with annotations-pse vs ca

7/1/2015 SUPREMECOURTREPORTSANNOTATEDVOLUME281

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232 SUPREME COURT REPORTS ANNOTATEDPhilippine Stock Exchange, Inc. vs. Court of Appeals

G.R. No. 125469. October 27, 1997.*

PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs.THE HONORABLE COURT OF APPEALS, SECURITIESAND EXCHANGE COMMISSION and PUERTO AZULLAND, INC., respondents.

Corporation Law Securities and Exchange CommissionStock Exchanges The SEC is the entity with the primary say as towhether or not securities, including shares of stock of acorporation, may be traded or not in the stock exchange.Weaffirm that the SEC is the entity with the primary say as towhether or not securities, including shares of stock of acorporation, may be traded or not in the stock exchange. This is inline with the SECs mission to ensure proper compliance with thelaws, such as the Revised Securities Act and to regulate the saleand disposition of securities in the country. As the appellate courtexplains: Paramount policy also supports the authority of thepublic respondent to review petitioners denial of the listing.Being a stock exchange, the petitioner performs a function that isvital to the national economy, as the business is affected withpublic interest. As a matter of fact, it has often been said that theeconomy moves on the basis of the rise and fall of stocks beingtraded. By its economic power, the petitioner certainly can dictatewhich and how many users are allowed to sell securities thru thefacilities of a stock exchange, if allowed to interpret its own rulesliberally as it may please. Petitioner can either allow or deny theentry to the market of securities. To repeat, the monopoly, unlessaccompanied by control, becomes subject to abuse hence,considering public interest, then it should be subject togovernment regulation.

Same Same Same Philippine Stock Exchange The PSEsmanagement prerogatives are not under the absolute control of theSEC, for the PSE is, after all, a corporation authorized by its



corporate franchise to engage in its proposed and duly approvedbusiness.This is not to say, however, that the PSEsmanagement prerogatives are under the absolute control of theSEC. The PSE is, after all, a corporation authorized by itscorporate franchise to engage in its proposed and duly approvedbusiness. One of the PSEs main concerns, as such, is still thegeneration of profit for its stock

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* SECOND DIVISION.

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VOL. 281, OCTOBER 27, 1997 233

Philippine Stock Exchange, Inc. vs. Court of Appeals

holders. Moreover, the PSE has all the rights pertaining tocorporations, including the right to sue and be sued, to holdproperty in its own name, to enter (or not to enter) into contractswith third persons, and to perform all other legal acts within itsallocated express or implied powers.

Same Same Same Same Questions of policy and ofmanagement are left to the honest decision of the officers anddirectors of a corporation, and the courts are without authority tosubstitute their judgment for that of the board of directorstheboard is the business manager of the corporation, and so long as itacts in good faith, its orders are not reviewable by the courts.Acorporation is but an association of individuals, allowed totransact under an assumed corporate name, and with a distinctlegal personality. In organizing itself as a collective body, itwaives no constitutional immunities and perquisites appropriateto such a body. As to its corporate and management decisions,therefore, the state will generally not interfere with the same.Questions of policy and of management are left to the honestdecision of the officers and directors of a corporation, and thecourts are without authority to substitute their judgment for thejudgment of the board of directors. The board is the businessmanager of the corporation, and so long as it acts in good faith, itsorders are not reviewable by the courts.

Same Same Same Same Notwithstanding the regulatory



power of the SEC over the PSE, and the resultant authority toreverse the PSEs decision in matters of application for listing inthe market, the SEC may exercise such power only if the PSEsjudgment is attended by bad faith.Thus, notwithstanding theregulatory power of the SEC over the PSE, and the resultantauthority to reverse the PSEs decision in matters of applicationfor listing in the market, the SEC may exercise such power only ifthe PSEs judgment is attended by bad faith. In Board ofLiquidators vs. Kalaw, it was held that bad faith does not simplyconnote bad judgment or negligence. It imports a dishonestpurpose or some moral obliquity and conscious doing of wrong. Itmeans a breach of a known duty through some motive or interestof ill will, partaking of the nature of fraud.

Same Same Same Same As the primary market forsecurities, the PSE had established its name and goodwill, and ithas the right to protect such goodwill by maintaining a reasonablestandard of propriety in the entities who choose to transactthrough its facilities The concept of government absolutism is athing of the past, and

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234 SUPREME COURT REPORTS ANNOTATED


should remain so.Also, as the primary market for securities, thePSE has established its name and goodwill, and it has the right toprotect such goodwill by maintaining a reasonable standard ofpropriety in the entities who choose to transact through itsfacilities. It was reasonable for the PSE, therefore, to exercise itsjudgment in the manner it deems appropriate for its businessidentity, as long as no rights are trampled upon, and publicwelfare is safeguarded. In this connection, it is proper to observethat the concept of government absolutism is a thing of the past,and should remain so.

