SECURITIES REGULATION CODE

First law enacted: Blue Sky Law in 1916

- Purpose: protect investors from speculative schemes with no basis than a fee feet of
blue sky

1936 Blue Sky law revoked and revised; CA no. 83, Securities Act of 1936
1982 BP 178 enacted; Revised Securities Act

2000 Securities Regulation Code enacted, revised the Revised Securities Act

Objectives
What is the market for Securities in the PH?
- Sec. 2
- in the PSE
- 1st objective: State shall establish socially conscious free market that regulates itself

What is PSE?
- Under the SRC, the PSE is a self-regulation organization
- is a kind of SRO (only one in the PH) and the market where you buy and sell securities

What is the goal of SEC as regards these SROs?

- Chapter 10 of SRC
- deals with registration, supervision, monitoring, oversight of SROs
- also outlines the responsibilities of these SROs
- purpose: to meet the statement in the declaration of policy, to create self-regulatory
markets
- PSE can issue its own rules and regulations, provided that these must not be in conflict
with the provisions of SRC and IRR established by SEC
- Ordinarily, law will not grant private corporations the right to issue its own rules and
regulations, but such right is granted to PSE to allow them to be independent and self-
regulating

2nd objective: Encourage widest participation and ownership in interprises

- Actually, this is not under SRC, but SEC has issued IRRs pertaining to SROs
- Under IRRs, there are certain portions of stock offered (10%) under IPO must be held
for sale to the public at large
- 60% will be for small and medium investors
- 30% are for qualifying investors, like banks
- So SEC has found a way to make sure that the shares sold to the public are not
concentrated only in big institutional qualifying buyers like banks, but ensures that this
reaches the public, through SM investors
- so this is how SRC encourages widest participation and ownership
- Registration is just basically an application, the important is the prospectus
main purpose of reg: make this information available to the public
- Prospectus contains information about the securities and the issuer of the securities

What is in this prospectus?

- the document made by or on behalf of an issuer, underwriter or dealer to sell or offer
securities for sale to the public through a registration statement filed with the
Commission

SRC is also known as the truth in securities law

But it is not a merit-based approach, but only a full and fair disclosure
SEC does not guarantee that the security will earn the best income when it
allows registration

Why does the public need to be informed about the security and the issuer?
This will help the public decide what securities are best for their investment
But the decision is still with the public; SEC does not guarantee that all of this
is safe and viable for the rest of your life
Registration will just really provide the public with the best information, with
the purpose of protecting the investors

What happens if investors feel secure?

- They will invest more, and the capital market would grow and develop.
- This in turn achieves another objective of the SRC promote and develop the capital
market. Then there would be a democratization of wealth.

Democratization of wealth
- Everyone is then given the chance to earn from big companies

Last objective: Minimize/totally eliminate insider tradingand practices that distort the
free market

Powers and Functions of the SEC

- Sec. 5 of the SRC

Primary Franchise
- all private corps are grantees of primary franchise from SEC, because this is needed to
incorporate. Once approved, then juridical personality commences.
- gives life to the corporation

What do you call those permit you get from other agencies that allow you to operation?
- Secondary Franchise
- this is the permit to operate (remember Sec. 6 under GBL)

What is the rule as regards corporations granted PF by SEC and SF by other government
agencies, regarding supervision and regulation?
- Theres a SEC regulation Mem. Circ. 11-2003 that says that if a company gets a SC
from another government agency, the latter will exercise control and supervision.
ex. Banks, PF from SEC, SF from BSP. They will be under the direct
supervision from BSP, the grantor of the SF.

What is the role of the SEC?

If the grantor of the SF is the SEC itself (like financial companies or investment
companies), same rule. These companies are under the direct control and supervision of
SEC.

What is the role of SEC with respect to grantees of SF?

- Only to ensure that these companies comply with the SRC, but all the rest like its
operations are under the control of the grantor of the SF.
- Only companies under direct supervision and regulation of SEC are only those
companies that are granted by SEC of SF.

2 instances under the SRC when its allowed to issue CDOs (cease and desist order)
- Sec. 64
- Sec. 53.3

Powerhomes Unlimited Corp. vs. SEC

- Under this case, before the SEC can issue a CDO, is it required to hold a formal trial
and hearing?
- One of the issues of this case was on the validity of the issuance of the CDO, it was said
that it violated due process
- SC: What is required is NOT a formal notice and hearing, for a valid issuance of a
CDO, is a mere opportunity to be heard.
- It is sufficient that the other party has been granted the opportunity to be heard and
produce its own evidence.
- In this case, officers of Powerhomes was invited by SEC, allowed to present documents,
and then SEC visited the premises. So there is no violation of due process.

