Dead Heroes

It would be unethical to sell the shares.

Rule 1.01 of the Code of Professional Responsibility provide, “A lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct.”

A lawyer should not only refrain from performing unlawful acts. He should also desist from engaging in unfair deceitful conduct to conceal from the buyer of the shares the planned corporate rehabilitation.

Insider Trading (2008)

No.XIII. Grand Gas Corporation, a publicly listed company, discovered after extensive drilling a rich deposit of natural gas along the coast of Antique. For five (5%) months, the company did not disclose the discovery so that it could quietly and cheaply acquire neighboring land and secure mining rights to the land. Between the discovery and its disclosure of the information to the Securities and Exchange Commission, all the directors and key officers of the company bought shares in the company at very low prices. After the disclosure, the price of the shares went up. The directors and officers sold their shares at huge profits,

(A) What provision of the Securities Regulation Code (SRC) did they violate, if any ? Explain. (4%)

SUGGESTED ANSWER:

The directors and key officers of the company violated the prohibition against insider trading under Sec. 27 of the Securities Regulation Code, which declares it unlawful for an “insider”

(which includes directors and officers of a publicly listed company) to sell or buy its securities, if they know of a fact of special significance with respect to the company or the security, that is not generally available to the public, before such material information made public through disclosure proceedings. The directors and key officers are liable to disgorge the profits earned and to pay damages.

(B) Assuming that the employees of the establishment handling the printing work of Grand Gas Corporation saw the exploration reports which were mistakenly sent to their establishment together with other materials to be printed. They too bought shares in the company at low prices and later sold them at huge profits. Will they be liable for violation of the SRC? Why? (3%)

SUGGESTED ANSWER:

The employees are liable for violation of the prohibition against insider trading.

They fall within the definition of

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“insider”. Subsection 3.8 of the Securities Regulation Code defines an insider as “a person whose relationship or former relationship to Issuer gives or gave him access to a fact of special significance about Issuer or the security that is not generally available.”

Investment Contract; Procedure (2010)

No.IV. Andante Really, a marketing company that promotes and facilitates sales of real property through leverage marketing, solicits investors who are required to be a Business Center Owner (BCO) by paying an enrollment fee of S250. The BCO is then entitled to recruit two other investors who pay S250 each. The BCO receives S90 from the S250 paid by each of his recruits and is credited a certain amount for payments made by investors through the initial efforts of his Business Center. Once the accumulated amount reaches S5, 000, the same is used as down payment for the real property chosen by the BCO.

(A) Does this multi-level marketing scheme constitute an ―investment contract‖ under the Securities Regulation Code? Define an

―investment contract.‖ (2%) SUGGESTED ANSWER:

Yes. The multi-level marketing constitutes an “investment contract”

under the Securities Regulation Code.

An “investment contract” is a contract, transaction or scheme (1) involving an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from the efforts of others (Power Homes Unlimited Corporation v. Securities and Exchange Commission, 546 SCRA 567 (2008)).

(B) What procedure must be followed under the Securities Regulation Code to authorize the sale or offer for sale or distribution of an investment contract? (2%)

SUGGESTED ANSWER:

Before the investment contract is sold or offered for sale or distribution to the public in the Philippines, it should be registered with the Securities and Exchange Commission in accordance with Section 8 of the Securities Regulation Code (Power Homes Unlimited Corporation v. Securities and Exchange Commission, 546 SCRA 567 (2008)).

(C) What are the legal consequences of failure to follow this procedure? (2%)

SUGGESTED ANSWER:

The failure to follow the procedure has criminal consequences (i.e., upon conviction, a fine 50,000 to 5 million pesos and / or imprisonment of 7 to 21 years). It carries also civil liabilities in

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that the purchaser can recover from the seller (i) the consideration paid with interest thereon, less the amount of any income received on the purchased securities, upon the tender of such securities, or (ii) damages if the purchaser no longer owns such securities (Sections 57 and 73, Securities Regulation Code). Furthermore, the Securities and Exchange Commission (SEC) may issue a cease and desist order (Subsection 64.1, Securities Regulation Code).

Margin Trading Rule (2009)

No.XX. Under the Securities Regulation Code, what is the margin Trading Rule?

(2%)

SUGGESTED ANSWER:

Under the Margin Trading Rule, no registered broker or dealer, or member of an exchange shall extend credit on any security an amount greater than whichever is higher of:

(a) 65 percent of the current market price of the security, or

(b) 100 percent of the lowest market price of the security during the preceding 36 calendar months, but not more than 75 percent of the current

market price (Section 48, Securities Regulation Code).

The purpose of the Margin Trading Rule is to prevent excessive use of credit for the purchase of securities. It is a counter to a broker’s desire to generate more sales by encouraging clients to but securities on credit (Carolina Industries, Inc. vs. CMS STock Brokerage, Inc. 97 SCRA 734 [1980]).

