Corporate Disclosure Requirements

1995 CORPORATE DISCLOSURE REQUIREMENTS A Primer PHILIPPINE STOCK EXCHANGE Volume 1 1995 Table of Contents Corporate Disclosure Requirements: A Primer Insider Trading "Short-Swing" Liability Quick Guide on Corporate Disclosures Continuing Listing Requirements Corporate Disclosure Requirements : A Primer PSE Principle Q: What is the PSE's principle on corporate disclosure? A: The basic principle of the Philippine Stock Exchange, Inc., ("PSE" or the "Exchange") is to ensure full, fair, timely and accurate disclosure for all listed companies. This principle is founded in Article 1 of its By-laws which states: "Sec. 1. The Principles and foundation of the Philippine Stock Exchange hereinafter referred to as the Exchange are as follows: xxx xxx xxx (c) It shall uncompromisingly adhere to the highest ethical standards, to ensure full, fair, timely and accurate disclosure at all times of material information that may affect the value and trading of listed securities. xxx xxx xxx." Q: What is the purpose behind this principle? A: It is the position of the Exchange that a fair and orderly market demands that all listed companies make available to the public information necessary to enable holders of the listed securities and the public to appraise the position of the listed company; and to take reasonable steps to ensure that all who invest in its securities enjoy equal access to such information . cd Q: What are the kinds of disclosure? A: There are two kinds of disclosure: the structured and the unstructured continuing disclosures. Ensuring Full & Timely Disclosures Structured Continuing Disclosure Q: What are structured Continuing Disclosures? A: Structured Continuing Disclosures are the periodic reportorial requirements required by the Securities and Exchange Commission ("SEC or the Commission") and the PSE. The purpose of these structured disclosures is to assure the public availability of continuing adequate information on publicly listed companies. The following are the reportorial requirements required by the Exchange as found in Chapter 9 of the PSE Listing Manual: (1) Audited Annual Financial Repor t to be furnished the Exchange not later than 105 days after the end of its fiscal year. 200 copies must be provided the Exchange for distribution. (SEC Cir. 7 Series of 1988). (2) Annual Report to be furnished the Exchange 15 days from Annual Meeting. 200 copies must be provided the Exchange for distribution. (SEC Cir. 7 Series of 1988). (3) Semi-Annual Report to be furnished the Exchange within 60 days from the end of the first semester of fiscal year. 200 copies must be provided the Exchange for distribution. (4) Quarterly Report to be furnished the Exchange within 30 days from the end of the Quarter. 200 copies must be provided the Exchange for distribution. (SEC.-BED Cir. No. 1 Series of 1987) (5) Report on Beneficial Ownership as required by Section 36 of the Revised Securities Act, which shall be filed within 10 days after the close of each calendar month. (6) List of stockholders entitled to vote in an annual or special stockholders meeting as may be required by the Exchange. (7) Annual Verification of the Bureau of Mines for mining companies. (8) Duplicate original of every other information, documents, and reports submitted to the SEC pursuant to Sec. 11 of the Revised Securities Act (RSA). UNSTRUCTURED CONTINUING DISCLOSURE Q: What is unstructured continuing disclosure? A: Unstructured disclosure is the communication of corporate developments to the investing public as they occur. aisadc Q: Is there a SEC rule on unstructured corporate disclosure? A: Yes. The SEC rule on unstructured corporate disclosure can be found in Sec. 11 (A-3) of the Revised Securities Act which requires every issuer of a security registered pursuant to this Act to file with the Commission such annual reports and such periodicals and other reports as may be necessary to update information on the operation of the business of the issuer or registran t. Q: Is there a PSE rule on unstructured corporate disclosure? A: In addition to the various SEC rules, the PSE has disclosure regulation to which companies must adhere. Recently, the PSE added Chapter 10 to its listing rules to clarify a listed company's disclosure obligations to the public and to the PSE Compliance and Surveillance Department regarding material news, unusual market activity and rumors and to further clarify the function of temporary trading halts. Q: What is the PSE rule on unstructured corporate disclosure? A: A listed company is required to keep the PSE and the Commission promptly informed by phone or fax immediately, i.e. at least 10 minutes after, and confirmed in writing within 2 hours of any material information or corporate act, development or event. During trading hours , a listed company should inform the Compliance and Surveillance Department by phone at least 10 minutes after and to be immediately confirmed by fax. All unstructured corporate disclosures should be addressed to the attention of the Compliance and Surveillance Department of the Exchange. Q: What standards and tests should be employed to determine whether disclosure should be made? A: Immediate disclosure should be made of information about company's affairs or about events or conditions in the market for the company's securities which meets either of the following standards: (1) where the information is necessary to enable the company and the public to appraise their position or standing; or (2) where such information is necessary to avoid the creation of a false market for its securities; or (3) where such information may reasonably be expected to materially affect market activity and the price of its securities. Thus, the test in determining if immediate disclosure should be made: A material fact does not have to be a decision-changing fact. [ The practical test is : Is it a market-moving event? Is it likely to move the stock price if disclosure is made ?] Whether or not the investor would have changed his or her decision is not a test in determining if immediate disclosure should be address made. Q. What kind of information helps the public to appraise their position? A: Material information with a significant impact in the listed company's operations such as those relating to the issuer's financial condition, prospects, development projects, contracts entered into in the ordinary course of the business or otherwise, mergers and acquisitions, dealings with employees, suppliers, customers and others, as well as information concerning a significant change in ownership of the company's securities owned by insiders or representing control of the company. Q: What are some specific examples of a company's affairs or market conditions typically requiring disclosure? A: The following events, while not comprising a