34.

Chua
PVB VS SEC

FACTS:
1. On March 17, 2004, respondent Justina F. Callangan, the Director of the Corporation Finance
Department of the SEC, sent the Bank a letter, informing it that it qualifies as a "public company" under
Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the SRC. The Bank is thus required to comply with the
reportorial requirements set forth in Section 17.1 of the SRC.

2. The Bank responded by explaining that it should not be considered a "public company"
because it is a private company whose shares of stock are available only to a limited class or sector,
i.e., to World War II veterans, and not to the general public.

3. In a letter dated April 20, 2004, Director Callangan rejected the Bank’s explanation and assessed
it a total penalty of One Million Nine Hundred Thirty-Seven Thousand Two Hundred Sixty-Two and
80/100 Pesos (₱1,937,262.80) for failing to comply with the SRC reportorial requirements from 2001 to
2003. The Bank moved for the reconsideration of the assessment, but Director Callangan denied the
motion in SEC-CFD Order No. 085, Series of 2005 dated July 26, 2005. When the SEC En Banc also
dismissed the Bank’s appeal for lack of merit in its Order dated August 31, 2006, prompting the Bank
to file a petition for review with the CA.

4. On March 6, 2008, the CA dismissed the petition

5. The bank filed an MR,The Bank reiterates that it is not a "public company" subject to the reportorial
requirements under Section 17.1 of the SRC because its shares can be owned only by a specific group of
people, namely, World War II veterans and their widows, orphans and compulsory heirs, and is not
open to the investing public in general. The Bank also asks the Court to take into consideration the
financial impact to the cause of "veteranism"; compliance with the reportorial requirements under the
SRC, if the Bank would be considered a "public company," would compel the Bank to spend
approximately ₱40 million just to reproduce and mail the "Information Statement" to its 400,000
shareholders nationwide.

Issue: Whether the Bank is a "public company" burdened with the reportorial requirements ordered by the
SEC,

Ruling: Yes, we look to Subsections 17.1 and 17.2 of the SRC, which provide:
Section 17. Periodic and Other Reports of Issuers. –

17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof shall file with the Commission:
a) Within one hundred thirty-five (135) days, after the end of the issuer’s fiscal year, or such other time
as the Commission may prescribe, an annual report which shall include, among others, a balance
sheet, profit and loss statement and statement of cash flows, for such last fiscal year, certified by an
independent certified public accountant, and a management discussion and analysis of results of
operations; and
b) Such other periodical reports for interim fiscal periods and current reports on significant
developments of the issuer as the Commission may prescribe as necessary to keep current
information on the operation of the business and financial condition of the issuer
.
17.2. The reportorial requirements of Subsection 17.1 shall apply to the following:
c) An issuer with assets of at least Fifty million pesos (₱50,000,000.00) or such other amount as the
Commission shall prescribe, and having two hundred (200) or more holders each holding at least one
hundred (100) shares of a class of its equity securities: Provided, however, That the obligation of such
issuer to file reports shall be terminated ninety (90) days after notification to the Commission by the
issuer that the number of its holders holding at least one hundred (100) shares is reduced to less than
one hundred (100). (emphases supplied)
We also cite Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC, which
defines a "public company" as "any corporation with a class of equity securities listed on an Exchange
or with assets in excess of Fifty Million Pesos (₱50,000,000.00) and having two hundred (200) or more
holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of
its equity securities."

From these provisions, it is clear that a "public company," as contemplated by the SRC, is not
limited to a company whose shares of stock are publicly listed; even companies like the Bank, whose
shares are offered only to a specific group of people, are considered a public company, provided they
meet the requirements enumerated above.
The records establish, and the Bank does not dispute, that the Bank has assets exceeding
₱50,000,000.00 and has 395,998 shareholders. It is thus considered a public company that must
comply with the reportorial requirements set forth in Section 17.1 of the SRC.

The Bank also argues that even assuming it is considered a "public company" pursuant to Section 17
of the SRC, the Court should interpret the pertinent SRC provisions in such a way that no financial
prejudice is done to the thousands of veterans who are stockholders of the Bank. Given that the
legislature intended the SRC to apply only to publicly traded companies, the Court should exempt the
Bank from complying with the reportorial requirements.