Same Same Same Same The SEC had acted arbitrarily inarrogating unto itself the discretion of approving the applicationfor listing of Puerto Azul Land, Inc., since this is a matteraddressed to the sound discretion of the PSE, a corporate entity,whose business judgments are respected in the absence of badfaith.In any case, for the purpose of determining whether PSEacted correctly in refusing the application of PALI, the true



ownership of the properties of PALI need not be determined as anabsolute fact. What is material is that the uncertainty of theproperties ownership and alienability exists, and this puts toquestion the qualification of PALIs public offering. In sum, theCourt finds that the SEC had acted arbitrarily in arrogating untoitself the discretion of approving the application for listing in thePSE of the private respondent PALI, since this is a matteraddressed to the sound discretion of the PSE, a corporate entity,whose business judgments are respected in the absence of badfaith.

Same Same Same The question as to what policy is, orshould be relied upon in approving the registration and sale ofsecurities in the PSE is not for the Supreme Court to determine,but is left to the sound discretion of the Securities and ExchangeCommission.The question as to what policy is, or should berelied upon in approving the registration and sale of securities inthe PSE is not for the Court to determine, but is left to the sounddiscretion of the Securities and Exchange Commission. Inmandating the SEC to administer the Revised Securities Act, andin performing its other functions under pertinent laws, theRevised Securities Act, under Section 3 thereof, gives the SEC thepower to promulgate such rules and regulations as it mayconsider appropriate in the public interest for the enforcement ofthe said laws. The second paragraph of Section 4 of the said law,on the other hand, provides that no security, unless exempt bylaw, shall be issued, endorsed, sold, transferred or in any othermanner conveyed to the public, unless registered in accordance

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VOL. 281, OCTOBER 27, 1997 235


with the rules and regulations that shall be promulgated in thepublic interest and for the protection of investors by theCommission. Presidential Decree No. 902A, on the other hand,provides that the SEC, as regulatory agency, has supervision andcontrol over all corporations and over the securities market as awhole, and as such, is given ample authority in determiningappropriate policies.

Same Same Same The absolute reliance on the fulldisclosure method in the registration of securities is untenable.A



reading of the foregoing grounds reveals the intention of thelawmakers to make the registration and issuance of securitiesdependent, to a certain extent, on the merits of the securitiesthemselves, and of the issuer, to be determined by the Securitiesand Exchange Commission. This measure was meant to protectthe interests of the investing public against fraudulent andworthless securities, and the SEC is mandated by law tosafeguard these interests, following the policies and rulestherefore provided. The absolute reliance on the full disclosuremethod in the registration of securities is, therefore, untenable.As it is, the Court finds that the private respondent PALI, on atleast two points (Nos. 1 and 5) has failed to support the proprietyof the issue of its shares with unfailing clarity, thereby lendingsupport to the conclusion that the PSE acted correctly in refusingthe listing of PALI in its stock exchange. This does not discountthe effectivity of whatever method the SEC, in the exercise of itsvested authority, chooses in setting the standard for publicofferings of corporations wishing to do so. However, the SEC mustrecognize and implement the mandate of the law, particularly theRevised Securities Act, the provisions of which cannot beamended or supplanted by mere administrative issuance.

PETITION for review on certiorari of a decision of theCourt of Appeals.

The facts are stated in the opinion of the Court. Berenguer & Guno Law Firm and Siguion Reyna,

Montecillo & Ongsiako for petitioner.Herminio F. Valerio for Puerto Azul Land, Inc.

TORRES, JR., J.:

The Securities and Exchange Commission is thegovernment agency, under the direct general supervision ofthe Of

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fice of the President,1 with the immense task of enforcing

the Revised Securities Act, and all other duties assigned toit by pertinent laws. Among its inumerable functions, andone of the most important, is the supervision of all



corporations, partnerships or associations, who aregrantees of primary franchise and/or a license or permitissued by the government to operate in the Philippines.

2

Just how far this regulatory authority extends,particularly, with regard to the Petitioner Philippine StockExchange, Inc. is the issue in the case at bar.

In this Petition for Review on Certiorari, petitionerassails the resolution of the respondent Court of Appeals,dated June 27, 1996, which affirmed the decision of theSecurities and Exchange Commission ordering thepetitioner Philippine Stock Exchange, Inc. to allow theprivate respondent Puerto Azul Land, Inc. to be listed in itsstock market, thus paving the way for the public offering ofPALIs shares.

The facts of the case are undisputed, and are herebyrestated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic realestate corporation, had sought to offer its shares to thepublic in order to raise funds allegedly to develop itsproperties and pay its loans with several bankinginstitutions. In January, 1995, PALI was issued a Permitto Sell its shares to the public by the Securities andExchange Commission (SEC). To facilitate the trading ofits shares among investors, PALI sought to course thetrading of its shares through the Philippine StockExchange, Inc. (PSE), for which purpose it filed with thesaid stock exchange an application to list its shares, withsupporting documents attached.

On February 8, 1996, the Listing Committee of the PSE,upon a perusal of PALIs application, recommended to thePSEs Board of Governors the approval of PALIs listingapplication.

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1 Section 1, Presidential Decree No. 902A.2 Section 3, Ibid.

