THE REBT REVIEWER Chapter 8 SECURITIES REGULATION CODE e&s ITRODUCTION TO SRC PURPOSE: The Securities Regulations Code or RA No. 8799 aims to protect the investing public primarily through a system of disclosure and provide punishment for fraudulent practices. PROTECTION OF THE PUBLIC: The Securities Regulations Code protects the public as follows: 1. Requiring full disclosure of information to the public regarding the securities that are being offered and the issuers, including the filing and approval of the registration statement and the approval of the prospectus; 2. The requirement of regularly submitting material information to the SEC; 3. Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved including brokers, issuers, the exchange itself, etc. in order to ensure compliance with pertinent laws and regulations; 4, Prohibiting and penalizing different fraudulent practices and transactions; and 5. Providing the SEC the powers and functions. SEC POWERS AND FUNCTIONS a. Have jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or a permit issued by the Government; b. Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspect of the securities market and propose legislation and amendments thereto; 438Securities Regulations Code ‘Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; Regulate, investigate or supervise the activities of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto; Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulation and orders; Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association Or Person in the implementation of its powers and function under its Code; Iesue cease and desist orders to prevent fraud or injury to the investing public; Punish for the contempt of the Commission, both direct and indirect, jin accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or associations, upon any of the grounds provided by law; and Exercise such other powers as may be provided by law as well as those which may be implied from, oF which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. Isat all ae over Intracorporate Disputes: 1. The Commission's jurisdiction over enaitS enumerated under Section 5 of Presidential Decree No. 902-A is ¥ transferred to the Courts of general jurisdiction oF the appropriate > 439SS ‘THE REBT REVIEWER Regional Trial Court: Provided, that the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases a.k.a. Special Commercial Courts. Principal Departments of SEC: a The Markets and Securities Regulation Department develops the registration criteria for all market participants and supervises them to ensure compliance with registration requirements and endorses infractions of the Code and rules and tegulations to the Enforcement and Investor Protection Department, It registers equity securities and debt instruments, or recommends their exemption from registration, before they are sold, offered for sale, or distributed to the public and ensures that full, timely and accurate information is available about the said securities. b. The Corporate Governance and Finance Department registers mutual funds, including exchange-traded funds, membership certificates, club shares, both proprietary and non-proprietary, and time shares before they are offered for sale or sold to the public and ensures that adequateSecurities Regulations Code SECURITIES Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. (Section 3.1) ‘The main feature of a security is that a person purchases or acquires the same ive income or asset appreciation, that is fort of another person. This feature d necessitates the protection of the in the expectation of obtaining passi income or gain obtained through the et makes them attractive and desirable an« investing public. 1. Commodity futures contract means a contract providing for the making or taking delivery at a prescribed in the future of a specific quantity and quality of a commodity or the cash value thereof, which is customarily offset prior to the delivery date, and includes standardized contracts having the indicia of commodities futures, commodity options and commodity leverage, or margin contracts. 2. Commodity means any goods, articles, agricultural and mineral products, services, rights and interests, financial instruments, foreign currencies, including any group or index of any of the foregoing, in which commodity interest contracts are presently or in the future dealt in. 3. Forward means a contract between a buyer and a seller whereby the buyer is obligated to take delivery and the seller is obliged to deliver a fixed amount of an underlying commodity at a pre-determined price and date. Payment in full is due at the time of delivery. 4. Warrant Certificate - means the certificate representing the right to a Warrant, which mayor may not be detachable, that is issued by an Issuer to a Warrant holder. 5. Warrant Instrument - means the written document or deed containing the terms and conditions of the issue and exercise of a Warrant whose terms and conditions shall include (i) the maximum underlying shares that can be purchased upon exercise, (ii) the exercise period, and (iii) such other terms and conditions as the Commission may require. 441 il.THE REBT REVIEWER 6. Detachable Warrant - means a Warrant that may be sold, transferred or assigned to any person by the Warrant holder separate from, and independent of, the corresponding Beneficiary Securities. 7. Non-detachable Warrant - means a Warrant that may not be sold, transferred or assigned to any person by the Warrant holder separate from, and independent of, the Beneficiary Securities. 8. Beneficiary Securities - means the shares of stock and other securities of the Issuer which form the basis of entitlement in a Warrant. 9. Underlying Shares - means the unissued shares ofa corporation that may be purchased by the Warrant holder upon the exercise of the right granted under the Warrant. 