SRC Compiled Sec 1-10 (1)

Corporation Law Case Digests Atty. Jose B. Quimson

Agdamag | Anderson |Aquino |De Guzman | Empaynado | Estremadura| Lopez| Macabagdal | Magtoto | Meer |Mercado| Militante |Pineda |Squillantini| Taruc

1

Securities Regulations Code

1. People v. Rosenthal June 12, 1939

Petitioners: THE PEOPLE OF THE PHILIPPINES Respondent: JACOB ROSENTHAL and NICASIO OSMEA Summary: Rosenthal was accused of selling speculative securities in violation of Act No. 2581, the Blue Sky Law. They argue that it is unconstitutional as the authority granted to the Insular Treasurer constitutes undue delegation of legislative power. Held: It is valid. In view of the intention and purpose of Act No. 2581 to protect the public against "speculative schemes which have no more basis than so many feet of blue sky" and against the "sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations", we incline to hold that "public interest" in this case is a sufficient standard to guide the Insular Treasurer in reaching a decision on a matter pertaining to the issuance or cancellation of certificates or permits. Facts: Appellants, Rosenthal and Nicasio Osmea, were charged with having violated Act No.

2581, commonly known as the Blue Sky Law, under the following informations: Osmea and Rosenthal, 2 of 10 promoters, organizers, founders and incorporators of,

the former being, in addition, one of the members of the board of directors of, the O.R.O. Oil Co., Inc, (CASE #52365) and South Cebu Oil Co (CASE #52366), a domestic corporations organized under the laws of the Philippines and registered in the mercantile registry of the Bureau of Commerce, with central office in the said city, the main objects and purposes of which were "to mine, dig for, or otherwise obtain from earth, petroleum, rock and carbon oils, natural gas, other volatile mineral substances and salt, and to manufacture, refine, prepare for market, buy, sell and transport the same in crude or refined condition", and the capital thereof in their articles of incorporation, the accused herein included, consisting of the following: o In the O.R.O. Oil Co, 3,000 shares without par value, 400 shares of which

having been subscribed by the said accused at 200 shares each and paid partly by them at the price of only P5 per share, and in South Cebu Oil Co 2,800 shares without par value, 200 shares of which having been subscribed by the accused Nicasio Osmea, and 100 shares of which having been subscribed by the accused Jacob Rosenthal and paid by both at the price of only P5 per share, according to the said agreement which shares were speculative securities, because the value thereof materially depended upon proposed promise for future promotion and development of the oil business above mentioned rather than on actual tangible assets and conditions thereof, did with deliberate intent of evading the provisions of sections 2 and 5 of the said Act No. 2581, negotiate and speculate with, their shares aforesaid, by making personally or through brokers or agents repeated and successive sales of the said shares at a price ranging from P100 to P300 per share, as follows:

o O.R.O. Oil Co shares: Osmea sold 163 shares to 9 different parties, and the accused Rosenthal sold 21 shares to 7 others, without first obtaining the corresponding written permit or license from the Insular Treasurer of the Commonwealth of the Philippines, as by law required.

o South Cebu Oil shares: Osmea sold 185 shares to 9 different parties, and the accused Rosenthal sold 12 shares to 7 others, without first obtaining the corresponding written permit or license form the Insular Treasurer of the Commonwealth of the Philippines, as by law provided.

Rosenthal and Osmena were tried separately, but the lower court found the defendants guilty.

In case No. 52365 Rosenthal was sentenced to pay a fine of P500, with subsidiary imprisonment in case of insolvency, and to pay of the costs; Osmea was sentenced to pay a fine of P1,000, with subsidiary imprisonment in case of insolvency, and to pay of the costs.

In case No. 52366 Jacob Rosenthal was sentenced to pay a fine of P500, with subsidiary imprisonment in case of insolvency, and to pay of the costs; Osmea was sentenced to pay a fine of P2,000, with subsidiary imprisonment in case of insolvency, and to pay of the costs.

Issue 1: W/N Act No. 2581 is unconstitutional for violating the principle of non- delegation No. A. The Law: Under section 2 of Act No. 2581, every person, partnership, association, or

corporation attempting to offer to sell in the Philippines speculative securities of any kind or character whatsoever, is under obligation to file previously with the Insular Treasurer the various documents and papers enumerated therein and to pay the required tax of twenty pesos.

Section 3: Certain securities listed in are exempted from the operation of the Act. Section 5 imposes upon the Insular Treasurer the mandatory duty to examine the

statements and documents thus filed and the additional duty to make or cause to be made, if deemed advisable by him, a detailed examination of the affairs of the applicant. o It also provides that "whatever the said Treasurer of the Philippine Islands is

satisfied, either with or without the examination herein provided, that any person, partnership, association or corporation is entitled to the right to offer its securities as above defined and provided for sale in the Philippine Islands, he shall issue to such person, partnership, association or corporation a certificate or permit reciting that such person, partnership, association or corporation has complied with the provisions of this Act, and that such person, partnership, association or corporation, its brokers or agents are entitled to offer the securities named in said certificate or permit for sale"; that "said Treasurer shall furthermore have authority, whenever in his judgment it is in the public interest, to cancel said certificate or permit." "An appeal from the decision of the Insular Treasurer may be had within the period of 30 days to the Secretary of Finance."

B. Rosenthals arguments: It constitutes an undue delegation of legislative authority to the Insular Treasurer

While the Act empowers the Insular Treasurer to issue and cancel certificates or permits for the sale of speculative securities, no standard or rule is fixed in the Act which can guide said official in determining the cases in which a certificate or permit ought to be issued, thereby making his opinion the sole criterion in the matter of its issuance

C. SC held (in the book): The Act furnishes a sufficient standard for the Insular Treasurer to follow in reaching a decision regarding the issuance or cancellation of a certificate or permit. The certificate or permit to be issued under



2

the Act must recite that the person, partnership, association or corporation applying therefor "has complied with the provisions of this Act", and this requirement, construed in relation to the other provisions of the law, means that a certificate or permit shall be issued by the Insular Treasurer when the provisions of Act No. 2581 have been complied with. Upon the other hand, the authority of the Insular Treasurer to cancel a certificate or permit is expressly conditioned upon a finding that such cancellation "is in the public interest."

In view of the intention and purpose of Act No. 2581 to protect the public against "speculative schemes which have no more basis than so many feet of blue sky" and against the "sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations", we incline to hold that "public interest" in this case is a sufficient standard to guide the Insular Treasurer in reaching a decision on a matter pertaining to the issuance or cancellation of certificates or permits."Public interest" is not without a settled meaning.

Since Act No. 2581 allows an appeal to the Secretary of Finance, it cannot be contended that the Insular Treasurer can act and decide without any restraining influence.

The maximum of non-delegation, has been made to adapt itself to the complexities of modern governments, giving rise to the adoption, within certain limits, of the principle of "subordinate legislation", not only in the United States and England but in practically all modern governments.