list of all the situations which may require disclosure, are particularly likely to require prompt disclosure. (a) Any declaration of a cash dividend, stock dividend and pre-emptive rights by the Board of Directors; (b) The holding of any stockholders' meeting; (c) A tender offer, take-over or reverse take-over and a merger for another corporation's securities. (d) Capitalization issues, options, directors/officers/employee stock option plans, warrants, stock splits and reverse splits; e) All material resolutions taken up in a stockholders' meeting of the issuer; (f) All call to be made on unpaid subscriptions to the capital stock of the issuer; (g) Any change of address of the registered office of the issuer or of its transfer agents; (h) Any change in the directors, officers, auditors or transfer agent of the issuer; (i) Any proposed amendment to the Articles of Incorporation and By-Laws; (j) Any change in shareholdings of directors, officers and stockholders owning more than 10% of any class of any security, as provided for under Sec. 36, Chapter IV of the Revised Securities Act; (k) Any action filed in court, or any application filed with the SEC, to dissolve or wind-up the issuer or any of its subsidiaries, or any amendment to the Articles of Incorporation shortening its corporate term; or any significant litigation that will affect the corporation; (l) The appointment of a receiver or liquidator for the issuer or any of its subsidiaries; (m) Any acquisition of shares of another corporation or any transaction resulting in such corporation becoming a subsidiary of the issuer; (n) Any acquisition by the issuer of shares resulting in its holding 10% or more of the paid-up capital of another listed corporation or where the total value of its holdings exceeds 5% of net assets of an unlisted corporation; (o) Joint ventures, mergers, consolidation, take-overs, reverse take-overs and acquisitions; (p) Any sale made by the issuer of its shareholdings in another listed or unlisted corporation, i. resulting in such corporation ceasing to be its subsidiary; ii. resulting in its shareholding falling below 10% of the issued capital stock; (q) Firm evidence of significant improvement or deterioration in near-term earnings prospects; (r) The purchase or sale of significant assets; (s) A new product or discovery; (t) The public or private sale of a significant amount of additional securities; (u) A call for redemption of securities; (v) The borrowing of a significant amount of funds; (w) Default of financing or sale agreements; (x) A significant change in capital investment plans; (y) A significant dispute or disputes with subcontractors, customers or suppliers, or with any other parties. Disclosing Cash Dividends Q: How should a corporation disclose a declaration of cash dividend? A: Disclosure of cash dividend declarations should be made as follows: (1) The corporation is required to notify the Exchange by phone, after 10 minutes, and immediately confirmed in writing by fax after the declaration of cash dividends by the Board of Directors. (2) The record date set by the corporation shall not be less than 10 nor more than 30 days from the declaration. In case no record date is specified, the record date shall be deemed fixed at fifteen (15) days from such declaration. [ Secs . 3 and 10 of the Amended Rules Governing Pre-emptive and other Subscription Rights and Declaration of Stock or Cash Dividends of Corporations whose Securities are Registered under the Revised Securities Act or Listed in the Exchange, April 12, 1991 ]. Disclosing Stock Dividends Q: How should a corporation disclose a declaration of stock dividends? A: If the stock dividend is from the unissued : (1) The corporation is required to notify the Exchange by phone, after 10 minutes, and immediately confirmed in writing by fax after the declaration of stock dividends by the Board of Directors. (2) All corporations declaring stock dividends must secure approval of stockholders within 45 days from such declaration, notify the Exchange by phone and immediately confirmed in writing by after the ratification of the stock dividend by the stockholders specifying the amount of the stock dividend. The Exchange requires that it be notified by phone or fax within 10 minutes (3) The record date set by the corporation shall not be less than 10 nor more than 30 days from the approval of the stockholders. In case no record date is specified, the record date shall be deemed fixed at fifteen (15) days from such approval. Provided, however, that the record date shall not be less than 10 trading days from receipt of notice by the Exchange. [ Secs . 2 and 10 of the Amended Rules Governing Pre-emptive and other Subscription Rights and Declaration of Stock or Cash Dividends of Corporations whose Securities are Registered under the Revised Securities Act or Listed in the Stock Exchange, April 12, 1991 ]. cdt If the stock dividend is taken from an increase in authorized capital stock : (1) Upon the declaration of the stock dividend by the Board of Directors, the corporation should notify the Commission and the Exchange within 10 minutes by phone after the Board's meeting declaring the stock dividend and immediately confirmed in writing by fax. (2) The approval of the stockholders must be secured within 30 days from the declaration of the Board. (3) Within 45 days from the date of the approval of the stockholders, the application for the increase in authorized the capital stock and for the registration of the securities must be filed with the Commission together with all requirements necessary for approval and within the same period the application for listing of shares to cover the dividend declaration shall be filed with the Exchange. (4) The record date shall be fixed by the Commission which shall not be less than 10 days or more than 30 days after all clearances and approvals by the Commission shall have been secured. Disclosing Pre-emptive Rights Q: How should a corporation disclose pre-emptive rights declaration? A: Pre-emptive rights should be made as follows: (1) Upon the decision by the Board of Directors to offer pre-emptive rights by the Corporation, notice thereof shall be sent to the Commission and the Exchange within 10 minutes by phone from the approval and immediately confirmed in writing. (2) In making the disclosure, the Corporation shall state the ratio, offer price, record date, payment terms and the offering period of the rights issue. (3) If the offered shares shall come from an increase in authorized capital stock, the Articles of Incorporation should be first amended and approved by the SEC to reflect the increase. (4) The Corporation, subject to the approval of the Exchange, may set the record date for pre-emptive rights provided it has obtained a favorable endorsement from the Listing Committee. The record date