src: exempt securities, exempt transactions, and mandatory tender offer

8/12/2019 SRC: Exempt Securities, Exempt Transactions, and Mandatory Tender Offer

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BUSINESS ORGANIZATIONS IIATTY. ROCHELLE DAKANAY

Prepared by: DEUS E. DULAY3F Page 1

BUSINESS ORGANIZATIONS II:Securities Regulation Code (R.A. No. 8799)

Exempt Securities Exempt Transactions Mandatory Tender Offer

SEC. 2.Declaration of State Policy.The State shall establish a socially conscious, free market that regulates itself, encourage thewidest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital marketprotect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent omanipulative devices and practices which create distortions in the free market.

To achieve these ends, this Securities Regulation Code is hereby enacted.

The provision clarifies what the Code seeks to accomplish. Some provisions of the Code may be strict, but they are meant toassure investors that the Philippine capital market is fair and transparent. Any doubt in the interpretation of the Code and theimplementing rules and regulations adopted thereunder should be resolved in such manner that would carry out the abovepolicy and objectiveto establish a free market, observe free disclosure on securities, and protect investors.

The basic philosophy behind the SRC is that there should be a free securities market, which is self regulated with full and faidisclosure to the entire investing public, prohibiting insider trading and other fraudulent and manipulative devices andpractices.

Definitions:

Issuer is the originator, maker, obligor, or creator of the security.

Insider means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a personcontrolling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access tomaterial information about the issuer or the security that is not generally available to the public; (d) a governmentemployee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has accessto material information about an issuer or a security that is not generally available to the public; or (e) a person wholearns such information by a communication from any of the foregoing insiders.

Insider trading is the trading of corporations stock or other securities by individuals wi th potential access to nonpublic information about the company. It refers to a practice in which an insider or a related part trades based on a

material non-public information obtained during the performance of the insiders duties at the corporation, orotherwise in breach of fiduciary or other relationship of trust and confidence or where the non-public information wasmisappropriated from the company.

Stock price manipulation is another prohibited activity under the SRC which, in order to simulate interest in its stocka corporation may decide to buy its own shares (usually through a conduit) thereby artificially stimulating the marketof its own shares.

Some forms of manipulative devices which may bring negative effects to investors who may be subjected to undueadvantage are the following:

- Wash Sales1

- Improper Matched Order2

- Marking the Close3

- Hype & Dump4

- Squeezing the Float

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1This occurs when stocks are traded without a genuine change in actual beneficial ownership making it appear that the stocks are actively traded.

2A matched order occurs when both buy and sell orders are entered at the same time with the same price and quantity by different but colluding parties.

3This is a practice of placing an order near the close of the trading day in an effort to close the price higher or lower than the previous price.

4This is a form of price manipulation in which individuals or entities cause the price of certain stock to go up and then sell the securities in the market at higher prices

after announcing a glossy picture of a particular issue as good investment contrived to sustain public interest in the shares and thus lure investors to trade.


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- Painting the Tape6

- Market Rigging/Jiggling7

Essentially, the purpose of all these is to artificially show an upward or downward buying or selling trend.

Material information is anything that might induce an ordinary person to decide to buy or sell the securities. The materiainformation must be disclosed in a timely manner, to all investors at the same time.

SEC. 3.Definition of Terms.- 3.1. Securities are shares, participation or interests in a corporation or in a commercial enterprise orprofit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. I t includes:

a. Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities8;

b. Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for afuture subscription;

c. Fractional undivided interests in oil, gas or other mineral rights;

d. Derivatives like option9and warrants

10;

e. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or simila

instruments;

f. Proprietary or non proprietary membership certificates in corporations; and

g. Other instruments as may in the future be determined by the Commission.

The catch all provision under paragraph (g) of Section 3 of the Code gives the SEC the authority to regulate trading of any newinstruments by an exchange or other recognized markets. The provision is designed to prevent evasion of promoters orissuers who may adopt ingenious schemes in order to escape regulation or registration.

EXEMPT SECURITIES

SEC. 9.Exempt Securities. 9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any o

the following classes of securities:

a. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agencythereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government.

b. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomaticrelations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That theCommission may require compliance with the form and content of disclosures the Commission may prescribe.

c. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.

