OSCAR C. REYES vs. HON.

REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH

INSURANCE CORPORATION and RODRIGO C. REYES,

[G.R. No. 165744. August 11, 2008]

FACTS:

Oscar and private respondent Rodrigo are two of the four children of the spouses Pedro
and Anastacia Reyes. Each had owned shares of stock of Zenith Insurance Corporation, a
domestic corporation established by their family. Pedro died in 1964, and his estate was
judicially partitioned among his heirs while Anastacia died in 1993. However, no similar
settlement and partition appear to have been made with Anastacia’s estate, which included her
shareholdings in Zenith.

Thereafter, Zenith and Rodrigo filed a complaint with the Securities and Exchange
Commission (SEC) against Oscar. The complaint stated that it is a derivative suit to obtain an
accounting of the funds and assets of ZENITH which are now or formerly in the control, custody,
and/or possession of Oscar and to determine the shares of stock of deceased spouses Pedro
and Anastacia Reyes that were arbitrarily and fraudulently appropriated by Oscar for himself
and which were not collated and taken into account in the partition, distribution, and/or
settlement of the estate of the deceased spouses, for which he should be ordered to account for
all the income from the time he took these shares of stock, and should now deliver to his
brothers and sisters their just and respective shares.

The case was transferred to the RTC designated as a special commercial court pursuant
to R.A. 8799. Oscar asserted, as a defense, that he purchased the subject shares with his own
funds from the unissued stocks of Zenith. He claimed that the complaint is a mere nuisance or
harassment suit and should, according to the Interim Rules of Procedure for Intra-Corporate
Controversies, be dismissed; and that it is not a bona fide derivative suit as it partakes of the
nature of a petition for the settlement of estate of the deceased Anastacia that is outside the
jurisdiction of a special commercial court.

The RTC, and affirmed by the CA denied the motion in part and took cognizance as to
the derivative suit for accounting of the funds and assets of the corporation..

ISSUE: Whether the trial court, sitting as a special commercial court, has jurisdiction over the
subject matter of Rodrigos complaint?

HELD:

No. The allegations set forth in Rodrigo’s complaint principally invoke Section 5,
paragraphs (a) and (b) as basis for the exercise of the RTC’s special court jurisdiction. It
provides that SEC shall have original and exclusive jurisdiction:

a. Devices or schemes employed by or any acts of the board of directors, business

associates, its officers or partners, amounting to fraud and misrepresentation which may
 be detrimental to the interest of the public and/or of the stockholders, 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;
and

As to the allegation of fraudulent devices and schemes, the Supreme Court held that in all
averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated
with particularity. Not every allegation of fraud done in a corporate setting or perpetrated by
corporate officers will bring the case within the special commercial court’s jurisdiction. To fall
within this jurisdiction, there must be sufficient nexus showing that the corporation’ s nature,
structure, or powers were used to facilitate the fraudulent device or scheme. Contrary to this
concept, the complaint presented a reverse situation. No corporate power or office was alleged
to have facilitated the transfer of the shares; rather, Oscar, as an individual and without
reference to his corporate personality, was alleged to have transferred the shares of Anastacia
to his name, allowing him to become the majority and controlling stockholder of Zenith, and
eventually, the corporations President. Thus, the charges of fraud against Oscar were not
properly supported by the required factual allegations. While the complaint contained allegations
of fraud purportedly committed by him, these allegations are not particular enough to bring the
controversy within the special commercial court’s jurisdiction; they are not statements of
ultimate facts, but are mere conclusions of law: how and why the alleged appropriation of
shares can be characterized as illegal and fraudulent were not explained nor elaborated on.

As to the allegation of intra-corporate controversy, the Supreme Court adopted the two-tier
test (relationship test and nature of the controversy test). To determine whether a case involves
an intra-corporate controversy, and is to be heard and decided by the branches of the RTC
specifically designated by the Court to try and decide such cases, two elements must concur:
(a) the status or relationship of the parties; and (2) the nature of the question that is the subject
of their controversy. The first element requires that the controversy must arise out of intra-
corporate or partnership relations between any or all of the parties and the corporation,
partnership, or association of which they are 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 franchises. The second
element requires that the dispute among the parties be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves matters that are purely
civil in character, necessarily, the case does not involve an intra-corporate controversy.

Without the settlement of Anastacia’s estate, there can be no definite partition and
distribution of the estate to the heirs. Without the partition and distribution, there can be no
registration of the transfer. And without the registration, then it cannot consider the transferee-
heir a stockholder who may invoke the existence of an intra- corporate relationship as premise
for an intra-corporate controversy within the jurisdiction of a special commercial court. In sum,
insofar as the subject shares of stock (i.e., Anastacia’s shares) are concerned Rodrigo cannot
be considered a stockholder of Zenith. Consequently, it cannot be declared that an intra-
corporate relationship exists that would serve as basis to bring this case within the special
commercial courts jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigo’s
complaint, therefore, fails the relationship test.