Rosenthal also argues that the Insular Treasurer possesses "the discretionary power to determine when a security is a speculative security and when it is not" because "he is given the power to compel any corporation, association or partnership already functioning, to surrender to him for examination its books and accounts enumerated in section 2, 'whenever he has reasonable ground to believe that the securities being sold or offered for sale are of a speculative character.'"

SCs answer: Section 1 defines and enumerates what are "speculative securities" and all the other provisions of the Act must be read and construed in conjunction and harmony with said section.

US Jurisprudence: US SC upheld the Blue Sky Law of Ohio, which requires the commissioner before granting a license to "be satisfied of the good repute in business of such applicant and named if the licensee "is of bad business repute; has violated any provisions of this act or has engaged, or is about to engage, under favor of such license, in illegitimate business or in fraudulent transactions. " Reputation and character are quite tangible attributes, but there can be no legislative definition of them that can automatically attach to or identify individuals possessing them, and necessarily the aid of some executive agency must be invoked. o G.F. Redmond & Co. vs. Michigan Securities Commission: Michigan Blue Sky Law,

authorizing the commission to revoke a license for "good cause" upon notice to the dealer and a hearing duly had, is unconstitutional because the term "good cause" is valid. The term "good cause" for revocation, relates so clearly to the conduct of the licensed business, as to negative any arbitrary official action, and is so comprehensive of unlawful, irregular, fraudulent, unauthorized, and forbidden business management and transactions conducted as to demand no more particular specification of its meaning and its application.

o In Central Steam Heat & Power Co. vs. Gettle: Upheld the Wisconsin Blue Sky Law, which states that the Railroad Commission shall find that the "financial condition, plan of operation, and the proposed undertakings of the corporation are

such as to afford reasonable protection to the purchasers of the securities to be issued"

Issue 2: Whether Act No. 2581 is unconstitutional because it denies equal protection of the laws and because it discriminates between an owner who sells his securities in a single transaction and one who disposes of them in repeated and successive transactions. No A. SC relied on Hall vs. Geiger-Jones Co: Discriminations were asserted against the

statutes there. "Prominent among such discriminations are . . . between an owner who sells his securities in a single transaction and one who disposes of them in successive transactions

They are within the power of classification which a state has. If a class is deemed to present a conspicuous example of what the legislature seeks to prevent, the 14th Amendment allows it to be dealt with although otherwise and merely logically not distinguishable from others not embraced in the law.

Issue 3: (Osmea alleges this) W/N it is unconstitutional on the ground that it is vague and uncertain. No A. SC Held: "legislation should not be held invalid on the ground of uncertainty if

susceptible of any reasonable construction that will support and give it effect. An Act will not be declared inoperative and ineffectual on the ground that it furnishes no adequate means to secure the purpose for which it is passed, if men of common sense and reason can devise and provide the means, and all the instrumentalities necessary for its execution are within the reach of those intrusted therewith.

Issue 4: On the speculative nature of the shares of the O.R.O. Oil Co. and the South Cebu Oil Co. Speculative! A. Law: Section 1, paragraph (b) of Act No. 2581 provides: The term "speculative

securities" as used in this Act shall be deemed to mean and include: (b) All securities the value of which materially depend upon proposed or promised future promotion or development rather than on present tangible assets and conditions.

B. SC held: At the beginning, and at the time of the issuance of the shares of the O.R.O. Oil Co. and the South Cebu Oil Co., all that these companies had were their exploration leases. Beyond this, there was nothing tangible. The value of those shares depended upon future development and the uncertainty of "striking" oil.

The shares issued under these circumstances are clearly speculative because they depended upon proposed or promised future promotion or development rather than on present tangible assets and conditions.

Issue 5: W/N in view of the repeal of Act No. 2581 by Commonwealth Act. No. 83, they have been relieved of criminal responsibility. NO Assuming that the former Act has been entirely and completely abrogated by the latter

Act (a point we do not have to decide) this fact does not relieve appellants from criminal responsibility.

Where an Act of the Legislature which penalizes an offense repeals a former Act which penalized the same offense, such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict and sentence offenders charged with violations of the old law."



3

Issue 6: W/N Appellants come under the exception provided in section 8 of Act No. 2581. No A. The law: Sec 8: This Act shall not apply to the holder of any speculative security who

is not the issuer thereof, nor to the person who has acquired the same for his own account in the usual and ordinary course of business and not for the direct or indirect promotion of any enterprise or scheme within the purview of this Act, unless such possession is in good faith. Repeated and successive sales of any speculative securities shall be prima facie evidence that the claim of ownership is not bona fide, but is a mere shift, device or plot to evade the provisions of this Act. Such speculators shall incur the penalty provided for in section seven of this Act.

B. SC: There are clearly two classes of persons to whom the law is not applicable: (1) Persons who hold speculative securities but who are not the issuers thereof; and (2) persons who have acquired the same for their own account in the usual and ordinary course of business and not for the direct or indirect promotion of any enterprise or scheme within the purview of this Act, unless such possession is in good faith.

(Translated from Spanish): The accused has not acquired for his own account in the ordinary course of business and current in the GOLD Oil Co. for shares sold, since acquired by subscription as a founder of the corporation, but for the indirect promotion of a business project or company for which he had organized corporation, having paid in full the amount of these actions at the same corporation, nor are possessed of good faith, as the founder and member of the board of the corporation must have known that had not been issued by the Insular Treasurer no written permission to the corporation for sale of such shares. And successive and repeated sales of those shares held in the same corporation, although such actions were theirs for having the corporation obtained by the subscription and payment of the amount for this claim to prove that property was only half of that has been valid to sell such shares at prices much higher than the amount for such a permit has been issued for.

The good faith set up by Rosenthal for having acted on the advice of one Garcia, an officer in the Insular Treasury, and the subsequent devolution by him of amounts collected from some of the purchasers of the shares may be considered as a circumstance in his favor in the imposition of the penalty prescribed by law but does not exempt him from criminal responsibility.

The judgments of the lower court are affirmed, with the modification that the fines are reduced as to accused Jacob Rosenthal from P500 to P200 in each case, and as to accused Nicasio Osmea, from P1,000 to P500 in case No. 52365 and from P2,000 to P1,000 in case No. 52366, with subsidiary imprisonment for both in case of insolvency, and costs. So ordered.