5This is taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as

to create artificial prices.

6It is a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security.

7By performing similar acts where there is no change in beneficial ownership.

8Asset-backed securities are defined as certificates issued by a Special Purpose Entity (SPE), the repayment of which shall be derived from the cash flow of assets in

accordance with the Securitization Act of 2004.

9Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price, called the exercise or strike

price, on or before a predetermined date, called the expiry date, which can only be e xtended by the SEC upon stockholders approval.

10Warrants are rights to subscribe or purchase new shares or existing shares in a company on or before a predetermined date, called the expiry date, which cab only

be extended in accordance with the SEC rules and regulations and/or the Exchange rules. Warrants have generally longer exercise periods than options and are

evidenced by warrant certificates.


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d. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of theOffice of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue.

e. Any security issued by a bank except its own shares of stock.

9.2. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the

enforcement of this Code with respect to such securities is not necessary in the public interest and for the protection of investors.

Exempt securities are exempt from registration requirements because of the character of the issues or existence of aregulatory regime recognized as already providing adequate protection to the investors. These include the following:

1. Government Issues:These are issued and sold by the government over which a particular governmenagency exercises regulatory or supervisory care, thereby, investors are deemed adequately protected.

2. Issuances by Foreign Governments:Those issued/guaranteed by any foreign government with which thePhilippines maintains diplomatic relations, or any state, province or political subdivision thereof on the basisof reciprocity. The SEC may prescribe rules for disclosure with respect to offerings of securities by foreigngovernments. The imposition is not considered onerous and is common practice in other countries.

3. Certificates issued by a receiver/trustee in bankruptcy duly approved by the proper adjudicatorybody:Certificates issued in a rehabilitation/insolvency proceeding does not affect the general public, but

only the creditors of the issuer seeking full or partial payment of their claims. This exemption is necessary fothe efficient and quick processing of claims against an insolvent company.

4. Sale of securities under the regulation of the Office of the Insurance Commission, Housing and LandUse Regulatory Board, or the Bureau of Internal Revenue: In the event the securities which aresupposed to be regulated by the above-mentioned government offices, are not actually regulated by theconcerned government agency, they should be required to be registered under the Code, otherwise, it wouldbe unregulated leaving the investors without any protection.

5. Bank Issues, except their own shares of stock: Only customary or traditional banking activities are

exempt from SEC registration. The phliosophy behind the exemption is that issuance of securities bybanking institutions are already supervised and regulated by the BSP. But shares issued by banks to thepublic for the purpose of raising capital will have to be registered with the SEC. Note:If a bank is listed inExchange, it is not exempted from complying with reportorial requirement [Union B ank vs. SEC, 358 SCRA479 (2001)].

6. Others which the SEC may later decide to grant exemption: Simliar to the ones set forth, and a findingthat the enforcement of the SRC is not necessary in the public interest and for the protection of theinvestors.

Example:- Evidence of indebtedness issued by a financial institution itself that has been duly licensed by the

Bangko Sentral ng Pilipinas to engage in banking/quasi-banking activity;- Evidence of indebtedness issued to the Bangko Sentral ng Pilipinas (BSP) under its open marke

and/or rediscounting operations;- Evidence of indebtedness issued to the following primary institutional lenders;- Evidence of indebtedness e.g.short or long-term commercial papers; and- Bills of exchange arising from a bona fide sale of goods and services which are distributed and/o

traded by banks or investment houses duly licensed by SEC and BSP through an organized marke

properly conventioned and governed by rules approved by the appropriate regulatory body.

EXEMPT TRANSACTIONS

SEC. 10.Exempt Transactions. 10.1. The requirement of registration under Subsection 8.1 shall not apply to the sale of anysecurity in any of the following transactions:

a. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.