On this point, the Bank is apparently referring to the obligation set forth in Subsections 17.5 and 17.6 of the
SRC, which provide:
Section 17.5. Every issuer which has a class of equity securities satisfying any of the requirements in
Subsection 17.2 shall furnish to each holder of such equity security an annual report in such form and
containing such information as the Commission shall prescribe.
Section 17.6. Within such period as the Commission may prescribe preceding the annual meeting of the
holders of any equity security of a class entitled to vote at such meeting, the issuer shall transmit to such
holders an annual report in conformity with Subsection 17.5. (emphases supplied)
In making this argument, the Bank ignores the fact that the first and fundamental duty of the Court is to apply
the law.11 Construction and interpretation come only after a demonstration that the application of the law is
impossible or inadequate unless interpretation is resorted to.12 In this case, we see the law to be very clear
and free from any doubt or ambiguity; thus, no room exists for construction or interpretation.

Additionally, and contrary to the Bank’s claim, the Bank’s obligation to provide its stockholders with
copies of its annual report is actually for the benefit of the veterans-stockholders, as it gives these
stockholders access to information on the Bank’s financial status and operations, resulting in greater
transparency on the part of the Bank. While compliance with this requirement will undoubtedly cost
the Bank money, the benefit provided to the shareholders clearly outweighs the expense. For many
stockholders, these annual reports are the only means of keeping in touch with the state of health of
their investments; to them, these are invaluable and continuing links with the Bank that immeasurably
contribute to the transparency in public companies that the law envisions.

35
SEC vs. PROSPERITY.COM, INC.
FACTS: Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing
internet service. To make a profit, PCI devised a scheme in which a buyer could acquire from it an
internet website of a 15-Mega Byte (MB) capacity.
At the same time, by referring to PCI his own down-line buyers, a first-time buyer could earn
commissions, interest in real estate in the Philippines and in the United States, and insurance
coverage.
In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that the latter
had taken over GVI’s operations.
After hearing, the SEC, through its Compliance and Enforcement unit, issued a CDO against PCI. The SEC
ruled that PCI’s scheme constitutes an Investment contract and, following the Securities Regulations
Code, it should have first registered such contract or securities with the SEC pursuant to R.A. 8799.
PCI filed with the Court of Appeals and CA rendered a decision, granting PCI’s petition and setting aside the
SEC-issued CDO. The CA ruled that, following the Howey test, PCI’s scheme did not constitute an investment
contract that needs registration pursuant to R.A. 8799, hence, this petition by the SEC.
ISSUE: WON PCI’s scheme constitutes an investment contract that requires registration under R.A. 8799.
RULING: NO. PCI’s scheme does not require registration under R.A. 8799. The United States Supreme
Court held in Securities and Exchange Commission v. W.J. Howey Co. that, for an investment contract
to exist, the following elements, referred to as the Howey test must concur: (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. Thus, to sustain the
SEC position in this case, PCI’s scheme or contract with its buyers must have all these elements.
Here, PCI’s clients do not make such investments. They buy a product of some value to them: an
Internet website of a 15-MB capacity. The client can use this website to enable people to have internet
access to what he has to offer to them, say, some skin cream. The buyers of the website do not invest
money in PCI that it could use for running some business that would generate profits for the investors.
The price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI
creates, using its computer facilities and technical skills. The CA is right in ruling that the last requisite
in the Howey test is lacking in the marketing scheme that PCI has adopted. Evidently, it is PCI that
expects profit from the network marketing of its products. PCI is correct in saying that the US$234 it
gets from its clients is merely a consideration for the sale of the websites that it provides.
 36
Power Homes Unlimited Corporation v. SEC
G.R. No. 164182, February 26, 2008

FACTS: Petitioner is a domestic corporation duly registered with Public Respondent SEC, and is
engaged in the transaction of promoting, acquiring, managing, leasing, obtaining options on,
development, and improvement of real estate properties for subdivision and allied purposes, and in the
purchase, sale and/or exchange of said subdivision and properties through network marketing.

Public Respondent SEC acted on the letters of Respondent Noel Manero and a certain Romulo Munsayac, Jr.
Manero alleged that in a seminar he attended, Petitioner claimed that it sells properties that were
inexistent and without any broker’s license.