shall not be less than 10 trading days from receipt of notice by the PSE . Disclosing Stockholders' Meeting Q: What are the rules in disclosing stockholders' meeting? A. For the holding of any stockholders' meeting and its agenda, the Exchange must be given at least ten (10) trading days written notice before the stockholders' meeting. Q: What rule should be observed in disclosing stockholders who are entitled to vote and the closing of books? A: The Exchange shall be given not later than five (5) trading days after the record date fixed by the issuer the list of stockholders who are entitled to notice and to vote at a regular or special stockholders' meeting; and to give ten (10) trading days notice prior to the closing of transfer books. Disclosing Pre-Emptive Rights, Stock Dividends and Cash Dividends of Exempt Securities (i . e . commercial banks) Q: Are "Exempt Securities" excused from complying with the SEC-Amended Rules Governing Pre-Emptive and other Subscription Rights and Declaration of stock or Cash Dividends of Corporations Whose Securities are Registered under the Revised Securities Act or Listed in the Stock Exchanges ? A: No . Exempt securities are not excused from complying with the abovementioned SEC Rule. The said securities are only exempt from the registration requirements. Thus they must comply with the said Rules as well as those pertaining to the full disclosure requirements of the Revised Securities Act . TRADING OF SECURITIES ON EX-BASIS Q: How is the Ex-date determined? A: According to Circular No. 402 dated September 7, 1995, effective September 22, 1995, "Whenever listed companies announce a date for closing of books or a record date for any of their corporate action, the Exchange shall automatically determine the ex-date for which transactions prior to this ex-date shall be entitled to the announced corporate action (stock and cash dividends, stockholders' meeting, rights offering, etc.). This ex-date shall be computed as seven trading days before the announced record date." ENSURING ACCURATE DISCLOSURES Rules in Writing Disclosures Q: How should a disclosure or public announcement be worded? A: As stated earlier in Art. 1 of the PSE By-Laws, disclosures should not only be fair and timely but also full and accurate. Clearly, while the Exchange does not approve the announcement nor guarantees its accuracy when it discloses the same to the members, a listed company should not make a false statement in a public announcement. Thus, in preparing the contents of a disclosure or public announcement, a listed company should be guided by the following: (1) Be factual, clear and succinct and avoid boosterism; (2) Contain sufficient quantitative information to allow investors to evaluate its relative importance to the activities of the listed issuer; (3) Bad news should not be buried or concealed. It must be disclosed in the same manner and with the same clarity and emphasis as good news. Its impact must not be minimized by equivocal or misleading statements. Q: What is the PSE policy on boosterism on disclosures? A: It is the PSE's policy that boosterism on the disclosures should be avoided. This is also known as "unwarranted promotional disclosure activity." Q: What is boosterism on disclosures? A: "Boosterism on disclosures" or "promotional disclosure activity" are disclosures from listed companies which exceed that which is necessary to enable the public to make informed investment decision. Such activity includes in appropriately worded news release, public announcements not justified by actual developments in the company's affairs, exaggerated reports or predictions, flamboyant wording and other form of overstated or over-zealous disclosure activity which may mislead investors and cause unwarranted price movements and activity in a company's securities, omission of important unfavorable facts, or the slighting of such fact, presentation of favorable possibilities as certain, or as more probable than is actually the case, presentation of projects without sufficient factual basis, and negative statements phrased so as to create a positive implication. Soft information Q: What listed company activity or development may not be required to be disclosed? A: Soft information is not required to be disclosed. Soft information is an information that is indefinite in nature where it is in the company's and shareholder's interest to wait until it is certain before it is disclosed to the public. Q: What does soft information include? A: Soft information includes: 1. "Forward looking" or predictive information e.g. earnings forecasts, financial projections. 2. Subjective, evaluative information e.g. management's beliefs and opinions asset appraisals. 3. Uncertainties and developments in process e.g. corporate transactions in the planning stage or preliminary negotiations, bid submissions. Forward Looking Statements Q: What are forward looking statements? How should forward looking disclosures be prepared? A: Forward looking statements are disclosures about the company's future prospects. Forward looking statements include not only projections or estimates but also subjective statement about a company's view of the future. Of all types of disclosure statements, forward looking statements create the greatest risk of facing a plaintiff class action. Thus, the following guidelines may be used in preparing forward looking statements: 1. In making public estimates of revenue and earnings, it is important that the external statements be consistent with internal planning and budgeting documents, and of refraining from making optimistic forward looking statements at times when the company is in possession of undisclosed information that might seriously undermine the statement. [ In re Adobe Systems, Inc . Securities Litigation, 787 F . Supp . 912 (N . D . Cal . 1992)] . cdt 2. Corporate managers have to be aware not only of the own disclosures, but of what others are saying about their company which requires a disclosure which must be transmitted with a degree of intensity and credibility, sufficient to effectively correct or counter-balance any misleading impression created by the one-sided representations. [ In re Apple Computer Securities Litigation, 886 F . 2d 1109 (9th Cir . 1989) ]. 3. Forward looking statements, even if reasonable at the time they are made, can continue to alter the legal landscape for months to come. [If subsequent events or information casts significant doubt on the continued reliability of an earlier statement, there may be a legal duty to correct that statement.] Moreover, even if there is no duty to affirmatively correct a previous statement, the fact that it is no longer reliable in light of subsequent events has an impact on what subsequent statements the company can make. Therefore, when planning a public statement, it is necessary to consider and take into account what previous statements have been made, and whether or not they have been affected by subsequent events. [ Kirby vs . Cullinet Software, Inc . , 721 E Supp . 