It is concluded that the complaint contained no sufficient allegation that justified the need for
an accounting other than to determine the extent of Anastacia’s shareholdings for purposes of
distribution. Moreover, the present controversy arose from the parties relationship as heirs of
Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is enforcing his
rights as a co-heir and not as a stockholder of Zenith. The injury he seeks to remedy is one
suffered by an heir (for the impairment of his successional rights) and not by the corporation nor
by Rodrigo as a shareholder on record. The nature, therefore of the present controversy is not
one which may be classified as an intra-corporate dispute and is beyond the jurisdiction of the
special commercial court to resolve. In short, Rodrigo’s complaint also fails the nature of the
controversy test.

In summary, whether as an individual or as a derivative suit, the RTC sitting as special

commercial court has no jurisdiction to hear Rodrigo’s complaint since what is involved is the
determination and distribution of successional rights to the shareholdings of Anastacia Reyes.

G.R. No. 164182 February 26, 2008

Power Homes Unlimited Corp. vs. SEC

FACTS:

Power Homes was engaged in managing real estate properties for subdivision & allied
purposes and in the purchase, exchange, and/or sale of such through network marketing.
Manero & Munsayac requested SEC to investigate petitioner’s business since he attended a
seminar conducted by Power Homes where the latter claimed to sell properties that were
inexistent and without any broker’s license & desires to know if network marketing is legitimate.

In compliance, petitioner submitted copies of its marketing course module and letters of
accreditation/authority or confirmation from Crown Asia, Fil-Estate Network and Pioneer 29
Realty Corporation. Respondent thereafter found Power Homes to be engaged in the sale or
offer for sale or distribution of investment contracts, which are considered securities under Sec.
3.1 (b) of R.A. No. 8799 (The Securities Regulation Code), but failed to register them in violation
of Sec. 8.1 of the same Act. R then issued a Cease and Desist Order to petitioner to enjoin the
latter from engaging in the sale, offer or distribution of the securities.
ISSUE:
Whether petitioner’s business constitutes investment contracts which should be registered with
R before its sale or offer for sale or distribution to the public?

HELD:

Yes. The Supreme Court ruled that petitioner failed the Howey Test which is used to
determine whether a contract is one of investment contract. It requires a transaction, contract, or
scheme whereby a person:
(1) makes an investment of money
(2) in a common enterprise
(3) with the expectation of profits
(4) to be derived solely from the efforts of others.

Any investment contract covered by the Howey Test must be registered under the
Securities Act, regardless of whether its issuer was engaged in fraudulent practices. R.A. No.
8799 defines an Investment contract as a contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led to expect profits not solely but primarily
from the efforts of others. In the case at bar, P’s business involves security contracts wherein an
investor enrolls in P’s program by paying US$234. This entitles him to recruit two (2) investors
who pay US$234 each and out of which amount he receives US$92. A minimum recruitment of
four (4) investors by these two (2) recruits, who then recruit at least two (2) each, entitles the
principal investor to US$184 and the pyramid goes on.

The trainings or seminars are merely designed to enhance P’s business of teaching its
investors the know-how of its multi-level marketing business. An investor enrolls under the
scheme of P to be entitled to recruit other investors and to receive commissions from the
investments of those directly recruited by him. Under the scheme, the accumulated amount
received by the investor comes primarily from the efforts of his recruits.

Securities and Exchange Commission v. Interport Resources Corporation

FACTS:

The Board of Directors of IRC approved a Memorandum of Agreement with GHB (Ganda
Holdings Berhad). Under said memorandum of agreement, IRC acquired 100% of the entire capital stock
of GEHI (Ganda Energy Holdings Inc.) which would own and operate a 102 megawatt gas turbine power
generating barge. In exchange, IRC will issue to GHB 55% of the expanded capital stock of IRC. On the
side, IRC would acquire 67% of the entire capital of PRCI (Philippine Racing Club).

It is alleged herein that a press release announcing the approval of the agreement was sent to the
Philippine Stock Exchange through facsimile and the SEC, but the facsimile machine of the SEC could
not receive it. However, the SEC received reports that the IRC failed to make timely public disclosures of
its negotiations with GHB and that some of its directors, heavily traded IRC shares utilizing this material
insider information. For this reason, the SEC required the directors to appear before the SEC to explain
the alleged failure to disclose material information as required by the Rules on Disclosure of Material
Facts. Unsatisfied with the explanation, the SEC issued an order finding that the IRC violated the Rules in
connection with the then Old Securities Act when it failed to make timely disclosures of its negotiations
with GHB. In addition, the SEC found that the directors of IRC entered into transactions involving IRC
shares in violation of the Revised Securities Act.

