232 SUPREME COURT REPORTS ANNOTATED

Philippine 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, SECURITIES
AND EXCHANGE COMMISSION and PUERTO AZUL
LAND, INC., respondents.

Corporation Law; Securities and Exchange Commission;

Stock Exchanges; The SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange.—We
affirm that the SEC is the entity with the primary say as to
whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange. This is in
line with the SEC’s mission to ensure proper compliance with the
laws, such as the Revised Securities Act and to regulate the sale
and disposition of securities in the country. As the appellate court
explains: “Paramount policy also supports the authority of the
public respondent to review petitioner’s denial of the listing.
Being a stock exchange, the petitioner performs a function that is
vital to the national economy, as the business is affected with
public interest. As a matter of fact, it has often been said that the
economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can dictate
which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own rules
liberally as it may please. Petitioner can either allow or deny the
entry to the market of securities. To repeat, the monopoly, unless
accompanied by control, becomes subject to abuse; hence,
considering public interest, then it should be subject to
government regulation.”
Same; Same; Same; Philippine Stock Exchange; The PSE’s
management prerogatives are not under the absolute control of the
SEC, for the PSE is, after all, a corporation authorized by its
corporate franchise to engage in its proposed and duly approved
business.—This is not to say, however, that the PSE’s
management prerogatives are under the absolute control of the
SEC. The PSE is, after all, a corporation authorized by its
corporate franchise to engage in its proposed and duly approved
business. One of the PSE’s main concerns, as such, is still the
generation of profit for its stock-

_______________
 * SECOND DIVISION.

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Philippine Stock Exchange, Inc. vs. Court of Appeals

holders. Moreover, the PSE has all the rights pertaining to

corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts
with third persons, and to perform all other legal acts within its
allocated express or implied powers.
Same; Same; Same; Same; Questions of policy and of
management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to
substitute their judgment for that of the board of directors—the
board is the business manager of the corporation, and so long as it
acts in good faith, its orders are not reviewable by the courts.—A
corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct
legal personality. In organizing itself as a collective body, it
waives no constitutional immunities and perquisites appropriate
to 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 honest
decision of the officers and directors of a corporation, and the
courts are without authority to substitute their judgment for the
judgment of the board of directors. The board is the business
manager of the corporation, and so long as it acts in good faith, its
orders are not reviewable by the courts.
Same; Same; Same; Same; Notwithstanding the regulatory
power of the SEC over the PSE, and the resultant authority to
reverse the PSE’s decision in matters of application for listing in
the market, the SEC may exercise such power only if the PSE’s
judgment is attended by bad faith.—Thus, notwithstanding the
regulatory power of the SEC over the PSE, and the resultant
authority to reverse the PSE’s decision in matters of application
for listing in the market, the SEC may exercise such power only if
the PSE’s judgment is attended by bad faith. In Board of
Liquidators vs. Kalaw, it was held that bad faith does not simply
connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or interest
of ill will, partaking of the nature of fraud.
Same; Same; Same; Same; As the primary market for
securities, the PSE had established its name and goodwill, and it
has the right to protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to transact
through its facilities; The concept of government absolutism is a
thing of the past, and
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234 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

should remain so.—Also, as the primary market for securities, the

PSE has established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard of
propriety in the entities who choose to transact through its
facilities. It was reasonable for the PSE, therefore, to exercise its
judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public
welfare is safeguarded. In this connection, it is proper to observe
that the concept of government absolutism is a thing of the past,
and should remain so.
Same; Same; Same; Same; The SEC had acted arbitrarily in
arrogating unto itself the discretion of approving the application
for listing of Puerto Azul Land, Inc., since this is a matter
addressed to the sound discretion of the PSE, a corporate entity,
whose business judgments are respected in the absence of bad
faith.—In any case, for the purpose of determining whether PSE
acted correctly in refusing the application of PALI, the true
ownership of the properties of PALI need not be determined as an
absolute fact. What is material is that the uncertainty of the
properties’ ownership and alienability exists, and this puts to
question the qualification of PALI’s public offering. In sum, the
Court finds that the SEC had acted arbitrarily in arrogating unto
itself the discretion of approving the application for listing in the
PSE of the private respondent PALI, since this is a matter
addressed to the sound discretion of the PSE, a corporate entity,
whose business judgments are respected in the absence of bad
faith.
Same; Same; Same; The question as to what policy is, or
should be relied upon in approving the registration and sale of
securities in the PSE is not for the Supreme Court to determine,
but is left to the sound discretion of the Securities and Exchange
Commission.—The question as to what policy is, or should be
relied upon in approving the registration and sale of securities in
the PSE is not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In
mandating the SEC to administer the Revised Securities Act, and
in performing its other functions under pertinent laws, the
Revised Securities Act, under Section 3 thereof, gives the SEC the
power to promulgate such rules and regulations as it may
consider appropriate in the public interest for the enforcement of
the said laws. The second paragraph of Section 4 of the said law,
on the other hand, provides that no security, unless exempt by
law, shall be issued, endorsed, sold, transferred or in any other
manner conveyed to the public, unless registered in accordance