2. Martinez v. Yek Tong Lin April 20, 1939

Petitioner: MARIA MARTINEZ Respondent: THE YEK TONG LIN FIRE & MARINE INSURANCE CO. Summary Central Brokerage Co., Inc. and Yek Tong Lin Fire & Marine Insurance Co., Ltd. bound themselves for a period of one (1) year to pay any person who may sustain any loss or damage by reason of any fraud or negligence connected with or growing out of the nonperformance of the obligations stipulated in the bond. The plaintiff, Martinez purchased

for J. Lontoc of the Central Brokerage Co., Inc., 5,000 shares of the Baguio Gold Mining Co., the price of which was paid by said corporation by means of checks for the P1,020 and P680 drawn by the corporation on the Philippine National Bank in favor of the plaintiff. Jesus Lontoc ordered the plaintiff to purchase 11,000 shares of the Baguio Gold Mining Co. at P0.34 a share. Jesus Lontoc instructed Baguio Gold mining company to transfer the 11,000 shares in his name. RTC decided that Central Brokerage and Yek Tong should be liable. CA, however, reversed the decision with regard to the liability of Yek Tong. SC said that Yek Tong should be liable as surety for the violation of Central Brokerage of its obligation as a broker. He shouldnt have purchased nor sold shares upon its own account. FACTS

Central Brokerage Co., Inc., was duly registered as a corporation in the Bureau of Commerce. One of its incorporators and directors was Jesus Lontoc. Said corporation, through its president and/or manager, H. A. Wendt, applied for a certificate of authority to engage in brokerage business in the Philippines.

Central Brokerage Co., Inc. as principal, and the Yek Tong Lin Fire & Marine Insurance Co., Ltd., a corporation duly organized and existing under and by virtue of the laws of the Philippines, as surety, bound themselves for a period of one (1) year to pay, jointly and severally, an amount not to exceed P20,000 to the Government of the Philippine Islands, or to whom it may concern, for the purpose of securing the payment to any person who may sustain any loss or damage by reason of any fraud or negligence connected with or growing out of the nonperformance of the obligations stipulated in the bond. (No details re: this bond.)

The certificate of authority applied for by the Central Brokerage Co., Inc., was issued by the Bureau of Commerce. Jesus Lontoc took all the necessary steps for the issuance of said authority, but Lontoc was not a broker. The authority of the Central Brokerage Co., Inc., is still subsisting.

The plaintiff, Martinez, who was a licensed broker, purchased for J. Lontoc of the Central Brokerage Co., Inc., 5,000 shares of the Baguio Gold Mining Co., the price of which was paid by said corporation by means of checks for the P1,020 and P680 drawn by the corporation on the Philippine National Bank in favor of the plaintiff. Said checks were signed by Jesus Lontoc, as manager, and H. A. Wendt, as president, of the Central Brokerage Co., Inc., the name of the corporation appearing typewritten over and above said signatures.

Jesus Lontoc ordered the plaintiff to purchase 11,000 shares of the Baguio Gold Mining Co. at P0.34 a share. The price thereof amounting to P3,758.70 including the brokerage charges, has not been paid by the defendants Central Brokerage Co., Inc., and the Yek Tong Lin Fire & Marine Insurance Co., Ltd., except P500 paid by Jesus Lontoc on August 24, 1934; despite demands made upon said defendants to do so.

(Take note of these facts please) On August 23, 1934, in a letter addressed by Jesus Lontoc to the Baguio Gold

Mining Co., he instructed said mining company to transfer the 11,000 shares in his name.

On August 23, 1934, at 9 a.m. the office of Fleming & Williamson, transfer agents of the Baguio Gold Mining Co., received the letter and pursuant thereto said 11,000 shares of the Baguio Gold Mining Co. were transferred in the name of Jesus Lontoc.



4

On August 24, 1934, 5,000 of said shares were transferred to Hess Investment Co. Inc.; and on August 27, 1934, 6,000 of said shares were transferred to A. Elsingre.

CA decision being assailed

CA reached the conclusion that a contractual relation arose between the plaintiff, the herein petitioner, and the defendant corporation, and held that said corporation was bound to live up to its part of the contract entered into by its manager, Jesus Lontoc.

This part is to pay the price of the shares purchased by it; but as to the liability of the other defendant, the Yek Tong Lin Fire & Marine Insurance Co., Ltd., the Court of Appeals found no reason to make it liable under the terms of its bond. This is the part of the decision that has been appealed.

MR in the CA filed on the ground that the said court has entirely put out of view paragraph (c) of the bond of said surety company, which paragraph reads: (c) That with the exception of the case where he has underwritten an issue of securities and is reselling them to the public, he shall not purchase and sell for his own account.

ISSUE: WON Yek Tong Lin should be liable as a surety for the violation of the bond by Central Brokerage (Central Brokerage purchasing and selling for his own account the shares) YES RATIO

The facts established in this case warrant the conclusion that a contractual relation arose between the MArtinez and the Central Brokerage corporation. Said defendant is bound to perform its part of the contract entered into by its manager or agent. That part is to pay the price of the shares purchased for it.

The contract of sale of the 11,000 shares of Baguio Gold Mining Co. took place between the plaintiff and the defendant, Central Brokerage Co. Inc.

In view of the foregoing facts, there is no question that Central Brokerage Co., Inc., purchased the aforesaid 11,000 shares of Baguio Gold Mining Co. upon its own account, and thereafter sold them also upon its own account, a part to Hess Investment Co., Inc.; and a part to A. Elsingre, in violation of its obligations as a broker, for as such broker it could neither purchase nor sell shares upon its own account. The compliance with this obligation was guaranteed by the surety under paragraph (c) of the bond above transcribed. (Cited in the book)

Wherefore, the appealed decision is reversed, and the Yek Tong Lin Fire & Marine Insurance Co., Ltd., is likewise ordered to pay to the petitioner, jointly and severally with the Central Brokerage Co., Inc., the sum of P3,258.70, with legal interest thereon from August 30, 1934, the date of the filing of the complaint, with the costs to the respondents. So ordered.

3. Araneta v. Gatmaitan

G.R. Nos. L-8895 and L-9191 | April 30, 1957 Petitioners: Salvador Araneta (Secretary of Agriculture), etc. Respondents: Honorable Magno Gatmaitan (CFI Judge), etc.

Ponente: Justice Felix Summary: The President issued several Executive Orders banning the operation of trawl fishing in San Miguel Bay in Camarines. The trawl operators questioned these EOs. The CFI invalidated the EOs, saying that the President has no power to issue such law since it is within the realm of the legislature. It also imposed a bond payment upon the Secretary of Agriculture and Director of Fisheries who were the ones tasked to implement the EO. On appeal to the SC, the Court said that the action, being one against Government officials, is essentially one against the Government, and to require these officials to file a bond would be indirectly a requirement against the Government for as regards bonds or damages that may be proved, if any, the real party in interest would be the Republic of the Philippines. However, that issue is already moot and academic. The Court also reversed the CFI decision since the matters in the EO were validly issued and there was already existing legislation. Thus, the EOs merely implemented what Congress enacted. Facts:

San Miguel Bay, located between the provinces of Camarines Norte and Camarines Sur is considered as the most important fishing area in the Pacific side of the Bicol region.

Sometime in 1950, trawl operators from Malabon, Navotas and other places migrated to this region, for the purpose of using this particular method of fishing in said bay.

o Trawl fishing involves a fishing net made in the form of a bag with the mouth kept open by a device, the whole affair being towed, dragged, trailed or trawled on the bottom of the sea to capture demersal, ground or bottom species.

