Beruflich Dokumente
Kultur Dokumente
SYLLABUS
DECISION
MENDOZA , J : p
1. The ASSIGNEE shall take appropriate steps against any user other
than ASSIGNOR or infringer of the BMW trademark in the Philippines, for such
purpose, the ASSIGNOR shall inform the ASSIGNEE immediately of all such use or
infringement of the said trademark which comes to his knowledge and upon such
information the ASSIGNOR shall automatically act as Attorney-In-Fact of the
ASSIGNEE for such case, with full power, authority and responsibility to prosecute
unilaterally or in concert with ASSIGNEE, any such infringer of the subject mark
and for purposes hereof the ASSIGNOR is hereby named and constituted as
ASSIGNEE's Attorney-In-Fact, but any such suit without ASSIGNEE's consent will
exclusively be the responsibility and for the account of the ASSIGNOR;
2. That the ASSIGNOR and the ASSIGNEE shall continue business
relations as has been usual in the past without a formal contract, and for that
purpose, the dealership of ASSIGNOR shall cover the ASSIGNEE s complete
production program with the only limitation that, for the present. in view of
ASSIGNEE's limited production, the latter shall not be able to supply automobiles
to ASSIGNOR.
Per the agreement, the parties "continue[d] business relations as has been usual in
the past without a formal contract." But on February 16, 1993, in a meeting with a BMW
representative and the president of Columbia Motors Corporation (CMC), Jose Alvarez,
petitioner was informed that BMW was arranging to grant the exclusive dealership of BMW
cars and products to CMC, which had expressed interest in acquiring the same. On
February 24, 1993, petitioner received con rmation of the information from BMW which, in
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a letter, expressed dissatisfaction with various aspects of petitioner's business,
mentioning among other things, decline in sales, deteriorating services, and inadequate
showroom and warehouse facilities, and petitioner's alleged failure to comply with the
standards for an exclusive BMW dealer. 2 Nonetheless, BMW expressed willingness to
continue business relations with the petitioner on the basis of a "standard BMW importer"
contract, otherwise, it said, if this was not acceptable to petitioner, BMW would have no
alternative but to terminate petitioner's exclusive dealership effective June 30, 1993. cdasia
Petitioner protested, claiming that the termination of his exclusive dealership would
be a breach of the Deed of Assignment. 3 Hahn insisted that as long as the assignment of
its trademark and device subsisted, he remained BMW's exclusive dealer in the Philippines
because the assignment was made in consideration of the exclusive dealership. In the
same letter petitioner explained that the decline in sales was due to lower prices offered
for BMW cars in the United States and the fact that few customers returned for repairs and
servicing because of the durability of BMW parts and the efficiency of petitioner's service.
Because of Hahn's insistence on the former business relations, BMW withdrew on
March 26, 1993 its offer of a "standard importer contract" and terminated the exclusive
dealer relationship effective June 30, 1993. 4 At a conference of BMW Regional Importers
held on April 26, 1993 in Singapore, Hahn was surprised to nd Alvarez among those
invited from the Asian region. On April 29, 1993, BMW proposed that Hahn and CMC jointly
import and distribute BMW cars and parts.
Hahn found the proposal unacceptable. On May 14, 1993, he led a complaint for
speci c performance and damages against BMW to compel it to continue the exclusive
dealership. Later he led an amended complaint to include an application for temporary
restraining order and for writs of preliminary, mandatory and prohibitory injunction to
enjoin BMW from terminating his exclusive dealership. Hahn's amended complaint alleged
in pertinent parts:
2. Defendant [BMW] is a foreign corporation doing business in the
Philippines with principal o ces at Munich, Germany. It may be served with
summons and other court processes through the Secretary of the Department of
Trade and Industry of the Philippines. . . .
....
8. From the time the trademark "BMW & DEVICE" was rst used by the
Plaintiff in the Philippines up to the present, Plaintiff, through its rm name "HAHN
MANILA" and without any monetary contribution from defendant BMW, established
BMW's goodwill and market presence in the Philippines. Pursuant thereto, Plaintiff has
invested a lot of money and resources in order to single-handedly compete against
other motorcycle and car companies .... Moreover, Plaintiff has built buildings and
other infrastructures such as service centers and showrooms to maintain and promote
the car and products of defendant BMW.
....
The case was docketed as Civil Case No. Q-93-15933 and ra ed to Branch 104 of
the Quezon City Regional Trial Court, which on June 14, 1993 issued a temporary
restraining order. Summons and copies of the complaint and amended complaint were
thereafter served on the private respondent through the Department of Trade and Industry,
pursuant to Rule 14, §14 of the Rules of Court. The order, summons and copies of the
complaint and amended complaint were later sent by the DTI to BMW via registered mail
on June 15, 1993 5 and received by the latter on June 24, 1993.
On June 17, 1993, without proof of service on BMW, the hearing on the application
for the writ of preliminary injunction proceeded ex parte, with petitioner Hahn testifying. On
June 30, 1993, the trial court issued an order granting the writ of preliminary injunction
upon the ling of a bond of P100,000.00. On July 13, 1993, following the posting of the
required bond, a writ of preliminary injunction was issued.
On July 1, 1993, BMW moved to dismiss the case, contending that the trial court did
not acquire jurisdiction over it through the service of summons on the Department of
Trade and Industry, because it (BMW) was a foreign corporation and it was not doing
business in the Philippines. It contended that the execution of the Deed of Assignment was
an isolated transaction; that Hahn was not its agent because the latter undertook to
assemble and sell BMW cars and products without the participation of BMW and sold
other products; and that Hahn was an indentor or middleman transacting business in his
own name and for his own account.
Petitioner Alfred Hahn opposed the motion. He argued that BMW was doing
business in the Philippines through him as its agent, as shown by the fact that BMW
invoices and order forms were used to document his transactions; that he gave warranties
as exclusive BMW dealer; that BMW o cials periodically inspected standards of service
rendered by him; and that he was described in service booklets and international
publications of BMW as a "BMW Importer" or "BMW Trading Company" in the Philippines.
The trial court 6 deferred resolution of the Motion to dismiss until after trial on the
merits for the reason that the grounds advanced by BMW in its motion did not seem to be
indubitable.
Without seeking reconsideration of the aforementioned order, BMW led a petition
for certiorari with the Court of Appeals alleging that:
I. THE RESPONDENT JUDGE ACTED WITH UNDUE HASTE OR
OTHERWISE INJUDICIOUSLY IN PROCEEDINGS LEADING TOWARD THE
ISSUANCE OF THE WRIT OF PRELIMINARY INJUNCTION, AND IN PRESCRIBING
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THE TERMS FOR THE ISSUANCE THEREOF.
Then, after stating that any ruling which the trial court might make on the motion to
dismiss would anyway be elevated to it on appeal, the Court of Appeals itself resolved the
motion. It ruled that BMW was not doing business in the country and, therefore, jurisdiction
over it could not be acquired through service of summons on the DTI pursuant to Rule 14,
Section 14. The court upheld private respondent's contention that Hahn acted in his own
name and for his own account and independently of BMW, based on Alfred Hahn's
allegations that he had invested his own money and resources in establishing BMW's
goodwill in the Philippines and on BMW's claim that Hahn sold products other than those
of BMW. It held that petitioner was a mere indentor or broker and not an agent through
whom private respondent BMW transacted business in the Philippines. Consequently, the
Court of Appeals dismissed petitioner's complaint against BMW.
Hence, this appeal. Petitioner contends that the Court of Appeals erred (1) in nding
that the trial court gravely abused its discretion in deferring action on the motion to
dismiss and (2) in nding that private respondent BMW is not doing business in the
Philippines and, for this reason, dismissing petitioner's case.
Petitioner's appeal is well taken. Rule 14, §14 provides:
§14. Service upon foreign corporations. — If the defendant is a foreign
corporation, or a nonresident joint stock company or association, doing business
in the Philippines, service may be made on its resident agent designated in
accordance with law for that purpose, or, if there be no such agent, on the
government o cial designated by law to that effect, or on any of its o cers or
agents within the Philippines. (Emphasis added)
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What acts are considered "doing business in the Philippines" are enumerated in
§3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042) as follows: 7
d) the phrase "doing business" shall include soliciting orders, service
contracts, opening o ces, whether called "liaison" o ces or branches,
appointing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totalling one hundred
eighty (180) days or more; participating in the management, supervision or
control of any domestic business. rm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to that extent the performance of acts or works, or
the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not be
deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of
rights as such investor. nor having, a nominee director or o cer to represent its
interests in such corporation. nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its
own account. (Emphasis supplied)
Thus, the phrase includes "appointing representatives or distributors in the
Philippines" but not when the representative or distributor "transacts business in its name
and for its own account." In addition, Section 1(f)(1) of the Rules and Regulations
implementing (IRR) the Omnibus Investment Code of 1987 (E.O. No. 226) provided:
(f) "doing business" shall be any act or combination of acts,
enumerated in Article 44 of the Code. In particular, "doing business" includes:
The question is whether petitioner Alfred Hahn is the agent or distributor in the
Philippines of private respondent BMW. If he is, BMW may be considered doing business
in the Philippines and the trial court acquired jurisdiction over it (BMW) by virtue of the
service of summons on the Department of Trade and Industry. Otherwise, if Hahn is not the
agent of BMW but an independent dealer, albeit of BMW cars and products, BMW, a
foreign corporation, is not considered doing business in the Philippines within the meaning
of the Foreign Investments Act of 1991 and the IRR, and the trial court did not acquire
jurisdiction over it (BMW).
The Court of Appeals held that petitioner Alfred Hahn acted in his own name and for
his own account and not as agent or distributor in the Philippines of BMW on the ground
that "he alone had contacts with individuals or entities interested in acquiring BMW
vehicles. Independence characterizes Hahn's undertakings for which reason he is to be
considered, under governing statutes, as doing business." (p. 13) In support of this
conclusion, the appellate court cited the following allegations in Hahn's amended
complaint:
8. From the time the trademark "BMW & DEVICE" was rst used by the
Plaintiff in the Philippines up to the present, Plaintiff, through its rm name
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"HAHN MANILA" and without any monetary contributions from defendant BMW,
established BMW's goodwill and market presence in the Philippines. Pursuant
thereto, Plaintiff invested a lot of money and resources in order to single-handedly
compete against other motorcycle and car companies . . . Moreover, Plaintiff has
built buildings and other infrastructures such as service centers and showrooms
to maintain and promote the car and products of defendant BMW.