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VOL. 281, OCTOBER 27, 1997 237Philippine Stock Exchange, Inc. vs. Court of Appeals

On February 14, 1996, before it could act upon PALIsapplication, the Board of Governors of the PSE received a



letter from the heirs of Ferdinand E. Marcos, claiming thatthe late President Marcos was the legal and beneficialowner of certain properties forming part of the Puerto AzulBeach Hotel and Resort Complex which PALI claims to beamong its assets and that the Ternate DevelopmentCorporation, which is among the stockholders of PALI,likewise appears to have been held and continue to be heldin trust by one Rebecco Panlilio for then President Marcosand now, effectively for his estate, and requested PALIsapplication to be deferred. PALI was requested to commentupon the said letter.

PALIs answer stated that the properties forming part ofthe Puerto Azul Beach Hotel and Resort Complex were notclaimed by PALI as its assets. On the contrary, the resort isactually owned by Fantasia Filipina Resort, Inc. and thePuerto Azul Country Club, entities distinct from PALI.Furthermore, the Ternate Development Corporation ownsonly 1.20% of PALI. The Marcoses responded that theirclaim is not confined to the facilities forming part of thePuerto Azul Hotel and Resort Complex, thereby implyingthat they are also asserting legal and beneficial ownershipof other properties titled under the name of PALI.

On February 20, 1996, the PSE wrote ChairmanMagtanggol Gunigundo of the Presidential Commission onGood Government (PCGG) requesting for comments on theletters of the PALI and the Marcoses. On March 4, 1996,the PSE was informed that the Marcoses received aTemporary Restraining Order on the same date, enjoiningthe Marcoses from, among others, further impeding,obstructing, delaying or interfering in any manner by orany means with the consideration, processing and approvalby the PSE of the initial public offering of PALI. The TROwas issued by Judge Martin S. Villarama, Executive Judgeof the RTC of Pasig City in Civil Case No. 65561, pendingin Branch 69 thereof.

In its regular meeting held on March 27, 1996, theBoard of Governors of the PSE reached its decision to rejectPALIs application, citing the existence of serious claims,issues and

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circumstances surrounding PALIs ownership over itsassets that adversely affect the suitability of listing PALIsshares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SECaddressed to the then Acting Chairman, Perfecto R. Yasay,Jr., bringing to the SECs attention the action taken by thePSE in the application of PALI for the listing of its shareswith the PSE, and requesting that the SEC, in the exerciseof its supervisory and regulatory powers over stockexchanges under Section 6(j) of P.D. No. 902A, review thePSEs action on PALIs listing application and institutesuch measures as are just and proper under thecircumstances.

On the same date, or on April 11, 1996, the SEC wrote tothe PSE, attaching thereto the letter of PALI and directingthe PSE to file its comments thereto within five days fromits receipt and for its authorized representative to appearfor an inquiry on the matter. On April 22, 1996, the PSEsubmitted a letter to the SEC containing its comments tothe April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order,reversing the PSEs decision. The dispositive portion of thesaid order reads:

WHEREFORE, premises considered, and invoking theCommissioners authority and jurisdiction under Section 3 of theRevised Securities Act, in conjunction with Section 3, 6(j) and6(m) of Presidential Decree No. 902A, the decision of the Board ofGovernors of the Philippine Stock Exchange denying the listing ofshares of Puerto Azul Land, Inc., is hereby set aside, and the PSEis hereby ordered to immediately cause the listing of the PALIshares in the Exchange, without prejudice to its authority torequire PALI to disclose such other material information it deemsnecessary for the protection of the investing public.

This Order shall take effect immediately.SO ORDERED.

PSE filed a motion for reconsideration of the said order onApril 29, 1996, which was, however denied by theCommission in its May 9, 1996 Order which states:

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I.

II.

III.

IV.

WHEREFORE, premises considered, the Commission finds nocompelling reason to reconsider its order dated April 24, 1996,and in the light of recent developments on the adverse claimagainst the PALI properties, PSE should require PALI to submitfull disclosure of material facts and information to protect theinvesting public. In this regard, PALI is hereby ordered to amendits registration statements filed with the Commission toincorporate the full disclosure of these material facts andinformation.

Dissatisfied with this ruling, the PSE filed with the Courtof Appeals on May 17, 1996 a Petition for Review (withApplication for Writ of Preliminary Injunction andTemporary Restraining Order), assailing the abovementioned orders of the SEC, submitting the following aserrors of the SEC:

SEC COMMITTED SERIOUS ERROR ANDGRAVE ABUSE OF DISCRETION IN ISSUINGTHE ASSAILED ORDERS WITHOUT POWER,JURISDICTION, OR AUTHORITY SEC HAS NOPOWER TO ORDER THE LISTING AND SALE OFSHARES OF PALI WHOSE ASSETS ARESEQUESTERED AND TO REVIEW ANDSUBSTITUTE DECISIONS OF PSE ON LISTINGAPPLICATIONSSEC COMMITTED SERIOUS ERROR ANDGRAVE ABUSE OF DISCRETION IN FINDINGTHAT PSE ACTED IN AN ARBITRARY ANDABUSIVE MANNER IN DISAPPROVING PALISLISTING APPLICATIONTHE ASSAILED ORDERS OF SEC ARE ILLEGALAND VOID FOR ALLOWING FURTHERDISPOSITION OF propertIES IN CUSTODIALEGIS AND WHICH FORM PART OFNAVAL/MILITARY RESERVATION ANDTHE FULL DISCLOSURE OF THE SEC WASNOT PROPERLY PROMULGATED AND ITSIMPLEMENTATION AND application IN THISCASE VIOLATES THE DUE PROCESS CLAUSEOF THE Constitution.