Under the Corpo Code, who has the right to call a meeting of the SH?
-President.
-If no officer is present, any SH can petition SEC. But SEC will not call the hearing, but
it will only grant that SH the right to call a hearing.
-If no petitioning SH, under the Corpo Code, you have no recourse. But under Sec. 5 of
SRC, the SEC can compel any officer to call a SHs meeting. So this right to compel
exists even if there is no petitioning SH.

Par. 5.2 is relevant to Civ Pro

- powers of SEC to hear intra-corp disputes is now transferred to RTC

The SRC is known as the truth in securities act. How is this objective of getting the
truth with respect to securities achieved?
- Registration
What is required to be registered?
- ex. I am issuing company in SG, and I want to sell my shares in the securities in PH
do I need to register? Yes.
How about if I am an issuing company in PH, wanting to sell my securities in SG, do I
need to register in SEC? No.
- What is required to be registered are securities that are to be sold within the PH. If to be
sold outside of PH, no need to be registered.

What is required to be registered?

- Securities Sec. 3.1

In general, what are the kinds of securities? How are they classified?
1. Equity Securities
2. Debt Securities

Examples of securities under 3.1:

How are bonds different from debentures?

Bonds longer term
Debentures shorter maturity
Asset-backed securities governed by the Securitization Act of 2004, but how does this
asset-backed security work?
They are called ABS because they are based on assets owned by the issuing
company. And the sale of these ABS have to be registered under SEC.

What are asset-backed securities?

Securities issued by special purpose entities, which are backed by assets in the form of
debt securities. The income stream of the debt securities will now be the income of these
ABS.
- SPEs have to be created for the purpose of issuing ABS; so you have to register as an
SPE under the Securitization Act of 2004.

What is an investment contract?

- IRR 3G

What is the test to determine if a contract is an investment contract?

Howey Test
- case: SEC vs. Prosperity.com

Requisites of an investment contract:

1. an investment of money
2. in a common enterprise
3. with expectation of profits
4. primarily from efforts of others
- this modifies the Howey Test which requires the profit to be derived solely from the
efforts of others
5. (from Prosperity case): contract t

Case: SEC vs. Prosperity.com

- Not an investment contract, it was more of a sale based on the Howey test

How is it different from the Powerhomes case?

- In powerhomes, when you invested the money, you got a right to recruit investors.
These investors will pay you money, and look for other investors. And so on and
- In powerhomes, you are basically earning from the efforts of your down lines. This is an
investment contract, applying Howey test.

What are other securities? 3.1

What are derivatives? Rule 3F

- ex. Options and warrants
- Derivative has minimal value in relation to its underlying security. Value of the
derivatives change depending on the value of the underlying security.

How is an option different from a warrant?

- Options broader because it pertains to any type of security
Warrants confined to shares
warrants and options by themselves are securities, so you need consent from SEC

Deeds of Assignment used in selling intangible rights

Certificate of Participatipation selling only a portion of the intangible right

Registration of Securities

Sale of securities under 8.1 is subject to 3 periods, in general.

1. Pre-filing period
- securities cannot be sold, because registration needs approval from SEC
- no information dissemination allowed
SRC Rule 8.1, par.1(a): 2nd sentence does not allow dissemination unless registration
statement has been filed with SEC

2. Pre-offering period
- you have already filed the registration statement, but not yet approved by SEC
- sale not allowed
- dissemination of info allowed, subject to contents that must be stated based on SEC
rules
basis SRC Rule 8.1 unless a registration statement has been filed
or SRC Sec. 8

What accompanies the registration statement?

- prospectus

The prospectus is called at this stage?

-preliminary pros or red herring pros
-contains info on the security and the issuer

Preliminary or Red Herring Prospectus

- one which is not yet final, submitted together with the reg statement. This can be
disseminated provided that it contains the information that the securities covered by the
registration statement has not yet been approved and the RS is not yet effective.
- Rule 8.3 not yet an offer for sale because you have to state that the RS is not yet
approved; dummy prospectus

3. Offering Period
- sale allowed
- dissemination of information allowed
- can now have a final prospectus
- how long? Under Rule 8.1, par.1(c) within 2 days from date of effectivity of Reg
Statement (RS) until sale is (1) terminated by action of issuer or by (2) expiration of
period given by SEC

Unsold securities and the offering period has already expired. Already registered, except
just not sold.
- Shelf Registration you just need to file an updated RS with SEC, no need to do
registration from Step 1.