1444 (D . MA . 1989) ]. Preliminary Negotiations Q: What are the issues to be considered in preliminary negotiations? A: The issues to be considered in preliminary negotiations are: * when does the company start disclosing; * when does the negotiation become material. Q: Is there a duty to disclose preliminary negotiations? A: No . A listed company is not required to disclose even if the preliminary negotiation is material . This has been upheld by the U.S. Supreme Court in the 1988 case of Basic Vs. Levinson (108 S. Ct. 978, 1988) that there was no inherent duty to disclose the existence of merger negotiations as long as the public company maintains a consistent silence and "no comment" position about the existence of negotiations. Q: When then is the company, engaged in preliminary negotiations, required to disclose to the Exchange? A: Before the Basic vs. Levinson Case, the basic rule adopted was the agreement-in-principal test which means that there was already an agreement between the parties on the price and structure of the proposed transaction. This guideline was however rejected by the U.S. Supreme Court in the Basic case. In the Basic Case, the court used the probability/magnitude test where events are speculative or contingent, i.e. the question of materiality will depend at any time upon balancing the probability that the merger negotiation will lead to an agreement and the anticipated magnitude of the event in light of total company activity . cd Q: What factors determine the existence of the probability/magnitude test? A: This is determined on a case-to-case basis, such as, the degree of interest in the transaction at the highest corporate levels. With regard to the magnitude of the transaction, facts such as the size of the different companies involved and the potential premiums over current market price must be considered. Q: What instances require disclosure during the preliminary negotiations? A: (1) When trading in the company's stock, the company or its directors may have a duty to disclose material information they possess before engaging in any transaction. (2) When confidentiality is not maintained resulting in a leak of the information. (3) When disclosure is necessary to correct an earlier affirmative statement that would be misleading absent disclosure of the negotiation. (4) SEC rule requiring disclosures such as the quarterly reports. (5) When the listed issuer receives a notice of intention to make a tender-offer or take-over offer. (6) When the information is requested by the PSE through the Compliance and Surveillance Department. Q: In the preceding instances, how does the company make the disclosure? A: If the company chooses to make a statement on preliminary negotiations, the statement must be true and complete. In addition, it must be responsible enough to update the information disclosed when material changes in the information occur. Q: What are the sanctions against false and misleading disclosures? A: As stated, while the Exchange is not obligated to check or approve the announcements, where suspicious of falsity arise, the same may be checked. In instances where falsity is verified, the Exchange may in serious cases delist the corporation . In other instances, the Exchange may file a report of the fraud committed to the SEC for its proper action such as suspension or revocation of the registration of securities. (Secs. 15 & 16, RSA). Moreover, the person or corporation responsible for the false disclosure may be sued in court to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon tender of such security, or for damages if he no longer owns the security. In addition, exemplary damages may likewise be awarded in cases of bad faith, fraud, malevolence or wantonness. (Sec. 13, RSA). Q: Is there any prescriptive period in filing an action based on false statements? A: Yes . Under Sec. 14 of the RSA, no action shall be maintained to enforce any liability on false statements (Secs. 12 & 13, RSA) unless brought within two years after the discovery of the facts constituting the cause of action and within five years after such cause of action accrued. COMMUNICATING THROUGH THE PRESS AND MARKET ANALYSTS Press and News Releases Q: Are press releases prohibited? A: Generally speaking, press releases are not prohibited provided the SEC approval to the same (pursuant to the SEC Rules) was acquired prior to the release . Q: What is the purpose of the SEC rule requiring their approval to the releases? A: The reason behind this requirement is to assure the public of the veracity and authenticity of the facts stated in the releases. Q: What happens if the Exchange receives a press release without the stamped approval of the SEC-BED? A: A Trading Halt will be issued when the Exchange receives a press release from a company which does not have an SEC-BED stamp of approval . The trading halt will immediately be lifted after the approved press release has been disseminated to the member-brokers of the Exchange. This prevents any person to take undue advantage of the information. Q: Is the PSE's approval to the press and news release required? A: No . As stated, the Exchange does not approve the contents of the disclosures submitted for public dissemination. Q: Is the PSE's approval necessary prior to its release to the public? A: No . If the release is to be given during trading hours, the exchange requires that a copy of the press release be submitted to the Exchange at least 30 minutes prior to the public release to enable the Exchange to appraise if the news in the release is significant enough to warrant a trading halt. Q: If the approval of the Exchange is not necessary to disseminate a press release, why does the Exchange monitor and write listed companies about releases in newspapers or media? A: The Exchange writes the companies regarding news found in print and media to verify the reports stated as most of the news printed or announced by the media shows material information which the Exchange is not informed of. Thus it should be stressed that press release do not relieve the listed company from disclosing material information to the Exchange by phone or fax within 10 minutes and confirmed in writing within 2 hours of any corporate meeting or activity or agreement . Q: What is the basis of the Exchange to require that copies of press releases be provided them? A: Sec. 11 of RSA which mandates that every issuer of a security registered with the Exchange shall file a duplicate original of such information, documents, and reports required by the SEC with the Exchange. Talking to Analysts Q: Can a listed corporation disclose non-public material