235
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Philippine Stock Exchange, Inc. vs. Court of Appeals

with the rules and regulations that shall be promulgated in the

public interest and for the protection of investors by the
Commission. Presidential Decree No. 902-A, on the other hand,
provides that the SEC, as regulatory agency, has supervision and
control over all corporations and over the securities market as a
whole, and as such, is given ample authority in determining
appropriate policies.
Same; Same; Same; The absolute reliance on the full
disclosure method in the registration of securities is untenable.—A
reading of the foregoing grounds reveals the intention of the
lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the Securities
and Exchange Commission. This measure was meant to protect
the interests of the investing public against fraudulent and
worthless securities, and the SEC is mandated by law to
safeguard these interests, following the policies and rules
therefore provided. The absolute reliance on the full disclosure
method in the registration of securities is, therefore, untenable.
As it is, the Court finds that the private respondent PALI, on at
least two points (Nos. 1 and 5) has failed to support the propriety
of the issue of its shares with unfailing clarity, thereby lending
support to the conclusion that the PSE acted correctly in refusing
the listing of PALI in its stock exchange. This does not discount
the effectivity of whatever method the SEC, in the exercise of its
vested authority, chooses in setting the standard for public
offerings of corporations wishing to do so. However, the SEC must
recognize and implement the mandate of the law, particularly the
Revised Securities Act, the provisions of which cannot be
amended or supplanted by mere administrative issuance.

PETITION for review on certiorari of a decision of the

Court 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 the

government agency, under the direct general supervision of
the Of-
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236 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals
 1
fice of the President, with the immense task of enforcing
the Revised Securities Act, and all other duties assigned to
it by pertinent laws. Among its inumerable functions, and
one of the most important, is the supervision of all
corporations, partnerships or associations, who are
grantees of primary franchise and/or a license or permit2
issued by the government to operate in the Philippines.
Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock
Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner
assails the resolution of the respondent Court of Appeals,
dated June 27, 1996, which affirmed the decision of the
Securities and Exchange Commission ordering the
petitioner Philippine Stock Exchange, Inc. to allow the
private respondent Puerto Azul Land, Inc. to be listed in its
stock market, thus paving the way for the public offering of
PALI’s shares.
The facts of the case are undisputed, and are hereby
restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real
estate corporation, had sought to offer its shares to the
public in order to raise funds allegedly to develop its
properties and pay its loans with several banking
institutions. In January, 1995, PALI was issued a Permit
to Sell its shares to the public by the Securities and
Exchange Commission (SEC). To facilitate the trading of
its shares among investors, PALI sought to course the
trading of its shares through the Philippine Stock
Exchange, Inc. (PSE), for which purpose it filed with the
said stock exchange an application to list its shares, with
supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE,
upon a perusal of PALI’s application, recommended to the
PSE’s Board of Governors the approval of PALI’s listing
application.

_______________

1 Section 1, Presidential Decree No. 902-A.

2 Section 3, Ibid.

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Philippine Stock Exchange, Inc. vs. Court of Appeals