The fishermen in the area believed that the trawl operation caused the depletion of the marine resources of that area and they want it to stop.

o The Municipal Mayors' League passed a resolution condemning the operation of trawls as the cause of the wanton destruction of the shrimp specie. The Governor also made oppositions. They and resolve to petition the President of the Philippines to regulate fishing in San Miguel Bay by declaring it closed for trawl fishing at a certain period of the year.

In response to these pleas, the President issued on April 5, 1954, Executive Order No. 22 prohibiting the use of trawls in San Miguel Bay, but said executive order was amended by Executive Order No. 66, issued on September 23, 1954 recommending the allowance of trawl fishing during the typhoon season only. On November 2, 1954, however, Executive Order No. 80 was issued reviving EO No. 22.

A group of Otter trawl operators filed a complaint in the CFI of Manila, praying that a writ of preliminary injunction be issued to restrain the Secretary of Agriculture and Natural Resources and the Director of Fisheries from enforcing said executive order; to declare the same null and void.

The Secretary of Agriculture and the Director of Fisheries answered the complaint alleging, among other things:

o that of the 18 plaintiffs, only 11 were issued license to operate fishing boats for the year 1954;

o that the EOs in question were issued accordance with law;



5

o that said executive orders do not constitute a deprivation of property without due process of law, and therefore prayed that the complaint be dismissed.

CFI Decision The EOs were invalidated. The power to close any definite area of the Philippine waters lies primarily within the fields of legislation not of execution: for it goes far and says who can and who can not fish in definite territorial waters. To accept respondents' view would be to sanction the exercise of legislative power by executive decrees. That may be done only by Congress. Until the trawler is outlawed by legislative enactment, it cannot be banned from San Miguel Bay by executive proclamation.

o Also issued an order requiring the Secretary of Agriculture and Natural Resources and the Director of Fisheries to post a bond for P30,000 if the writ of injunction restraining them from enforcing the executive orders in question must be stayed

The Secretary of Agriculture (Araneta), etc. brought the matter to the SC in a petition for prohibition and certiorari with preliminary injunction (first petition). They contend:

o that the order of, the respondent Judge requiring petitioners Secretary of Agriculture and Natural Resources and the Director of Fisheries to post a bond in the sum of P30,000 on or before March 1, 1955, had been issued without jurisdiction or in excess thereof, or at the very least with grave abuse of discretion, because by requiring the bond, the Republic of the Philippines was in effect made a party defendant and therefore transformed the suit into one against the Government which is beyond the jurisdiction of the respondent Judge to entertain;

o that the failure to give the Solicitor General the opportunity to defend the validity of the challenged executive orders resulted in the receipt of objectionable matters at the hearing;

o that Rule 66 of the Rules of Court does not empower a court of law to pass upon the validity of an executive order in a declaratory relief proceeding;

o that the respondent Judge did not have the power to grant the injunction as Section 4 of Rule 39 does not apply to declaratory relief proceedings but only to injunction, receivership and patent accounting proceedings.

They also filed an appeal (the second petition) questioning the merits CFI Decision re constitutionality of the EOs. These were joined.

Issues:

[CORP] W/N the Secretary of an Executive Department and the Director of a Bureau, acting in their capacities as such Government officials, could lawfully be required to post a bond in an action against them NO!!!

W/N the President of the Philippines has authority to issue EO Nos. 22, 66 and 80, banning the operation of trawls in San Miguel Bay YES!!!

W/N EO Nos. 22, 66 and 80 were valid, for the issuance thereof was not in the exercise of legislative powers unduly delegated to the President. YES!!!

Ratio:

FIRST ISSUE TO ASK GOVERNMENT OFFICIALS TO FILE BONDS IS AN INDIRECT ORDER FOR THE GOVT TO PAY THE BOND.

It is an elementary rule of procedure that an appeal stays the execution of a judgment. An exception is offered by section 4 of Rule 39 of the Rules of Court which provides that:

o SEC. 4. INJUNCTION, RECEIVERSHIP AND PATENT ACCOUNTING, NOT STAYED. Unless otherwise ordered by the court, a judgment in an action for injunction or in a receivership action, or a judgment or order directing an accounting in an action for infringement of letter patent, shall not be stayed after its rendition and before an appeal is taken or during the pendency of an appeal. The trial court, however, in its discretion, when an appeal is taken from a judgement granting, dissolving or denying an injunction, may make an order suspending, modifying, restoring, or granting such injunction during the pendency of an appeal, upon such terms as to bond or otherwise as it may consider proper for the security of the rights of the adverse party.

This provision was the basis of the order of the lower court requiring the filing by the respondents of a bond for P30,000 as a condition for the non-issuance of the injunction prayed for by plaintiffs therein.

This Court has already held that there are only two requisites to be satisfied if an injunction is to issue, namely, the existence of the right sought to be protected, and that the acts against which the injunction is to be directed are violative of said right.

There is no question that at least 11 of the complaining trawl operators were duly licensed to operate in any of the national waters of the Philippines, and it is undeniable that the executive enactment's sought to be annulled are detrimental to their interests.

And considering further that the granting or refusal of an injunction, whether temporary or permanent, rests in the sound discretion of the Court, taking into account the circumstances and the facts of the particular case, We find no abuse of discretion when the trial Court treated the complaint as one for injunction and declaratory relief and executed the judgment pursuant to the provisions of section 4 of Rule 39 of the Rules of Court.

On the other hand, it shall be remembered that the party defendants in Civil Case No. 24867 of the CFI of Manila are Salvador Araneta, as Secretary of Agriculture and Natural Resources, and, Deogracias Villadolid, as Director of Fisheries, and were sued in such capacities because they were the officers charged with duty of carrying out the statutes, orders and regulations on fishing and fisheries.

o In its order of February 19, 1955, the trial court denied defendants' motion to set aside judgment and they were required to file a bond for P30,000 to answer for damages that plaintiffs were allegedly suffering at that time, as otherwise the injunction prayed for by the latter would be issued.

Because of these facts, We agree with the Solicitor General when he says that the action, being one against herein petitioners as such Government officials, is essentially one against the Government, and to require these officials to file a bond would be indirectly a requirement against the Government for as regards bonds or damages that may be



6

proved, if any, the real party in interest would be the Republic of the Philippines.

The reason for this pronouncement is understandable; the State undoubtedly is always solvent.

However, as the records show that herein petitioners failed to put up the bond required by the lower court, allegedly due to difficulties encountered with the Auditor General's Office (giving the impression that they were willing to put up said bond but failed to do so for reasons beyond their control), and that the orders subjects of the prohibition and certiorari proceedings were enforced, if at all, in accordance with section 4 of Rule 39, which We hold to be applicable to the case at bar, the issue as to the regularity or adequacy of requiring herein petitioners to post a bond, becomes moot and academic.

SECOND ISSUE THE EOS WERE VALIDLY ISSUED.

We are of the opinion that with or without said Executive Orders, the restriction and banning of trawl fishing from all Philippine waters come, under the law, within the powers of the Secretary of Agriculture and Natural Resources, who in compliance with his duties may even cause the criminal prosecution of those who in violation of his instructions, regulations or orders are caught fishing with trawls in the Philippine waters.