information to analysts? A: U.S. cases are unanimous in holding that selective disclosure of material information when the same is not yet public is discouraged as buying on the basis of the information makes the analyst or his clients liable for insider trading. Thus, information received or obtained by an analyst of prior to public disclosure cannot be used by the analyst. ANSWERING RUMORS AND REPORTS Q: Is a listed company required to clarify or confirm rumors or reports not originating from them? A: Yes . A public circulation of information, whether by an article published in a newspaper, by a broker's market letter, or by word of mouth, either correct or false, which has not been substantiated by the issuer and which is likely to have, or has had, an effect on the price of the issuer's securities or would likely to have a bearing on investment decisions by investors must be promptly and properly clarified or confirmed. Q: Why should a company correct a false rumor or report that did not originate from them? A: It is necessary for the company to correct a false rumor or report to prevent the creation of a false market. In addition, if the company keeps its silence, it might be construed by the investing public as a tacit approval by the company of the rumor, release or report . Q: How should a company correct a rumor? cdt A: Rumors or reports of a supposedly factual basis is such that it is manifestly based on erroneous information, or the listed company or any of its executive officers is wrongly attributed as the source. the listed company should respond promptly to the supposed factual elements of the rumor or report. If a rumor or report contains a prediction that it is clearly erroneous, the listed issuer should issue should issue an announcement to the effect that the issuer itself has made no such prediction and currently knows of no facts that would justify making such a prediction. ENSURING FAIR DISCLOSURES TRADING HALTS Q: What is a trading halt? A: A trading halt is a temporary halt or suspension of the trading of the listed company's securities through the facilities of the Exchange. Q: What causes a trading halt? What is its purpose? A: Trading halts are caused by a significant material information or announcement known to a few and which has not been disseminated to the Exchange. Its purpose is to enable all market participants to have an equal opportunity to see the news, digest it and understand its full impact. It is usually done when the disclosure is made during trading hours. The Exchange may halt the trading of the listed company's securities to provide an opportunity for the material information to be properly disseminated. Q: Is a trading halt automatic for all disclosures given during trading hours? A: No . As explained earlier, the Exchange requires notification by phone at least 10 minutes after the meeting or agreement/event and to be immediately confirmed in writing by fax. The purpose for this requirement is to enable the Compliance and Surveillance Department to make a determination whether the announcement is important enough to warrant a halt in the trading of the securities. aisadc Q: How long does a trading halt last? When will trading be resumed? A: From the time the Compliance and Surveillance Department determines the existence of a material information that has not been disseminated to the public, a trading halt will be enforced until after one hour from distribution of the notice by the Department to the public or the next day if the notice is circulated after trading hours. Q: What are the benefits of a trading halt? A: A trading halt benefits the investing public because somebody with the news is unable to take advantage of somebody else who does not know it yet. It therefore puts the investing public and the insider in the same position. It also benefits the company because it gives them an opportunity while trading is halted, to talk to analysts and express their view to the analysts. In the U.S., some companies request for trading halts so they can arrange a conference with all analysts. Q: Why does the exchange implement a trading halt in spite of a submission of a press release? A: In cases of press releases, a trading halt is implemented only when the press release submitted was not approved by the SEC. The reason for the halt in trading is the inability of the Exchange to disclose the information to the public in the absence of the SEC approval. FREEZING DUE TO UNUSUAL TRADING ACTIVITY Q: What is unusual trading activity? A: Unusual trading activity occurs when the trading of the securities of a listed company is active without any apparent publicly available information which could account for the activity. Q: What is the implication when unusual trading activity occurs? A: Unusual trading activity may signify trading by persons who are acting either on unannounced material information or on a rumor or report, whether true or false, about the company. Q: What action is undertaken by the Exchange in this situation? A: If the trading price of the shares moves 50% upward or 40% downward from the previous closing price, the price of the securities is frozen. Q: Is trading still allowed during a price freeze? A: Yes . When freezing occurs, trading is still allowed but the movement of the price is not allowed to move up beyond 50% or move down beyond 40% from the previous closing price. Q: What is the reason for freezing the prices? A: When unusual trading activity occurs, the market action itself may be misleading to investors, who are likely to assume that a sudden and appreciable change in the price of a listed issuer's securities must reflect a parallel change in its business prospects. Q: Does unusual trading activity occur only when the prices move upward by 50% and downward by 40%? A: No . Unusual trading activity occurs even if the prices do not move 50% or 40%, when the Department determines there is unusual trading activity, the Department will make inquiries with the listed company if they are aware of any reason that would justify the unusual trading. The listed company must respond promptly to any inquiries made by the Exchange. Q: What guidelines should the company apply when responding to inquiries of the Exchange? A: In responding to inquiries of the Exchange, a listed company may be guided by the following: (1) If the unusual trading activity results from the "leak" of material information, the information in question must be announced promptly. If the unusual trading activity results from a false rumor or report, the Exchange's policy on correction of such rumors and reports should be complied with; and (2) If the listed issuer is unable to determine the cause of the unusual trading activity, the exchange may suggest that the issuer make a public announcement to the effect that there are no