apply the block off
period?
Yes, the block off period is only applicable to listed companies.
Q: So if dili mu apply ang block off period, there’s no hard and
fast rule sa time of absorption of the public?
None. Kaning block off period is strictly only for listed
companies because that’s PSE rules. But these rules apply to all
issuers and issuers, meaning those corporations whose shares
are registered with the SEC. So not all issuers are listed man so
kani siya, you will have to prove that the public has not yet
absorbed the information.
Okay, although the 2 days is strictly applicable only to the PSE
such that even for example, murag malum prohibita, even if
you didn’t have the intention to do insider trading, you’re not
allowed to transact within the 2 day period.
On the other hand, if it’s not a listed company, you won’t apply
that rule. So he can transact within a 2 day period but if there’s
an essence of insider trading, he has to prove because in
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insider trading, there’s a presumption that you are doing insider
trading if you transact if you’re in possession of material non-
public information. So you’re already presumed to do insider
trading. So you have to prove that wala.
So it doesn’t mean also that you have a 2 day block off period,
it doesn’t mean that you transacted on the 3rd day, dili ka ma
liable for insider trading. Because what if the information is so
complicated that dili diay siya masabtan sa public. So even after
the lapse of the 2 day period, pwede gihapon ka ma liable for
insider trading. Because the purpose of this prohibition is to
prohibit insider trading but this is a violation of its own. You can
violate the block off period without violating the insider trading
rule. Pwede sad ka mag violate sa insider trading rule without
violating the block off period. Because insider trading is a
violation of the SEC while the block off period is a PSE rule.
Mutually exclusive ang duha guys.
FOREIGN INVESTMENT ACT
Classifications of Corporations:
1. Based on Nationality- determined by the citizenship of
the stockholders of the corporation.
2. Place of Incorporation- is dependent on which country
it was registered. It can either be:
a. Domestic- they are incorporated under the laws of
the Philippines. They are registered with the
Philippine SEC as Corporations.
b. Foreign- they are registered under the laws of a
country other than the Philippines.
Which corporations are allowed to do business in the
Philippines?
Both.
If a foreign corporation (registered abroad), intends to do
business in the Philippines, it has different options. One, it can
put up a branch, which means if it’s just a branch, it’s not a
separate entity from the head corporation but just an
extension. It can also do a representative office, it’s an
extension of a foreign corporation who is registered in the
office as a rep office but is not allowed to earn income.
Domestic corporations on the other hand, are corporations
registered under the SEC but these are not the only ways that a
foreign corporation can do business in the Philippines. Because
a foreign corporation can also put up a subsidiary. If it puts up
a subsidiary, it means it incorporates another corporation in the
Philippines. So a foreign corporation, it puts up and it registers
its own corporation in the Philippines. That corporation
registered in the Philippines is considered a domestic
corporation.
So a domestic corporation does not necessarily mean that the
corporation is Filipino-owned. Foreign corporation, on the other
hand, does not necessarily mean foreign-owned kay pwede
man all Filipino’s incorporate in Hong Kong and then they do a
branch office in the Philippines. That’s actually a foreign
corporation but Philippine owned.
So the classification of Place of Incorporation only talks about
where it’s registered. If in the Philippines then domestic, if
outside then foreign. Which is separate from the nationality of a
corporation.
The nationality of a corporation, it does not matter where the
corporation is registered. What matters is the citizenship of the
stockholders of the corporation. So when it comes to
nationality, it can be a Philippine national(meaning owned by
Filipino’s) or foreign owned or a Non-Philippine national.
So this place of incorporation, this is governed by the
Corporation Code because under the Corporation Code, it
provides you the requirements and the rules to apply in case of
domestic and foreign corporations, depending on where the
corporation is registered.
This one on nationality is not governed by the Corporation Code
but by the Foreign Investment Act. So it’s the FIA that
determines whether or not the corporation is a Philippine
national or a non-Philippine national. Why is it important to
distinguish between a Philippine national and a non-Philippine
national?
FOREIGN INVESTMENT NEGATIVE LIST
Under the FIA, what are the activities that corporations can
engage in?
1. Export Enterprise
- Companies which export 60% or more of its
products or services.
2. Domestic Market Enterprise
- Companies which provide products or services
within the country or whose exports are less than
60%.
What is the required ownership of this type of
enterprise?
Under the FIA, Corporations can engage in export or domestic
market except if the activity that they are engaged in is
included in the Foreign Investment Negative List (FINL).
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What’s the similarity between List A and List B?
List A- So the limit on foreign ownership is expressly provided
under the Constitution and the law
List B- these are regulated activities. The limitation on foreign
ownership is not expressly provided under the law but these
activities are regulated. Such that the government agencies
regulating them has provided for a ceiling on foreign
ownership.
So List A and List B are the same in the sense that they list
down the activities that foreign ownership is limited. It’s just
that on List A, the restriction on ownership is expressly
provided in the Constitution and special laws. Whereas in List B,
the limitation is not expressly provided under the laws but
these activities are regulated so there’s still a restriction on
foreign ownership.
The FIA provides you with the classification of Corporations
based on Nationality. Why does the FIA differentiate the
nationality of corporations?
Because the FIA regulates the activities where foreign
ownership is allowed and where only Filipino ownership is
allowed. In general, the FIA provides for 2 activities:
1. Export Enterprise
2. Domestic Market Enterprise
As a general rule the FIA says, whether it’s export or a
domestic market, 100% foreign ownership is allowed except if
the activity is listed in the FINL. In which case, you have to
follow the percentage of ownership required under the list.
And those activities that are listed under the FINL are called
Nationalized Activities because ownership is reserved for
Filipino citizens.
List A: Foreign Ownership is Limited by Mandate of the