On June 4, 1996, PALI filed its Comment to the Petition forReview and subsequently, a Comment and Motion to



Dismiss. On June 10, 1996, PSE filed its Reply to Commentand Opposition to Motion to Dismiss.

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On June 27, 1996, the Court of Appeals promulgated itsResolution dismissing the PSEs Petition for Review.Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had bothjurisdiction and authority to look into the decision of thepetitioner PSE, pursuant to Section 3

3 of the Revised

Securities Act in relation to Section 6(j) and 6(m)4 of P.D.

No. 902A, and Section 38(b)5 of the Revised Securities Act,

and for the purpose

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3 Sec. 3. Administrative Agency.This Act shall be administered by the(Securities and Exchange) Commission which shall continue to have theorganization, powers, and functions provided by Presidential DecreeNumbered 902A, 1653, 1758, and 1799 and Executive Order No. 708. TheCommission shall, except as otherwise expressly provided, have the powerto promulgate such rules and regulations as it may consider appropriatein the public interest for the enforcement of the provisions hereof.

4 Sec. 6. In order to effectively exercise such jurisdiction, the (Securitiesand Exchange) Commission shall possess the following powers:

x x x(j) To authorize the establishment and operation of stock exchanges,

commodity exchanges and such other similar organizations and tosupervise and regulate the same including the authority to determinetheir number, size and location, in the light of national or regionalrequirements for such activities with the view to promote, conserve orrationalize investment

x x x(m) To exercise such other powers as may be provided by law as well as

those which may be implied from, or which the necessary or incidental tothe carrying out of, the express powers granted to the Commission or toachieve the objectives and purposes of this Decree.

5 Sec. 38. Powers with respect to exchanges and securities.(a) x x x(b) The Commission is further authorized, if after making appropriate

request in writing to a securities exchange that such exchange effect on itsown behalf specified changes in the rules and practices and, after



(1)

(2)

(3)(4)

(5)(6)(7)

appropriate notice and opportunity for hearing, it determines that suchexchange has not made the changes so requested, and that such changesare necessary or appropriate for the

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of ensuring fair administration of the exchange. Both as acorporation and as a stock exchange, the petitioner issubject to public respondents jurisdiction, regulation andcontrol. Accepting the argument that the public respondenthas the authority merely to supervise or regulate, wouldamount to serious consequences, considering that thepetitioner is a stock exchange whose business is impressedwith public interest. Abuse is not remote if the publicrespondent is left without any system of control. If thesecurities act vested the public respondent with jurisdictionand control over all corporations the power to authorizethe establishment of stock exchanges the right tosupervise and regulate the same and the power to alterand supplement rules of the exchange in

_______________

protection of investors or to insure fair dealing in securities tradedupon such exchange, by rules or regulations or by order, to alter orsupplement the rules of such exchange (insofar as necessary orappropriate to effect such changes) in respect of such matters as

Safeguards in respect of the financial responsibility of membersand adequate provision against the evasion of financialresponsibility through the use of corporate forms or specialpartnershipsThe limitation or prohibition of the registration or trading in anysecurity within a specified period after the issuance or primarydistribution thereofThe listing or striking from listing of any securityHours of trading

The manner, method, and place of soliciting businessFictitious accountsThe time and method of making settlements, payments, anddeliveries, and of closing accounts



(8)

(9)

(10)

(11)(12)

1.

2.

3.

4.

The reporting of transactions on the exchange upon ticketsmaintained by or with the consent of the exchange, including themethod of reporting short sales, stopped sales, sales of securities ofissuers in default, bankruptcy or receivership, and sales involvingother special circumstancesThe fixing of reasonable rates of commission, interests, listing, andother chargesMinimum units of trading

Oddlot purchases and sales andMinimum deposits on margin accounts.

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the listing or delisting of securities, then the law certainlygranted to the public respondent the plenary authority overthe petitioner and the power of review necessarily comeswithin its authority.

All in all, the court held that PALI complied with all therequirements for public listing, affirming the SECs rulingto the effect that:

x x x the Philippine Stock Exchange has acted in an arbitraryand abusive manner in disapproving the application of PALI forlisting of its shares in the face of the following considerations:

PALI has clearly and admittedly complied with theListing Rules and full disclosure requirements of theExchangeIn applying its clear and reasonable standards on thesuitability for listing of shares, PSE has failed to justifywhy it acted differently on the application of PALI, ascompared to the IPOs of other companies similarlysituated that were allowed listing in the ExchangeIt appears that the claims and issues on the title to PALIsproperties were even less serious than the claims againstthe assets of the other companies in that, the assertions ofthe Marcoses that they are owners of the disputedproperties were not substantiated enough to overcome thestrength of a title to properties issued under the TorrensSystem as evidence of ownership thereofNo action has been filed in any court of competent



jurisdiction seeking to nullify PALIs ownership over thedisputed properties, neither has the governmentinstituted recovery proceedings against these properties.Yet the import of PSEs decision in denying PALIsapplication is that it would be PALI, not the Marcoses,that must go to court to prove the legality of its ownershipon these properties before its shares can be listed.

