Interpretation of Section 23.2 of R.A. No. 8799 (Securities Regulation Code) Re: Short-Swing Profits

DOJ OPINION NO. 011 , s. 2012 March 5, 2012 Mr. Emilio S. de Quiros, Jr. President and CEO, Social Security System East Ave.,Diliman, Quezon City Dear Mr. De Quiros, Jr. : This has reference to your request for advice and guidance on the queries stated therein relating to the interpretation of the provisions of Section 23.2 of Republic Act No. 8799. 1 Specifically, you want to be advised on the following issues: 1. Does the requirement under Section 23.2 to first request PHILEX to file a suit for recovery of short-swing profits also apply to SSS as Plaintiff-Intervenor? CIaHDc 2. Does the requirement of demand upon the defendants (Roberto V. Ongpin, et al. ,), as required by the Civil Code, to return to PHILEX the alleged short-swing profits also apply to SSS as Plaintiff-Intervenor? 3. Should SSS pay the required filing fee of P8.25 million? Alternatively, should SSS assist Plaintiff by advancing the balance of the filing fee? 4. As ex-officio counsel of SSS, would DOJ recommend that SSS join Atty. Ongkiko in the suit for recovery of short-swing profits? If in the affirmative, may the Secretary of Justice or her representative represent SSS in the said case? The provisions of R.A. No. 8799 adverted to read: "For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of less than six (6) months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such profit may be instituted before the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but no such suit shall be brought more than two (2) years after the date such profit was realized . This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of his subsection." 2 Based on the documents and pleadings appended to the instant request, it appears that PHILEX is the "issuer" referred to in the above-quoted provision; that Mr. Roberto V. Ongpin is the "beneficial owner, director, or officer" of PHILEX, who purportedly realized profits from the purchase and sale of shares of stock of PHILEX within a period of less than six (6) months (otherwise known as "short-swing profits");and that Atty. Mario E. Ongkiko is the shareholder of PHILEX who filed a suit to recover said short-swing profits, in behalf of PHILEX, docketed as SEC Case No. 11-166, before the Regional Trial Court of Pasig City, Branch 158. You state that SSS is a shareholder of PHILEX and occupies three (3) seats in its Board of Directors; that on 8 December 2011, Secretary Cesar V. Purisima, Department of Finance, wrote you for SSS to "carefully study and explore all possible remedies under relevant laws and regulations to bring about the recovery of the profits that were purportedly earned by Mr. Ongpin";and that on 30 January 2012, Secretary Purisima wrote another letter urging SSS "to join the other stockholders in filing said derivative suit since the recovery of the substantial profits will ultimately benefit" the SSS and its members. TcEaAS To answer the above questions, it is important to first point out that the suit authorized to be filed by a shareholder of the issuer who fails or refuses to bring such suit pursuant to Section 23.2 of R.A. No. 8799 is in the nature of a derivative suit. 3 A derivative suit is considered a class suit under the Rules of Court. 4 The controlling provision on class suits is Section 12, Rule 3 of the Rules of Court, which reads as follows: "SEC. 12. Class suit. When the subject matter of the controversy is one of common or general interest to many persons so numerous that it is impracticable to join all as parties, a number of them which the court finds to be sufficiently numerous and representative as to fully protect the interests of all concerned may sue or defend for the benefit of all. Any party in interest shall have the right to intervene to protect his individual interest." Considering the nature of the suit, the party or parties who brought the class suit have control over the case and the judgment obtained in such suit binds all members of the class. However, a member of the class is given the right to intervene to protect his individual interest. Under the Rules of Court, the motion to intervene may be filed at any time before rendition of judgment by the trial court. 5 One of the requisites for filing a derivative suit is that the plaintiff-shareholder must have first exhausted intra-corporate remedies, i.e., he has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea. 6 However, an intervening shareholder, as distinguished from the original plaintiff-shareholder, need not allege prior demand upon the corporation nor exhaustion of intra-corporate remedies before he can move to intervene. 7 As applied to the instant case and in answer to question no. 1, if SSS intervenes in the suit filed against Mr. Ongpin by Atty. Ongkiko (plaintiff-shareholder),in behalf of PHILEX, there is no need for SSS to also formally request PHILEX to recover the said short-swing profits because this has been done already by the original plaintiff-shareholder (Atty. Ongkiko).As mentioned above, PHILEX failed or refused to bring such suit. In other words, the requirement of exhaustion of intra-corporate remedies had already been done by Atty. Ongkiko. aSITDC Using parity of reasoning stated in the two immediately preceding paragraphs and in answer to question no. 2, the affirmative defense of Mr. Ongpin, et al., that PHILEX should have made a demand upon them for the return of the alleged short-swing profits before a cause of action against them may accrue is applicable against the SSS, in the event that SSS intervenes as additional plaintiff in the suit against Mr. Ongpin, et al., regardless of whether or not there is merit to this affirmative defense, because such failure to make a demand may be considered as part of the failure of PHILEX to collect the alleged short-swing profits. In other words, since the derivative suit is filed in behalf of PHILEX, if PHILEX has no cause of action, so does its shareholders. In answer to question no. 3, it is our opinion that if SSS does decide to intervene, it may have to share the amount of the filing fee with the original plaintiff-shareholder (Atty. Ongkiko). 