Kong, Marchini Sandro C.

OSCAR REYES V. REGIONAL TRIAL COURT OF MAKATI & ZENITH INSURANCE

CORP.

Facts:
Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the
spouses Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of
stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by their family.
Pedro died in 1964, while Anastacia died in 1993. Although Pedro’s estate was judicially
partitioned among his heirs sometime in the 1970s, no similar settlement and partition appear to
have been made with Anastacia’s estate, which included her shareholdings in Zenith. As of June
30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and
4,250 shares, respectively.
On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange
Commission (SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated
that it is "a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an
accounting of the funds and assets of ZENITH INSURANCE CORPORATION which are now or
formerly in the control, custody, and/or possession of respondent [herein petitioner 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."
In his Answer with Counterclaim, Oscar denied the charge that he illegally acquired the shares of
Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own funds
from the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit because the
requisites therefor have not been complied with. He thus questioned the SEC’s jurisdiction to
entertain the complaint because it pertains to the settlement of the estate of Anastacia Reyes.
Issue:
Whether or not the complaint is not a bona fide derivative suit but is in fact in the nature of a
petition for settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special
commercial court.

Ruling:
First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings
originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share are
inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo has
not alleged any individual cause or basis as a shareholder on record to proceed against Oscar.
Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must
allege with some particularity in his complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the directors or other officers for appropriate
relief with the expressed intent to sue if relief is denied.35 Paragraph 8 of the complaint hardly
satisfies this requirement since what the rule contemplates is the exhaustion of remedies within the
corporate setting:
As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted
all legal means of resolving the dispute with the end view of amicably settling the case, but the
dispute between them ensued.
Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to
Oscar’s acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in his own name,
then the damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect
the capital stock or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any
particular cause or wrongdoing against the corporation that he can champion in his capacity as a
shareholder on record.

POWER HOMES UNLIMITED CORPORATION V. SECURITIES AND EXCHANGE

COMMISSION AND NOEL MANERO
Facts:
Petitioner is a domestic corporation duly registered with public respondent SEC on October 13,
2000 under SEC Reg. No. A200016113. Its primary purpose is:
To engage 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.4
On October 27, 2000, respondent Noel Manero requested public respondent SEC to investigate
petitioner’s business. He claimed that he attended a seminar conducted by petitioner where the
latter claimed to sell properties that were inexistent and without any broker’s license.
On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public respondent SEC
whether petitioner’s business involves "legitimate network marketing."
On the bases of the letters of respondent Manero and Munsayac, public respondent SEC held a
conference on December 13, 2000 that was attended by petitioner’s incorporators John Lim, Paul
Nicolas and Leonito Nicolas. The attendees were requested to submit copies of petitioner’s
marketing scheme and list of its members with addresses.
The following day or on December 14, 2000, petitioner submitted to public respondent SEC copies
of its marketing course module and letters of accreditation/authority or confirmation from Crown
Asia, Fil-Estate Network and Pioneer 29 Realty Corporation.
On January 26, 2001, public respondent SEC visited the business premises of petitioner wherein
it 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.
On the same day, after finding petitioner 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 Republic Act (R.A.)
No. 8799 (The Securities Regulation Code),5 but failed to register them in violation of Sec. 8.1 of
the same Act,6 public respondent SEC issued a Cease and Desist Order.

Issues:
1. Whether or not public respondent SEC followed due process in the issuance of the assailed
CDO
 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. We hold that petitioner was not denied due process. The records reveal that public
respondent SEC properly examined petitioner’s business operations when it (1) called into
conference three of petitioner’s incorporators, (2) requested information from the
incorporators regarding the nature of petitioner’s business operations, (3) asked them to
submit documents pertinent thereto, and (4) visited petitioner’s business premises and
gathered information thereat. All these were done before the CDO was issued by the public
respondent SEC. Trite to state, a formal trial or hearing is not necessary to comply with the
requirements of due process. Its essence is simply the opportunity to explain one’s position.
Public respondent SEC abundantly allowed petitioner to prove its side.
2. 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 business scheme of petitioner in the case at bar is essentially similar. An investor
enrolls 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.
We reject petitioner’s claim that the payment of US$234 is for the seminars on leverage
marketing and not for any product. Clearly, the trainings or seminars are merely designed
to enhance petitioner’s business of teaching its investors the know-how of its multi-level
marketing business. An investor enrolls under the scheme of petitioner 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.We therefore rule that the business
operation or the scheme of petitioner constitutes an 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. As an investment contract that is security under
R.A. No. 8799, it must be registered with public respondent SEC, 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.

SECURITIES AND EXCHANGE COMMISSION V. INTERPORT RESOURCE CORP.

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.

Issues:
1. Whether or not the SEC has authority to file suit against respondents for violations of the
RSA.
2. Whether or not their right to due process was violated when the SEC denied the parties of
their right to cross examination.