Difference between exempt security and exempt transaction?

Exempt Security, Sec. 9 SRC you can still it until forever; no need to register
Exempt transaction not the security that is exempt, but the circumstances of the sale.
Ex. When you purchased the shares, the transaction was exempt. But when
you sold them, no longer exempt. So you have to register this time.

- Non-risk securities are exempt securities because the government is seen as forever
solvent, through its power of taxation
- Securities issued foreign governments exempt for political reasons
- Bankruptcy securities are exempt because there is presumption that securities have
already been scrutinized by courts
- Securities issued by bank except its own shares of stock exempt because under the
supervision and control of the BSP, except the equity of the bank which needs greater
control because there is a big chance of conflict of interest, as bank will want to sell its
own equity.

9.2 allows SEC to add to any other exempt securities

Exempt Transactions SRC Sec.10

- Bankruptcy proceedings/insolvency proceedings controlled by courts, so considered as
adequate protection
- Foreclosure sale of chattel or pledge done in a EJF or JF. Either way, you go through
a process. Again, sufficient protection for sale of securities
- Distribution of securities as stock dividends when Corpo declares dividends, not
considered as a sale of security, so not required to be registered
or other distribution out of profits cash dividend not registrable because it is not a
security, so not covered; property dividend depends. If properties are securities, then it
might fall under SRC. But expressly exempted under Sec.10 (d).
ex. I have a corpo, I have investments in SMC shares. I want to use these
shares in SMC as dividends to be distributed to my SH, these are exempt
transactions.
- Sale of capital stock of corpo to own SH exclusively because SH are already
presumed to know their own corpo, so the law does not protect them.
Covers any purchase by a SH in the exercise of preemptive rights
Covers sale of shares of corporation from its authorized but unissued shares
- Exercise of a right of conversion when SH convert their shares to common share,
exempt transaction also
- Brokers transactions executed upon customers orders
Kinds of securities sold by brokers? Shares which are publicly-listed.
o Listed shares have to be registered; listed shares are sold in PSE and
because you are selling to the public, you have to register your shares.
But NOT all registered shares are required to be listed.
o Listed shares in the market, sold through the broker, do not need to be
registered again. If your shares are listed in the PSE and you sell them
through a broker, subsequent sales or transactions of those listed
shares need not be registered. But only if the sale is through brokers.
Personal sale not covered by the exemption. Like if I buy
shares and sell them on my own, not covered.
- Sale or subscription of securities for incorporation purposes, within 25% no need of
registration
If sale or subscription is within the 25% in pursuance of an increase in its
ACS, no requirement of registration
If you go beyond 25%, if you do not fall under any other criteria, then
registration is now needed.
- Private placement securities are sold to less than 20 persons in PH, within a 12-month
period
Ex. Today, Feb. 20, 2014, I sell shares to 10 persons. Aug. 2014, I sell another
set of securities to 5 persons. Jan. 3, 2015, to 5 persons. Total: 20 persons,
already above limit set in (k). Limit is only 19 below. More than 19 is already
considered selling to the public.
12-month period is not calendar year, but fiscal year. Start counting from the
first sale. Feb.20, 2014 Feb. 19, 2015.
How done? Last tranche of sale (sale to the 5 persons sold in Jan. 3, 2015) that
breached the 19-person limit now needs to be registered. Registration is
before the last sale is made.
 Ex. I published in a newspaper for sale, securities, 100/each and 19 persons
bought. Should I have registered? Is it covered by the exemption? NO.
o NOT COVERED. Private placement is geared toward the idea that
your target is only 19 persons, so from the start, you already know
who these people are. So if you made a publication TO THE WHOLE
WORLD but only 19 people bought, it is not private placement
anymore. Registration needed.
- Sale of securities to qualified buyers no protection because they are deemed experts.

Do you need to file anything with SEC before the entertain exempt transactions? It
depends.
10k and 10l you need to notify SEC; file a notice of exemption, before or after
Others no notification needed; but confirmation of exemption needed.
If you dont secure a confirmation of exemption before or after the sale,
anyone can question the sale. If you get a confirmation of exemption, no one
can question anymore. But there is a fee, 1/10 of the 1% of the maximum
aggregate price. Confirmation is optional, but it can protect you because it will
prevent anyone from questioning the validity of the sale.