10. Pre-need plans are contracts which provide for the performance of future services of or the payment of future monetary considerations at the time actual need, for which plan holders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve. Investment contract is a contract, transaction, or scheme whereby a Person invests his money in a common enterprise and is led to expect Profits primarily from the efforts of others. a Requisites: a. An investment of money; b. Inacommon enterprise; c. With expectation of profits; d. Primarily from the efforts of others (this modifies the Howey Test which requires profits to be derived “solely” from the efforts of others) ILLUSTRATION: Power Homes Unlimited Corp. (PHUC) requires an investor to pay $234 to become a Business Center Owner (BCO), which entitles him to recruit two person who should pay $234 each and out of which he shall receive a commission of $92. In case the two referrals/enrollees would recruit a minimum of four (4) persons each recruiting two (2) persons who become his/her own down lines, the BCO will receive a total amount of US$147.20, and so on. Here, the BCO is considered as an investment contract because the investor Would be earning imarily from the efforts of his recruits and theirrecruits, 164182, 26 February 2008) Securities Regulations Code as the pyramid goes on. (Power Homes Unltd. Corp. v. SEC, G.R. No. REGISTRATION AND REPORTORIAL REQUIREMENTS REGISTRATION ‘The Securities Regulations Code (SRC) provides that: 1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the SEC. No information relating to an offering of securities shall be disseminated unless a registration statement has been filed with the Securities and Exchange Commission and the written communication proposed to be released contains the required information under SRC. No person shall offer, sell or enter into commodity futures contracts except in accordance with the rules, regulations and orders the SEC may prescribe in the public interest. The SEC shall promulgate rules and regulations involving, commodity futures contracts to protect investors to ensure the development of a fair and transparent commodities market. Procedure: 1. Filing of SWORN REGISTRATION STATEMENT containing the information as the SEC may by rule require. a. Signatories to registration statement: Executive officer, principal operating officer, principal financial officer, comptroller, principal accounting officer, corporate secretary. b. Written consent of the expert named as having certified any part of the registration statement, whenever necessary. Where the registration statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall also be filed. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such securities are proposed to be offered. 443‘THE REBT REVIEWER 3. PUBLICATION of notice of the filing of the registration statement in two newspapers of general circulation once for two consecutive weeks. 4. Within 45 days after the date of filing, or by such later date to which the issuer has consented, the SEC shall give an ORDER declaring the registration statement effective or rejecting it. 5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement and in such prospectus are correct. Grounds for rejection or revocation of registration of securities: 1. The issuer: a. Has been judicially declared insolvent; b. Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed ¢. Has been or is engaged or is about to engage in fraudulent transactions; d. Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; e. Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact Tequired to be stated therein or necessary to make the statement therein not misleading; or 3. The issuer, any officer, director or controllin, functions, or any under writer has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws, 8 Person performing similar Grounds for suspension of registration of securities: 1. If at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect, or the sale or offering for sale of the security "egistered thereunder may work or tend to work a fraud Refusal to furnish information required by theSEC, 444Securities Regulations Code securities required to be registered with the SEC: Shares of stocks, Bonds, debentures, ‘Asset-backed securities Certificates of interest or participation ina Certifies of deposit for a future subscription Fractional undivided interests in oil, gas or ofl Derivatives like option and warrants Certificates of assignments, certificates of participation, trust certificates Voting trust certificates or sit 10, Proprietary or nonproprietary 11, Other instruments as may in the future be det and Exchange Commission notes or evidences of indebtedness s and Investment contracts profit sharing agreement her mineral rights milar instruments membership certificates in corporatic termined by the Securities jons SP PNAHMEwy ION jon: (GRIBO) cd by the Government of the Philippines, . f, or by any person trumentality of said EXEMPTION FROM. REGISTRATI SECURITIES exempt from registrati 1. Any security issued or guarantee or by any political subdivision or agency thereo! controlled or supervised by, and acting a5 an ins! Government. 2. Any security issued or guaranteed by the government of any country with which the Philippines mai state, province or political subdivis Provided, That the SEC may require compliance content for disclosures the SEC may prescribe. 3. Certificates issued by a receiver or by @ trustee in bankruptcy duly approved by the proper adjudicatory body. 4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. 5. Any security issued by a ban! 6. Ordinary deeds or instrumen such as contract of lease, contract of sale, intains diplomatic relations, or by any sion thereof on the basis of reciprocity: with the form and k except its own shares of stock. tg that are not normally sold to the public contract of real estate mortgage TRANSACTIONS exempt from registration: (BISCEPS SMILE) 445Yy THE REBT REVIEWER 1. BROKER'S transaction, executed upon customer's orders, on any registered Exchange or other trading market. 