Constitution and Specific Laws
No Foreign Equity
1. Mass media except recording (Art. XVI, Sec. 11 of the
Constitution; Presidential Memorandum dated 05 May 1994)
Mass Media – newspaper, television, radios, broadcasting
companies.
Streaming sites cannot put up in Philippines because of the
100% requirement of Filipino ownership.
2. Practice of professions (Art. XII, Sec. 14 of the Constitution,
Sec. 1 of RA 5181, Sec. 7.j of RA 8981)
a. Pharmacy (RA 5921)
b. Radiologic and x-ray technology (RA 7431)
c. Criminology (RA 6506)
d. Forestry (RA 6239)
e. Law (Art. VIII, Section 5 of the Constitution; Rule 138, Sec. 2
of the Rules of Court of the Philippines)
3. Retail trade enterprises with paid-up capital of less than
US$2,500,000 (Sec. 5 of RA 8762)
Retail Trade Enterprise
Paid up capital of less than US$2.5 Million.
Example: Sari-Sari Store
➢ Reserved for Filipino citizens
But if your paid-in capital is more than US$2.5M, you are
allowed foreign equity.
Example: Family Mart (Japanese based), they partnered with
Ayala and Rustans.
4. Cooperatives (Ch. III, Art. 26 of RA 6938)
5. Private security agencies (Sec. 4 of RA 5487)
6. Small-scale mining (Sec. 3 of RA 7076)
Small Scale Mining vs. MPSA Holders
MPSA Holders – allowed 60-40.
Small Scale Mining – no foreign equity. Here, you do your
mining manually.
7. Utilization of marine resources in archipelagic waters,
territorial sea, and exclusive economic zone as well as small-
scale utilization of natural resources in rivers, lakes, bays, and
lagoons (Art. XII, Sec. 2 of the Constitution)
8. Ownership, operation and management of cockpits (Sec. 5 of
PD 449)
9. Manufacture, repair, stockpiling and/or distribution of nuclear
weapons (Art. II, Sec. 8 of the Constitution)
10. Manufacture, repair, stockpiling and/or distribution of
biological, chemical and radiological weapons and anti-
personnel mines (various treaties to which the Philippines is a
signatory and conventions supported by the Philippines)
11. Manufacture of firecrackers and other pyrotechnic devices
(Sec. 5 of RA 7183)
Up to Twenty Percent (20%) Foreign Equity
12. Private radio communications network (RA 3846)
Up to Twenty-Five Percent (25%) Foreign Equity
13. Private recruitment, whether for local or overseas
employment (Art. 27 of PD 442)
14. Contracts for the construction and repair of locally-funded
public works (Sec. 1 of Commonwealth Act No. 541, Letter of
Instruction No. 630) except:
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a. Infrastructure/development projects covered in RA 7718; and
b. Projects which are foreign funded or assisted and required to
undergo international competitive bidding (Sec. 2 (a) of RA
7718)
15. Contracts for the construction of defense-related structures
(Sec. 1 of CA 541)
Up to Thirty Percent (30%) Foreign Equity
16. Advertising (Art. XVI, Sec. 11 of the Constitution)
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of natural
resources (Art. XII, Sec. 2 of the Constitution)
18. Ownership of private lands (Art. XII, Sec. 7 of the
Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182)
➢ For corporations owning private lands, foreign
ownership is only limited to 40%.
19. Operation of public utilities (Art. XII, Sec. 11 of the
Constitution; Sec. 16 of CA 146)
20. Educational institutions other than those established by
religious groups and mission boards (Art. XIV, Sec. 4 of the
Constitution)
21. Culture, production, milling, processing, trading except
retailing, of rice and corn and acquiring, by barter, purchase or
otherwise, rice and corn and the by-products thereof (Sec. 5 of
PD 194)
22. Contracts for the supply of materials, goods and
commodities to government-owned or controlled corporation,
company, agency or municipal corporation (Sec. 1 of RA 5183)
23. Facility operator of an infrastructure or a development
facility requiring a public utility franchise (Art. XII, Sec. 11 of
the Constitution; Sec. 2 (a) of RA 7718)
24. Operation of deep sea commercial fishing vessels (Sec. 27
of RA 8550)
25. Adjustment companies (Sec. 332 of RA 10607 amending PD
612)
26. Ownership of condominium units (Sec. 5 of RA 4726)
List B: Foreign Ownership is Limited for Reasons of
Security, Defense, Risk to Health and Morals and
Protection of Small- and Medium-Scale Enterprises
Up to Forty Percent (40%) Foreign Equity
1. Manufacture, repair, storage, and/or distribution of products
and/or ingredients requiring Philippine National Police (PNP)
clearance:
a. Firearms (handguns to shotguns), parts of firearms and
ammunition therefore, instruments or implements used or
intended to be used in the manufacture of firearms
b. Gunpowder
c. Dynamite
d. Blasting supplies
e. Ingredients used in making explosives
f. Telescopic sights, sniper scope and other similar devices
However, the manufacture or repair of these items may be
authorized by the Chief of the PNP to non-Philippine nationals;
Provided that a substantial percentage of output, as determined
by the said agency, is exported. Provided further that the
extent of foreign equity ownership allowed shall be specified in
the said authority/clearance (RA 7042 as amended by RA
8179).
2. Manufacture, repair, storage and/or distribution of products
requiring Department of National Defense (DND) clearance:
a. Guns and ammunition for warfare
b. Military ordnance and parts thereof (e.g., torpedoes, depth
charges, bombs, grenades, missiles)
c. Gunnery, bombing and fire control systems and components
d. Guided missiles/missile systems and components
e. Tactical aircraft (fixed and rotary-winged), parts and
components thereof
f. Space vehicles and component systems
g. Combat vessels (air, land and naval) and auxiliaries
h. Weapons repair and maintenance equipment
i. Military communications equipment
j. Night vision equipment
k. Stimulated coherent radiation devices, components and
accessories
l. Armament training devices
m. Others as may be determined by the Secretary of the DND
However, the manufacture or repair of these items may be
authorized by the Secretary of National Defense to non-
Philippine nationals; Provided that a substantial percentage of
output, as determined by the said agency, is exported. Provided
further that the extent of foreign equity ownership allowed shall
be specified in the said authority/clearance (RA 7042 as
amended by RA 8179).
DOMESTIC MARKET ENTERPRISE
General Rule: Up to 100% owned by foreigners whose
activity is not among those in FIA
Exception:
SMEs whose paid in capital is less than is $200,000, in which
case, it must be owned only 'Filipino Nationals'
XPNXPN (shall be allowed to non-Philippine national):
o Small and medium sized domestic market enterprise involved
in advanced technology as determined by the department of
science and technology with a paid in capital of at least
$100,000 OR
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o Small and medium sized domestic market enterprise that How much capital will the client put in? $500,000
employs 50 direct employees and with a paid in capital of at
least $100,000. Can you client own all the shares of his corporation?