On February 14, 1996, before it could act upon PALI’s

application, the Board of Governors of the PSE received a
letter from the heirs of Ferdinand E. Marcos, claiming that
the late President Marcos was the legal and beneficial
owner of certain properties forming part of the Puerto Azul
Beach Hotel and Resort Complex which PALI claims to be
among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI,
likewise appears to have been held and continue to be held
in trust by one Rebecco Panlilio for then President Marcos
and now, effectively for his estate, and requested PALI’s
application to be deferred. PALI was requested to comment
upon the said letter.
PALI’s answer stated that the properties forming part of
the Puerto Azul Beach Hotel and Resort Complex were not
claimed by PALI as its assets. On the contrary, the resort is
actually owned by Fantasia Filipina Resort, Inc. and the
Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their
claim is not confined to the facilities forming part of the
Puerto Azul Hotel and Resort Complex, thereby implying
that they are also asserting legal and beneficial ownership
of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman
Magtanggol Gunigundo of the Presidential Commission on
Good Government (PCGG) requesting for comments on the
letters of the PALI and the Marcoses. On March 4, 1996,
the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining
the Marcoses from, among others, “further impeding,
obstructing, delaying or interfering in any manner by or
any means with the consideration, processing and approval
by the PSE of the initial public offering of PALI.” The TRO
was issued by Judge Martin S. Villarama, Executive Judge
of the RTC of Pasig City in Civil Case No. 65561, pending
in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the
Board of Governors of the PSE reached its decision to reject
PALI’s application, citing the existence of serious claims,
issues and

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238 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

circumstances surrounding PALI’s ownership over its

assets that adversely affect the suitability of listing PALI’s
shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC
addressed to the then Acting Chairman, Perfecto R. Yasay,
Jr., bringing to the SEC’s attention the action taken by the
PSE in the application of PALI for the listing of its shares
with the PSE, and requesting that the SEC, in the exercise
of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the
PSE’s action on PALI’s listing application and institute
such measures as are just and proper under the
circumstances.
On the same date, or on April 11, 1996, the SEC wrote to
the PSE, attaching thereto the letter of PALI and directing
the PSE to file its comments thereto within five days from
its receipt and for its authorized representative to appear
for an “inquiry” on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to
the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order,
reversing the PSE’s decision. The dispositive portion of the
said order reads:

“WHEREFORE, premises considered, and invoking the

Commissioner’s authority and jurisdiction under Section 3 of the
Revised Securities Act, in conjunction with Section 3, 6(j) and
6(m) of Presidential Decree No. 902-A, the decision of the Board of
Governors of the Philippine Stock Exchange denying the listing of
shares of Puerto Azul Land, Inc., is hereby set aside, and the PSE
is hereby ordered to immediately cause the listing of the PALI
shares in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it deems
necessary 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 on

April 29, 1996, which was, however denied by the
Commission in its May 9, 1996 Order which states:
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VOL. 281, OCTOBER 27, 1997 239

Philippine Stock Exchange, Inc. vs. Court of Appeals

“WHEREFORE, premises considered, the Commission finds no

compelling reason to reconsider its order dated April 24, 1996,
and in the light of recent developments on the adverse claim
against the PALI properties, PSE should require PALI to submit
full disclosure of material facts and information to protect the
investing public. In this regard, PALI is hereby ordered to amend
its registration statements filed with the Commission to
incorporate the full disclosure of these material facts and
information.”

Dissatisfied with this ruling, the PSE filed with the Court
of Appeals on May 17, 1996 a Petition for Review (with
Application for Writ of Preliminary Injunction and
Temporary Restraining Order), assailing the above
mentioned orders of the SEC, submitting the following as
errors of the SEC:

I. SEC COMMITTED SERIOUS ERROR AND

GRAVE ABUSE OF DISCRETION IN ISSUING
THE ASSAILED ORDERS WITHOUT POWER,
JURISDICTION, OR AUTHORITY; SEC HAS NO
POWER TO ORDER THE LISTING AND SALE OF
SHARES OF PALI WHOSE ASSETS ARE
SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
 II. SEC COMMITTED SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN FINDING
THAT PSE ACTED IN AN ARBITRARY AND
ABUSIVE MANNER IN DISAPPROVING PALI’S
LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL
AND VOID FOR ALLOWING FURTHER
DISPOSITION OF propertIES IN CUSTODIA
LEGIS AND WHICH FORM PART OF
NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS
NOT PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND application IN THIS
CASE VIOLATES THE DUE PROCESS CLAUSE
OF THE Constitution.