2. An ISOLATED transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner's account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. 3. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a STOCK dividend or other distribution out of surplus. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of CONVERSION entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under the SRC or was, when sold, exempt from the provision of the SRC, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under the SRC. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. 5. EXCLUSIVE SALE: The sale of cap stockholders exclusively, is paid or given directly or capital stock. 6. PRIVATE PLACE! T: The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. 7. SUBSCRIPTIONS for shares to the incorporation thereof or in Pursuance of authorized capital stocks un is incurred, or no commissior ital stock of a corporation to its own where no commission or other remuneration indirectly in connection with the sale of such of the capitals stocks of a corporation prior an increase in its der the Corporation Code, when no expense iven in fon neh ny comPensation or remuneration is paid or only when ton withthe sale or disposition of such securities, and cab nnen the Purpose for soliciting, giving or taking of such reehbae s (2 SO™MPly with the requirements of such lee se to the Pereniage of the capital stock of a corporation Which should be 446Securities Regulations Code subscribed before it can be registered and duly incorporated, or its authorized, capital increase. g, Sale to SOPHISTICATED (Qualified) Buyers: The sale of securities to any number of the following qualified buyers: a. Bank; b._ Registered investment house; ¢. Insurance company; d. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; e. Investment company or £, Such other person as the SEC may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management 9. RTGAGE-BACKED SECURITIES: The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in INSOLVENCY or bankruptcy. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of SRC, to LIQUIDATE a bonafide debt, a security pledged in good faith as security for such debt. 12. The EXCHANGE of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. 1 5 11, The SEC may exempt other transactions where not necessary in public interest or for protection of investors such as small amount or limited character of public offering. However, an exemption fee of 1/10 of 1% of the ™aximum aggregate price or issued value of the securities should be paid. iT REQUIREMENT: 447 aeON ‘THE RFBT Reviewer 1. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash Flows certified by a CPA and a management discussion and analysis of results of operation 2, Other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the SEC may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer. These reportorial requirements shall apply to an issuer: 1. Which has sold a class of its securities pursuant to a registration 2, With a class of securities listed for trading in an Exchange 3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminate ninety (90) days after notification to the SEC by the issuer that the number of its holders holding at least one hundred (100) share reduced to less than one hundred (100) The issuer shall likewise furnish to each holder of such equity security an annual report in such form and containing such information‘as the SEC shall prescribe. FILING OF GENERAL INFORMATION SHEET (GIS) All corporations shall file their GIS within 30 calendar days from: 1. Stock Corporations — date of annual stockholders’ meeting 2. Non-Stock Corporations - date of annual members’ meeting 3. Foreign Corporations ~ anniversary date of the issuance of SEC license FILING OF ANNUAL FINANCIAL STATEMENTS (AFS) 1, Corporations using the calendar year: depending on the last numerical digit of their SEC registration or license number in accordance with the schedule set by the SEC. However, any corporations may file their AFS regardless of the last numerical digit or license number on or before the first day stated in the coding schedule. 448Securities Regulations Code ns using the fiscal year: 2, Corporatior 1 Rule: 120 calendar days from the end of the fiscal year; a. General pb. Exceptions: O calendar days from the end of the fiscal year; j, Broker dealers—11 Listed companies and Public Companies ~ 105 days from the end of the fiscal year. s, shall have the or its authorized mission for its n the consolidated financial statement Internal Revenue (BIR)” alternative proof of subi ‘The AFS, other tha stamped “received by the Bureau of banks, unless the BIR allows an authorized banks. 'RADING AND OTHER FRAUDULENT INSIDER T! TRANSACTIONS INSIDER TRADING er an insider, in possession of a material Insider trading is committed whenevs non-public information, transacts on the securities. ation: Information that will affect the price of the Material Non-Public Inform: person in deciding whether to buy, sell, or hold security or would influence a a security which is not available to the public. Insider: 1. The issuer. 2. A director or officer of the issu 3. Aperson whose relationship oF gave him access to material non-publi yee, or director, er or a person controlling the issuer. former relationship to the issuer gives or ic information. or officer of an exchange, clearing 4. A government emplo. zation who has access to material agency, and/or self-regulatory organi non-public information. 