Yes.
A domestic market enterprise, they can be 100% foreign
owned. It’s okay if all the stockholders are all foreigners except If his capital is $150,000?
if the activity that they are engaged in is listed in the Foreign
Investment Negative List A or B. In which case, you have to It depends on the number of employees.
follow the capitalization requirement under the specific laws.
If $25,000?
Except again, for domestic market enterprise, which under the
No. This time, you tell your client that he cannot. He has to get
FIA says that, if the domestic market enterprise is a small and
60% Filipinos. He can only participate up to 40%.
medium enterprise, with paid in capital of less than P200,000,
that is reserved to Philippine National (not Philippine Citizens,
If you client says his capital is P500M. Can he own more
but Philippine Nationals).
than 40%? (Still on the call center business with clients Globe
Smart etc)
Exception to the Exception: If it is engaged in advanced
technology, or employs 50 direct employees, and with paid in
Yes.
capital of at least P100,000. They are then allowed to be non
Philippine National. Can his corporation purchase land?

If a client goes to you, a foreigner, saying that I want to
put a business. It will be engaged in call center
services.
What will you ask your client?
Who are your clients?
If their clients are based abroad, that means they are exporting
their services.
What will be the next thing to do?
Check if call center business is in the FINL. It is not.
Can he put a corporation with a call center business
with clients abroad?
Yes
Can he own all his the shares of the company?
Yes.
Gavi Tip: Do not advice to get the family of his Filipino
girlfriend because they will be the one to incorporate etc…
because, first, they are export, and second, not in the FINL.
What if he says that his clients are Globe, Smart etc so
the call center?
It becomes a domestic market.
If domestic market, what will be your next question?
No, because in order to purchase land, you need 60-40
ownership.
CONSTITUTION REVIEW:
The Consti says that corporations are not allowed to own
public lands. They can only lease. But for private lands, the
Consti says, whoever are authorized to lease public lands under
the Public Land Act, are also authorized to buy public lands
(private lands cguro? But she said gyud public lands). And
that are the 60-40 companies
The 60-40 is not found in the Constitution under the acquisition
of private lands. It is found in the Public Land Act.
Are foreigners allowed to engage in business or to
invest in domestic corporations?
General Rule: Yes.
Up to how much?
Up to 100% whether they are doing export or domestic market.
Exception: If the activity is in the FINL. And included in the
FINL is that if the domestic market is a small and medium
enterprise, which is less than $200,000 paid in, these are
reserved to Philippine Nationals.
If the business is not in the FINL, it is okay to have 100%
foreign. It is in the FINL, you have to respect the limitations.
That is why the FINL activities are known as the Nationalized
Activities because they limit foreign participation.

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Who are Philippine Nationals?
SECTION 3. Definitions. — As used in this Act:
a) The term "Philippine national" shall mean a citizen of the
Philippines or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty (60%) of the fund will
accrue to the benefit of the Philippine nationals: Provided,
That where a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the
capital stocks outstanding and entitled to vote of both
corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of
the Board of Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall be
considered a Philippine national;
are normally banks. What they do is they have
the fund purchase land, then lease it to the
corporation. They still control the land.
Technically, the land is owned by the retirement
fund.
Why is this allowed?
Because the laws says the retirement fund where beneficiaries
are 60% Filipinos are considered as Philippine Nationals.
Philippine Nationals, 60-40 companies, can own land.
What if the stockholder of the corporation is also a
corporation, is that allowed?
Yes. This is called Corporate Layering.
What is the rule when it comes to corporate layering?
The law says:
(1) as long asat least60% of the total outstanding capital
stock entitled to voteis owned by Filipino citizens and
(2)as long as at least 60% of the board of directors are
Filipino citizens
This basically allows you to have a foreign stockholder who can
more or less exercise control of a Philippine National. The law
says, as long as the corporation is a Philippine National, all its
stockholdings are considered as Filipino ownership.

1. Philippine citizens Example:

2. Domestic partnership or association wholly owned by
citizens of the Philippines
- this means the corporation is registered in the
Philippines.
3. Corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines
- This is why the small and medium domestic
enterprises under FINL 40% ownership is only
allowed to foreigners because the law says 60%
has to be Philippine National.
Corporation A is owned by Filipino citizens; it owns 60% of
4. Foreign corporations wholly owned by Filipino citizens
Corporation B.
- It is not domestic, it is a foreign corporation but
fully owned by Filipino citizens.
Corporation C is a foreign owned corporation; it owns 40% of
- Difference between place of incorporation and
corporation B.
ownership. It is allowed that you are not
registered in the Philippines but 100% Filipino
What is Corporation B? It is a Philippine National.
own, still considered as a Philippine National.
5. A trustee of funds for pension or other employee
If Corporation B owns another 60% in Corporation D, what is
retirement or separation benefits, where the trustee is
Corporation D? Philippine National because as long as it
a Philippine national and at least sixty (60%) of the
complies with the 60-40 requirement ownership by Filipinos in
fund will accrue to the benefit of the Philippine
the outstanding capital stock entitled to vote and the board of
nationals
directors all the ownership of Corporation B (60%) in
- If what are involved are big multinational
Corporation D is considered as Filipino ownership, even in in
company, they are not allowed to own lands,
reality the 60% is not purely 60% Filipino. 40% of that is
because what is allowed is the 60-40 ownership.
foreign, the 40% of the 60% ownership is owned by C. (60%
What they do is they set up a retirement fund for
their employees. Who are the beneficiaries? The
ownership by Corp. B in Corp D in reality = 24% foreign, 36%
employees who are Filipino citizens. The trustees
Filipino)