As the above quoted allegations of the amended complaint show, however, there is
nothing to support the appellate court's finding that Hahn solicited orders alone and for his
own account and without "interference from, let alone direction of, BMW." (p. 13) To the
contrary, Hahn claimed he took orders for BMW cars and transmitted them to BMW. Upon
receipt of the orders, BMW xed the down payment and pricing charges, noti ed Hahn of
the scheduled production month for the orders, and recon rmed the orders by signing and
returning to Hahn the acceptance sheets. Payment was made by the buyer directly to
BMW. Title to cars purchased passed directly to the buyer and Hahn never paid for the
purchase price of BMW cars sold in the Philippines. Hahn was credited with a commission
equal to 14% of the purchase price upon the invoicing of a vehicle order by BMW. Upon
confirmation in writing that the vehicles had been registered in the Philippines and serviced
by him, Hahn received an additional 3% of the full purchase price. Hahn performed after-
sale services, including, warranty services. for which he received reimbursement from
BMW. All orders were on invoices and forms of BMW. 8
These allegations were substantially admitted by BMW which, in its petition for
certiorari before the Court of Appeals, stated: 9
9.4. As soon as the vehicles are fully manufactured and full payment
of the purchase prices are made, the vehicles are shipped to the Philippines. (The
payments may be made by the purchasers or third-persons or even by Hahn.) The
bills of lading are made up in the name of the purchasers, but Hahn-Manila is
therein indicated as the person to be notified.
9.5. It is Hahn who picks up the vehicles from the Philippine ports, for
purposes of conducting pre-delivery inspections. Thereafter, he delivers the
vehicles to the purchasers.
9.6. As soon as BMW invoices the vehicle ordered, Hahn is credited
with a commission of fourteen percent (14%) of the full purchase price thereof,
and as soon as he con rms in writing, that the vehicles have been registered in
the Philippines and have been serviced by him, he will receive an additional three
percent (3%) of the full purchase prices as commission.
In effect, BMW was holding Hahn accountable to it under the 1967 Agreement.
This case ts into the mould of Communications Materials, Inc. v. Court of Appeals
12 in which the foreign corporation entered into a "Representative Agreement" and a
"Licensing Agreement" with a domestic corporation, by virtue of which the latter was
appointed "exclusive representative" in the Philippines for a stipulated commission.
Pursuant to these contracts, the domestic corporation sold products exported by the
foreign corporation and put up a service center for the products sold locally. This Court
held that these acts constituted doing business in the Philippines. The arrangement
showed that the foreign corporation's purpose was to penetrate the Philippine market and
establish its presence in the Philippines.
In addition, BMW held out private respondent Hahn as its exclusive distributor in the
Philippines. even as it announced in the Asian region that Hahn was the "o cial BMW
agent" in the Philippines. 13
The Court of Appeals also found that petitioner Alfred Hahn dealt in other products,
and not exclusively in BMW products, and, on this basis, ruled that Hahn was not an agent
of BMW. (p. 14) This nding is based entirely on allegations of BMW in its motion to
dismiss led in the trial court and in its petition for certiorari before the Court of Appeals.
1 4 But this allegation was denied by Hahn 1 5 and therefore the Court of Appeals should not
have cited it as if it were the fact.
Indeed this is not the only factual issue raised, which should have indicated to the
Court of Appeals the necessity of a rming the trial court's order deferring resolution of
BMW's motion to dismiss. Petitioner alleged that whether or not he is considered an agent
of BMW, the fact is that BMW did business in the Philippines because it sold cars directly
to Philippine buyers. 1 6 This was denied by BMW, which claimed that Hahn was not its
agent and that, while it was true that it had sold cars to Philippine buyers, this was done
without solicitation on its part. 1 7
It is not true then that the question whether BMW is doing business could have been
resolved simply by considering the parties' pleadings. There are genuine issues of facts
which can only be determined on the basis of evidence duly presented. BMW cannot short
circuit the process on the plea that to compel it to go to trial would be to deny its right not
to submit to the jurisdiction of the trial court which precisely it denies. Rule 16, §3
authorizes courts to defer the resolution of a motion to dismiss until after the trial if the
ground on which the motion is based does not appear to be indubitable. Here the record of
the case bristles with factual issues and it is not at all clear whether some allegations
correspond to the proof. lexlib
Far from committing an abuse of discretion, the trial court properly deferred
resolution of the motion to dismiss and thus avoided prematurely deciding a question
which requires a factual basis, with the same result if it had denied the motion and
conditionally assumed jurisdiction. It is the Court of Appeals which, by ruling that BMW is
not doing business on the basis merely of uncertain allegations in the pleadings, disposed
of the whole case with nality and thereby deprived petitioner of his right to be heard on
his cause of action. Nor was there justi cation for nullifying the writ of preliminary
injunction issued by the trial court. Although the injunction was issued ex parte, the fact is
that BMW was subsequently heard on its defense by filing a motion to dismiss.
WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is
REMANDED to the trial court for further proceedings.
SO ORDERED.
Regalado, Romero, Puno and Torres, Jr., JJ., concur.
Footnotes
1. Per Justice Cancio C. Garcia and concurred in by Justices Ramon U. Mabutas and
Antonio M. Martinez, chairman.
De Los Reyes Banaga Briones & Associates for respondent Solidbank Corp.
SYNOPSIS
SYLLABUS
DECISION
SANDOVAL-GUTIERREZ, J : p
In the present Petition for Review on Certiorari , petitioner MR Holdings, Ltd. assails
the a) Decision 1 dated January 8, 1999 of the Court of Appeals in CA-G.R. SP No. 49226
finding no grave abuse of discretion on the part of Judge Leonardo P. Ansaldo of the
Regional Trial Court (RTC), Branch 94, Boac, Marinduque, in denying petitioner's
application for a writ of preliminary injunction; 2 and b) Resolution 3 dated March 29, 1999
denying petitioner's motion for reconsideration.
On even date, ADB and Placer Dome, Inc., (Placer Dome), a foreign corporation
which owns 40% of Marcopper, executed a "Support and Standby Credit Agreement"
whereby the latter. agreed to provide Marcopper with cash flow support for the payment of
its obligations to ADB.
To secure the loan, Marcopper executed in favor of ADB a "Deed of Real Estate and
Chattel Mortgage" 6 dated November 11, 1992, covering substantially all of its
(Marcopper's) properties and assets in Marinduque. It was registered with the Register of
Deeds on November 12, 1992.
When Marcopper defaulted in the payment of its loan obligation, Placer Dome, in
fulfillment of its undertaking under the "Support and Standby Credit Agreement," and
presumably to preserve its international credit standing, agreed to have its subsidiary
corporation, petitioner MR Holding, Ltd., assumed Marcopper's obligation to ADB in the
amount of US$18,453,450.02. Consequently, in an "Assignment Agreement" 7 dated March
20, 1997, ADB assigned to petitioner all its rights, interests and obligations under the
principal and complementary loan agreements, ("Deed of Real Estate and Chattel
Mortgage," and "Support and Standby Credit Agreement"). On December 8, 1997,
Marcopper likewise executed a "Deed of Assignment" 8 in favor of petitioner. Under its
provisions, Marcopper assigns, transfers, cedes and conveys to petitioner, its assigns
and/or successors-in-interest all of its (Marcopper's) properties, mining equipment and
facilities, to wit:
Mine/Mobile Equipment
1. To pay plaintiff Solidbank the sum of Fifty Two Million Nine Hundred
Seventy Thousand Pesos Seven Hundred Fifty Six and 89/100 only
(PHP 52,970,756.89), plus interest and charges until fully paid;
"SO ORDERED."
Upon Solidbank's motion, the RTC of Manila issued a writ of execution pending
appeal directing Carlos P. Bajar, respondent sheriff, to require Marcopper "to pay the sums
of money to satisfy the Partial Judgment." 10 Thereafter, respondent Bajar issued two
notices of levy on Marcopper's personal and real properties, and over all its stocks of scrap
iron and unserviceable mining equipment. 11 Together with sheriff Ferdinand M. Jandusay
(also a respondent) of the RTC, Branch 94, Boac, Marinduque, respondent Bajar issued
two notices setting the public auction sale of the levied properties on August 27, 1998 at the
Marcopper mine site. 12
Having learned of the scheduled auction sale, petitioner served an "Affidavit of Third-
Party Claim" 13 upon respondent sheriffs on August 26, 1998, asserting its ownership over
all Marcopper's mining properties, equipment and facilities by virtue of the "Deed of
Assignment."
Upon the denial of its "Affidavit of Third-Party Claim" by the RTC of Manila, 14
petitioner commenced with the RTC of Boac, Marinduque, presided by Judge Leonardo P.
Ansaldo, a complaint for reivindication of properties, etc., with prayer for preliminary
injunction and temporary restraining order against respondents Solidbank, Marcopper, and
sheriffs Bajar and Jandusay. 15 The case was docketed as Civil Case No. 98-13.
In an Order 16 dated October 6, 1998, Judge Ansaldo denied petitioner's
application for a writ of preliminary injunction on the ground that a) petitioner has no
legal capacity to sue, it being a foreign corporation doing business in the Philippines
without license; b) an injunction will amount "to staying the execution of a final judgment
by a court of co-equal and concurrent jurisdiction"; and c) the validity of the
"Assignment Agreement" and the "Deed of Assignment" has been "put into serious
question by the timing of their execution and registration."
Unsatisfied, petitioner elevated the matter to the Court of Appeals on a Petition for
Certiorari , Prohibition and Mandamus, docketed therein as CA-G.R. SP No. 49226. On
January 8, 1999, the Court of Appeals rendered a Decision holding that Judge Ansaldo did
not commit grave abuse of discretion in denying petitioner's prayer for a writ of preliminary
injunction, ratiocinating as follows:
"Petitioner contends that it has the legal capacity to sue and seek redress
from Philippine courts as it is a non-resident foreign corporation not doing
business in the Philippines and suing on isolated transactions.