Now, if under the law the Secretary of Agriculture and Natural Resources has authority to regulate or ban the fishing by trawl which, can the President of the Philippines exercise that same power and authority? DUH.

Section 10(1), Article VII of the Constitution The President shall have control of all the executive departments, bureaus or offices, exercises general supervision over all local governments as may be provided by law, and take care that the laws be faithfully executed.

For administrative purposes the President of the Philippines shall be considered the Department Head of the Executive Office. One of the executive departments is that of Agriculture and Natural Resources which by law is placed under the direction and control of the Secretary, who exercises its functions subject to the general supervision and control of the President of the Philippines

THIRD ISSUE THERE WAS ALREADY EXISTING LAW. EOS ONLY ENFORCED THEM.

But does the exercise of such authority by the President constitute and undue delegation of the powers of Congress?

As already held by this Court, the true distinction between delegation of the power to legislate and the conferring of authority or discretion as to the execution of law consists in that the former necessary involves a discretion as to what the law shall be, wile in the latter the authority or discretion as to its execution has to be exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can be made.

Based on existing legislation, it may be seen that in so far as the protection of fish fry or fish egg is concerned, the Fisheries Act is complete in itself, leaving to the Secretary of Agriculture and Natural Resources the promulgation of rules and regulations to carry into effect the legislative intent.

In the light of these facts it is clear to Our mind that for the protection of fry or fish eggs and small and immature fishes, Congress intended with the promulgation of Act No. 4003, to prohibit the use of any fish net or

fishing device like trawl nets that could endanger and deplete our supply of sea food, and to that end authorized the Secretary of Agriculture and Natural Resources to provide by regulations such restrictions as he deemed necessary in order to preserve the aquatic resources of the land.

Consequently, when the President, in response to the clamor of the people and authorities of Camarines Sur issued Executive Order No. 80 absolutely prohibiting fishing by means of trawls in all waters comprised within the San Miguel Bay, he did nothing but show an anxious regard for the welfare of the inhabitants of said coastal province, which were in consonance and strict conformity with the law.

Held:

Declaring that the issues involved in the first petition have become moot, as no writ of preliminary injunction has been issued by this Court the respondent Judge of the Court of First Instance of Manila Branch XIV, from enforcing his order of March 3, 1955; and

Reversing the decision appealed in the second petition; dissolving the writ of injunction prayed for in the lower court by plaintiffs, if any has been actually issued by the court a quo; and declaring EOs 22, 66 and 80, series of 1954, valid for having been issued by authority of the Constitution, the Revised Administrative Code and the Fisheries Act.

4. Union Bank v. SEC

PETITIONER: UNION BANK OF THE PHILIPPINES RESPONDENT: SECURITIES and EXCHANGE COMMISSION SUMMARY: Facts: Union Bank sought the opinion of the SEC as to the applicability and coverage of the Full Material Disclosure Rule on banks, contending that said rules, in effect, amend Section 5 (a) (3) of the Revised Securities Act which exempts securities issued or guaranteed by banking institutions from the registration requirement provided by Section 4 of the same Act. Chairman Yasay replied and informed the petitioner that while the requirements of registration do not apply to securities of banks which are exempt under Section 5(a) (3) of the Revised Securities Act, however, banks with a class of securities listed for trading on the Philippine Stock Exchange, Inc. are covered by certain Revised Securities Act Rules governing the filing of various reports with respondent Commission. Issue: WON is required to comply with the respondent SECs full disclosure rules. Held: YES. The provision exempts from registration the securities issued by banking or financial institutions mentioned in the law. Nowhere does it state or even imply that petitioner, as a listed corporation, is exempt from complying with the reports required by the assailed RSA Implementing Rules. It must be emphasized that petitioner is a commercial banking corporation listed in the stock exchange. Thus, it must adhere not only to banking and other allied special laws, but also to the rules promulgated by Respondent SEC.That petitioner is under the supervision of the Bangko Sentral ng Pilipinas (BSP) and the Philippine Stock Exchange (PSE) does not exempt it from complying with the continuing disclosure requirements embodied in the assailed Rules. It must abide by the reasonable rules imposed by the SEC.



7

FACTS: Petitioner, through its General Counsel and Corporate Secretary, sought the

opinion of Chairman Yasay, Jr. of SEC as to the applicability and coverage of the Full Material Disclosure Rule on banks, contending that said rules, in effect, amend Section 5 (a) (3) of the Revised Securities Act(RSA) which exempts securities issued or guaranteed by banking institutions from the registration requirement provided by Section 4 of the same Act.

Chairman Yasay, in a letter dated April 8, 1997, informed petitioner that while the requirements of registration do not apply to securities of banks which are exempt under Section 5(a) (3) of the Revised Securities Act, however, banks with a class of securities listed for trading on the Philippine Stock Exchange, Inc. are covered by certain Revised Securities Act Rules governing the filing of various reports with respondent Commission.

o Unsatisfied, petitioner, informed Chairman Yasay that they will refer the matter to the Philippine Stock Exchange.

SEC, through its Money Market Operations Department Director, wrote petitioner, reiterating its previous position that petitioner is not exempt from the filing of certain reports. The letter further stated that the RSA requires the submission of reports necessary for full, fair and accurate disclosure to the investing public, and not the registration of its shares.

SEC wrote petitioner, enjoining the latter to show cause why it should not be penalized for its failure to submit a Proxy/Information Statement in connection with its annual meeting, in violation of respondent Commissions Full Material Disclosure Rule. Petitioner failed to respond, so they were given an assessment(for penalties).

MR denied by the SEC. CA affirmed the orders of the SEC. Hence this petition. ISSUES: (1) the applicability of RSA Implementing Rules 11(a)-1, 34(a)-1 and 34(c)-1 to petitioner Not exempt (2) the propriety of the fine imposed upon the latter proper (NOT IMPORTANT) HELD:

(1) Applicability of the Assailed RSA Implementing Rules CONTENTION: Because its securities are exempt from the registration

requirements under Section 5(a)(3) of the Revised Securities Act, petitioner argues that it is not covered by RSA Implementing Rule 11(a)-1, which requires the filing of annual, quarterly, current predecessor and successor reports; Rule 34(a)-1, which mandates the filing of proxy statements and forms of proxy; and Rule 34(c)-1, which obligates the submission of information statements.

o We do not agree. Section 5(a)(3) of the said Act reads:

Sec 5. Exempt Securities. (a) Except as expressly provided, the requirement of registration under subsection (a) of Section four of this Act shall not apply to any of the following classes of securities:XXX

(3) Any security issued or guaranteed by any banking institution authorized to do business in the Philippines, the business of which is substantially confined to banking, or a financial institution licensed to engage in quasi-banking, and is supervised by the Central Bank.

This provision exempts from registration the securities issued by banking or financial institutions mentioned in the law. Nowhere does it state or even imply that petitioner, as a listed corporation, is exempt from complying with the reports required by the assailed RSA Implementing Rules.