8 Based on the documents and pleadings appended to the instant request, the filing fee paid by Atty. Ongkiko is only P4,325. However, it is contended by the defendants, by way of affirmative defense, that the filing fee should be in the amount of P8,246,500. The RTC of Pasig City (Branch 158) has yet to rule on whether the amount of filing fee paid by Atty. Ongkiko is correct as to properly vest jurisdiction on the court. Hence, it may be proper to wait for such ruling before SSS decides to intervene. You state that "SSS has the obligation to hold in trust the moneys belonging to the SSS members hence it is very prudent in spending the money of the SSS." It is well-settled that the funds contributed to SSS are not public funds, but funds belonging to the members thereof which are merely held in trust by the Government. 9 Hence, being mere trustee of the funds, SSS cannot perform any acts affecting the same that would diminish the property rights of the owners and beneficiaries of such funds without an express or specific authority therefor. 10 Under the law, SSS has the power to sue and be sued. 11 It also has the power to invest the revenues of SSS that are not needed to meet its current administrative and operational expenses and funds that are not needed to meet its current benefit obligations, provided that the investment must be made "with the skill, care, prudence and diligence necessary under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would exercise in the conduct of an enterprise of a like character and with similar aims" and "in line with the basic principles of safety, good yield and liquidity." 12 We understand that if ever SSS does decide to intervene, such action would of course be in relation to its investments in PHILEX, as shareholder thereof. Hence, as in the making of investments, the same standard (mentioned above) applies in determining whether SSS should take such action. If it does not decide to intervene and, as alternative, would only assist Atty. Ongkiko (plaintiff-shareholder) by advancing the balance of the filing fee, the more reason should the same standard as in the making investment would apply because as a non-intervenor to the case, it is not required to share in the costs of the suit. With respect to the last question (question no. 4),it is this Department's opinion that whether or not to intervene would depend on the discretion or business judgment of the Social Security Commission, i.e., whether certain remedies may actually cost SSS as a corporate body more in terms of future profits. As ex officio counsel of SSS, we can only state that under the law, a derivative suit is representative in character in that the plaintiff-shareholder acts not only for his own benefit but also for the benefit of the other shareholders; 13 that all shareholders may properly join as complainants, but this is not necessary; 14 that a shareholder may intervene only if it has an individual interest to be protected. 15 Lastly and in relation to your last question (question no. 4),the Secretary of Justice as ex officio legal adviser and counsel of SSS 16 is primarily tasked to give advice and guidance on specific and important questions of law arising in the performance of SSS' powers and duties. If SSS decides to file (or intervene in) a case, it is our opinion that such may be primarily undertaken by its Legal Department. Alternatively, the Office of the Solicitor General (OSG) may be requested to assist as the matter may fall within its mandate to "represent the Government of the Philippines, its agencies and instrumentalities and its officers and agents in any litigation, proceeding, investigation or matter requiring the services of a lawyer. When authorized by the President or head of office concerned, it shall also represent government-owned or controlled corporations." 17 Please be guided accordingly. CTSAaH Very truly yours, (SGD.) LEILA M. DE LIMA Secretary Footnotes 1. The "Securities Regulation Code". 2. Emphasis supplied. 3. "The legal standing of stockholders to bring derivative suits for and in behalf of their corporation is not a civil law right; in fact, the Corporation Code contains no provision recognizing or regulating the filing of derivative suits. It is a common law right of stockholders and members; it exists by virtue of Philippine jurisprudence adopted from Anglo-American jurisprudence." Cesar L. Villanueva, Philippine Corporate Law (1998 ed.), p. 369. 4. Florenz D. Regalado, Remedial Law Compendium, Volume I (1997 ed.),p. 88. 5. Section 2, Rule 19, Rules of Court. 6. San Miguel Corp. vs. Kahn, 176 SCRA 447 (1989).In this case, there are three requisites for filing a derivative suit, namely: (1) The party bringing the suit should be a shareholder during the time of the act or transaction complained of, the number of shares not being material; (2) The party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and (3) The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. 7. Emmanuel S. Tipon, Shareholders Derivative Suit in the Philippines, Philippine Law Journal, Volume 4, No. 3-02, citing De Pinto vs. Provident Security Life Insurance Corporation, 303 F. 2d. 826 and 19 Am. Jur. 2d., p. 103. 8. See Rule 141, Rules of Court. 9. Roman Catholic Archbishop vs. Social Security Commission, 1 SCRA 10. 10. Id. 11. Section 4 (b) (10), Republic Act No. 8282 ("Social Security Act of 1997"). 12. Section 26, Republic Act No. 8282 ("Social Security Act of 1997"). 13. Emmanuel S. Tipon, Shareholders Derivative Suit in the Philippines, Philippine Law Journal, Volume 4, No. 3-02, citing Swanson vs. Traer, 354 U.S. 114 (1957). [The suit is dual in character: derivative and representative.] 14. Id. 15. Rule 3, Section 12, Rules of Court (Class Suit); Rule 19, Section 1, Rules of Court (Intervention). 16. Section 6, Republic Act No. 8282 ("Social Security Act of 1997"). 17. Section 35, Chapter 12, Title III, Book IV, Administrative Code of 1987.