Grounds of Revocation

Next meeting: Investor protection, covering tender offers, proxy solicitations, insider
trading and manipulative processes, including Cemco case

27 February 2014
SRC- truth and securities law
Main purpose: full and fair disclosure to the public about the securities and the issuing
company

Registration under the SEC does not mean that the shares are viable nor meritorious;
what SEC requires is that the full disclosure to the public allows the public to decide
whether it wants to invest in the securities or not

What is tender offer? Sec. 19

When you publicly announce your intention to acquire the securities

When is it considered mandatory? Sec. 19

- Ceiling for when tender

Tender offer required in 3 instances:

1. Person, alone or in concert, intends to acquire 35% or more equity securities in a single
transaction
2. Person/s intends to acquire 35% or more equity securities in a fleeting (?) transaction
-over the course of 12 months
3. Even if person/s intend to acquire less than 35% but acquisition will allow person/s to
own now more than 51% of the total outstanding capital stock
Tender offer does not apply to debt securities; it only applies to equity securities

Public company defined in IRR of SRC

- this definition was confirmed by the SC in the case of Phil. Veterans Bank vs.
Callangan
- according to SRC definition of a public company, confirmed by SC:
2 kinds of public companies:
1. Listed in exchange, regardless of amount of assets and no. of shareholders
2. When assets exceed 50M pesos in assets; 200 or more equity shareholders, at least 200
SH holding at least 100 shares each of a particular class of equity

When is tender offer not required under the SRC rules?

Rule 19.3, IRR
1. 35% ownership from unissued authorized capital stock
- primary purchase of shares purchase the shares directly from the corporation, from
the unissued ACS
secondary purchase of shares purchase from SH; 2nd time that shares are sold (first
time: from corpo to SH; second time: SH to purchaser)

What happens when a corpo issues shares from its authorized but unissued shares?
Preemptive right purpose: pro rate shareholding in the corporation will remain intact.
Reason why no.1 is exempt is because the existing SH will have the right to exercise their
preemptive right. According to SEC, that is already sufficient protection to existing SH,
so no need for tender offer.

2. Any purchase of shares from an increase in ACS

- Necessary to Amend AOI, which needs approval by SEC
- Corpo cannot do it by itself. So SEC will need to approve, this then is sufficient
protection to existing SH of the company.
- SEC requires submission of written waiver of preemptive right of existing SH

3. Purchase in connection with foreclosure proceedings

- court approval process, considered by SEC as sufficient protection
- only exempt if acquisition is made by creditor or debtor, not by a third person

4. Purchases in connection with privatization undertaken by government

- When government privatizes, it means it will sell the government-owned company to a
private investor. There has to be a public bidding.
- Because you publish and you make it known to the public that youre selling these
shares, SEC considers that as sufficient protection.

5. Purchases in connection with corporate rehabilitation under court supervision

6. Purchases through an open market at the prevailing market price

7. Merger or consolidation.

How is tender offer done?

Sec. 19
1. File your declaration to make a tender offer with SEC, and the PSE, if the shares are
listed in the exchange.
2. Give a copy of your offer to the issuing company
3. Publish a request for invitation for tender offer
- announce to the whole world that you intend to buy xx no. of shares from this company.
All of you existing SH intending to sell your shares, please let me know. Deposit your
shares at xx, payment will be done through xx.
- You make the whole world know that you intend to buy equity securities from a certain
corporation. And you want the SH to let you know if they want to sell.

Situation: What if I only want to buy 5,000 shares. But people are offering 10,000 shares.
Do I need to buy all?
- I can buy in proportion to the shares offered.

What if I change my mind. I dont want to sell my shares anymore. Can I still withdraw.
1. Yes, while the tender offer period is still open, meaning the tender offeror is still
accepting the deposit of securities.
- If the money has been paid to me, I have to return the money.
2. When can the person who are offering to sell their shares allowed to withdraw?
Sec.19.b/c, SRC
2 instances when securities deposited pursuant to a tender offer may be withdrawn
1. when the tender offer period is still open
2. if the securities have not been accepted for payment (deposited but wala pa bayari),
you can withdraw it after the lapse of 60 business days from the commencement of tender
offer, provided it has not been accepted for payment
- elucidated further in SRC rule 19.1, par.9.d

If you change the terms of your offer, particularly by increasing the consideration, it
should apply to ALL securities deposited, including those that have already been paid for.