On June 4, 1996, PALI filed its Comment to the Petition for

Review and subsequently, a Comment and Motion to
Dismiss. On June 10, 1996, PSE filed its Reply to Comment
and Opposition to Motion to Dismiss.
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Philippine Stock Exchange, Inc. vs. Court of Appeals

On June 27, 1996, the Court of Appeals promulgated its

Resolution dismissing the PSE’s Petition for Review.
Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the 3
decision of the
petitioner PSE, pursuant to Section 3 of the 4 Revised
Securities Act in relation to 5 Section 6(j) and 6(m) of P.D.
No. 902-A, and Section 38(b) of the Revised Securities Act,
and for the purpose

_______________

3 Sec. 3. Administrative Agency.—This Act shall be administered by the

(Securities and Exchange) Commission which shall continue to have the
organization, powers, and functions provided by Presidential Decree
Numbered 902-A, 1653, 1758, and 1799 and Executive Order No. 708. The
Commission shall, except as otherwise expressly provided, have the power
to promulgate such rules and regulations as it may consider appropriate
in the public interest for the enforcement of the provisions hereof.
4 Sec. 6. In order to effectively exercise such jurisdiction, the (Securities
and Exchange) Commission shall possess the following powers:
xxx
(j) To authorize the establishment and operation of stock exchanges,
commodity exchanges and such other similar organizations and to
supervise and regulate the same; including the authority to determine
their number, size and location, in the light of national or regional
requirements for such activities with the view to promote, conserve or
rationalize investment;
 xxx
(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 to
the carrying out of, the express powers granted to the Commission or to
achieve 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 its
own behalf specified changes in the rules and practices and, after
appropriate notice and opportunity for hearing, it determines that such
exchange has not made the changes so requested, and that such changes
are necessary or appropriate for the

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Philippine Stock Exchange, Inc. vs. Court of Appeals

of ensuring fair administration of the exchange. Both as a

corporation and as a stock exchange, the petitioner is
subject to public respondent’s jurisdiction, regulation and
control. Accepting the argument that the public respondent
has the authority merely to supervise or regulate, would
amount to serious consequences, considering that the
petitioner is a stock exchange whose business is impressed
with public interest. Abuse is not remote if the public
respondent is left without any system of control. If the
securities act vested the public respondent with jurisdiction
and control over all corporations; the power to authorize
the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to alter
and supplement rules of the exchange in

_______________

protection of investors or to insure fair dealing in securities traded

upon such exchange, by rules or regulations or by order, to alter or
supplement the rules of such exchange (insofar as necessary or
appropriate to effect such changes) in respect of such matters as—

(1) Safeguards in respect of the financial responsibility of members

and adequate provision against the evasion of financial
responsibility through the use of corporate forms or special
partnerships;
(2) The limitation or prohibition of the registration or trading in any
security within a specified period after the issuance or primary
distribution thereof;
(3) The listing or striking from listing of any security;
(4) Hours of trading;
(5) The manner, method, and place of soliciting business;
(6) Fictitious accounts;
(7) The time and method of making settlements, payments, and
deliveries, and of closing accounts;
 (8) The reporting of transactions on the exchange upon tickets
maintained by or with the consent of the exchange, including the
method of reporting short sales, stopped sales, sales of securities of
issuers in default, bankruptcy or receivership, and sales involving
other special circumstances;
(9) The fixing of reasonable rates of commission, interests, listing, and
other charges;
(10) Minimum units of trading;
(11) Odd-lot purchases and sales; and
(12) Minimum deposits on margin accounts.

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Philippine Stock Exchange, Inc. vs. Court of Appeals

the listing or delisting of securities, then the law certainly

granted to the public respondent the plenary authority over
the petitioner; and the power of review necessarily comes
within its authority.
All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SEC’s ruling
to the effect that:

“x x x the Philippine Stock Exchange has acted in an arbitrary

and abusive manner in disapproving the application of PALI for
listing of its shares in the face of the following considerations:

1. PALI has clearly and admittedly complied with the

Listing Rules and full disclosure requirements of the
Exchange;
2. In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify
why it acted differently on the application of PALI, as
compared to the IPOs of other companies similarly
situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI’s
properties were even less serious than the claims against
the assets of the other companies in that, the assertions of
the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome the
strength of a title to properties issued under the Torrens
System as evidence of ownership thereof;
4. No action has been filed in any court of competent
jurisdiction seeking to nullify PALI’s ownership over the
disputed properties, neither has the government
instituted recovery proceedings against these properties.
Yet the import of PSE’s decision in denying PALI’s
application is that it would be PALI, not the Marcoses,
that must go to court to prove the legality of its ownership
on these properties before its shares can be listed.”