In addition, the argument that the PALI properties belongto the Military/Naval Reservation does not inspire belief.The point is, the PALI properties are now titled. A propertyloses its public character the moment it is covered by atitle. As a matter of fact, the titles have long been settledby a final judgment and the final decree having beenregistered, they can no longer be reopened consideringthat the one year period has already passed. Lastly, thedetermination of what

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standard to apply in allowing PALIs application for listing,whether the discretion method or the system of publicdisclosure adhered to by the SEC, should be addressed tothe Securities Commission, it being the government agencythat exercises both supervisory and regulatory authorityover all corporations.

On August 15, 1996, the PSE, after it was granted anextension, filed the instant Petition for Review onCertiorari, taking exception to the rulings of the SEC andthe Court of Appeals. Respondent PALI filed its Commentto the petition on October 17, 1996. On the same date, thePCGG filed a Motion for Leave to file a Petition forIntervention. This was followed up by the PCGGs Petitionfor Intervention on October 21, 1996. A supplementalComment was filed by PALI on October 25, 1997. TheOffice of the Solicitor General, representing the SEC andthe Court of Appeals, likewise filed its Comment onDecember 26, 1996. In answer to the PCGGs motion forleave to file petition for intervention, PALI filed itsComment thereto on January 17, 1997, whereas the PSEfiled its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated



Reply to the comments of respondent PALI (October 17,1996) and the Solicitor General (December 26, 1996). OnMay 16, 1997, PALI filed its Rejoinder to the saidconsolidated reply of PSE.

PSE submits that the Court of Appeals erred in rulingthat the SEC had authority to order the PSE to list theshares of PALI in the stock exchange. Under presidentialdecree No. 902A, the powers of the SEC over stockexchanges are more limited as compared to its authorityover ordinary corporations. In connection with this, thepowers of the SEC over stock exchanges under the RevisedSecurities Act are specifically enumerated, and these donot include the power to reverse the decisions of the stockexchange. Authorities are in abundance even in the UnitedStates, from which the countrys security policies arepatterned, to the effect of giving the Securities Commissionless control over stock exchanges, which in turn are givenmore leeway in making the decision whether or not toallow corporations to offer their stock to the

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public through the stock exchange. This is in accord withthe business judgment rule whereby the SEC and thecourts are barred from intruding into business judgmentsof corporations, when the same are made in good faith. Thesaid rule precludes the reversal of the decision of the PSEto deny PALIs listing application, absent a showing of badfaith on the part of the PSE. Under the listing rules of thePSE, to which PALI had previously agreed to comply, thePSE retains the discretion to accept or reject applicationsfor listing. Thus, even if an issuer has complied with thePSE listing rules and requirements, PSE retains thediscretion to accept or reject the issuers listing applicationif the PSE determines that the listing shall not serve theinterests of the investing public.

Moreover, PSE argues that the SEC has no jurisdictionover sequestered corporations, nor with corporations whoseproperties are under sequestration. A reading of Republicof the Philippines vs. Sandiganbayan, G.R. No. 105205, 240SCRA 376, would reveal that the properties of PALI, whichwere derived from the Ternate Development Corporation



(TDC) and the Monte del Sol Development Corporation(MSDC) are under sequestration by the PCGG, and subjectof forfeiture proceedings in the Sandiganbayan. This rulingof the Court is the law of the case between the Republicand TDC and MSDC. It categorically declares that theassets of these corporations were sequestered by the PCGGon March 10, 1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appealssanction that PALIs ownership over its properties can nolonger be questioned, since certificates of title have beenissued to PALI and more than one year has since lapsed, iserroneous and ignores well settled jurisprudence on landtitles. That a certificate of title issued under the TorrensSystem is a conclusive evidence of ownership is not anabsolute rule and admits certain exceptions. It isfundamental that forest lands or military reservations arenonalienable. Thus, when a title covers a forest reserve ora government reservation, such title is void.

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PSE, likewise, assails the SECs and the Court of Appealsreliance on the alleged policy of full disclosure to upholdthe listing of PALIs shares with the PSE, in the absence ofa clear mandate for the effectivity of such policy. As it is,the case records reveal the truth that PALI did not complywith the listing rules and disclosure requirements. In fact,PALIs documents supporting its application containedmisrepresentations and misleading statements, andconcealed material information. The matter ofsequestration of PALIs properties and the fact that thesame form part of military/naval/forest reservations werenot reflected in PALIs application.

It is undeniable that the petitioner PSE is not anordinary corporation, in that although it is clothed with themarkings of a corporate entity, it functions as the primarychannel through which the vessels of capital trade ply. ThePSEs relevance to the continued operation and filtration ofthe securities transactions in the country gives it a distinctcolor of importance such that government intervention inits affairs becomes justified, if not necessary. Indeed, as theonly operational stock exchange in the country today, the



PSE enjoys a monopoly of securities transactions, and assuch, it yields an immense influence upon the countryseconomy.