SRC Rule 19.2.c

- If the securities deposited exceed the number that you want to purchase, you are not
required to purchase everything. You pro-rate it among the offered securities.
Exception: SRC Rule 19.2.c the acquirer in such tender offer shall be required to accept
any and all securities thus tendered (if you acquire shares more than 51% of the total
outstanding equity securities)

Why is there a need for a tender offer?

Cemco vs. National Life Insurance Company

What is the danger if there is no tender offer?

What will happen if, example, I am a minority SH. Then here comes somebody buying
up shares, without making a tender offer. He just buys from whoever he wants. When that
person buys lots of shares of a public company, he can run the company anyway he wants
to. He, in effect, controls the value of the shares of the minority SH. He limits dividends,
controls boards, does not allow minority SH any say in the control of the corpo.

So minority SH wants to get out. You want to sell it to the public, but the public also do
not want to buy your shares because they dont like the way the corpo is being run by the
controlling SH. So the only person willing to buy your shares is the controlling SH. And
this time, he can dictate the price.

See, you have to make the offer to all. Anyone who wants to sell their shares are free to
do so, at a price applicable to all. It is basically a protection to minority SH.

-SC the acquisition of control being prevented in a tender offer does not only apply to
direct control, but also applies to indirect control. Any form of control is covered by the
tender offer.
- This is for public companies.

Is there a way for non-public companies, like a closed corp, to protect themselves from
something like this?
- Under corporate law or commercial law practice, there is such a thing as tag along
clause
- clause usually embodied in an agreement between maj SH and min SH, that if the maj
SH will sell its shares, the buyers of its shares will have to buy the shares of the min SH.
- minority SH say to maj SH i want to go with you

Drag along clause

Sale of the shares of the maj SH necessarily includes the sale of the min shares even if the
min SH does not necessarily agree
- maj SH wants to sell my shares, buyer will not buy without your shares, so come with
me.

Proxy Solicitations
Sec. 20, same under Corpo Code
- writing, signed by SH, valid only for 1 meeting (valid for more meetings if expressly
provided, but not more than 5 years at one time)
- SRC IRR has put in additional requirements affirms that no form is required in the by-
laws, except basic that it must be in writing. If by-laws require specific form, it must be
followed.
- has to be through a board resolution

Fraudulent, Manipulative Practices

What are the practices considered as manipulation of enterprises?
Sec. 24 of SRC
What is a wash sale? How is it done? Par.24.a.i.
In a wash sale, the person selling the shares is the one buying the shares. No change in
ownership. The buyer is the same person as the seller.
No real active trading, same person as buyer and seller.

Improper Match Orders Par.24.a.ii.

- 2 persons: 1 seller, 1 buyer. But both parties colluded/agreed. Person A sells to Person
B. The moment that the sell order goes in, the buy order goes in. Its giving the effect that
the shares are moving, its being traded.
No real active trading, because buyer and seller are colluding.

Both wash sale and improper match orders are actively trading, meaning people want to
buy the shares. Why would you want to give this impression?
Because if people think that the public want to buy the shares, it will increase the shares
and induce the public to buy. In both transactions, you create the impression of
movement, as if the shares are wanted.

24.1.b
Definitions of Terms can be found at SRC Rules 24.1.b-1.4

Boiler Room Operations

- its when the agents or the brokers pressure you into buying the stocks
- in the PH, boiler room tactics mean some people unregistered as brokers will set up an
illegal shop and call people giving the impression that they are licensed brokers

Churning
- an excessive trading by a broker dealer with a view to generating commissions
- broker dealers sell more than what they are allowed to sell, thereby earning more
commission

24.2
What is a short sale?
Short sales is basically when you sell shares that you dont own.
Not absolutely prohibited, but have to be done in accordance with the IRR
SRC Rule 24.2 on short sales

What is the problem with short sales?

This is a problem because for example, shares are trading at 200/share today. 20 days
from now, I know its going to go down because I follow the market. So today, I buy the
shares at 200, but I will not yet deliver them. I will only deliver them 10 days after. So 10
days from now, if my speculation is true, like if theyre worth 150, I buy the shares and
deliver them to the buyer. But I already got paid 200.

Stop Loss Order

Not absolutely prohibited. I buy the shares for 50 pesos. But I have instructions with my
broker that if shares go down to 45, sell it immediately. Meaning, you stop your loss at 5
pesos. It is not prohibited but must be regulated, because the market will suffer.