5. A person who learns such informati the foregoing insiders. ion by a communication from any of Exceptions: a person in possession of material non-public information can buy or sell securities: 1. When he can prove that the information was not gained from an insider, 449ee THE RFBT REVIEWER 2. If the other party is identified and that he: a, Disclosed the information; or b. Had reason to believe that the other party is also in possession of the information. Presumption: a purchase or sale of a security of the issuer made by an insider or such insider’s spouse or relatives by affinity or consanguinity within the 2n4 degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted: 1, After such information came into existence; 2. But prior to the dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information. ILLUSTRATION: Gas Gas Corporation, a publicly listed company, discovered a rich deposit of natural gas. This information was not made Public in order to acquire the lands in the surrounding area at cheap prices. Prior to the disclosure of the information to the SEC, the directors and officers of the company bought shares of the Corporation. The prices of such shares went up once the discovery was made public. In this instance, the directors and officers, being such are considered insiders and are informed of the discovery, which isa material information which would affect the share price of the corporation, Since they traded (bought) the shares of the company prior to the disclosure of the information, they are liable for insider trading. ILLUSTRATION 2: Assuming, employees of a printing company who handles the printing work of Gas Gas Corporation came into contact with the exploration reports which were sent to their department by mistake together with the materials intended to be printed, and such employees bought shares of the company at low prices and later sold them at huge profits. In this instance, the employees cannot be considered insiders since they acquired the information not because of any fiduciary relationship that they with Gas Gas Corporation. Likewise, they obtained the information not by “a communication” but because of error. 450 SellSecurities Regulations Code Insider Trading vis a vis Tender Offer: the answer above (Illustration 2) will not apply if the information is relative to a tender offer, because it is unlawful for any person (other than the tender offeror, and not just an “insiders”) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer. Liability for disclosure: It shall be unlawful for any insider to communicate material nonpublic information about the issuer or the security to any person who, by virtue of the communication, becomes an insider, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information. This is regardless of whether the one to whom the communication was given actually traded on the securities. FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS 1. Wash sale — any transaction in a security which involves no change in the beneficial ownership. A series of buy and sale transaction may be placed by one and the same beneficial owner in the exchange which would not affect any change of ownership of the shares transacted. 2. Matched Order - refers to an order or orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such security has, or wil be entered by or for the same or different parties. Wash Sale and Matched Orders are not in themselves illegal. But they are considered fraudulent whenever they are resorted to in order to create a false or misleading appearance of active trading. 451THE RFBT REVIEWER 3. AIL5 above ( Marking the close — placing of purchase or sale order, at or near the close of the trading period in order to affect the closing price likewise affecting the opening price the following day. king the close but the activity is made hich involves buying activity among ly higher or lower prices or causing Painting the tape — akin to marl during normal trading hours wl nominee accounts at increasing] fictitious reports to appear on the ticker tape. part or portion of the issue/security which is Ily held by dealers or other person with a view affecting supply of the security driving Squeezing the float - outstanding but intentional of reselling them later for profit. Thereby or its availability while demand remains the same or increases, the prices up. ~ involves the following steps: a. Purchase of outstanding capital stock of a company for a nominal amount; b.. Merger of the shell company with the person or group of persons involved to gain control o} Of the stocks of the merged entity; Reverse-split of the shares certificates in Hype and Dump dormant public shell privately held company of the f the majority d. Reissuance of the shares the name of the merged entity to relatives and associates; Hiring a broker-dealer who woul merged entity; {Hiring a promoter to “hype When the market reaches the high shareholdings and bail out. Id market the stocks of the newly /” the virtues of the company: price, they would “dump” their selling campaign volves an intensiv’ t mail perations - in through direc! Iesmen by telephone or of either a certain type or from a specific issuer ase through hard-sell techniques based on f misleading market letters. Boiler Room O; gh numerous $4 throu; securities offerings for Investors are induced to purch unfounded predictions and mailing ©! legal/unlawful if its effected to: . uce the purchase of 2 security or of @ controlling Jy controlled company by others 3 to 7) become ill Raise the price or ind controlled or common a. An?Securities Regulations Code b. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the same issuer or of a controlling, controlled company, or commonly controlled company by others; and c. Creates active trading to induce such purchase or sale through said devices or schemes. §, Circulating or Disseminating Information On Share Price Movement ~ involves people providing information that the price of any security listed in the exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security and thus inducing the purchase or sale of such security. 9. Making False or Misleading Statements — with respect to any material fact, which he knew or had some reasonable grounds to believe was so false or misleading for the purpose of inducing the purchase or sale of any security. 