IN THE BOOK:

It must be emphasized that petitioner is a commercial banking corporation listed in the stock exchange. Thus, it must adhere not only to banking and other allied special laws, but also to the rules promulgated by Respondent SEC, the government entity tasked not only with the enforcement of the Revised Securities Act, but also with the supervision of all corporations, partnerships or associations which are grantees of government-issued primary franchises and/or licenses or permits to operate in the Philippines.

o RSA Rules require the submission of certain reports to ensure full, fair and accurate disclosure of information for the protection of the investing public.

That petitioner is under the supervision of the BSP and the PSE does not exempt it from complying with the continuing disclosure requirements embodied in the assailed Rules. Petitioner, as a bank, is primarily subject to the control of the BSP; and as a corporation trading its securities in the stock market, it is under the supervision of the SEC. It must be pointed out that even the PSE is under the control and supervision of respondent. There is no over-supervision here. Each regulating authority operates within the sphere of its powers. That stringent requirements are imposed is understandable, considering the paramount importance given to the interests of the investing public.

Otherwise stated, the mere fact that in regard to its banking functions, petitioner is already subject to the supervision of the BSP does not exempt the former from reasonable disclosure regulations issued by the SEC. These regulations are meant to assure full, fair and accurate disclosure of information for the protection of investors in the stock market. Imposing such regulations is a function within the jurisdiction of the SEC. Since petitioner opted to trade its shares in the exchange, then it must abide by the reasonable rules imposed by the SEC.

(2) Propriety of Fine Imposed (NOT IMPORTANT) Contending that both respondent and the CA erred in imposing an excessive fine

upon it, petitioner complains that it was not given an opportunity to be heard regarding the matter.

o We reject the contention of petitioner that it was not heard on the matter of the fine imposed. The latter was assessed after the former had failed to respond to the SECs first show-cause letter. Petitioner sought before the SEC en banc the nullification of the fine. The matter was raised to the appellate court, which then considered it. Clearly then, petitioner satisfied the essence of due process notice and opportunity to be heard.

Petitioner complied with RSA Rule 11(a)-1 on April 30, 1998. To date, it still has not complied with either RSA Rule 34(a)-1 or Rule 34(c)-1. That there was a



8

failure to submit the required reports on time is evident in the present case. Thus, respondent was justified in imposing a fine upon it.

5. Nestle v. CA Petitioner: Nestle Philippines Inc Respondents: Court of Appeals and Securities and Exchange Commission Emergency Recit: Nestle asked the SEC whether the issuance of the previously authorized but unissued capital stock of Nestle is exempt from the registration requirement under sec 6(a)4 of the RSA. SEC ruled that it is not because it is applicable only where there is an increase in the authorized capital stock of a corporation. SC affirmed the decision of the SEC and CA. Their interpretation of the provision is more in consonance with the statutory objective protecting the investing public by requiring proposed issuers of capital stock to inform such public of the true financial conditions and prospects of the corporation. Facts:

Nestles authorized capital stock was increased from P300M divided into 3M shares with a par value of P100/share, to P600M divided into 6M shares. Nestle underwent the necessary procedures involving Board and stockholders approvals and effected the necessary filings to secure the approval of the increase of authorized capital stock by SEC, which approval was in fact granted. Nestle also paid to the SEC the amount of P50k as filing fee in accordance with the Schedule of Fees and Charges being implemented by the SEC under the Corporation Code.

Nestle has only 2 principal stockholders: San Miguel Corporation and Nestle S.A. The other stockholders, who are individual natural persons, own only 1 share each.

The Board of Directors and stockholders of Nestle approved resolutions authorizing the issuance of 344,500 shares out of the previously authorized but unissued capital stock of Nestle, exclusively to San Miguel Corporation and to Nestle S.A.

Nestle filed a letter with the SEC seeking exemption of its proposed issuance of additional shares to its existing principal shareholders, from the registration requirement of Sec 4 of the Revised Securities Act (RSA) and from payment of the fee referred to in Sec 6(c).

Argument presented by Nestle was that Sec 6(a) (4): Sec. 6. Exempt transactions. a) The requirement of registration under

subsection (a) of Sec 4 of this Act shall not apply to the sale of any security in any of the following transactions: xxx xxx xxx (4) xxx or the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock.

embraces "not only an increase in the authorized capital stock but also the issuance of additional shares to existing stockholders of the unissued portion of the unissued capital stock".

Nestle argued that: "increased capital stock" should be interpreted to refer to additional capital stock or equity participation of the existing stockholders as a consequence of either an increase of the authorized capital stock or the issuance of unissued capital stock.

o If the intention of the pertinent legal provision was to limit the exemption to subscription to proposed increases in the authorized capital stock of a corporation, we see no reason why the law should not have been more specific or accurate about it. It certainly should have mentioned "increase in the authorized capital stock of the corporation" rather than merely the expression "the issuance of additional capital stock.

All the additional shares proposed to be issued would be issued only to San Miguel Corporation and Nestle S.A. and that no commission or other form of remuneration had been given, directly or indirectly, in connection with the issuance or distribution of such additional shares of stock.

In respect of its claimed exemption from the fee provided for in Sec 6(c), it contended that since Sec 6 (a) (4) of the statute declares (in Nestle's view) the proposed issuance of previously authorized but unissued shares to its existing shareholders as an exempt transaction, the SEC could not collect fees for "the same transaction" twice.

SEC responded adversely to Nestles requests and ruled that the proposed issuance of shares did not fall under Sec 6 (a) (4), since it is applicable only where there is an increase in the authorized capital stock of a corporation.

o Chairman Sulit held, however, that the proposed transaction could be considered by the Commission under the provisions of Sec 6 (b) which reads as follows:

(b) The Commission may, from time to time and subject to such terms and conditions as it may prescribe, exempt transactions other than those provided in the preceding paragraph, if it finds that the enforcement of the requirements of registration xxx is not necessary in the public interest and for the protection of the investors by reason of the small amount involved or the limited character of the public offering.

CA sustained the ruling of the SEC. Issue/Held: W/N the issuance of the previously authorized but unissued capital stock of Nestle is exempt from the requirements of registration and the payment of the fees NO. Ratio: Case to Case Basis

The construction given by the SEC and CA to Sec 6 (a) (4) must be upheld. The reading by the SEC of the scope of application of Sec 6(a) (4) permits greater

opportunity for the SEC to implement the statutory objective of protecting the investing public by requiring proposed issuers of capital stock to inform such public of the true financial conditions and prospects of the corporation.

By limiting the class of exempt transactions to issuances of stock done in the course of and as part of the process of increasing the authorized capital stock of a corporation, the SEC is enabled to examine issuances by a corporation of



9

previously authorized but unissued capital stock, on a case-to-case basis, and to grant or withhold exemption from the normal registration requirements depending upon the perceived level of need for protection by the investing public in particular cases.