Respondents, however, questioned the authority of the SEC to investigate on said matter since
according to PD 902-A, jurisdiction upon the matter was conferred upon the PED (Prosecution and
Enforcement Department) of the SEC – however, this issue is already moot since pending the disposition
of the case, the Securities Regulation Code was passed thereby effectively repealing PD 902-A and
abolishing the PED. They also contended that their right to due process was violated when the SEC
required them to appear before the SEC to show cause why sanctions should not be imposed upon them
since such requirement shifted the burden of proof to respondents.

The case reached the CA and said court ruled in favor of the respondents and effectively enjoined
the SEC from filing any criminal, civil or administrative cases against respondents. In its resolution, the
CA stated that since there are no rules and regulations implementing the rules regarding DISCLOSURE,
INSIDER TRADING OR ANY OF THE PROVISIONS OF THE REVISED SECURITIES ACT, the SEC has
no statutory authority to file any suit against respondents. The CA, therefore, prohibited the SEC from
taking cognizance or initiating any action against the respondents for the alleged violations of the Revised
Securities Act.

ISSUE:

Whether or not the SEC has authority to file suit against respondents for violations of the RSA?

HELD:

The Revised Securities Act does not require the enactment of implementing rules to make it
binding and effective. The provisions of the RSA are sufficiently clear and complete by themselves. The
requirements are specifically set out and the acts which are enjoined are determinable. To tule that
absence of implementing rules can render ineffective an act of Congress would empower administrative
bodies to defeat the legislative will by delaying the implementing rules. Where the statute contains
sufficient standards and an unmistakable intent (as in this case, the RSA) there should be no impediment
as to its implementation.

The court does not discern any vagueness or ambiguity in the RSA such that the acts proscribed
and/or required would not be understood by a person of ordinary intelligence. The provision explains in
simple terms that the insider's misuse of nonpublic and undisclosed information is the gravamen of illegal
conduct and that the intent of the law is the protection of investors against fraud committed when an
insider, using secret information, takes advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from trading the shares of his corporation. This
duty to disclose or abstain is based n 2 factors: 1) the existence of a relationship giving access, directly or
indirectly to information intended to be available only for a corporate purpose and not for the personal
benefit of anyone and 2) the inherent unfairness involved when a party takes advantage of such
information knowing it is unavailable to those with whom he is dealing.

This obligation to disclose is imposed upon "insiders" which are particularly officers, directors or
controlling stockholders but that definition has already been expanded and not includes those persons
whose relationship of former relationship to the issuer or the security that is not generally available and
the one who learns such a fact from an insider knowing that the person from whom he learns such fact is
an insider. In some case, however, there may be valid corporate reasons for the nondisclosure of material
information but it should not be used for non-corporate purposes.

Respondent contends that the terms "material fact", "reasonable person", "nature and reliability"
and "generally available" are vaguely used in the RSA because under the provision of the said law what is
required to be disclosed is a fact of special significance, meaning:

1. a material fact which would be likely to affect the market price of a security or;
2. one which a reasonable person would consider especially important in determining his course of
action with regard to the shares of stock.

But the court dismissed said contention and stated that material fact is already defined and
explained as one which induces or tends to induce or otherwise affect the sale or purchase of securities.
On the other hand, "reasonable person" has already been used many times in jurisprudence and in law
since it is a standard on which most of legal doctrines stand (even the doctrine on negligence uses such
standard) and it has been held to mean "a man who relies on the calculus of common sense of which all
reasonable men have in abundance"

As to "nature and reliability" the proper adjudicative body would be able to determine if facts of a
certain nature and reliability can influence a reasonable person's decision to retain, buy or sell securities
and thereafter explain and justify its factual findings in its decision since the same must be viewed in
connection with the particular circumstances of a case. As to "generally available", the court held also that
such is a matter which may be adjudged given the particular circumstances of the case. The standards of
which cannot remain at a standstill.

Furthermore, the SEC retained jurisdiction to investigate violations of the RSA, reenacted in the
Securities Regulations Code despite the abolition of the PED. In this case, the SEC already commenced
investigating the respondents for violations of the RSA but during the pendency of the case the Securities
and Regulations Code was passed thereby repealing the RSA. However, the repeal cannot deprive the
SEC of its jurisdiction to continue investigating the case.

CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE COMPANY OF THE

PHILIPPINES, INC.