Insider Trading
GR: prohibited
- SRC Sec. 27

Insider defined in Sec 3.8 of SRC

When is information material?

1. Material information is such information that will affect the market price
2. Information that affects the decision of WON to buy or sell the shares.

Material Non public information?

Par.2 of Sec. 27.1, last sentence
Instances:
1. If the information already came into existence but before dissemination to the public.
2. The lapse of a reasonable time for the market to absorb such information.
- it means that the information has already been disseminated, but reasonable time has not
lapsed for the market to absorb or to analyze or understand the information.
- ordinary citizens will not really know the effect of a merger/consolidation with respect
to the shares. It might take a day or 2 for them to consult with their brokers or read the
news to learn the effect of such merger/consolidation.

What sec. 27 is trying to prevent is an insider taking advantage of his position, not really
to defraud, but to take advantage of the public.

Sec. 23 of SRC
- deals with transactions of directors, stockholders, officers, or beneficial owner of more
than 10% of equity security
Beneficial owner: more general; person who has the right to the benefits
Stockholder: your name appears in the stock and transfer book, but you may not be the
beneficial owner
- insider but with a specific denominations

23.2
Prohibits a short swing transaction
- Short swing profits derived from SW transactions belong to the issuer company
- it is a combination of a purchase and sale of any equity security of such issuer with any
period of less than 6 months
ex. I sell my shares today at 500/share. But I bought those shares 3 mos. Ago at
400/share. If less than 6 mos., that is what you call a SW transaction, and the 100 pesos is
your SW profit.
- Or it can be the other way around. I purchase today at 300. I sell it 4 mos. From now at
500. I have a SW transaction, and the 200-peso gain is the SW profit.
23.3 If done by D, O, or Ben. Owner owning more than 10% - absolutely prohibited
23.3.a - Short sale
If person transacting is Director, Officer, or Beneficial owner, short sale is
ABSOLUTELY prohibited, even if you follow SEC Rules
Only way to be valid: Good faith

23.3.b Sales against the box

- you sell something but you dont deliver it yet
ex. you sell shares at 200 today, but deliver them 10 days from now when they are now
being sold at 150. In effect, youre making paper profit. Rule is, you have to deliver it
within 20 days after sale.
- not even regulated, but under 23.3 is illegal

6 March 2014
Mock Bar question:
Swiss Challenge
- a provision under the Build-Operate-Transfer Scheme
- meaning: if the proposal to buy or bid government is unsolicited (not coming from the
government), it still has to be bid out. When the proponent does not win the bidding, the
proponent has the right to a Swiss Challenge, meaning the right to challenge the highest
bidder.

FOREIGN INVESTMENTS ACT

Kinds of Investors:
1. Philippine Nationals
citizens of PH
- partnership or fully-owned by Filipinos
- corpo established in the laws of PH, at least 60% owned by Filipinos
o 60% owned capital stock outstanding and entitled to vote
- corpos established outside the laws of PH, but 100% owned by Filipinos
- trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a PH national and at least 60% of the fund will
accrue to the benefit of PH nationals

Gamboa vs. Teves

- theres a difference between 60% of total outstanding capital stock and 60% of capital
stock outstanding and entitled to vote.
- term Philippine National is not defined under FIA, but the law enumerates who are
Philippine Nationals

Where do you look into to determine whether the corpo is PH national or not?
1. Place of incorporation
Within PH
o 60% OCS/VS PN
 o less than 60% - NPN
Outside PH
o 100% of equity owned by Filipinos PN
o Less than 100% - NPN
2. Non-Philippine National

2 kinds of Enterprise
Export Enterprise
- Sec. 3e

Domestic Enterprise
Sec. 3f
- rendering services within the PH

Restrictions of ownership as to the 2 types of enterprise:

A. Foreign Investment in Export Enterprise
- Sec. 6
Ex. I manufacture ammunitions and I export them. Am I allowed to do that? Because Im
considered as an export enterprise. NO.
- consider foreign investment negative list
Sec. 7

When can you be an export enterprise but still limited to Filipino ownership?
Ex. I want to operate a BPO. My clients are all abroad, am I export or domestic?
- Export enterprise. This does not only pertain to goods, but also services. Since all my
clients are abroad, that means 100% of my revenues are from abroad. Can I be 100%
foreign owned?
- GR: Yes, if its an export enterprise, you can be 100% foreign owned.
Exception: Activity is prohibited under FINL, ex. Land ownership, no manufacturing of
gun powder, dangerous drugs, chemicals, etc.