Securities; Exempt Securities (2009)

No.X. What are the so-called exempt securities under the Securities Regulation Code? (2%)

SUGGESTED ANSWER:

Under Section 9 of the Securities Regulation Code, the so-called exempt securities are:

(A) Those issued or guaranteed by the government of the Philippines or any of its political subdivisions or agencies;

(B) Those issued or guaranteed by the government of any foreign country with which the Philippines has diplomatic relation, or any other state on the basis of reciprocity, although the SEC may

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require compliance with the form and content of disclosures;

(C) Those issued by the receiver or by the trustee in a bankruptcy duly approved by the proper adjudicatory board;

(D) Those involving the sale or transfer which is bylaw, under the regulation of the OIC, HLURB, BIR; and

(E) Those issued by banks, except its own shares.

(Note: It is suggested that any two of the above exempt securities should be considered as enough answer to the question.)

Securities; Selling of Securities (2009)

No.XVII. Philippine Palaces Realty (PPR) had been representing itself as a registered broker of securities, duly authorized by the Securities and Exchange Commission (SEC). On October6, 1996, PPR sold to spouses Leon and Carina one timeshare of Palacio del Boracay for US S7, 500.00.

However, its Registration Statement became effective only on Feb.11, 1998 after the SEC issued a resolution declaring that PPR was

authorized to sell securities, including timeshares.

On March 30, 1998, Leon and Carina wrote PPR rescinding their purchase agreement and demanding the refund of the amount they paid because the Palacio Del Boracay timeshare was sold to them by PPR without the requisite license or authority from the SEC. PPR contended that the grant of the SEC authority had the effect of ratifying the purchase agreement (with Leon and Carina) of Oct.6, 1996.

Is the contention of PPR correct? Explain (3%)

SUGGESTED ANSWER:

The contention of PPR is not correct. It is settled that no securities shall be sold or offered for sale or distribution in the Philippines without a registration duly filed and approved by the Commission.

Corporate registration is one of the requirements under Sec. 8of batas pambansa Blg. 178 (timeshare Realty Corporation v. Lao, 544 SCRA 254 (2008)).

ALTERNATIVE ANSWER:

No. Such contention is not correct. Sale or offer to sell securities which are not exempt securities or which do not arise out of exempt transactions, and, therefore, requiring registration, is unlawful as such act is violative of the

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Securities Regulation Cod. Subsequent grant of authority by the SEC does not retroact to past sales or offers to sell.

Tender Offer (2010)

No.VII. Union Mines, Inc. has total assets of P60 Million with 210 stockholders holding at least 100 shared each.

The company has two principal stockholders, ABC which owns 60% of the shares of stock, and XYZ; which owns 17%.

ABC in turns is owned to the extent of 21.13% by Acme, Inc.; 29.69% by Golden Boy Inc.; 9% by XYZ; and the rest by individual stockholders.

None of the parties is a publicly-listed company.

XYZ now proposes to buy Acme’s and Golden Boy’s shares in ABC, which would give it, direct control of ABC and indirect control of Union Mines.

Is the proposal acquisition by XYZ subject to the mandatory tender offer rule? Why or why not? What is tender offer and when is it mandatory? (5%)

SUGGESTED ANSWER

Yes, the proposed acquisition is subject to mandatory tender offer rule. A tender offer is publicly announced intention by a person (acting alone or in concert with other persons) to acquire shares of a public company. A tender offer is meant to protect minority stockholders against

any scheme that dilutes the share value of their investments. It gives them the chance to exit the company under the same terms offered to the majority stockholders.

Under the Securities Regulations Code and its implementing rules, a mandatory tender offer is required (i) when at least 35% of the outstanding shares of a public company is to be acquired in one transaction or a series of transaction during 12-month period, or (ii) even if any acquisition is less than 35%

threshold but the result thereof is the ownership of more than 51% of the total outstanding shares of a public company.

The mandatory offer rule also applies to share acquisition meeting the threshold, which is done at the level of the holding or Parent Corporation controlling a public company (Cemco Holding, Inc. v.

National Life Insurance Company of the Philippines, Inc. 529 SCRA 355 [2007]).

In this case, Union Mines is clearly a public company, since it has total assets of P60 million pesos with 210 stockholders holding at least 100 shares each. A public company is defined as a corporation listed on the stock exchange, or a corporation with assets exceeding 50 million pesos and with 200 or more stockholders at least 200 of them holding not less than 100 shares of such corporation.

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XYZ’s acquisition of shares of Acme, Inc.

and Golden Boy, Inc., taken separately, does not reach 35% threshold. If taken collectively, the two acquisitions total only 50%. However, when the acquisitions are added to XYZ’s existing shares in Union Mines, they meet the more- than -51% thresholds for mandatory tender offer.