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However, the FIA says, if you just comply with the 60% Filipino
owned requirement, the company will still be considered as
100% Filipino.
This is called the Control Test.
As long as it is 60% in all layers of the corporation that is
Filipino owned, it will be considered 100% Filipino. Such that,
Corporation D, is still a Philippine National even if in reality, the
60% ownership of Corporation B to D is not purely 60% Filipino
(24% foreign, 36% Filipino). They are still Filipino as far as the
law is concerned.
Do not apply the control test is what is involved is not corporate
layering. It is easy to identify if they are just individuals
because as long as there are 60 Filipino individuals, 40 foreign
individuals, the 60 Filipino individuals are pure Filipinos. The
problem with corporations, like that of Corporation B, it is not
purely Filipino (mixed raced, Mother- 40% foreign, Father 60%
Filipino). However, the law considers their offspring (of the
mixed raced) as 100% Filipino. Because as long as a Philippine
National holds 60% of the shares of another corporation, the
investee is also a Philippine National. You do not take a look at
the 60% as mixed race; you take a look at it as a whole, 100%
Filipino. In reality, like that of Corp. B, 40% of the 60% is
foreign. But you don’t consider that anymore.
There is another test, the Grandfather Rule.
The Grandfather Rule says that you have to trace back the
ownership of the foreigners up to the end.
If you apply grandfather rule, this is what will happen, the 40%
owner of Corporation D is Corporation C. If you look at it,
applying the control test, Corporation D is a Philippine National.
But grandfather rule says, you have to look at the root of
foreign ownership from the 60% (Ownership of Corp B in Corp
D). Of the 60%, 40% is foreign (24%). It is not pure Filipino
because 24% of that is foreign.
How much is the foreign ownership of Corporation D?
Indirect- 24% (40% of the 60% ownership of Corp B in Corp D)
Direct- 40%
Total: 64% foreign ownership
Thus, it is not a Philippine National.
In the grandfather rule, you take note of the direct ownership
and indirect ownership of the foreigner. In the control test, as
long as you are 60% you don’t take a look at anything else.
Take note: in the Control Test, the 60% ownership is
considered as a 100% Filipino citizen. You don’t consider that in
reality iyang mama is a foreigner, 40%.Basta, if iyang papa nga
Filipino has 60% ownership, Filipino anganak. You don’t look at
the indirect foreign ownership. Because 60% is the control
stockholder, siyaangmasunod.The citizenship of the controlling,
siyaangmasunod. That is the control test.
Sa grandfather rule, you have to “grandfather” the ownership.
You just don’t look at who is controlling. You take a look at how
much man gyudangiyang percentage nga foreign (from the
controlling). From the 60%, in reality, 40% of that is foreigner.
So there is a 24% indirect foreign ownership. But there is
another company (Corporation C) who owns 40% of
CoporationD, you now have 40% direct foreign ownership. The
total will now be 64% foreign ownership (24% indirect, 40%
direct). In this case, Corporation B will no longer be a Philippine
National because the foreign ownership is now more that the
40% limit.
The rule is, as long as it is 60-40, if you use the control test, it
is always Philippine national. If you use the grandfather rule, it
will always be a foreign national or a non-Philippine national.
Who are allowed to invest in the Philippines?
- under the Foreign Investment Act (FIA) as a general
rule, foreign or Filipino owned corporations are
allowed to do business in the Philippines.
Two basic industries identified in FIA
1. Export Enterprises – a company is considered an export
enterprise if it exports more than 60% of its products
2. Domestic Enterprises – those which provide products and
services within the country or whose export is less than 60%.
Who are allowed to engage in export enterprise?
- 100% foreign owned corporations are allowed to
engage in export enterprises
EXCEPTION: those industries which are found in the Foreign
Investment Negative List (FINL).
Who are allowed to engage in domestic enterprise?
- Up to 100% foreign owned corporations
EXCEPTION:
a.) those industries found in the Foreign Investment Negative
List (FINL)
b.) Small and medium domestic market enterprises with paid
equity capital less than the equivalent of 200,000 US dollars.
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EXCEPTION TO THE EXCEPTION: But what if instead of individuals, a corporation owns another
corporation. how do you determine whether or not the investee
a.) Small and medium sized domestic market enterprise corporation is a Philippine national?
involved in advanced technology as determined by the
department of science and technology with a paid in capital of
at least $100,000; OR

b.) Small and medium sized domestic market enterprise that

employs 50 direct employees and with a paid in capital of at
least $100,000.

What is the significance of the definition of Philippine

national?

The definition of Philippine national is important because most

of the nationalized industries are limited to corporations which
have 60% Filipino ownership. And those corporations fall under
Philippine nationals as defined under FIA.

Its simple to determine if a corporation is a Philippine national if

the corporation is owned by individual stockholders.

Example: Corporation A has 6 individuals who are Filipino A corporation owns Z corporation, there are two requirements
citizens and 4 individuals who are foreigners, owning 10% needed in order to make Z corporation a Philippine national.
shares each shares in a domestic company. Hence, this
company is a Philippine national. TWIN RULES:

a.) 60% of the outstanding capital stock entitled to vote of both

the investor and the investee corporation must be owned by
Filipino citizens.

b.) 60% of its board of directors must also be citizens of the

Philippines.

Discussion: Owning 60% of the outstanding capital stock,

entitled to vote is not enough. Because the law says 60% of
the BOD must also be Filipino citizens.

Gavi: these are twin requirements class, don’t forget.

Even if there’s just one person as a Filipino citizen as long as
that one person owns 60% of the shares of the company, that What is the significance in identifying whether or not a
is still considered as a Philippine national. corporation is a Philippine national?

TN: what you need to take a look at is if the Filipinos own at 1.) in order to know whether the corporation is qualified to
least 60% of the capital stock of the corporation. If yes, then engage in nationalized activities, since there are certain
that corporation is a Philippine national. industries that only Philippine nationals can engage in; and

2.) any shares owned by the corporation as long as it is a

Philippine national will be considered as 100% Filipino owned.