Munsayac on the other hand, inquired whether Petitioner’s business is legitimate or not. After
investigation, Public Respondent SEC found out that Petitioner is engaged in the sale or offer for sale
or distribution of investment contracts, which are considered securities under Sec. 3.1 (b) of Republic
Act (R.A.) No. 8799 (The Securities Regulation Code), but failed to register them in violation of Sec. 8.1
of the same Act, Public Respondent SEC issued a Cease and Desist Order against Petitioner. Petitioner
filed this petition for review after the Court of Appeals denied its petition for lack of merit and affirmed
in toto Public Respondent’s Cease and Desist Order.

ISSUES: 1. Whether or not Public Respondent SEC followed due process in the issuance of the assailed
Cease and Desist Order

2. Whether or not Petitioner’s business constitutes an investment contract which should be registered with
Public Respondent SEC before its sale or offer for sale or distribution to the public.

RULING: 1. The Court held that Petitioner was not denied of due process. The records reveal that Public
Respondent SEC properly examined petitioners business operations when it (1) called into conference
three of petitioners incorporators, (2) requested information from the incorporators regarding the
nature of petitioners business operations, (3) asked them to submit documents pertinent thereto, and
(4) visited petitioners business premises and gathered information thereat.

All these were done before the CDO was issued by the Public Respondent SEC. 2. The Court ruled that
Petitioner’s business constitutes an investment contract, thus, should be registered with Public
Respondent SEC before its sale or offer for sale of distribution to the public.

To determine whether a transaction falls within the scope of an investment contract, the Court made
use of the Howey Test which provides that an investment contract 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. Ciiting SEC v. Glenn W. Turner
Enterprises, Inc. et al., the Court therefore ruled that the business operation or the scheme of
Petitioner constitutes an

2. Investment contract that is a security under R.A. No. 8799. Thus, it must be registered with Public
Respondent SEC before its sale or offer for sale or distribution to the public. As petitioner failed to
register the same, its offering to the public was rightfully enjoined by Public Respondent SEC. The
CDO was proper even without a finding of fraud.

37
Cemco Holdings, Inc. vs. National Life Insurance Company of the Philippines, Inc.
529 SCRA 355, G.R. No. 171815 August 7, 2007
FACTS:
 Union Cement Corporation (UCC) has two principal stockholders:
o UCHC with shares amounting to 60.51%
 Majority of UCHCs stocks were owned by BCI with 21.31%
 ACC with 29.69%.
o petitioner Cemco with 17.03%.
 Cemco owned 9% of UCHC stocks.
 BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed
resolutions to sell to Cemco the BCIs stocks in UCHC.
 As a result of petitioner Cemcos acquisition of BCI and ACCs shares in UCHC, petitioners total
beneficial ownership, direct and indirect, in UCC has increased amounted to at least 53% of the
shares of UCC.
 As a consequence the PSE, inquired to SEC as to whether the Tender Offer Rule under Rule 19 of
the Implementing Rules of the Securities Regulation Code (SRC) is not applicable to the purchase
by petitioner of the majority of shares of UCC.
 The SECs Corporate Finance Department responded to the query of the PSE that while it was the
stance of the department that the tender offer rule was not applicable, the matter must still have to
be confirmed by the SEC en banc.
 SEC confirmed that the SEC en banc had resolved that the Cemco transaction was not covered by
the tender offer rule.
 Respondent National Life Insurance Company of the Philippines, Inc., a minority stockholder of
UCC, sent a letter to Cemco demanding the latter to comply with the rule on mandatory tender offer.
Cemco, however, refused.
 Respondent filed a complaint with the SEC asking it to reverse its Resolution and to declare the
purchase agreement of Cemco void and praying that the mandatory tender offer rule be applied to
its UCC shares.
 In a Decision the SEC ruled in favor of the respondent 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 SRC.
 Petitioner filed a petition with the CA challenging the SECs jurisdiction to take cognizance of
respondents complaint and its authority to require Cemco to make a tender offer for UCC shares,
and arguing that the tender offer rule does not apply.

ISSUES: 1. WON the SEC has jurisdiction over respondent’s complaint and to require Cemco to make a
tender offer for respondent’s UCC shares.
2. WON he 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.

RULING: 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
Rule19(13) of the Amended IRR of the SRC, 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 19thereof. 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 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 CA 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 CA:

“The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happen stance, as a result
of the transaction, it became an indirect owner of UCC. We are constrained, however, to construe ownership
acquisition to mean both direct and indirect. 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 bottom line 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.”