In addition, the argument that the PALI properties belong

to the Military/Naval Reservation does not inspire belief.
The point is, the PALI properties are now titled. A property
loses its public character the moment it is covered by a
title. As a matter of fact, the titles have long been settled
by a final judgment; and the final decree having been
registered, they can no longer be re-opened considering
that the one year period has already passed. Lastly, the
determination of what

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Philippine Stock Exchange, Inc. vs. Court of Appeals

standard to apply in allowing PALI’s application for listing,

whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to
the Securities Commission, it being the government agency
that exercises both supervisory and regulatory authority
over all corporations.
On August 15, 1996, the PSE, after it was granted an
extension, filed the instant Petition for Review on
Certiorari, taking exception to the rulings of the SEC and
the Court of Appeals. Respondent PALI filed its Comment
to the petition on October 17, 1996. On the same date, the
PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG’s Petition
for Intervention on October 21, 1996. A supplemental
Comment was filed by PALI on October 25, 1997. The
Office of the Solicitor General, representing the SEC and
the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG’s motion for
leave to file petition for intervention, PALI filed its
Comment thereto on January 17, 1997, whereas the PSE
filed 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). On
May 16, 1997, PALI filed its Rejoinder to the said
consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling
that the SEC had authority to order the PSE to list the
shares of PALI in the stock exchange. Under presidential
decree No. 902-A, the powers of the SEC over stock
exchanges are more limited as compared to its authority
over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised
Securities Act are specifically enumerated, and these do
not include the power to reverse the decisions of the stock
exchange. Authorities are in abundance even in the United
States, from which the country’s security policies are
patterned, to the effect of giving the Securities Commission
less control over stock exchanges, which in turn are given
more lee-way in making the decision whether or not to
allow corporations to offer their stock to the
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244 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

public through the stock exchange. This is in accord with

the “business judgment rule” whereby the SEC and the
courts are barred from intruding into business judgments
of corporations, when the same are made in good faith. The
said rule precludes the reversal of the decision of the PSE
to deny PALI’s listing application, absent a showing of bad
faith on the part of the PSE. Under the listing rules of the
PSE, to which PALI had previously agreed to comply, the
PSE retains the discretion to accept or reject applications
for listing. Thus, even if an issuer has complied with the
PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer’s listing application
if the PSE determines that the listing shall not serve the
interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction
over sequestered corporations, nor with corporations whose
properties are under sequestration. A reading of Republic
of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240
SCRA 376, would reveal that the properties of PALI, which
were derived from the Ternate Development Corporation
(TDC) and the Monte del Sol Development Corporation
(MSDC) are under sequestration by the PCGG, and subject
of forfeiture proceedings in the Sandiganbayan. This ruling
of the Court is the “law of the case” between the Republic
and TDC and MSDC. It categorically declares that the
assets of these corporations were sequestered by the PCGG
on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals’
sanction that PALI’s ownership over its properties can no
longer be questioned, since certificates of title have been
issued to PALI and more than one year has since lapsed, is
erroneous and ignores well settled jurisprudence on land
titles. That a certificate of title issued under the Torrens
System is a conclusive evidence of ownership is not an
absolute rule and admits certain exceptions. It is
fundamental that forest lands or military reservations are
non-alienable. Thus, when a title covers a forest reserve or
a government reservation, such title is void.
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Philippine Stock Exchange, Inc. vs. Court of Appeals

PSE, likewise, assails the SEC’s and the Court of Appeals’

reliance on the alleged policy of “full disclosure” to uphold
the listing of PALI’s shares with the PSE, in the absence of
a clear mandate for the effectivity of such policy. As it is,
the case records reveal the truth that PALI did not comply
with the listing rules and disclosure requirements. In fact,
PALI’s documents supporting its application contained
misrepresentations and misleading statements, and
concealed material information. The matter of
sequestration of PALI’s properties and the fact that the
same form part of military/naval/forest reservations were
not reflected in PALI’s application.
It is undeniable that the petitioner PSE is not an
ordinary corporation, in that although it is clothed with the
markings of a corporate entity, it functions as the primary
channel through which the vessels of capital trade ply. The
PSE’s relevance to the continued operation and filtration of
the securities transactions in the country gives it a distinct
color of importance such that government intervention in
its affairs becomes justified, if not necessary. Indeed, as the
only operational stock exchange in the country today, the
PSE enjoys a monopoly of securities transactions, and as
such, it yields an immense influence upon the country’s
economy.
Due to this special nature of stock exchanges, the
country’s lawmakers has seen it wise to give special
treatment 6to the administration and regulation of stock
exchanges.
These provisions, read together with the general grant
of jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the
affairs of stock exchanges so that the interests of the
investing public may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone,
is enough authority to uphold the SEC’s challenged control
authority over the petitioner PSE even as it provides that
“the Commission shall have absolute jurisdiction,
supervision, and control over all corporations, partnerships
or associations,