40. Pegging or Fixing or Stabilizing the price of security effected either alone or with others through any series of transactions for the purchase or sale thereof, if done for such purpose. 1. Short Sale - selling the security which the vendor does not own and borrowed only from another. This is not illegal per se but only regulated. MANDATORY TENDER OFFER RULE A tender offer is an offer by a person or group of persons to the stockholders of a corporation to tender their shares for purchase. Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide them with a fair price for their share whenever a Person or group of persons intends to buy a sizable number of shares in the company. 453THE RFBT REVIEWER Mandatory Tender Offer: applies to any person who intends to acquire at least 35% over a period of 12 months (previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity security of a: 1. Listed corporations; or 2. Corporations with: a. Assets of at least P50M and b. Having at least 200 shareholders who each have at least 100 shares The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership of over 50% of the total outstanding equity securities of the public company. ‘The offeror would be required to accept any and all securities thus tendered, 15%t if what is intended to be purchased is only 15% of the equity securities ina public company in one or more transactions within a period of 12 months, they are only required to file a declaration to that effect with the SEC. Indirect acquisitions: Note that the percentage requirements likewise applies even in indirect acquisitions. ‘a corporation listed in the PSE, has two ILLUSTRATION: U Corporation, X Corporation which owns 60% and principal stockholder-corporations, ‘ABC Corporation which owns 17%. olders of X Corporation are: XA (21%); XB (6%) (the same ABC Corporation that owns In turn, the principal stockhi (30%) and ABC Corporation 17% of U Corporation). XA and XB agreed to sell their shares to ABC Corporation. 454Securities Regulations Code in this case, the mandatory tender offer rule applies to ABC Corporation. ‘ABC Corporation is acquiring 51% (more than 35%) and the resulting ‘ownership will be 60% of X Corporation (21% + 30% + 9%) (more than 50%), thus it needs to make a tender offer to the stockholders representing the 40% (others); ‘ABC Corporation is also required to make a tender offer to the other stockholder of U Corporation (owning 23%) since X Corporation owns 60% of U Corporation, ABC will have an indirect ownership of U Corporation at the rate of 36% (60% in X Corp multiplied by the ownership of X Corp [60%] in U Corp); 1 ‘Accordingly, ABC Corporation will own a total of 53% of U Corporation (26% indirect ownership + 17% direct ownership), which is more than 50% ownership. (CEMCO Holdings, Inc. v. National Life Insurance Company of the Philippines, G.R. No. 171815, 7 August 2007) Transactions EXEMPT from the Mandatory Tender Offer Requirement: 1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a 50% or more ownership of shares by the purchaser; ‘Any purchase of shares from an increase in authorized capital stock. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor. 4. Purchases in connection with privatization undertaken by the government of the Philippines. 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. Process: 1. The offeror will make an announcement of his intention in a newspaper mmencement of the offer; of general circulation, prior to the co: date of the commencement of the 2 Atleast 2 business days prior to the tender offer: a. File SEC Form 19-1 with the SEC including all exhibits thereto and Pay the prescribed filing fees 455 _ ii, THE REBT REVIEWER b. Hand deliver a copy of such form including all exhibits to the target company at its principal executive office and to each Exchange where such class of the target company’s securities are listed for trading, Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days after the termination of the tender offer, copies of the final amendments to the form. INSIDER TRADING WHERE INFORMATION RELATES TO A TENDER OFFER: if the information is relative to a tender offer, it is unlawful for any Person (other than the tender offeror) who is in Possession of mate nonpublic information relating to such tender offer, securities of the issuer that are sought or to be sought by terial to buy or sell the such tender offer if 'e securities sought or tender offer, or any insider of such issuer.EO Securities Regulations Code MULTIPLE CHOICE QUESTIONS =O Hl, J! wq$©~$MmM@\§ Which of the following is not a requisite of an investment contract? 1 It must involve an investment of money a b. The investment of money is made in a common enterprise c. The investor must have an expectation of profits d. The profit will be derived exclusively from the efforts of others Which government agency governs the registration of securities? a. Securities and Exchange Commission b. Securities Registration Commission c. Securities Regulatory Board d. Securities Registration Board It is a contract between a buyer and a seller whereby the buyer is obligated to take delivery and the seller is obliged to deliver a fixed amount of an underlying commodity at a pre-determined price and date. a. Futures b. Warrant c. Forward d. Options 4. Statement 1: If the issuer of securities has filed for a judicial declaration of insolvency, then the SEC may revoke the registration of such securities. Statement 2: If the issuer of securities has been convicted by final judgment of an offense involving moral turpitude, then the SEC may revoke the registration of such securities. a. Only Statement 1 is true. b. Only Statement 2 is true. Both statements are true. d. Both statements are not true. 5. Which of the following is not required to be registered with the SEC under the SRRC? a. Shares of stock Voting trust certificates Certificates of deposit Contract of real estate mortgage aos 457