"We agree with the finding of the respondent court that petitioner is not
suing on an isolated transaction as it claims to be, as it is very obvious from the
deed of assignment and its relationships with Marcopper and Placer Dome, Inc.
that its unmistakable intention is to continue the operations of Marcopper and
shield its properties/assets from the reach of legitimate creditors, even those
holding valid and executory court judgments against it. There is no other way for
petitioner to recover its huge financial investments which it poured into
Marcopper's rehabilitation and the local situs where the Deeds of Assignment
were executed, without petitioner continuing to do business in the country.
"Furthermore, the court went further by declaring that even a single act
may constitute doing business if it is intended to be the beginning of a series of
transactions. (Far East International Import and Export Corporation vs. Nankai
Kogyo Co. supra).
"On the issue of whether petitioner is the bona fide owner of all the mining
facilities and equipment of Marcopper, petitioner relies heavily on the Assignment
Agreement allegedly executed on March 20, 1997 wherein all the rights and
interest of Asian Development Bank (ADB) in a purported Loan Agreement were
ceded and transferred in favor of the petitioner as assignee, in addition to a
subsequent Deed of Assignment dated December 28, 1997 conveying absolutely
all the properties, mining equipment and facilities of Marcopper in favor of
petitioner.
Hence, the present Petition for Review on Certiorari by MR Holdings, Ltd. moored on
the following grounds:
In its petition, petitioner alleges that it is not "doing business" in the Philippines and
characterizes its participation in the assignment contracts (whereby Marcopper's assets
were transferred to it) as mere isolated acts that cannot foreclose its right to sue in local
courts. Petitioner likewise maintains that the two assignment contracts, although executed
during the pendency of Civil Case No. 96-80083 in the RTC of Manila, are not fraudulent
conveyances as they were supported by valuable considerations. Moreover, they were
executed in connection with prior transactions that took place as early as 1992 which
involved ADB, a reputable financial institution. Petitioner further claims that when it paid
Marcopper's obligation to ADB, it stepped into the latter's shoes and acquired its (ADB'S)
rights, titles, and interests under the "Deed of Real Estate and Chattel Mortgage." Lastly,
petitioner asserts its existence as a corporation, separate and distinct from Placer Dome
and Marcopper.
Crucial to the outcome of this case is our resolution of the following issues: 1) Does
petitioner have the legal capacity to sue? 2) Was the Deed of Assignment between
Marcopper and petitioner executed in fraud of creditors? 3) Are petitioner MR Holdings,
Ltd., Placer Dome, and Marcopper one and the same entity? and 4) Is petitioner guilty of
forum shopping?
The Court of Appeals ruled that petitioner has no legal capacity to sue in the
Philippine courts because it is a foreign corporation doing business here without license. A
review of this ruling does not pose much complexity as the principles governing a foreign
corporation's right to sue in local courts have long been settled by our Corporation Law. 17
These principles may be condensed in three statements, to wit: a) if a foreign corporation
does business in the Philippines without a license , it cannot sue before the Philippine
courts; 18 b) if a foreign corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction 19 or on a cause of action
entirely independent of any business transaction; 20 and c) if a foreign corporation does
business in the Philippines with the required license, it can sue before Philippine courts on
any transaction. Apparently, it is not the absence of the prescribed license but the "doing
(of) business" in the Philippines without such license which debars the foreign corporation
from access to our courts. 21
The task at hand requires us to weigh the facts vis-a-vis the established principles.
The question whether or not a foreign corporation is doing business is dependent principally
upon the facts and circumstances of each particular case, considered in the light of the
purposes and language of the pertinent statute or statutes involved and of the general
principles governing the jurisdictional authority of the state over such corporations. 22
Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the
Philippines," is silent as to what constitutes "doing" or "transacting" business in the
Philippines. Fortunately, jurisprudence has supplied the deficiency and has held that the
term "implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object for which
the corporation was organized." 23 In Mentholatum Co. Inc., vs. Mangaliman, 24 this Court
laid down the test to determine whether a foreign company is "doing business," thus:
" . . . The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to
another. (Traction Cos. vs. Collectors of Int. Revenue [C.C.A., Ohio], 223 F.
984,987.) . . . ."
The traditional case law definition has metamorphosed into a statutory definition,
having been adopted with some qualifications in various pieces of legislation in our
jurisdiction. For instance, Republic Act No. 7042, otherwise known as the "Foreign
Investment Act of 1991," defines "doing business" as follows:
"d) The phrase 'doing business' shall include soliciting orders, service
contracts, opening offices, whether called 'liaison' offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eight(y) (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity, or corporation in the Philippines; and any other
act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works; or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization;
Provided, however , That the phrase 'doing business' shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such
investor, nor having a nominee director or officer to represent its interests in such
corporation, nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account."
(Italics supplied ) 25
There are other statutes 27 defining the term "doing business" in the same tenor as
those above-quoted, and as may be observed, one common denominator among them
all is the concept of "continuity."
In the case at bar, the Court of Appeals categorized as "doing business" petitioner's
participation under the "Assignment Agreement" and the "Deed of Assignment." This is
simply untenable. The expression "doing business" should not be given such a strict and
literal construction as to make it apply to any corporate dealing whatever. 28 At this early
stage and with petitioner's acts or transactions limited to the assignment contracts, it
cannot be said that it had performed acts intended to continue the business for which it was
organized. It may not be amiss to point out that the purpose or business for which
petitioner was organized is not discernible in the records. No effort was exerted by the
Court of Appeals to establish the nexus between petitioner's business and the acts
supposed to constitute "doing business." Thus, whether the assignment contracts were
incidental to petitioner's business or were continuation thereof is beyond determination.
We cannot apply the case cited by the Court of Appeals, Far East Int'1 Import and Export
Corp. vs. Nankai Kogyo Co., Ltd., 29 which held that a single act may still constitute "doing
business" if "it is not merely incidental or casual, but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do other business in the state."
In said case, there was an express admission from an official of the foreign corporation that
he was sent to the Philippines to look into the operation of mines, thereby revealing the
foreign corporation's desire to continue engaging in business here. But in the case at bar,
there is no evidence of similar desire or intent. Unarguably, petitioner may, as the Court of
Appeals suggested, decide to operate Marcopper's mining business, but, of course, at this
stage, that is a mere speculation. Or it may decide to sell the credit secured by the mining
properties to an offshore investor, in which case the acts will still be isolated transactions.
To see through the present facts an intention on the part of petitioner to start a series of
business transaction is to rest on assumptions or probabilities falling short of actual
proof. Courts should never base its judgments on a state of facts so inadequately
developed that it cannot be determined where inference ends and conjecture begins.
Indeed, the Court of Appeals' holding that petitioner was determined to be "doing
business" in the Philippines is based mainly on conjectures and speculation. In concluding
that the "unmistakable intention" of petitioner is to continue Marcopper's business, the
Court of Appeals hangs on the wobbly premise that "there is no other way for petitioner to
recover its huge financial investments which it poured into Marcopper's rehabilitation
without it (petitioner) continuing Marcopper's business in the country." 30 This is a mere
presumption. Absent overt acts of petitioner from which we may directly infer its intention
to continue Marcopper's business, we cannot give our concurrence. Significantly, a view
subscribed upon by many authorities is that the mere ownership by a foreign corporation of
a property in a certain state, unaccompanied by its active use in furtherance of the
business for which it was formed , is insufficient in itself to constitute doing business. 31 In
Chittim vs. Belle Fourche Bentonite Products Co. , 32 it was held that even if a foreign
corporation purchased and took conveyances of a mining claim, did some assessment
work thereon, and endeavored to sell it, its acts will not constitute the doing of business
so as to subject the corporation to the statutory requirements for the transacting of
business. On the same vein, petitioner, a foreign corporation, which becomes the assignee
of mining properties, facilities and equipment cannot be automatically considered as doing
business, nor presumed to have the intention of engaging in mining business.
One important point. Long before petitioner assumed Marcopper's debt to ADB and
became their assignee under the two assignment contracts, there already existed a
"Support and Standby Credit Agreement" between ADB and Placer Dome whereby the latter
bound itself to provide cash flow support for Marcopper's payment of its obligations to ADB.
Plainly, petitioner's payment of US$18,453,450.12 to ADB was more of a fulfillment of an
obligation under the "Support and Standby Credit Agreement" rather than an investment.
That petitioner had to step into the shoes of ADB as Marcopper's creditor was just a
necessary legal consequence of the transactions that transpired. Also, we must hasten to
add that the "Support and Standby Credit Agreement" was executed four (4) years prior to
Marcopper's insolvency , hence, the alleged "intention of petitioner to continue Marcopper's
business" could have no basis for at that time, Marcopper's fate cannot yet be determined.
In the final analysis, we are convinced that petitioner was engaged only in isolated
acts or transactions. Single or isolated acts, contracts, or transactions of foreign
corporations are not regarded as a doing or carrying on of business. Typical examples of
these are the making of a single contract, sale, sale with the taking of a note and mortgage
in the state to secure payment therefor, purchase, or note, or the mere commission of a
tort. 33 In these instances, there is no purpose to do any other business within the country.
II
Solidbank contends that from the chronology and timing of events, it is evident that
there existed a pre-set pattern of response on the part of Marcopper to defeat whatever
court ruling that may be rendered in favor of Solidbank.