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

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246 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

who are the grantees of primary franchises and/or a license

or permit issued by the government to operate in the
Philippines . . .” The SEC’s regulatory authority over
private corporations encompasses a wide margin of areas,
touching nearly all of a corporation’s concerns. This
authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from
the state.
The SEC’s power to look into the subject ruling of the
PSE, therefore, may be implied from or be considered as
necessary or incidental to the carrying out of the SEC’s
express power to insure fair dealing in securities traded
upon a stock exchange7
or to ensure the fair administration
of such exchange. It is, likewise, observed that the
principal function of the SEC is the supervision and control
over corporations, partnerships and associations with the
end in view that investment in these entities may be
encouraged and protected, and their activities
8
pursued for
the promotion of economic develop-ment.
Thus, it was in the alleged exercise of this authority that
the SEC reversed the decision of the PSE to deny the
application for listing in the stock exchange of the private
respondent PALI. The SEC’s action was affirmed by the
Court of Appeals.
We affirm that the SEC is the entity with the primary
say as to whether or not securities, including shares of
stock of a corporation, may be traded or not in the stock
exchange. This is in line with the SEC’s mission to ensure
proper compliance with the laws, such as the Revised
Securities Act and to regulate
9
the sale and disposition of
securities in the country. As the appellate court explains:

“Paramount policy also supports the authority of the public

respondent to review petitioner’s denial of the listing. Being a
stock

_______________

7 Section 6(m), Presidential Decree No. 902-A.

8 Abad vs. CFI of Pangasinan, Branch VIII, et al., G.R. Nos. 58507-08, February
26, 1992, 206 SCRA 567.
9 Securities and Exchange Commission vs. Court of Appeals, G.R. Nos. 106425
& 106431-32, July 21, 1995, 246 SCRA 738.

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Philippine Stock Exchange, Inc. vs. Court of Appeals

exchange, the petitioner performs a function that is vital to the

national economy, as the business is affected with public interest.
As a matter of fact, it has often been said that the economy moves
on the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate which and
how many users are allowed to sell securities thru the facilities of
a stock exchange, if allowed to interpret its own rules liberally as
it may please. Petitioner can either allow or deny the entry to the
market of securities. To repeat, the monopoly, unless accompanied
by control, becomes subject to abuse; hence, considering public
interest, 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 Securities
Act, Presidential Decree No. 902-A, and other pertinent
laws, has entrusted to it the serious responsibility of
enforcing all laws affecting corporations and other forms of
associations not 10 otherwise vested in some other
government office.
This is not to say, however, that the PSE’s management
prerogatives are under the absolute control of the SEC. The
PSE is, after all, a corporation authorized by its corporate
franchise to engage in its proposed and duly approved
business. One of the PSE’s main concerns, as such, is still
the generation of profit for its stockholders. Moreover, the
PSE has all the rights pertaining to corporations, including
the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third
persons, and to perform all other legal acts within its
allocated express or implied powers.
A corporation is but an association of individuals,
allowed to transact under an assumed corporate name, and
with a distinct legal personality. In organizing itself as a
collective body, it waives no constitutional
11
immunities and
perquisites appropriate to such a body. As to its corporate
and manage-

_______________

10 Pineda vs. Lantin, No. L-15350, November 30, 1962, 6 SCRA 757.
11 Bache & Co. (Phils.), Inc. vs. Hon. Judge Ruiz, et al., No. L-32409,
February 27, 1971, 37 SCRA 823.

