Securities Regulation Insider (2004) Ms. OB was employed in MAS Investment Bank. WIC, a medical drug company, retained the Bank to assess whether it is desirable to make a tender offer for DOP company, a drug manufacturer. OB overheard in the Page 91 of 103 course of her work the plans of WIC. By herself and thru associates, she purchased DOP stocks available at the stock exchange priced at P20 per share. When WIC's tender offer was announced, DOP stocks jumped to P30 per share. Thus OB earned a sizable profit. Is OB liable for breach and misuse of confidential or insider information gained from her employment? Is she also liable for damages to sellers or buyers with whom she traded? If so, what is the measure of such damages? Explain briefly. (5%) SUGGESTED ANSWER: OB is an insider (as defined in Subsection 3.8(3) of the Securities Regulation Code) since she is an employee of the Bank, the financial adviser of DOP, and this relationship gives her access to material information about the issuer (DOP) and the latter's securities (shares), which information is not generally available to the public. Accordingly, OB is guilty of insider trading under Section 27 of the Securities Regulation Code, which requires disclosure when trading in securities. OB is also liable for damages to sellers or buyers with whom she traded. Under Subsection 63.1 of the Securities Regulation Code, the damages awarded could be an amount not exceeding triple the amount of the transaction plus actual damages. Exemplary damages may also be awarded in case of bad faith, fraud, malevolence or wantonness in the violation of the Securities Regulation Code or its implementing rules. The court is also authorized to award attorney's fees not exceeding 30% of the award. Insider Trading (1995) Under the Revised Securities Act, it is unlawful for an insider to sell or buy a security of the issuer if he knows a fact of special significance with respect to the issuer or the security that is not generally available, without disclosing such fact to the other party. 3.a) What does the term insider mean as used in the Revised Securities act? 3.b) When is a fact considered to be of special significance under the same Act? 3.c) What are the liabilities of a person who violates the pertinent provisions of the Revised Securities Act regarding the unfair use of inside information? SUGGESTED ANSWER: 3a. Insider means 1) the issuer, 2) a director or officer of, or a person controlling, controlled by, or under common control with, the issuer, 3) a person whose relationship or former relationship to the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available, or 4) a person who learns such a fact from any of the foregoing insiders with knowledge that the person from whom he learns the fact is such an insider (Sec 30b, RSA) 3b. It is one which, in addition to being material, would be likely to affect the market price of a security to a significant extent on being made generally available, or one which a reasonable person would consider especially Mercantile Law Bar Examination Q & A (1990-2006) important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability. (Sec. 30c, RSA) 3c. The person may be liable to 1) a fine of not less than P5th nor more than P500th or 2) imprisonment of not less than 7 years nor more than 21 years, 3) or both such fine and imprisonment in the discretion of the court. If the person is a corporation, partnership, association or other juridical entity, the penalty shall be imposed upon the officers of the corporation, etc. responsible for the violation. And if such an officer is an alien, he shall, in addition to the penalties prescribed, be deported without further proceedings after service of sentence. (Sec 56 RSA) Insider Trading; Manipulative Practices (1994)1) Give a case where a person who is not an issuing corporation, director or officer thereof, or a person controlling, controlled by or under common control with the issuing corporation, is also considered an insider. 2) In Securities Law, what is a shortswing transaction. 3) In insider trading, what is a fact of special significance?

SUGGESTED ANSWER:

1) It may be a case where a person, whose relationship or former relationship to the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available, or a person, who learns such a fact from any of the insiders, with knowledge that the person from whom he learns the fact, is such an insider (Sec 30, par (b) Rev Securities Act)

2.A shortswing is a transaction where a person buys securities and sells or disposes of the same within a period of six (6) months.