This article presumes the existence of fraud made by a debtor. Thus, in the absence
of satisfactory evidence to the contrary, an alienation of a property will be held fraudulent if
it is made after a judgment has been rendered against the debtor making the alienation. 34
This presumption of fraud is not conclusive and may be rebutted by satisfactory and
convincing evidence. All that is necessary is to establish affirmatively that the
conveyance is made in good faith and for a sufficient and valuable consideration. 35
The "Assignment Agreement" and the "Deed of Assignment" were executed for
valuable considerations. Patent from the "Assignment Agreement" is the fact that petitioner
assumed the payment of US$ 18,453,450.12 to ADB in satisfaction of Marcopper's
remaining debt as of March 20, 1997. 36 Solidbank cannot deny this fact considering that a
substantial portion of the said payment, in the sum of US$ 13,886,791.06, was remitted in
favor of the Bank of Nova Scotia, its major stockholder. 37
The facts of the case so far show that the assignment contracts were executed in
good faith. The execution of the "Assignment Agreement" on March 20, 1997 and the "Deed
of Assignment" on December 8, 1997 is not the alpha of this case. While the execution of
these assignment contracts almost coincided with the rendition on May 7, 1997 of the
Partial Judgment in Civil Case No. 96-80083 by the Manila RTC, however, there was no
intention on the part of petitioner to defeat Solidbank's claim. It bears reiterating that as
early as November 4, 1992, Placer Dome had already bound itself under a "Support and
Standby Credit Agreement" to provide Marcopper with cash flow support for the payment to
ADB of its obligations. When Marcopper ceased operations on account of disastrous mine
tailings spill into the Boac River and ADB pressed for payment of the loan, Placer Dome
agreed to have its subsidiary, herein petitioner, paid ADB the amount of US$18,453,450.12.
Thereupon, ADB and Marcopper executed, respectively, in favor of petitioner an
"Assignment Agreement" and a "Deed of Assignment." Obviously, the assignment
contracts were connected with transactions that happened long before the rendition in 1997
of the Partial Judgment in Civil Case No. 96-80083 by the Manila RTC. Those contracts
cannot be viewed in isolation. If we may add, it is highly inconceivable that ADB, a
reputable international financial organization, will connive with Marcopper to feign or
simulate a contract in 1992 just to defraud Solidbank for its claim four years thereafter. And
it is equally incredible for petitioner to be paying the huge sum of US$18,453,450.12 to ADB
only for the purpose of defrauding Solidbank of the sum of P52,970.756.89.
III
The record is lacking in circumstances that would suggest that petitioner corporation,
Placer Dome and Marcopper are one and the same entity. While admittedly, petitioner is a
wholly-owned subsidiary of Placer Dome, which, in turn, was then a minority stockholder of
Marcopper, however, the mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity . If
used to perform legitimate functions, a subsidiary's separate existence shall be respected,
and the liability of the parent corporation as well as the subsidiary will be confined to those
arising in their respective business. 39
The recent case of Philippine National Bank vs. Ritratto Group Inc., 40 outlines the
circumstances which are useful in the determination of whether a subsidiary is but a mere
instrumentality of the parent-corporation, to wit:
(a) The parent corporation owns all or most of the capital stock of the
subsidiary.
(d) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation.
(f) The parent corporation pays the salaries and other expenses or
losses of the subsidiary.
(i) The parent corporation uses the property of the subsidiary as its
own.
(k) The formal legal requirements of the subsidiary are not observed.
In this catena of circumstances, what is only extant in the records is the matter of
stock ownership. There are no other factors indicative that petitioner is a mere
instrumentality of Marcopper or Placer Dome. The mere fact that Placer Dome agreed,
under the terms of the "Support and Standby Credit Agreement" to provide Marcopper with
cash flow support in paying its obligations to ADB, does not mean that its personality has
merged with that of Marcopper. This singular undertaking, performed by Placer Dome with
its own stockholders in Canada and elsewhere, is not a sufficient ground to merge its
corporate personality with Marcopper which has its own set of shareholders, dominated
mostly by Filipino citizens. The same view applies to petitioner's payment of Marcopper's
remaining debt to ADB.
With the foregoing considerations and the absence of fraud in the transaction of the
three foreign corporations, we find it improper to pierce the veil of corporate fiction — that
equitable doctrine developed to address situations where the corporate personality of a
corporation is abused or used for wrongful purposes.
IV
On the issue of forum shopping, there could have been a violation of the rules
thereon if petitioner and Marcopper were indeed one and the same entity. But since
petitioner has a separate personality, it has the right to pursue its third-party claim by filing
the independent reivindicatory action with the RTC of Boac, Marinduque, pursuant to Rule
39, Section 16 of the 1997 Rules of Civil Procedures. This remedy has been recognized in
a long line of cases decided by this Court. 41 In Rodriguez vs. Court of Appeals , 42 we
held:
". . . It has long been settled in this jurisdiction that the claim of ownership
of a third party over properties levied for execution of a judgment presents no
issue for determination by the court issuing the writ of execution.
This "reivindicatory action" has for its object the recovery of ownership or
possession of the property seized by the sheriff, despite the third party claim, as well as
damages resulting therefrom, and it may be brought against the sheriff and such other
parties as may be alleged to have connived with him in the supposedly wrongful execution
proceedings, such as the judgment creditor himself. Such action is an entirely separate
and distinct action from that in which execution has been issued. Thus, there being no
identity of parties and cause of action between Civil Case No. 98-13 (RTC, Boac) and those
cases filed by Marcopper, including Civil Case No. 96-80083 (RTC, Manila) as to give rise
to res judicata or litis pendentia, Solidbank's allegation of forum-shopping cannot prosper.
43
(a) That the applicant is entitled to the relief demanded, and the whole or part
of such relief consists in restraining the commission or continuance of the
act or acts complained of, or in requiring the performance of an act or acts,
either for a limited period or perpetually;
Petitioner's right to stop the further execution of the properties covered by the
assignment contracts is clear under the facts so far established. An execution can be
issued only against a party and not against one who did not have his day in court. 44 The
duty of the sheriff is to levy the property of the judgment debtor not that of a third person.
For, as the saying goes, one man's goods shall not be sold for another man's debts. 45 To
allow the execution of petitioner's properties would surely work injustice to it and render the
judgment on the reivindicatory action, should it be favorable, ineffectual. In Arabay, Inc.,
vs. Salvador , 46 this Court held that an injunction is a proper remedy to prevent a sheriff
from selling the property of one person for the purpose of paying the debts of another; and
that while the general rule is that no court has authority to interfere by injunction with the
judgments or decrees of another court of equal or concurrent or coordinate jurisdiction,
however, it is not so when a third-party claimant is involved. We quote the instructive
words of Justice Querube C. Makalintal in Abiera vs. Court of Appeals , 47 thus:
SO ORDERED.
Footnotes
1 Rollo, pp. 10-29. Former Justice Demetrio S. Demetria wrote the ponencia
3 Rollo, p. 31.
DECISION
PERALTA , J : p
Before the Court is a petition for review under Rule 45 of the Rules of Court,
which seeks to reverse and set aside the Decision 1 dated January 21, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 93337, the dispositive portion of which reads:
WHEREFORE , in view of the foregoing, the petition is GRANTED . The
assailed Resolution, dated December 15, 2005, of the Securities and Exchange
Commission, as well as its Order of Revocation dated December 8, 2004, are
hereby SET ASIDE .
SO ORDERED . 2
The facts are as follows:
Respondent Universal Right eld Property Holdings, Inc. (URPHI) is a corporation
duly registered and existing under the Philippine Laws, and is engaged in the business
of providing residential and leisure-related needs and wants of the middle and upper
middle-income market.
On May 29, 2003, petitioner Securities and Exchange Commission (SEC), through
its Corporate Finance Department, issued an Order revoking URPHI's Registration of
Securities and Permit to Sell Securities to the Public for its failure to timely le its Year
2001 Annual Report and Year 2002 1st, 2nd and 3rd Quarterly Reports pursuant to
Section 17 3 of the Securities Regulation Code (SRC), Republic Act No. 8799.
On October 16, 2003, URPHI led with the SEC a Manifestation/Urgent Motion to
Set Aside Revocation Order and Reinstate Registration after complying with its
reportorial requirements.
On October 24, 2003, the SEC granted URPHI's motion to lift the revocation
order, considering the current economic situation, URPHI's belated ling of the required
annual and quarterly reports, and its payment of the reduced fine of P82,000.00. EcTCAD
Thereafter, URPHI failed again to comply with the same reportorial requirements.
In a Notice of Hearing dated June 25, 2004, the SEC directed URPHI to show
cause why its Registration of Securities and Certi cate of Permit to Sell Securities to
the Public should not be suspended for failure to submit the said requirements.
Pertinent portion of the notice reads:
Records show that the corporation has failed to submit the following
reports in violation of SRC Rule 17.1:
(1) 2003 Annual Report (SEC Form 17-A); and
(2) 2004 1st Quarter Report (SEC Form 17-Q)
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The company has been allowed a non-extendible period until May 31,
2004 within which to le its 2003 Annual Report but to date the said report has
not been submitted.
In view of the foregoing and considering the inadequate information
available to the public, the corporation is hereby directed to show cause why the
Registration of its Securities and Certi cate of Permit to Sell Securities should
not be suspended, in a hearing scheduled before Atty. Francia A. Tiuseco-
Manlapaz on July 6, 2004, at the Securities Registration Division, Corporation
Finance Department of the Commission, 6th Floor, SEC Building, EDSA,
Greenhills, Mandaluyong, Metro Manila at 10:00 o'clock in the morning. Failure
of the company to appear, through its representative, at the said hearing shall
be deemed a waiver on its part to be heard with regard to the suspension of its
Certificate of Permit to Sell Securities to the Public.
SO ORDERED. 4
During the scheduled hearing on July 6, 2004, URPHI, through its Chief
Accountant, Rhodora Lahaylahay, informed the SEC why it failed to submit the
reportorial requirements, viz.: (1) it was constrained to reduce its accounting staff due
to cost-cutting measures; thus, some of the audit requirements were not completed
within the original timetable; and (2) its audited nancial statements for the period
ending December 31, 2003 could not be nalized by reason of the delay in the
completion of some of its audit requirements.
In an Order dated July 27, 2004, the SEC suspended URPHI's Registration of
Securities and Permit to Sell Securities to the Public for failure to submit its reportorial
requirements despite the lapse of the extension period, and due to lack of su cient
justification for its inability to comply with the said requirements.
On August 23, 2004, the SEC, through its Corporation Finance Department,
informed URPHI that it failed to submit its 2004 2nd Quarter Report (SEC Form 17-Q) in
violation of the Amended Implementing Rules and Regulations of the SRC Rule 17.1 (1)
(A) (ii). 5 It also directed URPHI to le the said report, and to show cause why it should
not be held liable for violation of the said rule.