undisclosed recent developments affecting the issuer that would account for the unusual trading activity. Q: Does a halt or a suspension occur when an unusual trading activity is detected? A: No. A trading halt or a suspension is not utilized when unusual trading activity occurs. Q: Why does a halt occur when unusual trading activity is detected? A: A trading halt is utilized when upon inquiry of the Compliance and Surveillance Department, they were informed of a material information not yet disclosed which in all probability is the cause of the unusual activity. If the information of the Department cannot be disseminated immediately, the Department will enforce a trading halt pending disclosure. Q: Can the listed company refuse to respond to the inquiries of the Exchange regarding the unusual trading activity? If not, what sanctions will be applied against the listed company? A: No . In the event the listed companies refuse to respond to the inquiries of the Exchange regarding the unusual trading activity, the Exchange may suspend the trading of the securities . PENALTIES : Q: What is the penalty for non-compliance with the PSE disclosure requirements? A: Subject to the provisions on delisting, any violations of the terms and conditions of the Listing Agreement and the Manual of Listing Rules of the Exchange, except for fraud of the market, manipulation and other offenses under the Revised Securities Act, shall make the issuer liable for the following penalties within a period of twelve months: First Violation P50,000. 00 Second Violation of a Similar Nature P75,000. 00 Third Violation P100,000. 00 Fourth Violation Suspension of trading the issue for a period of one (1) month Fifth Violation Ground for delisting An additional fine of P1,000.00 shall be imposed for each trading day during which the offense continues until and including the day on which the violation is corrected. Failure to pay within one month from the imposition of the penalty will result in the suspension of trading of the securities of the violator. Offenses involving fraud, concealment, and other offenses specified in the RSA shall be referred to the Board for its appropriate action. THE GENERAL RULE In cases of doubt as to whether disclosure should be provided or not, the presumption must always be in favor of disclosure. However, if disclosure is to be made, the disclosure must be full, fair, timely and accurate. aisadc Types of Market Manipulation 1. What is manipulation? Manipulation is defined as: a. a series of transactions designed to raise or lower the price of the security or to give the appearance of trading for the purpose of inducing others to buy or sell; b. an intentional interference with the free forces of supply and demand; and c. an economically irrational trading. 2. Do we have a policy against price manipulations? The policy against price manipulations can be found in Sec. 26, 27, 28 & 29 of the Revised Securities Act which states that: a. Section 26a, Nos . 2 (i) and 6 entitled Manipulation of Security Prices : "Sec. 26a: (2) To effect, alone or with one or more other persons, a series of transactions in securities that (i) raises their price for the purpose of inducing the purchase of a security, whether of the same or a different class, of the same issuer or of a controlling, controlled, or commonly controlled company by others; (6) To effect, either alone or with one or more persons, any series of transactions for the purchase and/or sale of any security registered in a securities exchange for the purpose of pegging, fixing or stabilizing the price of such security." b. Section 27b entitled Manipulative and Deceptive Devices : "Sec. 27b: To use or employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or contrivance;" c. Section 28 entitled Artificial Measures or Price Control : "Sec. 28: It shall be unlawful for any exchange to adopt and enforce artificial measures of price control of any nature whatsoever without the prior approval of the Commission which may be given only if it serves public interest and benefits the investors;" and d. Section 29 No . 1 entitled Fraudulent Transactions : "Sec. 29: It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities (1) To employ any device, scheme or artifice to defraud . . ." 3. What are the common manipulation schemes? A. HYPE AND DUMP MANIPULATIONS 1. Purchase of a privately owned company of that of a public shell company . * A manipulator and his close associates may purchase the outstanding capital stock of a dormant public shell company for a nominal amount. They then merge it with their privately held company. * The manipulators would then gain control of a majority of the free trading stock of the merged entity. ** The manipulator sometimes obtains possession and control of certificates for the shell's stock from the stock transfer agent, free of all restrictive legends. ** The shares of the shell company are often reverse-split four-to-one or more to reduce the number of shares, or split forward to increase the number of shares. ** Stock certificates are often reissued in the name of the merged entity to relatives and associates of the manipulator who acts as nominees under the manipulator's control. ** The "public float" (shares not under their control) is sharply reduced. * The manipulators would then look for a broker-dealer who is willing to make a market in the stock of the newly merged company. * They would then hire a promoter who would "hype" the virtues of the company, its products and the stock. The broker-dealer then generates trading volume and advances the bid-price. When the market price reaches a high level, the manipulators and his associates would then bail out. 2. Formation of a new company . * The manipulator and his associates usually formulates the idea of a new company as well as their formation. * They then actively promote the company to the broker-dealer community. * The company may effect a: ** blank check offering, which means that they will be free to decide later on what business it will engage in and the public is asked to invest in the company without knowing what that business would be; ** blind pool offering which identifies only the general type of business the company will engage in; and ** hot issue if it will purportedly engage in a trendy line of business such as high technology, mergers or acquisitions. * The officers and directors of the company may be related or associated with the manipulators, have little work experience, given large blocks of stock prior to the initial public offering and may have agreed with the manipulators to resign at any given time. * The shares of stock of the company usually go to the officers and directors of the company and to associates or individuals who has nothing to do with the company. * The company may have very little private capitalization