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248 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

ment decisions, therefore, the state will generally not

interfere with the same. Questions of policy and of
management are left to the honest decision of the officers
and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of
the board of directors. The board is the business manager
of the corporation, and so long as it acts12
in good faith, its
orders are not reviewable by the courts.
Thus, notwithstanding the regulatory power of the SEC
over the PSE, and the resultant authority to reverse the
PSE’s decision in matters of application for listing in the
market, the SEC may exercise such power only if the PSE’s
judgment is13 attended by bad faith. In Board of Liquidators
vs. Kalaw, it was held that bad faith does not simply
connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of
wrong. It means a breach of a known duty through some
motive or interest of ill will, partaking of the nature of
fraud.
In reaching its decision to deny the application for
listing of PALI, the PSE considered important facts, which,
in the general scheme, brings to serious question the
qualification of PALI to sell its shares to the public through
the stock exchange. During the time for receiving
objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos
and his family who claim the properties of the private
respondent to be part of the Marcos estate. In time, the
PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of
PALI, and suit for reconveyance to the state has been filed
in the Sandiganbayan Court. How the properties were
effectively transferred, despite the sequestration order,
from the TDC and MSDC to Rebecco Panlilio, and to the
private respondent PALI, in only a short span of time, are
not yet explained to the Court, but it is clear that such
circumstances

_______________

12 Sales vs. Securities and Exchange Commission, G.R. No. 54330,

January 13, 1989, 169 SCRA 109.
13 No. L-18805, August 14, 1967, 20 SCRA 987.

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Philippine Stock Exchange, Inc. vs. Court of Appeals

give rise to serious doubt as to the integrity of PALI as a

stock issuer. The petitioner was in the right when it
refused application of PALI, for a contrary ruling was not
to the best interest of the general public. The purpose of
the Revised Securities Act, after all, is to give adequate and
effective protection to the investing public against
fraudulent representations, or 14false promises, and the
imposition of worthless ventures.
It is to be observed that the U.S. Securities Act
emphasized its avowed protection to acts detrimental to
legitimate business, thus:

“The Securities Act, often referred to as the “truth in securities”

Act, was designed not only to provide investors with adequate
information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to
obtain capital through honest presentation against competition
from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities and Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly
(1) prevention of excesses and fraudulent transactions, merely by
requirement of that their details be revealed; (2) placing the
market during the early stages of the offering of a security a body
of information, which operating indirectly through investment
services and expert investors, will tend to produce a more
accurate appraisal of a security. x x x Thus, the Commission may
refuse to permit a registration statement to become effective if it
appears on its face to be incomplete or inaccurate in any material
respect, and empower the Commission to issue a stop order
suspending the effectiveness of any registration statement which
is found to include any untrue statement of a material fact or to
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(Idem).”

Also, as the primary market for securities, the PSE has

established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to transact
through its

_______________

14 Makati Stock Exchange, Inc. vs. Securities and Exchange

Commission, No. L-23004, June 30, 1965, 14 SCRA 620.

250

250 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

facilities. It was reasonable for the PSE, therefore, to

exercise its judgment in the manner it deems appropriate
for its business identity, as long as no rights are trampled
upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the
concept of government absolutism is a thing of the past,
and should remain so.
The observation that the title of PALI over its properties
is absolute and can no longer be assailed is of no moment.
At this juncture, there is the claim that the properties were
owned by TDC and MSDC and were transferred in
violation of sequestration orders, to Rebecco Panlilio and
later on to PALI, besides the claim of the Marcoses that
such properties belong to the Marcos estate, and were held
only in trust by Rebecco Panlilio. It is also alleged by the
petitioner that these properties belong to naval and forest
reserves, and therefore beyond private dominion. If any of
these claims is established to be true, the certificates of
title over the subject properties now held by PALI may be
disregarded, as it is an established rule that a registration
of a certificate of title does not confer ownership over the
properties described therein to the person named as owner.
The inscription in the registry, to be effective, must be
made in good faith. The defense of indefeasibility of a
Torrens Title does not extend to a transferee who takes the
certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE
acted correctly in refusing the application of PALI, the true
ownership of the properties of PALI need not be
determined as an absolute fact. What is material is that
the uncertainty of the properties’ ownership and
alienability exists, and this puts to question the
qualification of PALI’s public offering. In sum, the Court
finds that the SEC had acted arbitrarily in arrogating unto
itself the discretion of approving the application for listing
in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a
corporate entity, whose business judgments are respected
in the absence of bad faith.
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Philippine Stock Exchange, Inc. vs. Court of Appeals