In a letter dated September 28, 2004, URPHI requested for a nal extension, or
until November 15, 2004, within which to submit its reportorial requirements. Pertinent
portions of the letter read:
We refer to your Order dated 27 July 2004, wherein the Commission
resolved to SUSPEND the Corporation's Registration of Securities and Permit to
Sell Securities to the Public due to non- ling of the Corporation's reportorial
requirements under SRC Rule 17 effective for sixty (60) days or until the
reporting requirements are complied [with]; otherwise, the Commission shall
proceed with the revocation of the Corporation's registration [of] securities. To
date, the Corporation has not led with the Commission its 2003 Annual Report
in SEC Form 17-A and 2004 1st and 2nd Quarterly reports in SEC Form 17-Q.
The non-submission of these reportorial requirements, as we have already
disclosed to you per our letter dated 13 September 2004, was due to the non-
nalization of the Corporation's audited nancial statement for the scal year
ended December 31, 2003.
During our meeting with our external auditor, SGV & Co. last 8 September
2004, SGV agreed to facilitate the nalization of our nancial statements within
two (2) weeks. Notwithstanding the same, the Corporation foresees the
impossibility of complying with its submission until the end of the month, as the
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partners of SGV are still reviewing the final draft of the financial statements.
The Corporation intends to comply with its reportorial requirements.
However, due to the foregoing circumstances, the nalization of our nancial
statement has again been delayed. In this regard, may we request for the last
time until November 15, 2004 within which to submit said reportorial
requirements. 6
On December 1, 2004, URPHI filed with the SEC its 2003 Annual Report.
In an Order of Revocation 7 dated December 8, 2004, the SEC revoked URPHI's
Registration of Securities and Permit to Sell Securities to the Public for its failure to
submit its reportorial requirements within the final extension period.
On December 9, 10, and 14, 2004, URPHI nally submitted to the SEC its 1st
Quarterly Report for 2004, 2nd Quarterly Report for 2004, and 3rd Quarterly Report for
2004, respectively.
Meantime, URPHI appealed the SEC Order of Revocation dated December 8,
2004 by filing a Notice of Appeal and a Memorandum both dated January 3, 2005.
In a Resolution dated December 15, 2005, the SEC denied URPHI's appeal, thus:
HSAcaE
URPHI further cites the ruling 17 in BLTB, Co. v. Cadiao, et al ., 18 to support its
view that a motion for reconsideration is curative of a defect in procedural due process
only if a party is given su cient opportunity to explain his side of the controversy. It
claims that the controversy referred to is the underlying substantive controversy of
which the procedural due process controversy is but an offshoot. Noting that the only
issue raised in its appeal was procedural, i.e., whether it was denied prior notice and
hearing under the SRC, URPHI contends that it cannot be said that by appealing to the
SEC, it had the opportunity to explain its side on substantive controversy which pertains
to its alleged violation of the SRC and failure to comply with the reportorial
requirements that prompted the SEC to issue the Order of Revocation. Hence, such
appeal cannot be considered curative of the defect in procedural due process which
attended the issuance of the said Order.
URPHI further submits that the prior revocation of its registration on May 29,
2003 did not cure the lack of due process which attended the revocation of its
registration on December 8, 2004. Since the SEC deemed it proper to lift the prior
revocation, such can no longer be used to sustain another revocation order, much less
one issued without prior notice and hearing.
Granted that it was accorded due process, URPHI asserts that the revocation of
its registration of securities and permit to sell them to the public is inequitable under
the circumstances. It calls attention to the severe and certain consequences of such
revocation, i.e., termination of the public offering of its securities, return of payments
received from purchasers thereof, and its delisting from the PSE, which will cause
nancial ruin and jeopardize its efforts to recover from its current nancial distress.
Claiming that it exerted best effort and exercised good faith in complying with the
reportorial requirements, URPHI avers that the interest of the investing public will be
better served if, instead of revoking its registration of securities, the SEC will merely
impose penalties and allow it to continue as a going concern in the hope that it may
later return to profitability.
The petition is meritorious.
There is no dispute that violation of the reportorial requirements under Section
17.1 19 of the Amended Implementing Rules and Regulations 20 of the SRC is a ground
for suspension or revocation of registration of securities pursuant to Sections 13.1 and
54.1 of the SRC. However, contrary to the CA ruling that separate notices and hearings
for suspension and revocation of registration of securities and permit to sell them to
the public are required, Sections 13.1 and 54.1 of the SRC expressly provide that the
SEC may suspend or revoke such registration only after due notice and hearing, to wit:
13.1. The Commission may reject a registration statement and refuse
registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder after
due notice and hearing by issuing an order to such effect, setting forth its
findings in respect thereto, if it finds that:
a) The issuer:
xxx xxx xxx
(ii) Has violated any of the provisions of this Code, the rules
promulgated 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; 21
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xxx xxx xxx
54.1. If, after due notice and hearing, the Commission nds that:
(a ) There is a violation of this Code, its rules, or its orders ; (b) Any
registered broker or dealer, associated person thereof has failed reasonably to
supervise, with a view to preventing violations, another person subject to
supervision who commits any such violation; (c) Any registrant or other person
has, in a registration statement or in other reports, applications, accounts,
records or documents required by law or rules to be led with the Commission,
made any untrue statement of a material fact, or omitted to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; or, in the case of an underwriter, has failed to conduct an inquiry
with reasonable diligence to insure that a registration statement is accurate and
complete in all material respects; or (d) Any person has refused to permit any
lawful examinations into its affairs, it shall, in its discretion, and subject only to
the limitations hereinafter prescribed, impose any or all of the following
sanctions as may be appropriate in light of the facts and circumstances:
(i) Suspension, or revocation of any registration for the offering of
securities; 22
The Court has consistently held that the essence of due process is simply an
opportunity to be heard, or as applied to administrative proceedings, an opportunity to
explain one's side or an opportunity to seek a reconsideration of the action or ruling
complained of. 23 Any seeming defect in its observance is cured by the ling of a
motion for reconsideration, and denial of due process cannot be successfully invoked
by a party who has had the opportunity to be heard on such motion. 24 What the law
prohibits is not the absence of previous notice, but the absolute absence thereof and
the lack of opportunity to be heard. 25
In the present case, due notice of revocation was given to URPHI through the SEC
Order dated July 27, 2004 which reads:
Considering that the company is under rehabilitation, the request was
granted and it was given a non-extendible period until May 31, 2004 within
which to comply. caITAC
It bears emphasis that URPHI had committed several offenses for failure to
comply with the reportorial requirements for which it was ned and its registration of
securities revoked. On May 29, 2003, the SEC issued an Order revoking URPHI's
Registration of Securities and Permit to Sell Securities to the Public for its failure to
timely le its Year 2001 Annual Report and Year 2002 1st, 2nd and 3rd Quarterly
Reports. Then, on October 24, 2003, the SEC granted URPHI's petition to lift the
revocation, considering the current economic situation, its belated ling of the required
annual and quarterly reports, and its payment of the reduced ne of P82,000.00.
Despite the foregoing, URPHI failed again to submit its 2003 Annual Report, and Year
2004 1st, 2nd and 3rd Quarterly Reports within the requested extension periods. TCAScE
Therefore, notwithstanding the belated ling of the said reports, as well as the
claim that public interest would be better served if the SEC will merely impose penalties
and allow it to continue in order to become pro table again, the SEC cannot be faulted
for revoking once again URPHI's registration of securities and permit to sell them to the
public due to its repeated failure to timely submit such reports. Needless to state, such
continuing reportorial requirements are pursuant to the state policies declared in
Section 2 38 of the SRC of protecting investors and ensuring full and fair disclosure of
information about securities and their issuer.
All told, the CA erred in ruling that the SEC revoked URPHI's registration of
securities and permit to sell them to the public without due process of law. Quite the
contrary, the requirements of due notice and hearing under Sections 13.1 and 54.1 of
the SRC were substantially complied with. Due notice was made through the Order
dated July 27, 2004 stating that revocation proceeding shall ensue if URPHI would still
fail to submit the reportorial requirements after the lapse of the 60-day suspension
period. Though no formal hearing was held, URPHI was still given an opportunity to be
heard through the letters dated September 13 and 18, 2004 before the Order of
Revocation was issued, as well as through its Notice of Appeal and Memorandum when
it moved to reconsider the said order.
WHEREFORE , the petition is GRANTED and the Decision dated January 21,
2008 of the Court of Appeals in CA-G.R. SP No. 93337, is REVERSED and SET ASIDE .
In lieu thereof, the Resolution dated December 15, 2005 of the Securities and Exchange
Commission and its Order of Revocation dated December 8, 2004 are REINSTATED .
SO ORDERED .
Velasco, Jr., Villarama, Jr., Perez * and Jardeleza, JJ., concur.
Footnotes
1. Penned by Associate Justice Romeo F. Barza, with Associate Justices Mariano C. Del
Castillo (now Supreme Court Associate Justice) and Arcangelita M. Romilla-Lontok,
concurring; rollo, pp. 28-42.
2. Id. at 41-42. (Emphasis in the original).
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SECOND DIVISION
DECISION
LEONEN , J : p
On May 25, 1995, SBMA and UIG entered into a Lease and Development
Agreement. Under the agreement, SBMA agreed to lease the golf course to UIG for 50
years, renewable for another 25 years. 7 UIG agreed to "develop, manage and maintain
the golf course and other related facilities within the complex[.]" 8 Later, Universal
International Group Development Corporation (UIGDC) succeeded to the interests of
UIG on the golf course development. 9
On April 1, 1996, UIGDC executed a Deed of Assignment in favor of Subic Bay
Golf and Country Club, Inc. (SBGCCI). Under the Deed of Assignment, UIGDC assigned
all its rights and interests in the golf course's development, operations, and marketing
to SBGCCI. 10
On April 25, 1996, SBGCCI and UIGDC entered into a Development Agreement. 11
UIGDC agreed to " nance, construct and develop the [golf course], for and in
consideration of the payment by [SBGCCI] of its 1,530 (SBGCCI) shares of stock." 12
Upon SBGCCI's application, the Securities and Exchange Commission issued an
Order for the Registration of 3,000 no par value shares of SBGCCI on July 8, 1996.