Ruling:
1. 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 obligatd 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.
2. There is no violation of due process in this case since the proceedings before the PED are
summary in nature. The hearing officer may require the parties to submit their respective verified
position papers together will all supporting documents and affidavits of witnesses. A formal
hearing is not mandatory and it is within the discretion of the hearing officer to determine whether
or not there is a need for a formal hearing.
Moreover, the law creating the PED empowers it to investigate violations of the rules and
regulations and to file and prosecute such cases. It does not have an adjudicatory powers. Thus,
the PED need not comply with the provisions of the Administrative Code on adjudication.
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.
Investigations by the SEC is a requisite before a criminal case may be referred to the DOJ since
the SEC is an administrative agency with the special competence to do so. According to the
doctrine of primary jurisdiction, the courts will not determine a controversy involving a question
within the jurisdiction of an administrative tribunal where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate matters of fact.

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

PHILIPPINES, INC
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 dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that
it and its subsidiary ACC had passed resolutions to sell to Cemco BCI’s stocks in UCHC equivalent
to 21.31% and ACC’s stocks in UCHC equivalent to 29.69%.
In the PSE Circular for Brokers No. 3146-2004 dated 8 July 2004, it was stated that as a result of
petitioner Cemco’s acquisition of BCI and ACC’s shares in UCHC, petitioner’s total beneficial
ownership, direct and indirect, in UCC has increased by 36% and amounted to at least 53% of the
shares of UCC.
As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, 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.
In a letter dated 16 July 2004, Director Justina Callangan of the SEC’s 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.
Thereafter, in a subsequent letter dated 27 July 2004, Director Callangan confirmed that the SEC
en banc had resolved that the Cemco transaction was not covered by the tender offer rule.
On 28 July 2004, feeling aggrieved by the transaction, 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.
On 5 August 2004, a Share Purchase Agreement was executed by ACC and BCI, as sellers, and
Cemco, as buyer.On 12 August 2004, the transaction was consummated and closed.
On 19 August 2004, 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. Impleaded in the complaint were Cemco, UCC, UCHC, BCI and ACC, which were then
required by the SEC to file their respective comment on the complaint. In their comments, they
were uniform in arguing that the tender offer rule applied only to a direct acquisition of the shares
of the listed company and did not extend to an indirect acquisition arising from the purchase of the
shares of a holding company of the listed firm.

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.

Ruling:
1. The foregoing provision bestows upon the SEC the general adjudicative power which is
implied from the express powers of the Commission or which is incidental to, or reasonably
necessary to carry out, the performance of the administrative duties entrusted to it. As a
regulatory agency, it has the incidental power to conduct hearings and render decisions
fixing the rights and obligations of the parties. In fact, to deprive the SEC of this power
would render the agency inutile, because it would become powerless to regulate and
implement the law. As correctly held by the Court of Appeals:
We are nonetheless convinced that the SEC has the competence to render the particular
decision it made in this case. A definite inference may be drawn from the provisions of the
SRC that the SEC has the authority not only to investigate complaints of violations of the
tender offer rule, but to adjudicate certain rights and obligations of the contending parties
and grant appropriate reliefs in the exercise of its regulatory functions under the SRC.
Section 5.1 of the SRC allows a general grant of adjudicative powers to the SEC which
may be implied from or are necessary or incidental to the carrying out of its express powers
to achieve the objectives and purposes of the SRC. We must bear in mind in interpreting
the powers and functions of the SEC that the law has made the SEC primarily a regulatory
body with the incidental power to conduct administrative hearings and make decisions. A
regulatory body like the SEC may conduct hearings in the exercise of its regulatory powers,
and if the case involves violations or conflicts in connection with the performance of its
regulatory functions, it will have the duty and authority to resolve the dispute for the best
interests of the public.
Petitioner did not question the jurisdiction of the SEC when it rendered an opinion
favorable to it, such as the 27 July 2004 Resolution, where the SEC opined that the Cemco
transaction was not covered by the mandatory tender offer rule. It was only when the case
was before the Court of Appeals and after the SEC rendered an unfavorable judgment
 against it that petitioner challenged the SEC’s competence. As articulated in Ceroferr
Realty Corporation v. Court of Appeals11 :
While the lack of jurisdiction of a court may be raised at any stage of an action,
nevertheless, the party raising such question may be estopped if he has actively taken part
in the very proceedings which he questions and he only objects to the court’s jurisdiction
because the judgment or the order subsequently rendered is adverse to him.

2. 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.12 A public company is
defined as a corporation which is listed on an exchange, or a corporation with assets
exceeding ₱50,000,000.00 and with 200 or more stockholders, at least 200 of them holding
not less than 100 shares of such company.13 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.14 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 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.17
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.
This interpretation given by the SEC and the Court of Appeals must be sustained.