1

CEMCO HOLDINGS, INC., Petitioner vs. NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC.,
Respondent, G.R. No. 171815, August 7, 2007

Facts:

Respondent NLIC (National Life Insurance Company of the Philippines, Inc.), a minority stockholder of UCC
(Union Cement Corporation), a publicly-listed company, filed a complaint with the SEC to reverse and set aside
its previous ruling indicating that the acquisition by purchase agreement of petitioner CEMCO (Cemco Holdings,
Inc) of the shares of stock of BCI and ACC in UCHC (Union Cement Holdings Corporation), one of the two (2)
principal stockholders of UCC, was not covered by the Mandatory Offer Rule under Section 19 of Republic Act
No. 8799, otherwise known as the Securities Regulation Code. Petitioner contends that the same statute does
not vest the SEC with jurisdiction to adjudicate and determine the rights and obligations of the parties, and if
ever, SEC can only impose administrative sanctions such as the imposition of administrative fines, the suspension
or revocation of registrations with the SEC, and the like. Petitioner stresses that there is nothing in the statute
which authorizes the SEC to issue orders granting affirmative reliefs such as commanding it to make a tender
offer.

The SEC EB eventually reversed itself and set aside its previous Resolution which the CA affirmed.
The CA further held that SEC has jurisdiction to render the questioned decision and, in any event, petitioner
Cemco was barred by estoppel from questioning the SEC’s jurisdiction.

Issue:
Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a publicly-
listed company by Cemco through its purchase of the shares in UCHC, a non-listed company.

Ruling:

The scope of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or
any type of acquisition in line with the legislative intent of Section 19 of the Code which 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 indirect means, mandatory tender offer
applies.

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.

“Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to
acquire outstanding 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.

Under Section 19 of Republic Act No. 8799, it is stated:

 2
Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen
percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of
a corporation with assets of at least Fifty million pesos (P50,000,000.00) and having two hundred (200) or more
stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty percent (30%)
of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the
Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information
required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall
publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters
of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the
initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed
with the Commission and sent to the issuer not later than the time copies of such materials are first published
or sent or given to security holders.

Under existing SEC Rules,[16] the 15% and 30% threshold acquisition of shares under the foregoing provision was
increased to thirty-five percent (35%). It is further provided therein that mandatory tender offer is still applicable
even if the acquisition is less than 35% when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company.
 3
POWER HOMES UNLIMITED CORPORATION, Petitioner, vs. SECURITIES AND EXCHANGE COMMISSION AND
NOEL MANERO, Respondents. G.R. No. 164182, February 26, 2008

Facts:

The SEC was requested by private respondent Manero to conduct an investigation of petitioner as it was
allegedly involved in selling inexistent properties without any broker’s license. A month later, another letter of
inquiry was received by SEC pertaining to the activities of same petitioner engaging in the sale, offer for sale or
distribution of securities. The SEC then held a conference with petitioner and asked the submission of copies of
its marketing scheme and a list of its members and their addresses. It likewise visited its business premises and
gathered documents such as certificates of accreditation to several real estate companies, list of members with
web sites, sample of member mail box, webpages of two (2) members, and lists of Business Center Owners who
are qualified to acquire real estate properties and materials on computer tutorials.

After finding petitioner to be engaged in the sale or offer for sale or distribution of investment contracts, which
are considered securities, the SEC issued a CDO (cease and desist order) pursuant to Sec. 3.1 (b) of Republic Act
(R.A.) No. 8799 (The Securities Regulation Code) because petitioner violated Sec. 8.1 of the same Act as it failed
to register its business.

When petitioner’s motion to lift the CDO was denied by the SEC, aggrieved petitioner went to the CA imputing
grave abuse of discretion amounting to lack or excess of jurisdiction on public respondent SEC for issuing the
order. It also applied for a temporary restraining order, which the appellate court granted.

Issues:
(1) Whether petitioner’s business constitutes an investment contract which should be registered before its sale
or offer for sale or distribution to the public.

Held:

The petitioner is found to be engaged in the sale or distribution of an investment contract since the business
operation or the scheme of petitioner constitutes an investment contract that is a security under R.A. No. 8799.

An investment contract is defined in the Amended Implementing Rules and Regulations of R.A. No. 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.

The concept of an investment contract under R.A. No. 8799 traces its roots from the 1946 United States (US)
case of SEC v. W.J. Howey Co where the US Supreme Court was confronted with the issue of whether
the Howey transaction constituted an investment contract under the Securities Acts definition of security.
Recognizing that the term investment contract was not defined by the Act or illumined by any legislative report,
the US Supreme Court held that Congress was using a term whose meaning had been crystallized under the
state’s blue sky laws in existence prior to the adoption of the Securities Act. The blue sky laws refers to the time
from 1911 to 1931, where forty-seven of forty-eight states in the US enacted statutes regulating the sales of
securities. One advocate of the laws purportedly asserted that securities salesmen were so dishonest that they
would attempt to sell building lots in the blue sky. Thus, the statutes came to be known as the blue sky laws.
(Paul G. Mahoney, The Origins of the Blue Sky Laws: A Test of Competing Hypotheses, 46 J.L. & Econ. 229 [2003].)
Thus, it ruled that the use of the catch-all term investment contract indicated a congressional intent to cover a
wide range of investment transactions. It established a test to determine whether a transaction falls within the
scope of an investment contract known as the Howey Test. This test 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. Although the proponents must establish all four
elements, the US Supreme Court stressed that the Howey Test embodies a flexible rather than a static principle,
one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the
 4
use of the money of others on the promise of profits. Hence, 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.

After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al. In this case, the 9th Circuit
of the US Court of Appeals ruled that the element that profits must come solely from the efforts of others should
not be given a strict interpretation. It held that a literal reading of the requirement solely would lead to
unrealistic results. It reasoned out that its flexible reading is in accord with the statutory policy of affording broad
protection to the public.

This flexible concept appears to be what R.A. No. 8799 follows in our jurisdiction because it defines an
investment contract as a contract, transaction or scheme (collectively contract) 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. Thus, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must
be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits,
(4) primarily from efforts of others.

In the case, the scheme involves an investor enrolling in petitioner’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.

As petitioner failed to register the business, its offering to the public was rightfully enjoined by public respondent
SEC. The CDO was proper even without a finding of fraud. As an investment contract that is security under R.A.
No. 8799, it must be registered with SEC before its sale or offer for sale or distribution to the public, otherwise
the SEC cannot protect the investing public from fraudulent securities. The strict regulation of securities is
founded on the premise that the capital markets depend on the investing public’s level of confidence in the
system.