Example: such that if Z corporation later on owns 60% of the

shares of M corporation, this 60% ownership of Z corporation
under the control test is considered as 100% Filipino owned.

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Even if in reality, Z corporation is 40% foreign owned. This is
because Z corporation qualifies as a Philippine national.
Essence of the “Control test”
When a corporation qualifies as a Philippine national any
investment by it to another corporation, is considered a 100%
Filipino investment.
Although the FIA only uses a control test, the SEC the DOJ uses
another type of test and that is what we call as the
“grandfather rule”
Grandfather Rule
In the previous example, how do you do the grandfather test?
40% of the foreign owned corporation multiply it by 60%
because that’s the number of shares of Z corporation in M
corporation.
40% x 60% = 24% (indirect ownership)
Q: Why do you multiply 40% and 60%?
Since Z corporation which owns 60% of M corporation
is 40% foreign owned, that means that 40% of the 60% is
foreign owned. Which means that X corporation indirectly owns
24% of the 60% plus directly owns 40% of the M corporation.
• Then we add the product to X corporation’s shares of M
corporation which it directly owns which is 40%.
Equation:
indirectly owned shares + directly owned shares =
Total ownership of foreign nationals
24% + 40% = 64%
The total ownership of X corporation in M corporation is 64%.
Q: Is M corporation now considered as 60% Filipino owned?
A: No, it cannot be because foreigner (X Corporation) owns
64% of its capital stock. Its 40% direct and 24% indirect thru Z
corporation.
Difference between the control test and the grandfather
rule
Under the control test, as long as you meet the 60/40
requirement of the outstanding capital stock entitled to vote
and 60/40 requirement on the Board of Directors (BOD). You’re
60% is considered as 100% Filipino-owned. So its considered
pure blood even if in reality its not.
But if you use the grandfather rule, you look past the
majority ownership of the Filipinos. And you try to see how
much of this 60% is really foreign-owned.
That is the difference between the control test and the
grandfather rule.
Narra Nickel Case
Is mining a nationalized activity?
Yes, it’s a nationalized activity. The basis is Article XII, Section
2 of the Constitution which states that exploration,
development, and utilization of natural resources should be
under the full control and supervision of the State but the
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government can enter into agreements with Filipino citizens or So what was used to pay the McArthur shares?
corporations or associations with at least 60% of whose capital
is owned by such citizens (Philippine nationals). The money supplied by the Canadian company.

Table 1. Which means that this paid-up capital of 825,000 is all foreign
because the Filipinos did not contribute anything. Look at the
McArthur Share- Total Paid-up Total MMC structure (Table 2), they gave 0 pesos unlike the foreigner
holdings Subscribed who gave 2.8 Million.
MMC 1,997 5,997,000 825,000 59.97%
(Filipino) Because of this, there is now doubt on the Filipino ownership of
MDMI 3,998 3,998,000 1,878,174 39.98% the McArthur shares. And because there is doubt, the SC said
(Canadian) to apply the Grandfather rule.

And using the Grandfather rule, you will show that the
Table 2.
foreigners exceeded 40%. If you only use the Control Test, you
will always pass. But in the Grandfather rule, you will always
MMC Share Total Paid-up Total
holdings Subscribed fail.
Olympic 6,663 6,663,000 0 66.63
shares @ So the SC applied the Grandfather rule, using it foreigners
1K owned 64% of McArthur. And since the foreigners owned 64%,
MDMI 3,331 @ 3,331,000 2.8M 33.31% McArthur is not qualified to hold a MPSA.
1k
So this shows a classic case of Corporate layering (there are at
least 3 layers shown in the case)
McArthur is the part to the MPSA. So under the Constitution,
McArthur has to be 60% Filipino-owned. MMC who is the 60% So McArthur is the investee (M Corpo) and MMC (Z Corp) who
owner of McArthur which is the MPSA holder. The MPSA holder owns 60% of the shares and you have the grandfather which is
is the company that is required to be a Philippine national. Olympic mines supposedly. Supposedly, Olympic Mines is
supposed to own 60% of MMC and it does on paper. On face
So how to determine Philippine national? value, Olympic(“100% Filipino) owns 60% of MMC which in
turn, owns 60% of McArthur, which is the MPSA holder, which
60% of the outstanding capital entitled to vote has to be 60%
must meet the requirement of being a Philippine national.
owned by Philippine citizens and 60% of the BOD has to be
Filipino citizens. But there is doubt on this ownership because MMC payment of
P825,000, if you look at the MMC capital structure, this was all
Looking at this capital structure (Table 1), there is nothing
supplied by MDMI, so there is doubt. And if there is doubt,
wrong with it. Using the Control Test, this is a Philippine
apply the Grandfather rule.
national. It meets the 2 criteria’s: (1) 60% ownership and (2)
60% BOD. If you stop at the Control test, Table 1 would have If Filipino ownership falls below the 60% requirement, is there
been okay. This can be a MPSA holder. any use of the Control test?

But the SC says that to not stop at the control test because
there is doubt as to the 60% doubt ownership of MMC. There is
doubt if the 60% is controlled by Filipinos.
Where does the doubt come from?
Looking at MDMI (Table 2), all the money that MMC used to
subscribed at the McArthur shares are actually foreign-owned.
Because if you look at the MMC structure (Table 2), the
Filipinos(Olympic), the Filipinos did not pay for anything.
No, automatically it doesn’t qualify since it falls below the 60%
requirement.
So the SC said, that to apply the Grandfather rule only when
there is “doubt” and doubt would mean that Filipino ownership
falls below the 60% ownership is ridiculous. Because if you fall
below the 60%, you don’t have to use the Grandfather rule
because you also fail in the Control test. Doubt is not when
Filipino ownership falls below 60%.

So who supplied the money? Obviously MDMI.