since it depends on the proceeds of the initial public offering. * The prospectus of the company is generally prepared by the manipulator, without or little input from the nominee officers and directors. It often contains false and misleading information regarding the company's assets, prospects and offering proceeds. It also falls to disclose the involvement of the manipulator and his associates with any securities violations. It is then reviewed and filed with the Commission by attorneys and accountants associated with the manipulator. * The offering is usually underwritten by a firm associated with the promoter and securities are purchased by nominees with funds loaned to them for that purpose. The underwriter, who is also the lead market maker, dominates the market through price leadership and control of "floating supply." * When listed, match trades usually occur between and among nominee accounts. Promotional materials, such as attractive brochures, hype the stock to the desired level. After which, the manipulators ball out and the market collapses. B. BAIT AND SWITCH MANIPULATIONS : 1. Broker-dealers with boiler-room operations . * These firms have branches all over the country with large customer pools. They specialize in marketing low-priced over-the-counter-securities. They hire young and inexperienced people who employ specific and detailed marketing schemes. They use high pressure sales techniques. 2. Underwriters . * The broker-dealer underwrites the initial public offering of an over-the-counter security of a company which they may have a significant stake in. * They promote the IPO of the new security by distributing periodic brochures or newsletters which recommends the issue. They may also hold meetings to promote the new company. * The branch managers and sales representatives are provided with various incentives to sell the new security such as permitting the branch manager to purchase the shares in the IPO at discounted prices. * Various schemes are used by broker-dealers to control and profit from the IPO such as: ** purchasing customers at certain branch offices for the broker-dealers own account and in turn sell them to customers at other branches at a higher price; ** disseminating false and misleading information about the security to induce customers to sell their shares to the broker-dealer at below market prices and in turn the broker-dealer would sell the shares in the open market at prevailing market prices. C. HIGHEST BIDDER OR TRANSACTIONS AT PROGRESSIVELY HIGHER PRICES * The manipulator is usually the highest bidder in order to support or raise the price of a security. This also happens when new investors enter the market since it exhausts the supply of the securities thus making the others raise their bid. This is also similar to pump and dump. D. TRADITIONAL OR CLASSIC MANIPULATIONS 1. Demand side Manipulation Schemes . A. Commencing market with arbitrary quotes that bear no logical relation to the issuer's business history, earnings, assets and products. B. Marking the close. * Upping the quoted inside bid at or near the close of the market to send a positive signal to the market. A market maker will usually drop its bid back at opening of market next morning, unless it has captive accounts in which to place shares he had to purchase at higher price. * Purchasing the stock at or near the close of the market. C. Painting the Tape. * Buying activity among nominee accounts at increasingly higher prices or causing fictitious transaction reports to appear on the "ticker tape." D. Squeezing the Short Interest. * Calling for certificates in short sales to force sellers to purchase more shares in the market to cover their short positions and accordingly to increase the price of the stock. * Engaging in wash sales to move shares from an account at one firm to a new account at another firm to "squeeze" short sellers, thereby forcing them to "cover" in the market at increasingly high prices. E. Advancing the bid both to increase the price and to attract further trading interest. This conduct is highly suspicious when retail sales exceed retail purchases. F. Manipulation of Immediate After market. * It is a case wherein the defendant oversold the IPO unit offerings during the registration's waiting period. The other investors were solicited to provide a check for the full indication of interest prior to effective date. The underwriter then reduced the allocation for each investor and placed the remainder of the shares in the hands of the nominees. Prior to the opening of the after market, the representatives of the defendants filed out order tickets for after market trades at a pre-determined price. The after market opened but the firm's trader began executing after market orders of the IPO investors at a higher level. Thus, such action drove the increased the actual market price to such level. In order to supply such demand, the nominee accounts sold their shares with a profit. * Another case is when an investor in an IPO are required to buy a common stock in the immediate after market; and broker allocated common stock for sale in the immediate after market at a series of pre-determined and increasing "tick" prices, the lowest of which is still higher than the actual price of the warrants. 2. Supply Side Manipulation Schemes . A. Reducing the Floating Supply. * Purchasing the significant amount of security's float which in turn makes its price highly sensitive to demand. B. Tying Up Large Blocks. * This happens when brokers refuse to execute sell orders or when they request their clients to withhold a significant number of shares in relation to the trading float so as making the market sensitive to demand. 3. Going on the Box . * Inserting bid and asked quotations on the board before the broker-dealer's participation in the distribution is complete. 4. Inducing after market purchases while in distribution * It happens when brokers solicits indication of interest, requests submission of checks from investors for the total amount and then cuts back on the allocations to each investor using the balance of the payment submitted to purchase shares in the aftermarket pursuant to order tickets written before the aftermarket opens. 5. Entrance of improper stabilizing bid 6. Free Riding and Withholding * The broker dealer is supposed to distribute the entire offering at the public offering price and not withhold shares for registered representatives and their families when the issue is likely to trade at an immediate premium in the aftermarket. 7. Work Out Market * It is when the trader acts essentially as a broker and in which a customer offers to sell are not accepted unless an equivalent or greater order to buy exists. 