Due to this special nature of stock exchanges, thecountrys lawmakers has seen it wise to give specialtreatment to the administration and regulation of stockexchanges.

6

These provisions, read together with the general grantof jurisdiction, and right of supervision and control over allcorporations under Sec. 3 of P.D. 902A, give the SEC thespecial mandate to be vigilant in the supervision of theaffairs of stock exchanges so that the interests of theinvesting public may be fully safeguarded.

Section 3 of Presidential Decree 902A, standing alone,is enough authority to uphold the SECs challenged controlauthority over the petitioner PSE even as it provides thatthe Commission shall have absolute jurisdiction,supervision, and control over all corporations, partnershipsor associations,

_______________

6 See Sec. 6(j), PD. 902A Sec. 8, Revised Securities Act.

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who are the grantees of primary franchises and/or a licenseor permit issued by the government to operate in thePhilippines . . . The SECs regulatory authority overprivate corporations encompasses a wide margin of areas,touching nearly all of a corporations concerns. Thisauthority springs from the fact that a corporation owes itsexistence to the concession of its corporate franchise fromthe state.

The SECs power to look into the subject ruling of thePSE, therefore, may be implied from or be considered asnecessary or incidental to the carrying out of the SECsexpress power to insure fair dealing in securities tradedupon a stock exchange or to ensure the fair administrationof such exchange.

7 It is, likewise, observed that the

principal function of the SEC is the supervision and controlover corporations, partnerships and associations with the



end in view that investment in these entities may beencouraged and protected, and their activities pursued forthe promotion of economic development.

8

Thus, it was in the alleged exercise of this authority thatthe SEC reversed the decision of the PSE to deny theapplication for listing in the stock exchange of the privaterespondent PALI. The SECs action was affirmed by theCourt of Appeals.

We affirm that the SEC is the entity with the primarysay as to whether or not securities, including shares ofstock of a corporation, may be traded or not in the stockexchange. This is in line with the SECs mission to ensureproper compliance with the laws, such as the RevisedSecurities Act and to regulate the sale and disposition ofsecurities in the country.

9 As the appellate court explains:

Paramount policy also supports the authority of the publicrespondent to review petitioners denial of the listing. Being astock

_______________

7 Section 6(m), Presidential Decree No. 902A.8 Abad vs. CFI of Pangasinan, Branch VIII, et al., G.R. Nos. 5850708, February

26, 1992, 206 SCRA 567.9 Securities and Exchange Commission vs. Court of Appeals, G.R. Nos. 106425

& 10643132, July 21, 1995, 246 SCRA 738.

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exchange, the petitioner performs a function that is vital to thenational economy, as the business is affected with public interest.As a matter of fact, it has often been said that the economy moveson the basis of the rise and fall of stocks being traded. By itseconomic power, the petitioner certainly can dictate which andhow many users are allowed to sell securities thru the facilities ofa stock exchange, if allowed to interpret its own rules liberally asit may please. Petitioner can either allow or deny the entry to themarket of securities. To repeat, the monopoly, unless accompaniedby control, becomes subject to abuse hence, considering publicinterest, then it should be subject to government regulation.

The role of the SEC in our national economy cannot be



minimized. The legislature, through the Revised SecuritiesAct, Presidential Decree No. 902A, and other pertinentlaws, has entrusted to it the serious responsibility ofenforcing all laws affecting corporations and other forms ofassociations not otherwise vested in some othergovernment office.

10

This is not to say, however, that the PSEs managementprerogatives are under the absolute control of the SEC. ThePSE is, after all, a corporation authorized by its corporatefranchise to engage in its proposed and duly approvedbusiness. One of the PSEs main concerns, as such, is stillthe generation of profit for its stockholders. Moreover, thePSE has all the rights pertaining to corporations, includingthe right to sue and be sued, to hold property in its ownname, to enter (or not to enter) into contracts with thirdpersons, and to perform all other legal acts within itsallocated express or implied powers.

A corporation is but an association of individuals,allowed to transact under an assumed corporate name, andwith a distinct legal personality. In organizing itself as acollective body, it waives no constitutional immunities andperquisites appropriate to such a body.

11 As to its corporate

and manage

_______________

10 Pineda vs. Lantin, No. L15350, November 30, 1962, 6 SCRA 757.11 Bache & Co. (Phils.), Inc. vs. Hon. Judge Ruiz, et al., No. L32409,

February 27, 1971, 37 SCRA 823.

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ment decisions, therefore, the state will generally notinterfere with the same. Questions of policy and ofmanagement are left to the honest decision of the officersand directors of a corporation, and the courts are withoutauthority to substitute their judgment for the judgment ofthe board of directors. The board is the business managerof the corporation, and so long as it acts in good faith, itsorders are not reviewable by the courts.

12

Thus, notwithstanding the regulatory power of the SECover the PSE, and the resultant authority to reverse the



PSEs decision in matters of application for listing in themarket, the SEC may exercise such power only if the PSEsjudgment is attended by bad faith. In Board of Liquidatorsvs. Kalaw,

13 it was held that bad faith does not simply

connote bad judgment or negligence. It imports a dishonestpurpose or some moral obliquity and conscious doing ofwrong. It means a breach of a known duty through somemotive or interest of ill will, partaking of the nature offraud.