SBGCCI was issued a Certi cate of Permit to Offer Securities for Sale to the Public of
its 1,530 no par value proprietary shares on August 9, 1996. The shares were sold at
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P425,000.00 per share. SBGCCI would use the proceeds of the sale of securities to pay
UIGDC for the development of the golf course. 13
In the letter 14 dated November 4, 2002 addressed to Atty. Justina Callangan,
Director of Securities and Exchange Commission's Corporation Finance Department,
complainants Regina Filart (Filart) and Margarita Villareal (Villareal) informed the
Securities and Exchange Commission that they had been asking UIGDC for the refund
of their payment for their SBGCCI shares. UIGDC did not act on their requests. 15 They
alleged that they purchased the shares in 1996 based on the promise of SBGCCI and
UIGDC to deliver the following:
a. an 18 hole golf course that would meet the highest USGA and PGA standards.
b. A 9 hole executive course which would be completely illuminated to allow
members to play after dark.
c. A swimming pool and tennis courts.
d. Golf Villas and Residential Condominium-Hotel. AaCTcI
In the July 1, 2003 Order, the Securities and Exchange Commission's Corporation
Finance Department gave due course to Villareal and Filart's letter-complaint: 29
WHEREFORE, upon consideration of the foregoing, the complaint of
REGINA S. FILART and MARGARITA G. VILLAREAL is hereby given DUE
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COURSE.
Respondents SUBIC BAY GOLF AND COUNTRY CLUB, INC. and
UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION, are
hereby ordered to refund to REGINA S. FILART and MARGARITA G. VILLAREAL,
within ten (10) days from receipt of this Order, the total purchase price of their
shares of stock issued by Subic Bay Golf and Country Club, Inc., in the amount
of P740,000.00 each, or a total of P1,480,000.00.
SUBIC BAY GOLF and COUNTRY CLUB, INC. is likewise hereby ordered to
amend its Prospectus, re ecting therein the actual status of the facilities of the
club, and to comply with the requirements of SRC Rule 14. EcTCAD
This case also involves corporate rights and obligations. The nature of the action
— whether it involves corporate rights and obligations — is determined by the
allegations and reliefs in the complaint. 73
Villareal and Filart's right to a refund of the value of their shares was based on
SBGCCI and UIGDC's alleged failure to abide by their representations in their
prospectus. Speci cally, Villareal and Filart alleged in their letter-complaint that the
world-class golf course that was promised to them when they purchased shares did
not materialize. This is an intra-corporate matter that is under the designated Regional
Trial Court's jurisdiction. It involves the determination of a shareholder's rights under
the Corporation Code or other intra-corporate rules when the corporation or
association fails to fulfill its obligations.
However, even though the Complaint led before the Securities and Exchange
Commission contains allegations that are intra-corporate in nature, it does not
necessarily oust the Securities and Exchange Commission of its regulatory and
administrative jurisdiction to determine and act if there were administrative violations
committed.
The Securities and Exchange Commission is organized in line with the policy of
encouraging and protecting investments. 74 It also administers the Securities
Regulation Code, 75 which was enacted to "promote the development of the capital
market, protect investors, ensure full and fair disclosure about securities, [and]
minimize if not totally eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market." 76 Pursuant to these
policies, the Securities and Exchange Commission is given regulatory powers 77 and
"absolute jurisdiction, supervision and control over all corporations, partnerships or
associations. . . ." 78
In relation to securities, the Securities and Exchange Commission's regulatory
power pertains to the approval and rejection, and suspension or revocation, of
applications for registration of securities 79 for, among others, violations of the law,
fraud, and misrepresentations. Thus:
SEC. 13. Rejection and Revocation of Registration of Securities. — 13.1.
The Commission may reject a registration statement and refuse registration of
the security thereunder, or revoke the effectivity of a registration statement and
the registration of the security thereunder after due notice and hearing by
issuing an order to such effect, setting forth its ndings in respect thereto, if it
finds that:
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a. The issuer:
i. Has been judicially declared insolvent;
ii. Has violated any of the provisions of this Code, the rules
promulgated 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;
iii. Has been engaged or is about to engage in fraudulent
transactions;
iv. Has made any false or misleading representation of material
facts in any prospectus concerning the issuer or its securities;
v. Has failed to comply with any requirement that the Commission
may impose as a condition for registration of the security for
which the registration statement has been filed; or
b. The registration statement is on its face incomplete or inaccurate in any
material respect or includes any untrue statement of a material fact
or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; or
c. The issuer, any o cer, director or controlling person of the issuer, or
person performing similar functions, or any underwriter 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 judicial or administrative body for violations of
securities, commodities, and other related laws.
xxx xxx xxx
13.4. If the Commission deems it necessary, it may issue an order
suspending the offer and sale of the securities pending any investigation. The
order shall state the grounds for taking such action, but such order of
suspension although binding upon the persons noti ed thereof, shall be
deemed con dential, and shall not be published. Upon the issuance of the
suspension order, no further offer or sale of such security shall be made until
the same is lifted or set aside by the Commission. Otherwise, such sale shall be
void. caITAC
The Securities and Exchange Commission argues that the power to order a
refund is in accordance with the implementing rules of the Securities Regulation Code.
Despite orders from the Securities and Exchange Commission to amend their
prospectus, SBGCCI and UIGDC failed to comply. Thus, Villareal and Filart were entitled
to the refund of the purchase price of their shares. They cite Section 14 of the
Implementing Rules and Regulations of the Securities Regulation Code:
SRC Rule 14 — Amendments to the Registration Statement
l. If a prospectus led with the Commission under the Code becomes incomplete
or inaccurate in any material respect or if the issuer wants to change any
material information therein, the issuer shall:
a. le an amendment to the registration statement with the Commission
explaining all proposed changes which shall be reviewed by the
Commission in accordance with Section 14 of the Code;
xxx xxx xxx
c. where material amendments have been made to the prospectus after the
effective date thereof, purchasers may, within thirty (30) days from the
date of such noti cation, renounce their purchase of securities , whereupon
the issuer, or any person acting on behalf of the issuer in connection with
the distribution of said securities, shall, within ten (10) days from receipt of
noti cation of such election, return the contributions paid by such
purchasers without making any deductions. Purchasers who decide not to
renounce their purchase of securities shall be subject to the terms of the
amended offering. (Emphasis supplied)
Based on these provisions, Villareal and Filart may be entitled to a refund of the
purchase price of their shares. Provisions giving shareholders rights, however, are not
to be interpreted as sources of authority or jurisdiction when there is none. The
provisions in the law or in the rules giving Villareal and Filart the right to be refunded the
value of their shares are not equivalent to authority for the Securities and Exchange
Commission to issue an order for the refund. Such order may not come from the
Securities and Exchange Commission.
Neither the provisions of the implementing rules nor the provisions of the
Securities Regulation Code, 82 the law being implemented, give the Securities and
Exchange Commission the power to order a refund. The Securities and Exchange
Commission's power when violations of the Securities Regulation Code are found is
limited to issuing regulatory orders such as suspending or revoking registration
statements, providing for the terms and conditions for registration, and imposing nes
and penalties.
The implementing rules cannot be interpreted to give the Securities and
Exchange Commission the power that is more than what is provided under the
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Securities Regulation Code. Implementing rules are limited by the laws they implement.
The rules cannot be used to amend, expand, or modify the law being implemented. The
law shall prevail in case of inconsistency between the law and the rules.
In United BF Homeowner's Association v. BF Homes, Inc.: 83
As early as 1970, in the case of Teoxon vs. Members of the Board of
Administrators (PVA) , we ruled that the power to promulgate rules in the
implementation of a statute is necessarily limited to what is provided for in the
legislative enactment. Its terms must be followed for an administrative agency
cannot amend an Act of Congress. "The rule-making power must be con ned to
details for regulating the mode or proceedings to carry into effect the law as it
has been enacted, and it cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute." If a discrepancy
occurs between the basic law and an implementing rule or regulation, it is the
former that prevails.
xxx xxx xxx
. . . The rule-making power of a public administrative body is a delegated
legislative power, which it may not use either to abridge the authority given it by
Congress or the Constitution or to enlarge its power beyond the scope intended.
Constitutional and statutory provisions control what rules and regulations may
be promulgated by such a body, as well as with respect to what elds are
subject to regulation by it. It may not make rules and regulations which are
inconsistent with the provisions of the Constitution or a statute, particularly the
statute it is administering or which created it, or which are in derogation of, or
defeat, the purpose of a statute.TCAScE
DECISION
ABAD , J : p
This case involves the application of the Howey test in order to determine if a
particular transaction is an investment contract.
The Facts and the Case
Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without
providing internet service. To make a pro t, PCI devised a scheme in which, for the
price of US$234.00 (subsequently increased to US$294), a buyer could acquire from it
an internet website of a 15-Mega Byte (MB) capacity. At the same time, by referring to
PCI his own down-line buyers, a rst-time buyer could earn commissions, interest in
real estate in the Philippines and in the United States, and insurance coverage worth
P50,000.00.
To bene t from this scheme, a PCI buyer must enlist and sponsor at least two
other buyers as his own down-lines. These second tier of buyers could in turn build up
their own down-lines. For each pair of down-lines, the buyer-sponsor received a
US$92.00 commission. But referrals in a day by the buyer-sponsor should not exceed
16 since the commissions due from excess referrals inure to PCI, not to the buyer-
sponsor.
Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI),
which company stopped operations after the Securities and Exchange Commission
(SEC) issued a cease and desist order (CDO) against it. As it later on turned out, the
same persons who ran the affairs of GVI directed PCI's actual operations.
In 2001, disgruntled elements of GVI led a complaint with the SEC against PCI,
alleging that the latter had taken over GVI's operations. After hearing, 1 the SEC, through
its Compliance and Enforcement unit, issued a CDO against PCI. The SEC ruled that
PCI's scheme constitutes an Investment contract and, following the Securities
Regulations Code, 2 it should have rst registered such contract or securities with the
SEC.
Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of
Republic Act (R.A.) 8799, PCI led with the Court of Appeals (CA) a petition for
certiorari against the SEC with an application for a temporary restraining order (TRO)
and preliminary injunction in CA-G.R. SP 62890. Because the CA did not act promptly on
this application for TRO, on January 31, 2001 PCI returned to the SEC and led with it
before the lapse of the ve-day period a request to lift the CDO. On the following day,
February 1, 2001, PCI moved to withdraw its petition before the CA to avoid possible
forum shopping violation. SHacCD
WHEREFORE , the Court DENIES the petition and AFFIRMS the decision dated
July 31, 2003 and the resolution dated June 18, 2004 of the Court of Appeals in CA-G.R.
SP 62890.
SO ORDERED.
Velasco, Jr., Peralta, Mendoza and Perlas-Bernabe, JJ., concur.
Footnotes
11.See also United Housing Foundation, Inc. v. Forman, 421 US 837 (1975); Securities and
Exchange Commission v. Glen W. Turner Enterprises, Inc., 474 F. 2d 476 (1973).
RESOLUTION
BRION, J :p
On March 6, 2008, the CA dismissed the petition and affirmed the assailed SEC
ruling, with the modification that the assessment of the penalty be recomputed from May
31, 2004. 6
The CA also denied the Bank's motion for reconsideration, 7 opening the way for
the Bank's petition for review on certiorari filed with this Court. 8
On June 16, 2010, the Court denied the Bank's petition for failure to show any
reversible error in the assailed CA decision and resolution. 9
The Motion for Reconsideration
The Bank reiterates that it is not a "public company" subject to the reportorial
requirements under Section 17.1 of the SRC because its shares can be owned only by a
specific group of people, namely, World War II veterans and their widows, orphans and
compulsory heirs, and is not open to the investing public in general. The Bank also asks
the Court to take into consideration the financial impact to the cause of "veteranism";
compliance with the reportorial requirements under the SRC, if the Bank would be
considered a "public company," would compel the Bank to spend approximately P40
million just to reproduce and mail the "Information Statement" to its 400,000
shareholders nationwide.
The Court's Ruling
We DENY the motion for reconsideration for lack of merit.
To determine whether the Bank is a "public company" burdened with the
reportorial requirements ordered by the SEC, we look to Subsections 17.1 and 17.2 of
the SRC, which provide:
a) Within one hundred thirty-five (135) days, after the end of the
issuer's fiscal year, or such other time as the Commission may prescribe, an
annual report which shall include, among others, a balance sheet, profit and loss
statement and statement of cash flows, for such last fiscal year, certified by an
independent certified public accountant, and a management discussion and
analysis of results of operations; and
b) Such other periodical reports for interim fiscal periods and current
reports on significant developments of the issuer as the Commission may
prescribe as necessary to keep current information on the operation of the
business and financial condition of the issuer.
Cc HDSA
We also cite Rule 3 (1) (m) of the Amended Implementing Rules and Regulations
of the SRC, which defines a "public company" as "any corporation with a class of equity
securities listed on an Exchange or with assets in excess of Fifty Million Pesos
(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."
From these provisions, it is clear that a "public company," as contemplated by the
SRC, is not limited to a company whose shares of stock are publicly listed; even
companies like the Bank, whose shares are offered only to a specific group of people,
are considered a public company, provided they meet the requirements enumerated
above.
The records establish, and the Bank does not dispute, that the Bank has assets
exceeding P50,000,000.00 and has 395,998 shareholders. 10 It is thus considered a
public company that must comply with the reportorial requirements set forth in Section
17.1 of the SRC.
The Bank also argues that even assuming it is considered a "public company"
pursuant to Section 17 of the SRC, the Court should interpret the pertinent SRC
provisions in such a way that no financial prejudice is done to the thousands of veterans
who are stockholders of the Bank. Given that the legislature intended the SRC to apply
only to publicly traded companies, the Court should exempt the Bank from complying
with the reportorial requirements. ATICc S
On this point, the Bank is apparently referring to the obligation set forth in
Subsections 17.5 and 17.6 of the SRC, which provide:
Section 17.5. Every issuer which has a class of equity securities satisfying
any of the requirements in Subsection 17.2 shall furnish to each holder of such
equity security an annual report in such form and containing such information
as the Commission shall prescribe.
In making this argument, the Bank ignores the fact that the first and fundamental
duty of the Court is to apply the law. 11 Construction and interpretation come only after a
demonstration that the application of the law is impossible or inadequate unless
interpretation is resorted to. 12 In this case, we see the law to be very clear and free
from any doubt or ambiguity; thus, no room exists for construction or interpretation.
Additionally, and contrary to the Bank's claim, the Bank's obligation to provide its
stockholders with copies of its annual report is actually for the benefit of the veterans-
stockholders, as it gives these stockholders access to information on the Bank's
financial status and operations, resulting in greater transparency on the part of the
Bank. While compliance with this requirement will undoubtedly cost the Bank money,
the benefit provided to the shareholders clearly outweighs the expense. For many
stockholders, these annual reports are the only means of keeping in touch with the state
of health of their investments; to them, these are invaluable and continuing links with the
Bank that immeasurably contribute to the transparency in public companies that the law
envisions. THIECD
WHEREFORE, premises considered, petitioner Philippine Veterans Bank's motion
for reconsideration is hereby DENIED with finality.
SO ORDERED.
Carpio, Leonardo-de Castro, * Perez and Sereno, JJ., concur.
Footnotes
*Designated as Acting Member of the Second Division per Special Order No. 1006 dated June
10, 2011.
2.Id. at 32.
3.Ibid.
4.Id. at 33.
5.Id. at 40-47.
7.Id. at 38-39.
8.Id. at 3-26.
9.Id. at 167.
10.Id. at 36.
11.People v. Mapa, G.R. No. L-22301, August 30, 1967, 20 SCRA 11.
DECISION
PUNO , C.J : p
This petition for review seeks the reversal and setting aside of the July 31, 2003
Decision 1 of the Court of Appeals that a rmed the January 26, 2001 Cease and Desist
Order (CDO) 2 of public respondent Securities and Exchange Commission (SEC)
enjoining petitioner Power Homes Unlimited Corporation's (petitioner) o cers,
directors, agents, representatives and any and all persons claiming and acting under
their authority, from further engaging in the sale, offer for sale or distribution of
securities; and its June 18, 2004 Resolution 3 which denied petitioner's motion for
reconsideration.
The facts: Petitioner is a domestic corporation duly registered with public
respondent SEC on October 13, 2000 under SEC Reg. No. A200016113. Its primary
purpose is:
To engage in the transaction of promoting, acquiring, managing, leasing,
obtaining options on, development, and improvement of real estate properties
for subdivision and allied purposes, and in the purchase, sale and/or exchange
of said subdivision and properties through network marketing. 4
On October 27, 2000, respondent Noel Manero requested public respondent SEC
to investigate petitioner's business. He claimed that he attended a seminar conducted
by petitioner where the latter claimed to sell properties that were inexistent and without
any broker's license.
On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public
respondent SEC whether petitioner's business involves "legitimate network marketing."
On the bases of the letters of respondent Manero and Munsayac, public
respondent SEC held a conference on December 13, 2000 that was attended by
petitioner's incorporators John Lim, Paul Nicolas and Leonito Nicolas. The attendees
were requested to submit copies of petitioner's marketing scheme and list of its
members with addresses.
The following day or on December 14, 2000, petitioner submitted to public
respondent SEC copies of its marketing course module and letters of
accreditation/authority or con rmation from Crown Asia, Fil-Estate Network and
Pioneer 29 Realty Corporation.
On January 26, 2001, public respondent SEC visited the business premises of
petitioner wherein it gathered documents such as certi cates of accreditation to
several real estate companies, list of members with web sites, sample of member mail
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box, webpages of two (2) members, and lists of Business Center Owners who are
qualified to acquire real estate properties and materials on computer tutorials.
On the same day, after nding petitioner to be engaged in the sale or offer for
sale or distribution of investment contracts, which are considered securities under Sec.
3.1 (b) of Republic Act (R.A.) No. 8799 (The Securities Regulation Code), 5 but failed to
register them in violation of Sec. 8.1 of the same Act, 6 public respondent SEC issued a
CDO that reads:
WHEREFORE, pursuant to the authority vested in the Commission,
POWER HOMES UNLIMITED, CORP., its o cers, directors, agents,
representatives and any and all persons claiming and acting under their
authority, are hereby ordered to immediately CEASE AND DESIST from further
engaging in the sale, offer or distribution of the securities upon the receipt of
this order.
In accordance with the provisions of Section 64.3 of Republic Act No.
8799, otherwise known as the Securities Regulation Code, the parties subject of
this Cease and Desist Order may le a request for the lifting thereof within ve
(5) days from receipt. 7
On February 5, 2001, petitioner moved for the lifting of the CDO, which public
respondent SEC denied for lack of merit on February 22, 2001.
Aggrieved, petitioner went to the Court of Appeals imputing grave abuse of
discretion amounting to lack or excess of jurisdiction on public respondent SEC for
issuing the order. It also applied for a temporary restraining order, which the appellate
court granted.
On May 23, 2001, the Court of Appeals consolidated petitioner's case with CA-
G.R. [SP] No. 62890 entitled Prosperity.Com, Incorporated v. Securities and
Exchange Commission (Compliance and Enforcement Department), Cristina
T. de la Cruz, et al.
On June 19, 2001, petitioner led in the Court of Appeals a Motion for the
Issuance of a Writ of Preliminary Injunction. On July 6, 2001, the motion was heard. On
July 12, 2001, public respondent SEC led its opposition. On July 13, 2001, the
appellate court granted petitioner's motion, thus:
Considering that the Temporary Restraining Order will expire tomorrow or
on July 14, 2001, and it appearing that this Court cannot resolve the petition
immediately because of the issues involved which require a further study on the
matter, and considering further that with the continuous implementation of the
CDO by the SEC would eventually result to the sudden demise of the petitioner's
business to their prejudice and an irreparable damage that may possibly arise,
we hereby resolve to grant the preliminary injunction.
WHEREFORE, let a writ of preliminary injunction be issued in favor of
petitioner, after posting a bond in the amount of P500,000.00 to answer
whatever damages the respondents may suffer should petitioner be adjudged
not entitled to the injunctive relief herein granted. 8
On August 8, 2001, public respondent SEC moved for reconsideration, which was
not resolved by the Court of Appeals.