Issuance of previously authorized but unissued capital stock by the corporation requires only Board of Directors approval. Neither notice to nor approval by the shareholders or the SEC is required for such issuance. There would, accordingly, under the view taken by petitioner Nestle, no opportunity for the SEC to see to it that shareholders (especially the small stockholders) have a reasonable opportunity to inform themselves about the very fact of such issuance and about the condition of the corporation and the potential value of the shares of stock being offered.

o Under the reading urged by Nestle, the issuance of previously authorized but unissued capital stock would automatically constitute an exempt transaction, without regard to the length of time which may have intervened between the last increase in authorized capital stock and the proposed issuance during which time the condition of the corporation may have substantially changed, and without regard to whether the existing stockholders to whom the shares are proposed to be issued are only two giants.

It may, in a particular instance, be held to be an exempt transaction by the SEC under Sec 6(b) so long as the SEC finds that the requirements of registration under the Revised Securities Act are "not necessary in the public interest and for the protection of the investors" by reason, inter alia, of the small amount of stock that is proposed to be issued or because the potential buyers are very limited in number and are in a position to protect themselves.

In fine, Nestle's proposed construction would establish an inflexible rule of automatic exemption of issuances of additional, previously authorized but unissued, capital stock. We must reject an interpretation which may disable the SEC from rendering protection to investors, in the public interest, precisely when such protection may be most needed.

Not Exempt from Paying the Fee

It is clear that the fee collected by the SEC was assessed in connection with the examination and approval of the certificate of increase of authorized capital stock. The fee, upon the other hand, provided for in Sec 6 (c) which Nestle will be required to pay if it does file an application for exemption under Sec 6 (b), is quite different; this is a fee specifically authorized by the Revised Securities Act, (not the Corporation Code) in connection with the grant of an exemption from normal registration requirements imposed by that Act. We do not find such fee either unreasonable or exorbitant.

6. Onapal v. CA G.R. No. 90707 | February 1, 1993

Petitioner : ONAPAL PHILIPPINES COMMODITIES, INC., Respondent: THE HONORABLE COURT OF APPEALS and SUSAN CHUA

Summary: Petitioner and private respondent concluded a "Trading Contract". The contract signed by private respondent purports to be for the delivery of goods with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner. Our issue here is whether or not the Trading Contract 1 on "futures" is a specie of gambling and therefore null and void. YES IT IS After considering all the evidence in this case, it appears that petitioner and private respondent did not intend, in the deals of purchasing and selling for future delivery, the actual or constructive delivery of the goods/commodity, despite the payment of the full price therefor. The contract between them falls under the definition of what is called "futures". The payments made under said contract were payments of difference in prices arising out of the rise or fall in the market price above or below the contract price thus making it purely gambling and declared null and void by law. Facts:

The petitioner, ONAPAL Philippines Commodities, Inc. (petitioner), a duly organized and existing corporation, was licensed as commission merchant/broker by the SEC, to engage in commodity futures trading in Cebu City under Certificate of Registration No. CEB-182.

Petitioner and private respondent concluded a "Trading Contract". Like all customers of the petitioner, private respondent was furnished regularly with "Commodities Daily Quotations" showing daily movements of prices of commodity futures traded and of market reports indicating the volume of trade in different future exchanges in Hongkong, Tokyo and other centers.

Every time a customer enters into a trading transaction with petitioner as broker, the trading order is communicated by telex to its principal, Frankwell Enterprises of Hongkong. If the transaction, either buying or selling commodity futures, is consummated by the principal, the petitioner issues a document known as "Confirmation of Contract and Balance Sheet" to the customer. An order of a customer of the petitioner is supposed to be transmitted from Cebu to petitioner's office in Manila to be forwarded to Hongkong and from there, transmitted to the Commodity Futures Exchange in Japan.

There were only two parties involved as far as the transactions covered by the Trading Contract are concerned the petitioner and the private respondents. We quote hereunder the respondent Court's detailed findings of the transactions:

o Plaintiff said that she was invited by defendant's Account Executive Elizabeth Diaz to invest in the commodity futures trading by depositing the amount of P500,000.00; She was told that the business is "profitable" and that she could withdraw her money anytime; she was instructed to go to the Onapal Office where she met the Manager, Mr. Ciam. She was then made to sign the Trading Contract and other documents without making her aware/understand the risks involved; that at the time they let her sign "those papers" they were telling her that those papers were for "formality sake"; that when she was told later on that she made a profit of P20,480.00 in a span of three days in the first transaction, they told her that the business is "very profitable" .

o Plaintiff was informed by Miss Diaz that she had to deposit an additional amount of P300,000.00 "to pay the difference" in prices, otherwise she will lose her original deposit of P500,000.00; Fearing the loss of her



10

original deposit, plaintiff was constrained to deposit an additional amount of P300,000.00.

o Plaintiff further testified that she understood the transaction of buying and selling as speculating in prices, and her paying the difference between gains and losses without actual delivery of the goods to be gambling, and she would like to withdraw from this kind of business, the risk of which she was not made aware of. She said that she stopped trading in commodity futures in September, 1983 when she realized she was engaged in gambling.

o She was able to get only P470,000.00 out of her total deposit of P800,000.00. In order to recover the loss of P330,000.00, she filed this case and engaged the services of counsel for P40,000.00 and expects to incur expenses of litigation in the sum of P20,000.00."

A commodity futures contract is a specie of securities included in the broad definition of what constitutes securities under Sec. 2 of the Revised Securities Act which says Securities shall include bonds, . . ., commodity futures contracts

The Revised Rules and Regulations on Commodity Futures Trading issued by the SEC and approved by the Monetary Board of the Central bank defines such contracts as follows:

o "Commodity Futures Contract" shall refer to an agreement to buy or sell a specified quantity and grade of a commodity at a future date at a price established at the floor of the exchange.

The petitioner is a duly licensed commodity futures broker as defined under the Revised Rules and Regulations on Commodity Futures Trading as follows:

o "Futures Commission Merchant/Broker" shall refer to a corporation or partnership, which must be registered and licensed as a Futures Commission Merchant/Broker and is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of the contract market and that, in connection with such solicitation or acceptance of orders, accepts any money, securities or property (or extends credit in lieu thereof) to margin, guarantee or secure any trade or contract that results or may result therefrom.

Petitioner signed a document denominated as "Trading Contract" in printed form as prepared by the petitioner represented by its Branch Manager, Albert Chiam, incorporating the Rules for Commodity Trading.

CONTENTION OF THE PETITIONERS: Petitioner now contends that commodity futures trading is a legitimate business practiced in the United States, recognized by the SEC and permitted under the Civil Code, specifically Article 1462 thereof, quoted as follows:

o The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised or acquired by the seller after the perfection of the contract of sale, in this Title called "future goods".

o There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen.

Petitioner further argues that the SEC, in the exercise of its powers, authorized the operation of commodity exchanges to supervise and regulate commodity futures trading.