In reaching its decision to deny the application forlisting of PALI, the PSE considered important facts, which,in the general scheme, brings to serious question thequalification of PALI to sell its shares to the public throughthe stock exchange. During the time for receivingobjections to the application, the PSE heard from therepresentative of the late President Ferdinand E. Marcosand his family who claim the properties of the privaterespondent to be part of the Marcos estate. In time, thePCGG confirmed this claim. In fact, an order ofsequestration has been issued covering the properties ofPALI, and suit for reconveyance to the state has been filedin the Sandiganbayan Court. How the properties wereeffectively transferred, despite the sequestration order,from the TDC and MSDC to Rebecco Panlilio, and to theprivate respondent PALI, in only a short span of time, arenot yet explained to the Court, but it is clear that suchcircumstances

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12 Sales vs. Securities and Exchange Commission, G.R. No. 54330,January 13, 1989, 169 SCRA 109.

13 No. L18805, August 14, 1967, 20 SCRA 987.

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give rise to serious doubt as to the integrity of PALI as astock issuer. The petitioner was in the right when itrefused application of PALI, for a contrary ruling was notto the best interest of the general public. The purpose ofthe Revised Securities Act, after all, is to give adequate andeffective protection to the investing public against



fraudulent representations, or false promises, and theimposition of worthless ventures.

14

It is to be observed that the U.S. Securities Actemphasized its avowed protection to acts detrimental tolegitimate business, thus:

The Securities Act, often referred to as the truth in securitiesAct, was designed not only to provide investors with adequateinformation upon which to base their decisions to buy and sellsecurities, but also to protect legitimate business seeking toobtain capital through honest presentation against competitionfrom crooked promoters and to prevent fraud in the sale ofsecurities. (Tenth Annual Report, U.S. Securities and ExchangeCommission, p. 14).

As has been pointed out, the effects of such an act are chiefly(1) prevention of excesses and fraudulent transactions, merely byrequirement of that their details be revealed (2) placing themarket during the early stages of the offering of a security a bodyof information, which operating indirectly through investmentservices and expert investors, will tend to produce a moreaccurate appraisal of a security. x x x Thus, the Commission mayrefuse to permit a registration statement to become effective if itappears on its face to be incomplete or inaccurate in any materialrespect, and empower the Commission to issue a stop ordersuspending the effectiveness of any registration statement whichis found to include any untrue statement of a material fact or toomit to state any material fact required to be stated therein ornecessary to make the statements therein not misleading.(Idem).

Also, as the primary market for securities, the PSE hasestablished its name and goodwill, and it has the right toprotect such goodwill by maintaining a reasonablestandard of propriety in the entities who choose to transactthrough its

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14 Makati Stock Exchange, Inc. vs. Securities and ExchangeCommission, No. L23004, June 30, 1965, 14 SCRA 620.

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facilities. It was reasonable for the PSE, therefore, toexercise its judgment in the manner it deems appropriatefor its business identity, as long as no rights are trampledupon, and public welfare is safeguarded.

In this connection, it is proper to observe that theconcept of government absolutism is a thing of the past,and should remain so.

The observation that the title of PALI over its propertiesis absolute and can no longer be assailed is of no moment.At this juncture, there is the claim that the properties wereowned by TDC and MSDC and were transferred inviolation of sequestration orders, to Rebecco Panlilio andlater on to PALI, besides the claim of the Marcoses thatsuch properties belong to the Marcos estate, and were heldonly in trust by Rebecco Panlilio. It is also alleged by thepetitioner that these properties belong to naval and forestreserves, and therefore beyond private dominion. If any ofthese claims is established to be true, the certificates oftitle over the subject properties now held by PALI may bedisregarded, as it is an established rule that a registrationof a certificate of title does not confer ownership over theproperties described therein to the person named as owner.The inscription in the registry, to be effective, must bemade in good faith. The defense of indefeasibility of aTorrens Title does not extend to a transferee who takes thecertificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSEacted correctly in refusing the application of PALI, the trueownership of the properties of PALI need not bedetermined as an absolute fact. What is material is thatthe uncertainty of the properties ownership andalienability exists, and this puts to question thequalification of PALIs public offering. In sum, the Courtfinds that the SEC had acted arbitrarily in arrogating untoitself the discretion of approving the application for listingin the PSE of the private respondent PALI, since this is amatter addressed to the sound discretion of the PSE, acorporate entity, whose business judgments are respectedin the absence of bad faith.

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The question as to what policy is, or should be relied uponin approving the registration and sale of securities in thePSE is not for the Court to determine, but is left to thesound discretion of the Securities and ExchangeCommission. In mandating the SEC to administer theRevised Securities Act, and in performing its otherfunctions under pertinent laws, the Revised Securities Act,under Section 3 thereof, gives the SEC the power topromulgate such rules and regulations as it may considerappropriate in the public interest for the enforcement of thesaid laws. The second paragraph of Section 4 of the saidlaw, on the other hand, provides that no security, unlessexempt by law, shall be issued, endorsed, sold, transferredor in any other manner conveyed to the public, unlessregistered in accordance with the rules and regulationsthat shall be promulgated in the public interest and for theprotection of investors by the Commission. PresidentialDecree No. 902A, on the other hand, provides that theSEC, as regulatory agency, has supervision and controlover all corporations and over the securities market as awhole, and as such, is given ample authority indetermining appropriate policies. Pursuant to thisregulatory authority, the SEC has manifested that it hasadopted the policy of full material disclosure where allcompanies, listed or applying for listing, are required todivulge truthfully and accurately, all material informationabout themselves and the securities they sell, for theprotection of the investing public, and under pain ofadministrative, criminal and civil sanctions. In connectionwith this, a fact is deemed material if it tends to induce orotherwise effect the sale or purchase of its securities.