Ex. BPO can be 100% foreign owned but I am export enterprise. Can I own land?
- No, because theres a restriction on ownership of land under the Constitution. 60-40 PH
ownership under the Constitution and Public Lands Act.

B. Domestic Market Enterprise

- GR: A. for S/M DME $200,000 US or less paid up capital PN
Exception:
1. utilize advance technology or e
2. Employ at least 50 EEs with a minimum of Paid-in capital of $100,000 US
for these 2 instances, even if you are S/M DME, you can be 100% foreign-owned

B. For Large Scale DME: more than $200,000 US PIC (same rule as Export Enterprise:
meaning can be 100% foreign, unless prohibited by FINL)
- can be NPN
unless: prohibited by FINL
ex. I put up 500M USD paid up capital. 100% foreign. And I want to do taxicab
operations. prohibited by FINL

Gamboa vs. Teves

- right of first refusal- even if you did not attempt to buy, but if somebody tries to buys it
other than you, you can say hey I want to buy that at this price.
right to match you tried to buy, but you lost because somebody bid at a higher price, but
you have the right to match that higher price.
PETITIONERS: Won the sale of PTIC shares are valid under the Consti prohibition on
foreign ownership?
But SC did not tackle this issue, because it remanded to SEC for violation of
the
Issue tackled by SC: What is the meaning of the word capital under Sec. 11, Art. 12 of
Consti, which is the requirement of 60-40 ownership of public utilities
- What was questioned was the sale of PTIC share, and PTIC was just a shareholder of
PLDT shares. It did not consider the PTIC share, in fact it was remanded to SEC. SC
decided to focus on PLDT.
- PLDTs OCS was composed of common and preferred:
1. Common voting share
Foreign owned- 64.27%
PH 35. 73 %
2. Preferred- non-voting share
Foreign-owned .56%
PH 99.44 %
- What percentage of the capital of PLDT was common? 22.15%
- What about preferred? 77.85% for preferred shares
- Actually, PLDT has a structure so that when you get a PLDT line, you automatically
become a subscriber of its preferred shares. So you become a shareholder of PLDT
preferred shares when you get a line. So preferred shares are more numerous than
common shares because all its subscribers are holders of the preferred shares.
Whereas, its common shares which were traded was only 22.15% of its total
OCS.
This was how the SC described the PLDT structure
- So what is capital?
total outstanding voting shares which should result in the controlling interest
Philippine National definition: capital outstanding and entitled to vote and is
owned and held by the citizen of the PH
- Difference between total outstanding shares and capital outstanding and entitled to
vote?
ex. a Company has 1000 total outstanding shares, 100 is common voting, 900 is
preferred-non-voting.
Total Outstanding Shares
100 common-voting owned by foreigners 10% Foreign
900 preferred-non-voting owned by PH 90% Filipino-owned
o Whats the problem here? The foreigners still own the corporation
because the foreigners own the voting shares. It is the directors have
 power over the assets and run the operations of the corporation.
Whoever gets to elect the directors gets to manage and control the
corporation.
o Here, even if PH owns 90% of the corporate stock, they cannot
manage the corporation because they cannot vote who can be the
directors.
o SC said you dont look at the total outstanding stock, but you look at
the voting stock
Voting Stock
- non-compliant because 60% is required to be owned by Filipinos

Maam: In fact, the SC made a comparison. It said that at the outset, if you take a look at
the total OCS, it looked like PLDT is compliant because 77% is owned by Filipinos, it
looks good on paper.
But you take a look at the difference beneath
Dividends: common shares: 70/ share; preferred shares: 1/share
Common shares: Market Value - more than 2,000 pesos; preferred shares - 11 pesos/
share
- you can see that there is disparity between being common shareholder and preferred
shareholder
- Filipinos were not getting 60% of the benefits; meaning their 77% ownership did not
translate into beneficial ownership. It showed that the common shares are more valuable
than the preferred shares, and the common shares was owned by foreigners
-SC never ruled on the constitutionality of the PLDT structure. It just showed that
beneficial ownership of PLDT was not with Filipinos, it remanded case to SEC.
- First Gamboa case: take a look at voting stock, not the total outstanding shares. Voting
stock is the measure of whether or not the corporation is PH-owned or not.

2nd Gamboa case: Motion for Reconsideration

- How is the test of ownership to be applied?
Separate for common shares and separate for preferred shares.