GR No. 171815, August 7, 2007

FACTS:

Union Cement Corporation (UCC), a publicly-listed company, has two principal

stockholders – UCHC, a non-listed company, with shares amounting to 60.51%, and
petitioner Cemco with 17.03%. Majority of UCHC’s stocks were owned by BCI with 21.31%
and ACC with 29.69%. Cemco, on the other hand, owned 9% of UCHC stocks. In a disclosure
letter, BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had
passed resolutions to sell to Cemco BCI’sstocks in UCHC equivalent to 21.31% and ACC’s
stocks in UCHC equivalent to 29.69%. As a consequence of this disclosure, the PSE inquired as
to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities
Regulation Code is not applicable to the purchase by petitioner of the majority of shares of
UCC. The SEC en banc had resolved that the Cemco transaction was not covered by the tender
offer rule. Feeling aggrieved by the transaction, respondent National Life Insurance Company of
the Philippines, Inc., a minority stockholder of UCC, sent a letter toCemco demanding the latter
to comply with the rule on mandatory tender offer. Cemco, however, refused.

Respondent National Life Insurance Company of the Philippines, Inc. filed a complaint
with the SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase
agreement of Cemco void and praying that the mandatory tender offer rule be applied to its UCC
shares. The SEC ruled in favor of the respondent by reversing and setting aside its 27 July 2004
Resolution and directed petitioner Cemco to make a tender offer for UCC shares to respondent
and other holders of UCC shares similar to the class held by UCHC in accordance with Section
9(E), Rule 19 of the Securities Regulation Code. On petition to the Court of Appeals, the CA
rendered a decision affirming the ruling of the SEC. It ruled that the SEC has jurisdiction to
render the questioned decision and, in any event, Cemcowas barred by estoppel from questioning
the SEC’s jurisdiction. It, likewise, held that the tender offer requirement under the Securities
Regulation Code and its Implementing Rules applies to Cemco’s purchase of UCHC stocks.
Cemco’s motion for reconsideration was likewise denied.

ISSUES:

1. Whether or not the SEC has jurisdiction over respondent’s complaint and to
require Cemco to make a tender offer for respondent’s UCC shares.

2. Whether or not the rule on mandatory tender offer applies to the indirect
acquisition of shares in a listed company, in this case, the indirect acquisition
by Cemco of 36% of UCC, a publicly-listed company, through its purchase of the
shares in UCHC, a non-listed company
HELD:

1. YES.

In taking cognizance of respondent’s complaint against petitioner and eventually

rendering a judgment which ordered the latter to make a tender offer, the SEC was acting
pursuant to Rule 19(13) of the Amended Implementing Rules and Regulations of the
Securities Regulation Code, to wit: “13. Violation

If there shall be violation of this Rule by pursuing a purchase of equity

shares of a public company at threshold amounts without the required tender
offer, the Commission, upon complaint, may nullify the said acquisition and
direct the holding of a tender offer. This shall be without prejudice to the
imposition of other sanctions under the Code.”

The foregoing rule emanates from the SEC’s power and authority to regulate,
investigate or supervise the activities of persons to ensure compliance with the
Securities Regulation Code, more specifically the provision on mandatory tender
offer under Section 19 thereof. Moreover, petitioner is barred from questioning
the jurisdiction of the SEC. It must be pointed out that petitioner had participated
in all the proceedings before the SEC and had prayed for affirmative relief.

2. YES.

Tender offer is a publicly announced intention by a person acting alone or in

concert with other persons to acquire equity securities of a public company. A
public company is defined as a corporation which is listed on an exchange, or a
corporation with assets exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not less than 100 shares of such
company. Stated differently, a tender offer is an offer by the acquiring person to
stockholders of a public company for them to tender their shares therein on the
terms specified in the offer. Tender offer is in place to protect minority
shareholders against any scheme that dilutes the share value of their
investments. It gives the minority shareholders the chance to exit the company
under reasonable terms, giving them the opportunity to sell their shares at the
same price as those of the majority shareholders.

The SEC and the Court of Appeals ruled that the indirect acquisition by petitioner of 36%
of UCC shares through the acquisition of the non-listed UCHC shares is covered by the
mandatory tender offer rule.

The legislative intent of Section 19 of the Code is to regulate activities relating to

acquisition of control of the listed company and for the purpose of protecting the minority
stockholders of a listed corporation. Whatever may be the method by which control of a
public company is obtained, either through the direct purchase of its stocks or through an
indirect means, mandatory tender offer applies. As appropriately held by the Court of
Appeals:
“What is decisive is the determination of the power of control. The
legislative intent behind the tender offer rule makes clear that the type of
activity intended to be regulated is the acquisition of control of the listed
company through the purchase of shares. Control may [be] effected
through a direct and indirect acquisition of stock, and when this takes
place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the shareholder of the listed
company the opportunity to decide whether or not to sell in connection
with a transfer of control.”