On July 31, 2003, the Court of Appeals issued its Consolidated Decision. The
disposition pertinent to petitioner reads: 9
WHEREFORE, . . . . the petition for certiorari and prohibition led by the
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other petitioner Powerhomes Unlimited Corporation is hereby DENIED for lack of
merit and the questioned Cease and Desist Order issued by public respondent
against it is accordingly AFFIRMED IN TOTO.
On June 18, 2004, the Court of Appeals denied petitioner's motion for
reconsideration; 1 0 hence, this petition for review.
The issues for determination are: (1) whether public respondent SEC followed
due process in the issuance of the assailed CDO; and (2) whether petitioner's business
constitutes an investment contract which should be registered with public respondent
SEC before its sale or offer for sale or distribution to the public.
On the first issue, Sec. 64 of R.A. No. 8799 provides:
Sec. 64. Cease and Desist Order. — 64.1. The Commission, after proper
investigation or veri cation, motu proprio or upon veri ed complaint by any
aggrieved party, may issue a cease and desist order without the necessity of a
prior hearing if in its judgment the act or practice, unless restrained, will operate
as a fraud on investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public.
We hold that petitioner was not denied due process. The records reveal that
public respondent SEC properly examined petitioner's business operations when it (1)
called into conference three of petitioner's incorporators, (2) requested information
from the incorporators regarding the nature of petitioner's business operations, (3)
asked them to submit documents pertinent thereto, and (4) visited petitioner's
business premises and gathered information thereat. All these were done before the
CDO was issued by the public respondent SEC. Trite to state, a formal trial or hearing is
not necessary to comply with the requirements of due process. Its essence is simply
the opportunity to explain one's position. Public respondent SEC abundantly allowed
petitioner to prove its side.
The second issue is whether the business of petitioner involves an investment
contract that is considered security 1 1 and thus, must be registered prior to sale or
offer for sale or distribution to the public pursuant to Section 8.1 of R.A. No. 8799, viz:
Section 8. Requirement of Registration of Securities. — 8.1. Securities
shall not be sold or offered for sale or distribution within the Philippines, without
a registration statement duly led with and approved by the Commission. Prior
to such sale, information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made available to each
prospective purchaser.
Public respondent SEC found the petitioner "as a marketing company that
promotes and facilitates sales of real properties and other related products of real
estate developers through effective leverage marketing." It also described the conduct
of petitioner's business as follows:
The scheme of the [petitioner] corporation requires an investor to become
a Business Center Owner (BCO) who must ll-up and sign its application form.
The Terms and Conditions printed at the back of the application form indicate
that the BCO shall mean an independent representative of Power Homes, who is
enrolled in the company's referral program and who will ultimately purchase real
property from any accredited real estate developers and as such he is entitled to
a referral bonus/commission. Paragraph 5 of the same indicates that there
exists no employer/employee relationship between the BCO and the Power
Homes Unlimited, Corp.
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The BCO is required to pay US$234 as his enrollment fee. His enrollment
entitles him to recruit two investors who should pay US$234 each and out of
which amount he shall receive US$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 after deducting the amount of US$36.80 as property fund from the
gross amount of US$184. After recruiting 128 persons in a period of eight (8)
months for each Left and Right business groups or a total of 256 enrollees
whether directly referred by the BCO or through his down lines, the BCO who
receives a total amount of US$11,412.80 after deducting the amount of
US$363.20 as property fund from the gross amount of US$11,776, has now an
accumulated amount of US$2,700 constituting as his Property Fund placed in a
Property Fund account with the Chinabank. This accumulated amount of
US$2,700 is used as partial/full down payment for the real property chosen by
the BCO from any of [petitioner's] accredited real estate developers. 1 2
An investment contract is de ned in the Amended Implementing Rules and
Regulations of R.A. No. 8799 as a "contract, transaction or scheme (collectively
'contract') whereby a person invests his money in a common enterprise and is led to
expect profits primarily from the efforts of others." 1 3
It behooves us to trace the history of the concept of an investment contract
under R.A. No. 8799. Our de nition of an investment contract traces its roots from the
1946 United States (US) case of SEC v. W.J. Howey Co . 1 4 In this case, the US
Supreme Court was confronted with the issue of whether the Howey transaction
constituted an "investment contract" under the Securities Act's de nition of "security."
1 5 The US Supreme Court, recognizing that the term "investment contract" was not
de ned by the Act or illumined by any legislative report, 1 6 held that "Congress was
using a term whose meaning had been crystallized" 1 7 under the state's "blue sky" laws
1 8 in existence prior to the adoption of the Securities Act. 1 9 Thus, it ruled that the use
of the catch-all term "investment contract" indicated a congressional intent to cover a
wide range of investment transactions. 2 0 It established a test to determine whether a
transaction falls within the scope of an "investment contract." 2 1 Known as the Howey
Test , it requires a transaction, contract, or scheme whereby a person (1) makes an
investment of money, (2) in a common enterprise, (3) with the expectation of pro ts,
(4) to be derived solely from the efforts of others. 2 2 Although the proponents must
establish all four elements, the US Supreme Court stressed that the Howey Test
"embodies a exible rather than a static principle, one that is capable of adaptation to
meet the countless and variable schemes devised by those who seek the use of the
money of others on the promise of pro ts." 2 3 Needless to state, any investment
contract covered by the Howey Test must be registered under the Securities Act,
regardless of whether its issuer was engaged in fraudulent practices.
After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises,
Inc. et al. 2 4 In this case, the 9th Circuit of the US Court of Appeals ruled that the
element that profits must come "solely" from the efforts of others should not be given a
strict interpretation. It held that a literal reading of the requirement "solely" would lead
to unrealistic results. It reasoned out that its exible reading is in accord with the
statutory policy of affording broad protection to the public. Our R.A. No. 8799 appears
to follow this exible concept for it de nes an investment contract as a contract,
transaction or scheme (collectively "contract") whereby a person invests his money in a
common enterprise and is led to expect pro ts not solely but primarily from the
efforts of others. Thus, to be a security subject to regulation by the SEC, an
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investment contract in our jurisdiction must be proved to be: (1) an investment of
money, (2) in a common enterprise, (3) with expectation of pro ts, (4) primarily from
efforts of others.
Prescinding from these premises, we a rm the ruling of the public respondent
SEC and the Court of Appeals that the petitioner was engaged in the sale or distribution
of an investment contract. Interestingly, the facts of SEC v. Turner 2 5 are similar to the
case at bar. In Turner , the SEC brought a suit to enjoin the violation of federal securities
laws by a company offering to sell to the public contracts characterized as self-
improvement courses. On appeal from a grant of preliminary injunction, the US Court of
Appeals of the 9th Circuit held that self-improvement contracts which primarily offered
the buyer the opportunity of earning commissions on the sale of contracts to others
were "investment contracts" and thus were "securities" within the meaning of the
federal securities laws. This is regardless of the fact that buyers, in addition to
investing money needed to purchase the contract, were obliged to contribute their own
efforts in nding prospects and bringing them to sales meetings. The appellate court
held:
It is apparent from the record that what is sold is not of the usual
"business motivation" type of courses. Rather, the purchaser is really buying
the possibility of deriving money from the sale of the plans by Dare to
individuals whom the purchaser has brought to Dare. The promotional aspects
of the plan, such as seminars, lms, and records, are aimed at interesting others
in the Plans. Their value for any other purpose is, to put it mildly, minimal.
Once an individual has purchased a Plan, he turns his efforts
toward bringing others into the organization, for which he will receive
a part of what they pay . His task is to bring prospective purchasers to
"Adventure Meetings."
The business scheme of petitioner in the case at bar is essentially similar. An
investor enrolls in petitioner's program by paying US$234. This entitles him to recruit
two (2) investors who pay US$234 each and out of which amount he receives US$92. A
minimum recruitment of four (4) investors by these two (2) recruits, who then recruit at
least two (2) each, entitles the principal investor to US$184 and the pyramid goes on.
We reject petitioner's claim that the payment of US$234 is for the seminars on
leverage marketing and not for any product. Clearly, the trainings or seminars are
merely designed to enhance petitioner's business of teaching its investors the know-
how of its multi-level marketing business. An investor enrolls under the scheme of
petitioner to be entitled to recruit other investors and to receive commissions from the
investments of those directly recruited by him. Under the scheme, the accumulated
amount received by the investor comes primarily from the efforts of his recruits.
We therefore rule that the business operation or the scheme of petitioner
constitutes an investment contract that is a security under R.A. No. 8799. Thus, it must
be registered with public respondent SEC before its sale or offer for sale or distribution
to the public. As petitioner failed to register the same, its offering to the public was
rightfully enjoined by public respondent SEC. The CDO was proper even without a
nding of fraud. As an investment contract that is security under R.A. No. 8799, it must
be registered with public respondent SEC, otherwise the SEC cannot protect the
investing public from fraudulent securities. The strict regulation of securities is founded
on the premise that the capital markets depend on the investing public's level of
confidence in the system.
Footnotes
1. Penned by Associate Justice Eloy R. Bello, Jr., concurred in by then Presiding Justice Cancio
C. Garcia and Associate Justice Mariano C. Del Castillo; rollo, pp. 104-112.
2. CED Case No. 20-2486, signed by "Order of the Commission" Emilio B. Aquino, Director,
Compliance and Enforcement Department; rollo, pp. 42-52.
3. Ibid., id. at 134-135.
4. Id. at 107.
5. Sec. 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
xxx xxx xxx
(b) Investment contracts, . . . .
6. Sec. 8.1. — 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
Commission. Prior to such sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.
13. Rule 3, 1 (G), Definition of Terms Used in the Rules and Regulations.
14. 328 U.S. 293, 66 S.Ct. 1100, 163 A.L.R. 1043, 90 L.Ed. 1244 (1946), where investment
contract was defined as "a contract, transaction or scheme whereby a person invests
money in a common enterprise expecting profits to accrue solely from the efforts of the
promoter or third parties."
15. Id. at 297.
16. Id. at 298.
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