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So how do you apply the Control and Grandfather test?
How do you determine the nationality of a corporation?
Steps:
1. Apply Control Test
“at least sixty percent (60%) of the capital stock outstanding
and entitled to vote of each of both corporations must be
owned and held by citizens of the Philippines AND at least sixty
percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in
order that the corporation shall be considered a Philippine
national; (as amended by R.A. 8179).”
If it FAILED: then it means it does not comply with 60-40
requirement and NO NEED TO APPLY THE GRANDFATHER
RULE because you already fell below the 60% requirement.
Automatically, it is disqualified and it is not a Philippine
National.
If it PASSED and there is NO DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = you can
stop here
If it PASSED and there is DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = apply
GRANDFATHER RULE
What do you mean by “doubt”?
“Doubt” is any circumstance, which renders the beneficial
ownership and control of the corporation outside of Filipino
ownership. It is not when you fall below 60%.
In the old rule, it used to be that when you fall below 60%, you
apply the Grandfather Rule. It is a stupid interpretation because
why would you apply the Grandfather Rule when it is clearly no
longer a Philippine National.
The Supreme Court in the Narra case said that it is not that the
Control Test is obsolete. You use the Control Test and the
Grandfather Rule cumulatively.
The first test you use is the Control Test, if it does not pass,
then it is not a Philippine National at all, automatic it is
disqualified. If it passes the Control Test, then you can stop
there, that corporation is a Philippine National UNLESS there is
doubt or circumstances, which will show that the beneficial
ownership and control of the corporation is not with the Filipino
stockholders and so you apply the Grandfather Rule. As we
said, the moment you apply the Grandfather Rule, it
automatically fails.
In the Control Test, as long as you comply with the 60%-40%
requirement, automatic PASS. In the Grandfather Rule,
automatic FAIL.
You only use the Grandfather Rule if there is doubt on the
beneficial ownership and control of the Filipino stockholders
otherwise you stop at the Control Test.
In the Narra case, the SC said, there is doubt when the
investment made by the Filipinos, actually were paid by the
foreigners.
Again, corporate layering is not a circumvention of the law. It is
a valid structure as long as the corporate layering is not used to
circumvent the rules. Here, in this case, it was really used to
circumvent the rules because it was really the foreigners
funding the whole venture then it means there was actually
control by these foreigners. How can the stockholders who did
not pay anything control the corporation. As a general rule,
corporate layering is allowed as long as it passes the Control
Test but if there is doubt of the beneficial ownership and
control of the Filipinos, that is the time you use the Grandfather
Rule.
Query: For example, in the illustration of Narra case, if
there was really paid-up capital by the MMC (Filipino-
owned) and it is only around P100, 000 compared to
P2.8M of MBMI, will there still be doubt?
Yes, the Court may still apply the Grandfather Rule.
CIRCUMSTANCES THAT SHOW DOUBT (as stated in the Narra
MR case):
• The foreigners are the one conducting the viability
studies.
• The foreigners are the ones providing technical
support. – they are the ones sending their own
engineers without employing any Filipino engineers.
As stated in an SEC case:
• There may also be doubt if the foreigners hold a
higher par value than the Filipinos but they have the
same benefits.
- This would now be a question of why are the
foreigners paying more, what are they getting out of
it. No one in their right mind would pay more and get
less.
Discussion from a query: (refer to the illustration on the
Narra case)
As long as you have 40% total (MBMI), then you have in your
layer (MMC), you have a hint of even only 5% that it is foreign,
then your ownership will increase to 45%.
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You are already maxed out in the 40% (MBMI) so it will really
go beyond 40% but if you are not maxed out (not 40%) then
there is a chance that your indirect ownership is not sufficient
to make it over the limit but if youre already maxed out, you
will always fail kung 60-40 nadaanimong range.
Atty’s example: Let’s say,
MMC (Fil) total is 80%
MBMI (Canadian) total is 20%
Layer: MMC (Filipino) composed of:
Olympic (Fil) Paid Up= 90%
MBMI (Canadian) = 10%
So in here, you pass the Control Test. So if we’ll say that naa
pa gyud doubt, we will use Grandfather Rule, which means that
10% of your 80% is foreign so 80% x 10% = 8.
Then 20 + 8 = 28% so it is still a Philippine National.
This is one instance where you pass your Grandfather Rule
because you’re not maxed out, you are not 60-40. If
Grandfather Rule, automatic fail immediately. But if it is more
than 60%, there is a chance that you will pass.
What if all funds were given by the foreigner but you did not
reach 40%, it does not matter because ultimately the doubt is
whether you apply or not the Grandfather Rule but if you pass
the Grandfather Rule, then what’s the problem.
Summary:
To determine whether or not you have a Philippine National,
two requirements:
1. Total Outstanding Capital Entitled to Vote must be
60% Filipino-owned
2. The BOD must at least be made up of 60% Filipinos
There are two tests to determine whether or not the Filipino
ownership is sufficient:
1. Control Test - 60-60 Rule
2. Grandfather Rule – Take a look at not just the first
layer, but also determine the indirect ownership by the
foreigners to determine whether or not they exceed
the 40% limit.
The Grandfather Rule and the Control Test requires application
of 60% so it must be 60% Filipino-owned.
There arises a question of where you apply the 60%? A
corporation has many different kinds of shares.
In the Narra Nickel case, it is simple because there is only one
kind of share, the Common Shares.
What if there many kinds shares? Where do you apply
the 60%?
Gamboa v Teves 2011
The Philippine Legislature granted PLDT the franchise and right
to engage in telecommunications business. The American
company, General Telephone Electronics Corporation (GTE)
which is a major stockholder of PLDT, sold 26% of its common
shares to Philippine Telecommunications Investment
Corporation (PTIC). Prime Holdings, Inc. (PHI) became the
owner of 111,415 shares of stock of PTIC. In turn, such
111,415 shares of PTIC held by PHI were sequestered by the
PCGG which represent 46.125% of the outstanding capital
stock of PTIC that were later declared to be owned by the
Republic of the Philippines. First Pacific which is a Bermuda-
registered & HK-based firm acquired the remaining 54% of
PTIC. Subsequently, Interagency Privatization Council
announced selling the 111,415 shares or 46.125% of PTIC
through a public bidding. Parallax won the bid. Thereafter, First
Pacific as PTIC stockholder announced to match the bid of
Parallax to buy the 111,415 shares. However, it failed to do so
because of the deadline. Through its subsidiary MPAH, First
Pacific entered into a Conditional Sale & Purchase Agreement
with the government. With the completed sale, First Pacific
common shareholdings in PLDT increased to 37%, thereby
increasing the shares of foreigners to about 81.47% and thus
violating the constitutional limitation of foreign ownership of the
capital of a public utility.
PLDT had two kinds of shares
1. Common shares (voting) - made up 22.15 % of its total
outstanding shares.
2. Preferred non-voting shares – made up 77.85% of its total
outstanding shares
PLDT
Preferred Shares Common Shares
(77%) (22%)
99% 1% 81% 19%
(Fil) (For) (Fil) (For)
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Is PLDT a nationalized company?
Yes it is a public utility company engaged in
telecommunications. Under the Constitution, public utility
franchises are granted to Filipino citizens or corporations 60%
of the capital of which is owned by Filipinos.
ISSUE: When you say 60% of the capital, what then is
CAPITAL?
RULING/DISCUSSION:
CAPITAL is either:
1. Common
2. Preferred
3. Total Outstanding Capital Stock
a. Total Voting
b. Total Non-voting
In the first Gamboa case, the SC said that when you say
capital, you mean the common shares or based on voting
shares.
In the case of PLDT that would just be the common shares. In
order to determine whether you have 60-40 ownership, take a
look at the ownership of the voting shares, that is where you
apply the Control test.
GAMBOA v TEVES 2011:
“The term "capital" in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the
present case only to common shares, and not to the total
outstanding capital stock comprising both common and
non-voting preferred shares.”
CAPITAL is based on VOTING SHARES.
Control test is applied on the VOTING SHARES.
In the first Gamboa, the SC ruled that capital refers to shares
of stock entitled to vote in the election of BOD. Only
voting shares can vote in the election of board of directors.
Non-voting shares do not matter, TOCS does not matter.
To determining the 60-40 ownership, we take a look at the
total VOTING SHARES.
HEIRS OF GAMBOA v. TEVES MR 2012
HEIRS OF GAMBOA v TEVES (MR) 2012:
In short, the 60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of shares,
whether common, preferred non-voting, preferred voting or
any other class of shares. This uniform application of the 60-
40 ownership requirement in favor of Filipino citizens clearly
breathes life to the constitutional command that the
ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose
capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each
class of shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino
control of public utilities, as mandated by the Constitution.
60-40 Control test is applied to EACH class of shares.
Whether voting or non-voting.
In the Gamboa MR, the SC ruled that capital refers to shares
of stock entitled to vote. PERIOD
Under the Corporation Code, there is no such thing as a
completely “non-voting” share.
Non-voting shares participate in the voting in major
transactions of the Corporations (like amendment of articles,
sale of its assets, issuance of bonds, increase of authorized
voting capitals).
Therefore, to a degree, all of these shares have the capacity to
vote. In this case, SC does not confine “entitled to vote” to
voting in the BOD.
SEC-MC No. 8
Section 2. All covered corporations shall, at all times,
observe the constitutional or statutory ownership
requirement. For purposes of determining compliance
therewith, the required percentage of Filipino ownership
shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of
outstanding shares of stock, whether or not
entitled to vote in the election of directors.
Corporations covered by special laws which provide
specific citizenship requirements shall comply with the
provisions of said law.
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The Gamboa cases did not actually determinethe citizenship of Argument: But these “non-voting” shares also vote, as
PLDT. SC merely ordered SEC to make the determination. extensively discussed in the Gamboa ruling.