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b. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale odelivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Code, to liquidatea bona fidedebt, a security pledged in good faith as security for such debt.

c. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, oby his representative for the owners account, such sale or offer for sale, subscription or delivery not being made inthe course of repeated and successive transactions 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.

d. The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, osecurities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.

e. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or otheremuneration is paid or given directly or indirectly in connection with the sale of such capital stock.

f. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entiremortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.

g. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right oconversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That thesecurity so surrendered has been registered under this Code or was, when sold, exempt from the provisions of thisCode, 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 this Code. Upon such conversion thepar value of the security surrendered in such exchange shall be deemed the price at which the securities issued anddelivered in such exchange are sold.

h. Brokers transactions, executed upon customers orders, on any registered Exchange or other trading market.

i. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of anincrease in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commissioncompensation or remuneration is paid or given in connection with the sale or disposition of such securities, and onlywhen the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such lawas to the percentage of the capital stock of a corporation which should be subscribed before it can be registered andduly incorporated, or its authorized capital increased.

j. The exchange of securities by the issuer with its existing security holders exclusively, where no commission or otheremuneration is paid or given directly or indirectly for soliciting such exchange.

k. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-monthperiod.

l. The sale of securities to any number of the following qualified buyers:i. Bank;ii. Registered investment house;iii. Insurance company;iv. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision

thereof or managed by a bank or other persons authorized by the Bangko Sentralto engage in trusfunctions;

v. Investment company; orvi. Such other person as the Commission may by rule 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.

10.2. The Commission may exempt other transactions, if it finds that the requirements of registration under this Code is not necessaryin the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of thepublic offering.

10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption reliedupon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a feeequivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities.

What is exempt from the registration requirements under this Section are the transactions and not the securitiesthemselves. The following transactions are specifically exempted under this section:


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1. Judicial sale of securities made pursuant to a judgment rendered by a court.

2. Sale of foreclosed securities in order to obtain satisfaction of a mortgage out of the proceeds, whether authorizedby a decree of the court or by power of sale contained in the mortgage agreement.

3. Isolated transaction:An isolated transaction in which any security is sold, offered for sale, subscription or delivery

by the owner thereof, or for his account, not being made in the course of repeated and successive transactions of alike character, and such owner or representative not being the underwriter

11of such security.

4. Stock dividends: Stock dividend or other distribution out of surplus by a corporation, actively engaged in the

business authorized by its articles of incorporation, to its stockholders or other security holders. These are exemptfrom registration because they are generally not given for value and thus do not constitute a sale.

5. Sale of shares to stockholders not underwritten:Sale of capital stock of a corporation to its own stockholders

exclusively, where no commission or other remuneration is paid or given directly or indirectly in connectiontherewith; it is a common practice for companies in the Philippines to sell small amounts of shares to itsstockholders to raise capital.

6. Issuance of bonds to a single purchaser:This transaction is exempt in the sense that it is of limited character asit involves only one (1) investor.

7. Transaction pursuant to right of conversion:An example of this transaction is conversion of preferred shares owarrants to common shares upon maturity.

8. Brokers transactions: It is immaterial whether or not brokers solicit the transactions. This is intended to allowordinary after market trading to occur among investors through brokers and to restrict the registration requirementsto primary offerings by issuers directly through undertwriters.

9. Pre-incorporation subscription or subscription to a capital increase: Subscriptions of the capital stock of acorporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock, when noexpense is incurred, or no commission, compensation or remuneration is paid or given in connection therewith, andonly when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements osuch law as to the percentage of the capital stock of a corporation which should be subscribed before it can beregistered and duly incorporated, or i ts authorized capital increased.

10. Exchange of securities by the issuer with its existing security holders exclusively, where no commission orremuneration is paid or given in connection with the transaction.

11. Private placements:The sale of securities by an issuer to not more than 19 persons during any twelve month

period.

12. Sale to qualified buyers such as banks, investment houses, insurance companies, pension funds, investmencompanies, and such other person as SEC may by rule determine as qualified buyers, on the basis of such factorsas financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount ofassets under management. They are called qualified buyers because they are institutional investors who arepresumed to know the risks of investing in the securities market, as one of their major business activities is to invesin securities.

13. Other qualified buyers or qualified institutional investors : The SEC may exempt other transactions, if it findsthat the requirements of registration is not necessary in the public interest or for the protection of investors, such as

by reason of the small amount involved or the limited character of the public offering.