ALTERNATIVE ANSWER: 2) It is a purchase by any person for the issuer or any person controlling, controlled by, or under common control with the issuer, or a purchase subject to the control of the issuer or any such person, resulting in beneficial ownership of more than 10% of any class of shares (Sec 32 R Sec Act) 3)

In insider trading, a fact of special significance is, in addition to being material, such fact as would likely, on being made generally available, to affect the market price of a security to a significant extent, or which a reasonable person would consider as especially important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability (Sec 30 par c RSecAct)

Manipulative Practices (2001)

Suppose A is the owner of several inactive securities. To create an appearance of active trading for such securities, Page 92 of 103 A connives with B by which A will offer for sale some of his securities and B will buy them at a certain fixed price, with the understanding that although there would be an apparent sale, A will retain the beneficial ownership thereof. a) Is the arrangement lawful? (3%) b) If the sale materializes, what is it called? (2%)

SUGGESTED ANSWER:

a) No. The arrangement is not lawful. It is an artificial manipulation of the price of securities. This is prohibited by the Securities Regulation Code. b) If the sale materializes, it is called a wash sale or simulated sale.

Securities Regulation Code; Purpose (1998)

What is the principal purpose of laws and regulations governing securities in the Philippines? (2%)

SUGGESTED ANSWER:

The principal purpose of laws and regulations governing securities in the Philippines is to protect the public against the nefarious practices of unscrupulous brokers and salesmen in selling securities.

Securities;

Definition (1996) Define securities

SUGGESTED ANSWER:

Stocks, bonds notes, convertible debentures, warrants or other documents that represent a share in a company or a debt owned by a company or government entity. Evidences of obligations to pay money or of rights to participate in earnings and distribution of corporate assets. Instruments giving to their legal holders rights to money or other property; they are therefore instruments which have intrinsic value and are recognized and used as such in the regular channels of commerce. (Note: Sec 2a of the Revised Securities Act does not really define the term securities.)

Securities; Selling of Securities; Meaning (2002) 2002

(18) Equity Online Corporation (EOL), a New York corporation, has a securities brokerage service on the Internet after obtaining all requisite U.S. licenses and permits to do so. EOLs website (www.eonline..com), which is hosted by a server in Florida, enables Internet users to trade on-line in securities listed in the various stock exchanges in the U.S. EOL buys and sells U.S. listed securities for the accounts of its clients all over the world, who convey their buy and sell instructions to EOL through the Internet. EOL has no offices, employees or representatives outside the U.S. The website has icons for many countries, including an icon For Filipino Traders containing the days prices of U.S. listed securities expressed in U.S. dollars and their Philippine peso equivalent. Grace Gonzales, a resident of Makati, is a regular customer of the website and has been purchasing and selling securities through EOL with the use of her American Express credit card. Grace has never traveled outside the Philippines. After a series of erroneous stock picks, she had incurred a net indebtedness of US$30,000. with EOL, at which time she cancelled her American Express credit card. After a Mercantile Law Bar Examination Q & A (1990-2006) number of demand letters sent to Grace, all of them unanswered, EOL, through a Makati law firm, filed a complaint for collection against Grace with the Regional Trial Court of Makati. Grace, through her lawyer, filed a motion to dismiss on the ground that EOL (a) was doing business in the Philippines without a license and was therefore barred from bringing suit and (b) violated the Securities Regulation Code by selling or offering to sell securities within the Philippines without registering the securities with the Philippine SEC and thus came to court with unclean hands. EOL opposed the motion to dismiss, contending that it had never established a physical presence in the Philippines, and that all of the activities related to plaintiffs trading in U.S. securities all transpired outside the Philippines. If you are the judge, decide the motion to dismiss by ruling on the respective contentions of the parties on the basis of the facts presented above. (10%)

SUGGESTED ANSWER:

The grounds of the motion to dismiss are both untenable. EOL is not doing business in the Philippines, and it did not violate the Securites Act, because it was not selling securities in the country.

The contention of EOL is correct, because it never did any business in the Philippines. All its transactions in question were consummated outside the Philippines.

Tender Offer (2002) 2002 (6)

A. What is a tender offer? B. In what instances is a tender offer required to be made?

SUGGESTED ANSWER:

A. Tender offer is a publicly announced intention of a person acting alone or in concert with other persons to acquire equity securities of a public company. It may also be defined as a method of taking over a company by asking stockholders to sell their shares at a price higher than the current market price and on a particular date.B. Instances where tender offer is required to be made: a) The person intends to acquire 15% or more of the equity share of a public company pursuant to an agreement made between or among the person and one or more sellers.

b) The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months.

c) The person intends to acquire equity shares of a public company that would result in ownership of more than 50% of the said shares.