Issue: Whether or not the Trading Contract 1 on "futures" is a specie of gambling and therefore null and void. YES IT IS Ratio:

The contract between the parties falls under the kind commonly called "futures".

How the transaction works

In the late 1880's, trading in futures became rampant in the purchase and sale of cotton and grain in the United States, giving rise to unregulated trading exchanges known as "bucket shops". The name of the party to whom the seller was to make delivery when the future contract of sale was closed or from whom he was to receive delivery in case of purchase is not given the memorandum (contract). The business dealings between the parties were terminated by the closing of the transaction of purchase and sale of commodities without directions of the buyer because his margins were exhausted.

Under the rules of the trading exchanges, weekly settlements were required if there was any difference in the prices of the cotton between those obtaining at the time of the contract and at the date of delivery so that under the contract made by the purchaser, if the price of cotton had advanced, he would have received in cash from the seller each week the advance (increase) in price and if cotton prices declined, the purchaser had to make like payments to the seller. In the terminology of the exchange, these payments are called "margins". Either the seller or the buyer may elect to make or demand delivery of the cotton agreed to be sold and bought, but in general, it seems practically a uniform custom that settlements are made by payments and receipts of difference in prices at the time of delivery from that prevailing at the time of payment of the past weekly "margins". These settlements are made by "closing out" the contracts. Where the broker represented the buyer in buying and selling cotton for future delivery with himself extending credit margins, and some of the transactions were closed at a profit while the others at a loss, payments being made of the difference in prices arising out of their rise or fall above or below the contract price, and the facts showed that no actual delivery of cotton was contemplated, such contracts are of the kind commonly called "futures". Making contracts for the purchase and sale of commodities for future delivery, the parties not intending an actual delivery, or contracts of the kind commonly called futures, are unenforceable.

The term "futures" has grown out of those purely speculative transactions in which there are nominal contracts to sell for future delivery, but where in fact no delivery is intended or executed. The nominal seller does not have or expect to have a stock of merchandise he purports to sell nor does the nominal buyer expect to receive it or to pay for the price. Instead of that, a percentage or margin is paid, which is increased or diminished as the market rates go up and down, and accounted for to the buyer. This is simple speculation, gambling or wagering on prices within a given time; it is not buying and selling and is illegal as against public policy.



11

SCs Ruling The contract signed by private respondent purports to be for the delivery of goods

with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner. We quote with approval the following findings of the trial court as cited in the Court of Appeals decision:

o The evidence of the plaintiff tend to show that in her transactions with the defendant, the parties never intended to make or accept delivery of any particular commodity but the parties merely made a speculation on the rise or fall in the market of the contract price of the commodity, subject of the transaction, on the pretended date of delivery so that if the forecast was correct, one party would make a profit, but if the forecast was wrong, one party would lose money. Under this scheme, plaintiff was only able to recover P470,000.00 out of her original and "additional" deposit of P800,000.00 with the defendant.

o The defendant admits that in all the transactions that it had with the plaintiff, there was (sic) no actual deliveries and that it has made no arrangement with the Central Bank for the remittance of its customer's money abroad but defendant contends in its defense that the mere fact that there were no actual deliveries made in the transactions which plaintiff had with the defendant, did not mean that no such actual deliveries were intended by the parties. However. . . the court is convinced that the parties never really intended to make or accept delivery of any commodity being trade as.

The trading contract signed by private respondent and Albert Chiam, representing petitioner, is a contract for the sale of products for future delivery, in which either seller or buyer may elect to make or demand delivery of goods agreed to be bought and sold, but where no such delivery is actually made.

o By delivery is meant the act by which the res or subject is placed in the actual or constructive possession or control of another. It may be actual as when physical possession is given to the vendee or his representative; or constructive which takes place without actual transfer of goods, but includes symbolic delivery or substituted delivery as when the evidence of title to the goods, the key to the warehouse or bill of lading/warehouse receipt is delivered.

A contract for the sale or purchase of goods/commodity to be delivered at future time, if entered into without the intention of having any goods/commodity pass from one party to another, but with an understanding that at the appointed time, the purchaser is merely to receive or pay the difference between the contract and the market prices, is a transaction which the law will not sanction, for being illegal.

The written trading contract in question is not illegal but the transaction between the petitioner and the private respondent purportedly to implement the contract is in the nature of a gambling agreement and falls within the ambit of Article 2018 of the New Civil Code, which is quoted hereunder:

o If a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference

between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid.

The facts clearly establish that the petitioner is a direct participant in the transaction, acting through its authorized agents. It received the customer's orders and private respondent's money. There is no evidence that the orders and money were transmitted to its principal Frankwell Enterprises Ltd. in Hongkong nor were the orders forwarded to the Tokyo Exchange. We draw the conclusion that no actual delivery of goods and commodity was intended and ever made by the parties. In the realities of the transaction, the parties merely speculated on the rise and fall in the price of the goods/commodity subject matter of the transaction. If private respondent's speculation was correct, she would be the winner and the petitioner, the loser, so petitioner would have to pay private respondent the "margin". But if private respondent was wrong in her speculation then she would emerge as the loser and the petitioner, the winner. The petitioner would keep the money or collect the difference from the private respondent. This is clearly a form of gambling provided for with unmistakeable certainty under Article 2018 abovestated. It would thus be governed by the New Civil Code and not by the Revised Securities Act nor the Rules and Regulations on Commodity Futures Trading laid down by the SEC.

Article 1462 of the New Civil Code does not govern this case because the said provision contemplates a contract of sale of specific goods where one of the contracting parties binds himself to transfer the ownership of and deliver a determinate thing and the other to pay therefore a price certain in money or its equivalent. The said article requires that there be delivery of goods, actual or constructive, to be applicable. In the transaction in question, there was no such delivery; neither was there any intention to deliver a determinate thing.

The transaction is not what the parties call it but what the law defines it to be. After considering all the evidence in this case, it appears that petitioner

and private respondent did not intend, in the deals of purchasing and selling for future delivery, the actual or constructive delivery of the goods/commodity, despite the payment of the full price therefor. The contract between them falls under the definition of what is called "futures". The payments made under said contract were payments of difference in prices arising out of the rise or fall in the market price above or below the contract price thus making it purely gambling and declared null and void by law.

Under Article 2018, the private respondent is entitled to refund from the petitioner what she paid. There is no evidence that the orders of private respondent were actually transmitted to the petitioner's principal in Hongkong and Tokyo. There was no arrangement made by petitioner with the Central Bank for the purpose of remitting the money of its customers abroad. The money which was supposed to be remitted to Frankwell Enterprises of Hongkong was kept by petitioner in a separate account in a local bank. Having received the money and orders of private respondent under the trading contract, petitioner has the burden of proving that said orders and money of private respondent had been transmitted. But petitioner failed to prove this point.



12

Held: For lack of merit, the petition is DISMISSED and the judgment sought to be reversed is hereby AFFIRMED. With costs against petitioner.

SRC Compiled Sec 1-10 (1)

Documents

Transcript of SRC Compiled Sec 1-10 (1)