The question as to what policy is, or should be relied upon

in approving the registration and sale of securities in the
PSE is not for the Court to determine, but is left to the
sound discretion of the Securities and Exchange
Commission. In mandating the SEC to administer the
Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act,
under Section 3 thereof, gives the SEC the power to
promulgate such rules and regulations as it may consider
appropriate in the public interest for the enforcement of the
said laws. The second paragraph of Section 4 of the said
law, on the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold, transferred
or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for the
protection of investors by the Commission. Presidential
Decree No. 902-A, on the other hand, provides that the
SEC, as regulatory agency, has supervision and control
over all corporations and over the securities market as a
whole, and as such, is given ample authority in
determining appropriate policies. Pursuant to this
regulatory authority, the SEC has manifested that it has
adopted the policy of “full material disclosure” where all
companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the
protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection
with this, a fact is deemed material if it tends to induce or
15
otherwise effect the sale or purchase of its securities.
While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities
Act sets substantial and procedural standards which a
proposed issuer of securi-

_______________

15 See SEC Rules Requiring Disclosure of Material Facts by

Corporations Whose Securities are Listed in Any Stock Exchange or
Registered/Licensed under the Revised Securities Act. (Approved by the
SEC Chairman on February 8, 1973, and published in the Bulletin Today
on February 19, 1973).
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252 SUPREME COURT REPORTS ANNOTATED

Philippine Stock Exchange, Inc. vs. Court of Appeals

16
ties must satisfy. Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the
Rejection of the registration of a security:

“—The Commission may reject a registration statement and

refuse to issue a permit to sell the securities included in such
registration statement if it finds that—

(1) The registration statement is on its face incomplete or

inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant—

(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of
this Act, or the rules promulgated pursuant thereto, or
any order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in
the public interest and for the protection of investors,
impose before the security can be registered;
(iv) has been engaged or is engaged or is about to engage in
fraudulent transactions;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law or is
engaged in a business that is illegal or contrary to
government rules and regulations.

(3) The enterprise or the business of the issuer is not shown

to be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or principal
stockholder of the issuer is disqualified to be such officer,
director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of
the Commission that the sale of its security would not work
to the prejudice of the public interest or as a fraud upon the
purchasers or investors.” (Emphasis Ours)

_______________

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

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Philippine Stock Exchange, Inc. vs. Court of Appeals
A reading of the foregoing grounds reveals the intention of
the lawmakers to make the registration and issuance of
securities dependent, to a certain extent, on the merits of
the securities themselves, and of the issuer, to be
determined by the Securities and Exchange Commission.
This measure was meant to protect the interests of the
investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard
these interests, following the policies and rules therefore
provided. The absolute reliance on the full disclosure
method in the registration of securities is, therefore,
untenable. As it is, the Court finds that the private
respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares
with unfailing clarity, thereby lending support to the
conclusion that the PSE acted correctly in refusing the
listing of PALI in its stock exchange. This does not discount
the effectivity of whatever method the SEC, in the exercise
of its vested authority, chooses in setting the standard for
public offerings of corporations wishing to do so. However,
the SEC must recognize and implement the mandate of the
law, particularly the Revised Securities Act, the provisions
of which cannot be amended or supplanted by mere
administrative issuance.
In resumé, the Court finds that the PSE has acted with
justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on its
part. Its action in refusing to allow the listing of PALI in
the stock exchange is justified by the law and by the
circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing
considerations, the Court hereby GRANTS the Petition for
Review on Certiorari. The Decisions of the Court of Appeals
and the Securities and Exchange Commission dated July
27, 1996 and April 24, 1996, respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is
hereby ENTERED, affirming the decision of the Philippine
Stock Exchange to deny the application for listing of the
private respondent Puerto Azul Land, Inc.
254

254 SUPREME COURT REPORTS ANNOTATED

Larranaga vs. Court of Appeals

SO ORDERED.

     Regalado (Chairman) and Puno, JJ., concur.

     Mendoza, J., In the result.

Petition granted, decisions of Court of Appeals and

Securities and Exchange Commission reversed and set
aside.
 Note.—An otherwise ordinary action for recovery of
certain properties and sum of money with damages is
transposed into an intracorporate controversy calling for
the adjudicative powers of the SEC when the complaint
alleges that an officer employed devices or schemes
tantamount to fraud and misrepresentation in order to
divert corporate funds and assets for his personal use.
(Alleje vs. Court of Appeals, 240 SCRA 495 [1995])

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