SEC came out with its own circular, it provides that the 60-40
test is to be applied on:
a. total number of stocks entitled to vote in election of
directors (1st Gamboa Rule); AND
b. TOCS
This is different from the 2nd Gamboa Ruling because it now
talks of TOTAL Outstanding Capital Stocks when the 2nd
Gamboa Ruling intended it to be EACH Kind of Stocks.
Thus, a case was filed against SEC Commissioner.
ROY v HERBOSA 2016
FACTS: Roy assails the SEC-MC No 8, arguing that it does not
follow the spirit of the ruling of the 2012 Gamboa Ruling (MR).
SC: But if you look at the Corpo Code, before the items can be
voted on by the non-voting shares, it has to go to the Board
first, and the BOD is controlled by the voting shares.
It doesn’t really matter if the non-voting shares can vote
because before they can vote, it has to go through BOD voting.
If the Filipinos control the BOD, by controlling 60% of the
voting shares, the capacity of the non-voting to vote will still be
dependent on the direction of the voting shares.
On the SEC MC No 8
On the first requirement,
1. total number of stocks entitled to vote in election of
directors (1st Gamboa Rule); AND
This actually follows the dictum of the First Gamboa ruling,
it is correct.

RULING: 2. TOCS
Good job to the SEC! They imposed an even stricter rule.
In view of the foregoing, the pronouncement of the Court This is a valid rulemaking by the SEC.
in the Gamboa Resolution — the constitutional
requirement to "apply uniformly and across the board to Therefore, the SEC MC is not against the Gamboa ruling.
all classes of shares, regardless of nomenclature and
So now, the prevailing rule is SEC MC No.8.
category, comprising the capital of a corporation 107 — is
clearly an obiter dictum that cannot override the
Atty Gaviola:In the exam, state “in the 2016 case of Roy v
Court's unequivocal definition of the term "capital" in both
Herbosa” as your basis because these rules are not in the law.
the Gamboa Decision and Resolution.
Illustration of all the rules

Intro discussion:
The 2nd Gamboa rule that the 60-40 is to be applied to EACH
kind of shares is merely an obiter dictum. The dispositive
CAPITAL in the company can have several kinds of shares.
portion of the 1st Gamboa ruling, it was clear that Capital
More commonly we have COMMON (Voting shares) and
should refer to shares of stocks entitled to vote in the
PREFERRED shares. The total of COMMON and PREFERRED, we
election of the BOD. (Nibalik ang SC sa 1st Gamboa ruling)
have TOCS.
Argument: What about the beneficial ownership? If 60-40 is
CS + PS = TOCS
just applied on the shares entitled to vote, this could mean that
there is a possibility there are more non-voting shares which GENERAL EXAMPLE:
will also vote on other matters in the Corporation?
COMMON SHARES 100
SC:The ruling of that the control, economic interest and
beneficial ownership, 60% must be in the hands of Filipinos, is PREFERRED SHARES-A Voting 100
not applicable in the Corporation as a whole. You only apply the
beneficial ownership control testand voting control test to the PREFERRED SHARES-B Non-Voting 100
only to the shares owned by the Filipino citizens. Such that, if
60% Filipinos control the voting rights and all the economic TOTAL OUTSTANDING CAPITAL STOCKS300
benefits, we don’t care what you do with the 40%. The 60% is
already compliance.