- Maam: in the first ruling, SC said consider voting because that is the control. When
PLDT made the MR, SC realized that not all shares can be considered as completely non-
voting, because even non-voting shares can vote during instances considered as
substantial transactions of the corporation
Amendment of AOI, Merger/Consolidation, Issuance of Bonded Indebtedness,
Increase in Capital Stock, etc.

- SC said that now its not just voting that is important, because even non-voting shares
can vote during important corpo transactions.
- Apply 60% for all types or classes of shares, whether voting or non-voting. Apply it
individually, PER CLASS.
60% of voting + 60% of non-voting
- SEC came up with SEC Mem.Circ. sometime in 2013, interpreting the Gamboa Rule.
But the SEC made it more reasonable. SEC said that in order to determine if you are a PH
national, 60% of your voting shares must be held by Filipinos, and 60% of your total
shares, voting or non-voting, must also be held by Filipinos.
- 1st ruling: voting, based on FIA.
- 2nd ruling: SC had no legal basis to say 60% across all types of shares. It just said that
aside from the control test, you also get the beneficial control test. Apply these 2 kinds of
test to see if there is compliance with the Filipino ownership.
SEC moderated this decision by saying 60% of voting and 60% of total
outstanding shares to be owned by Filipinos. This is now in consonance with
FIA. FIA definition quite equivocal, so SEC just clarified this by separating
both requirements.
nd
- in 2 ruling, SC said that 2 tests to apply: control and beneficial ownership test
- Before this, it also described the former tests used to see whether there is compliance
with minimum compliance with PH ownership
Old tests: control test and grandfather rule generally applied if you have
layering of corporations
Control Test
- you look at the controlling stockholdings (60%) is Filipino, then all the subsequent
investments will be considered as an investment of a PN.
- follow the citizenship of the controlling stockholder. Dont consider anymore the
minority shareholding.
Ex. A corp (foreign) wants to invest in PH. It formed another corporation, X Corp (60%
PH, 40% owned by A). In turn, X corp. invested in Z corp (60% owned by x, 40% owned
by A).
X is a PN, based on FIA.

Grandfather Rule
- does not make any presumptions; it considers the citizenship up to the individual
shareholder
- takes a look at the layering of the foreign shareholders

Rule under FIA

- Sec. 3, last paragraph

What is the test used in Gamboa?

- Remember that it was not the PLDT shares that were in issue; it was the PTIC shares.
IN the scheme of things, PTIC is just X corp in the example. What we are questioning is
the sale of PTIC shares helf by the PH government.
- In other words, SC basically applied the grandfather rule. Although it did not make a
categorical ruling that PLDT did not comply with the Constitution. SC took a look at the
shares of PLDT when in fact what was questioned was the PTIC shares.

Bayantel case
- The rehabilitation plan was to increase the cash of the bank, it would convert the shares
into equity.
convertible shares shares with the right of conversion
- here, you have a liability which you want to convert into equity. So utang that you want
to make into shares. Is this allowed? Yes. Your loans can be converted to equity.
- Plan of conversion: 40% of the equity would be owned directly by the foreingers. This
is not the total conversion, there was an excess, because the total conversion was
approximately around80%.
40% will go to the foreigners, while the remaining 40% will belong to the
holding company, on a direct basis, but 60% of which is owned by Filipino
citizens
- Rehabilitator said that you can convert the debt into equity, provided that you can
comply with the Consti requirement on public utilities
- Tried to apply control test, because they were saying that they will just own 40%, the
60% will be owned by a Filipino company. This was the plan
- SC did not approve of the plan. SC did not expressly say it, applied the grandfather rule.
It did not take the remaining 40% as wholly Filipino owned.

- Something weird in the ruling: December 2012, after the MR in the Gamboa case came
out in October 2012.
- SC did not apply it across the board, it went back to the 1st Gamboa ruling. This later
case was based on voting and not across the board.
2-step rule:
1. Identify the shares to be converted
2. Determine how much is owned by foreigners
If foreigners own more than 40% of the voting shares, then you have violated
the Consti requirement on capital

HOW TO ANSWER:
1. If question of total outstanding or total voting (no mention of other class of share
available)
- apply voting
2. If it mentions of other classes of shares, like preferred, common, etc.
- Use 2nd Gamboa ruling

For Maam: proper answer is SEC rule: 60% of voting and 60% of total outstanding

PH requirement is legal but not constitutional: apply control test

Ex. Land ownership not constitutional, yet found under the Public Land Act

Next Meeting: AMLA and trust receipts