15

While the employment of this policy is recognized andsanctioned by the laws, nonetheless, the Revised SecuritiesAct sets substantial and procedural standards which aproposed issuer of securi

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15 See SEC Rules Requiring Disclosure of Material Facts byCorporations Whose Securities are Listed in Any Stock Exchange orRegistered/Licensed under the Revised Securities Act. (Approved by theSEC Chairman on February 8, 1973, and published in the Bulletin Todayon February 19, 1973).

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(1)

(2)

(i)(ii)

(iii)

(iv)

(v)(vi)

(3)

(4)

(5)


ties must satisfy.16 Pertinently, Section 9 of the Revised

Securities Act sets forth the possible Grounds for theRejection of the registration of a security:

The Commission may reject a registration statement andrefuse to issue a permit to sell the securities included in suchregistration statement if it finds that

The registration statement is on its face incomplete orinaccurate in any material respect or includes any untruestatement of a material fact or omits to state a materialfact required to be stated therein or necessary to make thestatements therein not misleading orThe issuer or registrant

is not solvent or not in sound financial conditionhas violated or has not complied with the provisions ofthis Act, or the rules promulgated pursuant thereto, orany order of the Commissionhas failed to comply with any of the applicablerequirements and conditions that the Commission may, inthe public interest and for the protection of investors,impose before the security can be registeredhas been engaged or is engaged or is about to engage infraudulent transactionsis in any way dishonest or is not of good repute ordoes not conduct its business in accordance with law or isengaged in a business that is illegal or contrary togovernment rules and regulations.

The enterprise or the business of the issuer is not shownto be sound or to be based on sound business principlesAn officer, member of the board of directors, or principalstockholder of the issuer is disqualified to be such officer,director or principal stockholder orThe issuer or registrant has not shown to the satisfaction ofthe Commission that the sale of its security would not workto the prejudice of the public interest or as a fraud upon thepurchasers or investors. (Emphasis Ours)

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16 See Sections 4, 8, 9, 10, and 11, Revised Securities Act.

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A reading of the foregoing grounds reveals the intention ofthe lawmakers to make the registration and issuance ofsecurities dependent, to a certain extent, on the merits ofthe securities themselves, and of the issuer, to bedetermined by the Securities and Exchange Commission.This measure was meant to protect the interests of theinvesting public against fraudulent and worthlesssecurities, and the SEC is mandated by law to safeguardthese interests, following the policies and rules thereforeprovided. The absolute reliance on the full disclosuremethod in the registration of securities is, therefore,untenable. As it is, the Court finds that the privaterespondent PALI, on at least two points (nos. 1 and 5) hasfailed to support the propriety of the issue of its shareswith unfailing clarity, thereby lending support to theconclusion that the PSE acted correctly in refusing thelisting of PALI in its stock exchange. This does not discountthe effectivity of whatever method the SEC, in the exerciseof its vested authority, chooses in setting the standard forpublic offerings of corporations wishing to do so. However,the SEC must recognize and implement the mandate of thelaw, particularly the Revised Securities Act, the provisionsof which cannot be amended or supplanted by mereadministrative issuance.

In resum, the Court finds that the PSE has acted withjustified circumspection, discounting, therefore, anyimputation of arbitrariness and whimsical animation on itspart. Its action in refusing to allow the listing of PALI inthe stock exchange is justified by the law and by thecircumstances attendant to this case.

ACCORDINGLY, in view of the foregoingconsiderations, the Court hereby GRANTS the Petition forReview on Certiorari. The Decisions of the Court of Appealsand the Securities and Exchange Commission dated July27, 1996 and April 24, 1996, respectively, are herebyREVERSED and SET ASIDE, and a new Judgment ishereby ENTERED, affirming the decision of the PhilippineStock Exchange to deny the application for listing of the



private respondent Puerto Azul Land, Inc.

254

254 SUPREME COURT REPORTS ANNOTATEDLarranaga vs. Court of Appeals

SO ORDERED.

Regalado (Chairman) and Puno, JJ., concur.Mendoza, J., In the result.

Petition granted, decisions of Court of Appeals andSecurities and Exchange Commission reversed and setaside.

Note.An otherwise ordinary action for recovery ofcertain properties and sum of money with damages istransposed into an intracorporate controversy calling forthe adjudicative powers of the SEC when the complaintalleges that an officer employed devices or schemestantamount to fraud and misrepresentation in order todivert corporate funds and assets for his personal use.(Alleje vs. Court of Appeals, 240 SCRA 495 [1995])

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