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FIRST GAMBOA RULE: a) TOTAL VOTING SHARES;

We apply 60-40 Control test to the VOTING SHARES. means aggregate of all shares that are entitled to vote the
BOD. AND
Thus, in our situation we consider the COMMON and the
PREFERRED Voting shares. COMMON 100
PREFERRED Voting 100
*Gamboa states “voting shares”, not just Common TOTAL VOTING SHARES= 200 shares
shares. Although more commonly, it is the common 60% of 200 shares
shares that has the voting power, but some preferred 120% must be Filipinos
may also have voting power, you include that in the
consideration of the “voting shares” it is not just
B) TOCS
limited to COMMON shares.
-means aggregate of all shares in the company, whether voting
CONTROL TEST under the First Gamboa Rule
or non-voting.
COMMON 100
PREFERRED Voting 100 COMMON 100
PREFERRED Voting 100
TOTAL VOTING SHARES= 200 shares
PREFERRED Non Voting 100
60% of 200 shares
120% must be Filipinos TOCS 300
60% of 300
180% must be Filipinos
SECOND GAMBOA RULE:
You have to pass both tests.
We apply 60-40 Control test to EACH class of shares. Meaning
all class of shares are subjected to the 60-40 test,
SEPARATELY. Each class must pass the 60-40 test. DOING BUSINESS IN THE PHILIPPINES

CONTROL TEST under the Second Gamboa Rule

Foreign corporations mean they were established by laws
COMMON 100 60% Filipinos
outside of the Philippines. It is different from Foreign-owned.
PREFERRED Voting 100 60% Filipinos
PREFERRED Non Voting 100 60% Filipinos
You will learn in your Corporation Code that if a foreign
TOCS 300irrelevant
corporation will do business in the Philippines it needs to
register and be licensed.

Remember: There are many ways for a foreign corporation to do business

60% of EACH CLASSES OF SHARES, not 60% of ALL
CLASSES OF SHARES.
“All classes of shares” refer to your TOCS.
What the Second Gamboa rule provides is EACH. You apply the
Control Test as many times as how many kinds of shares you
have.
SEC MC No. 8 (PREVAILING RULE)
We now apply 60-40 test to a) TOTAL VOTING SHARES and b)
TOCS.
in the Philippines:
1. Incorporate a Subsidiary
In this case, the subsidiary created will be a domestic corp.
2. Open a branch
Branch is a foreign corporation
3. Open a representative office, ROHQ or RAAHQ
They are still foreign corporation.
If you do business by #2 or #3, you will still have to get a
license from SEC to do business in the Philippines.
In the Corporation Code and under Remedial Law,

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If the corporation is

• Not doing business in the Philippines, you cannot sue
because they are not under our jurisdiction.
• Doing business in the PHbut without license, you can
sue them because they are doing business in the PH but
they cannot sue you because they have no legal presence.
• Doing business in the PH, with license, you can sue
them and they can sue you.
But the corporation code does not define what ‘doing
business’ is. The definition of doing business is in the FIA.
Foreign corporation incorporates a subsidiary. Subsidiary is a
domestic corporation engaged in business in the PH, but should
there be foreign stockholders, by merely owning the shares,
they are not deemed as doing business.
The foreign shareholders are not deemed as doing business. As
the one who is doing business is the domestic corporation. The
domestic corporation here, may be foreign owned or domestic
owned.

• nor having a nominee director or officer to represent its

Section 3. Definitions. - As used in this Act: interests in such corporation

d) The phase "doing business" shall include • nor appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name
• soliciting orders, service contracts, opening offices, and for its own account
whether called "liaison" offices or branches;
• appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay in Ordinarily, if there is a representative here in the PH, the
the country for a period or periods totaling one corporation is “doing business”.
hundred eighty (180) days or more;
• participating in the management, supervision or But if the agent transact in his own name and for its own
control of any domestic business, firm, entity or account, that corporation is “not doing business” because the
corporation in the Philippines;
agent is in the business for himself, not for the corporation.
• and any other act or acts that imply a continuity
of commercial dealings or arrangements, and
HAHN v CA
contemplate to that extent the performance of
acts or works, or the exercise of some of the
BMW contracted Hahn as an exclusive dealer of BMW. Later on,
functions normally incident to, and in
progressive prosecution of, commercial gain or of BMW replaced him and contracted another company.Hahn then
the purpose and object of the business organization. sued BMW.

CA: BWM cannot be sued because it is not doing business here

Provided, however, That the phrase "doing business: shall in the PH.
not be deemed to includemere investment as a
shareholder by a foreign entity in domestic SC: BMW is doing business in the PH.
corporations duly registered to do business, and/or the
Although BMW is doing business through Hahn, Hahn merely
exercise of rights as such investor; nor having a nominee
gets orders from customers, relates it to BMW. He doesn’t even
director or officer to represent its interests in such
receive payment.
corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its
BMW controls the structure of the dealership and all documents
own name and for its own account;
it issues. Hahn therefore, is not doing business in its own
name. Hahn is doing business as an agent of BMW.
“doing business”
Case was then remanded to RTC to determine if there was
So, if your activities in the PH show that you intend to stay in breach of contract.
the PH to gain profit, get costumers, you are doing business.
And here, you need to get a license.

“not doing business”

• mere investment as a shareholder by a foreignentity in

domestic corporations duly registered to do business

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