Example:Employees Stock Ownership Plan: Intended as an effective reward mechanism that has enabled the company toretain key talents in the organization; a privilege, not a right, that a corporation extends to it =s employees or staffwhereby the corporation allocates a certain portion of it authorized capital stock for subscription under certain termsand conditions stipulated in the plan.

11Sec. 3.15: Underwriter is a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any

kind by another company.


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MANDATORY TENDER OFFER

SRC Rule 19. Tender Offers(formerly, SRC Rule 19.1)

Mandatory Tender Offers

A. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) or more of equityshares in a public company shall disclose such intention and contemporaneously make a tender offer for the percentsought to all holders of such class.

B. Any person or group of persons acting in concert, who intends to acquire thirty five percent (35%) or more of equityshares in a public company in one or more transactions within a period of twelve (12) months, shall be required to makea tender offer to all holders of such class for the number of shares so acquired within the said period.

C. If any acquisition of even less than thirty five percent (35%) would result in ownership of over fifty one percent (51%) othe total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer underthis Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supportedby a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such atender offer shall be required to accept any and all securities thus tendered.

Tender Offer:A publicly announced intention by a person acting alone or in concert with other persons to acquire equity

securities of a public company.

Public Company:a. Any corporation with a class of equity securities listed on an Exchange; orb. With assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two

hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities.

NOTE:Public Companyas contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed; evencompanies like the Bank, whose shares are offered only to a specific group of people, are considered a public company,provided they meet the requirements enumerated above (Phi l ippine Veterans Bank v s. Cal langan, G.R. No. 191995, Augus3, 2011).

Mandatory tender offer is designed and is in place to protect minority shareholders where there is a buy-out of largeshareholders. It seeks to protect investors against any scheme that dilutes the share value of their investment where there areno guaranteed preemptive rights, and gives the minority shareholders the chance to exit the company under reasonable termsgiving them the opportunity to sell their shares at the same price as those of the majority shareholders. (Cemco HoldingsInc. vs. National Life Insuranc e Compan y, Inc. , G.R. No. 171815, August 7, 2007)

The rule applies to both direct and indirect acquisition as indirect acquisition would result in a change of influence or controover the public company. The legislative intent of the SRC is to regulate activities relating to the acquisition of control of apublic company. The bottom line of the law is to give the shareholders of the public company the opportunity to decide whetheor not to sell their shares in connection with the transfer of control. Whatever may be the method by which control of a publiccompany is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offerapplies. (Cemco Hold ings, Inc. vs. Nat ional Li fe Insurance Company, Inc., G.R. No. 171815, August 7, 2007)

Exempt from Mandatory Tender Offer RequirementThe mandatory tender offer requirement shall not apply to the following:

1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a fifty percent (50%) omore ownership of shares by the purchaser;

2. Any purchase of shares from an increase in authorized capital stock;

3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where theacquisition 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;


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

7. Merger or consolidation.

Obligations of Person Making a Tender Offer

A person making a tender offer is required to:

a) Make an announcement of his intention in a newspaper of general circulation, prior to the commencement of the offer;

b) At least two (2) business days prior to the date of the commencement of the tender offer:

1. File with the SEC a required form for tender offer (SEC Form 19-1) including all exhibits thereto (and anyamendments thereto), with the prescribed filing fees; and

2. Hand deliver a copy of such form including the exhibits (and amendments) to the target company at its principaexecutive office and to each Exchange where such securities are listed for trading.; and

c) Report the results of the tender offer by filing with the SEC, not later than ten (10) calendar days after the termination of thetender offer, copies of the final amendments to the form.

REFERENCES:

Hector S. De Leon and Hector M. De Leon, Jr. (2013) The Corporation Code of the Philippines Annotated, 11th EditionRex Printing Company, Inc., Quezon City

Lucila M. Decasa (2013) Securities Regulation Code Annotated (Revised Edition). Rex Printing Company, Inc., QuezonCity

Jose R. Sundiang, Sr. and Timoteo B. Aquino (2011) Reviewer on Commercial Law, 5th Edition. Rex Printing CompanyInc., Quezon City

Jose Jesus G. Laurel (2006) Corporation Law Simplified. Central Book Supply, Inc., Quezon City

2013 Centralized Bar Operations, Memory Aid in Commercial Law. San Beda College of Law, Manila

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