8. Scalping * It is a practice in which a person, like an investment advisor, purchases securities for his own account before recommending that security and then sells the shares at a profit upon the rise in the market price following the recommendation. 9. Reaching Across the Market * This is to purchase shares above the manipulator's current quotation. In order to raise the bid, the manipulator "takes out" the asking price of the other market makers to prevent locking the market when bid is made. 10. Raising the Price to Improve Exchange Ratio . 11. Churning . * Excessive trading in an account, which usually result in buy/sell activities against the financial interests of the customer. 12 Box in the Stock . * It is when an individual has physical possession of a sufficient number of the issuer's shares to control the market and to make it nearly impossible for market makers to deliver the securities they have sold by settlement date. This produces a thin market and reduces liquidity. The manipulator then locks up the supply and provides him the ability to sell when he desires and at a profit. 13. Daisy Chain . * It is a pattern of fictitious trading activity by a group of persons who lure the innocent people into the scheme who bails out the manipulators. They are then left with the securities since there is no one to sell it to. 14. Flipping . * It happens when one office buys a particular stock for customers while another office simultaneously recommends that its customers sell the stock. Thus the stock is shifted from one office to the other. The firm then makes a profit and the brokers receive commissions. 15. Ponzi Scheme . * A fraudulent investment scheme whereby each tier of investors is paid off using the money provided by each later tier of investors. 16. Chain Letter Rally . * This occurs when speculators support the manipulators thereby increasing the volume and price movement. 17. Wash Sales . * When an order to buy and to sell is placed at the same time even if beneficial ownership does not change. 18. Failure to Disclose . * When there is a failure to disclose control or association of the purchase or sale of a security which then allows a manipulator to convey to the market that the demand or supply for securities is genuine when in fact it is related to his own position. 19 Guarantees or Payments . * Guaranteeing purchasers against loss or making payments to induce others to purchase or sell the security. cdt 20. Use of Nominee Accounts . * The use of a nominee or a fictitious account to manipulate a certain stock conceals the actual control and purpose of the manipulators. Insider Trading General Q: What is insider trading? A: The illegal act of insider trading is discussed in Section 30 of the Revised Securities Act of the Philippines as follows: "a. It shall be unlawful for an insider to sell or buy a security of the issuer, if he knows a fact of special significance with respect to the issuer or the security that is not generally available, unless (1) the insider proves that the fact is generally available or (2) if the other party to the transaction (or his agent) is identified, (a) the insider proves that the other party knows it, or (b) that other party in fact knows it from the insider or otherwise." Q: What is the present policy of the PSE on insider trading? A: Under Art. 1 of the PSE By-laws, the PSE is mandated to: "(b) . . . strengthen itself into an effective and professional self-regulating organization as it provides one efficient and fair market for buyers and sellers to conveniently and effectively transact listed securities through member brokers." Q: What is meant by a fair and efficient market? A: In general terms, an efficient market exists where one party cannot interfere with the free-market forces of supply and demand such that the price of a given security is not an accurate reflection of the underlying assets (both physical and human) and information pertaining to those assets, of a given corporate body. On the other hand, a fair market is achieved where all participants face the same conditions of trading, i.e. no party can take advantage of an information that is attained from a privileged information. Q: What is the basic principle behind inhibiting insider trading? A: The obligation of inhibiting oneself from using insider information rests on two basic principles: (1) the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and (2) the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealing. 1 Q: What is the purpose of outlawing insider trading ? A: It must be emphasized that the primary purpose of Sec. 30 of RSA is to outlaw the use of inside information by corporate officers and principal stockholders for their own financial advantage and to the detriment of the uninformed public security holders-those who sold or bought shares without the benefit of the inside information. 1a Q: Is there an exception to the rule ? A: Yes. Insider trading does not exist when (1) the insider proves that the fact is generally available or (2) if the other party to the transaction (or his agent) is identified, (a) the insider proves that the other party knows it, or (b) that other party in fact knows it, from the insider or otherwise." Q: What are the elements of insider trading? A: Elements: (1) An insider (2) buys or sells a security (3) due to knowledge of a fact of special significance (4) which is not generally available. INSIDERS Q: Who is an insider? A: An insider as defined in Sec. 30 (b) of the RSA is any of the following: (1) the issuer ( i.e. every person who issues any security); (2) a director or officer of, or a person controlling, controlled by, or under common control with the issuer; (3) a person whose relationship or former relationship to the issuer gives or gave him access to a fact of special significance about the issuer or the security that is not generally available; or (4) a person who learns such a fact from any of the foregoing insiders as defined in this subsection, with knowledge that the person from whom he learns the fact is such an insider. They may be further classified into the following: CATEGORY 1: CORPORATE INSIDERS officers, directors, certain employees and majority or controlling share-holders of the company at issue. CATEGORY 2: TEMPORARY INSIDERS underwriters, lawyers, accountants and consultants who become "temporary" insiders because they have obtained confidential information about the company while in a fiduciary * relationship to the company. CATEGORY 3: TIPPERS and TIPPEES when an insider or temporary insider described as the "tipper" provides material, nonpublic information or purchase or sale recommendations to a third party known as the "tippee," who then trades on the information or passes it on to the others who do so. In this instance, both the tipper and the tippee shall be liable. cd Q: What is the "misappropriation theory" of insider trading ? A: Under the "misappropriation theory", a person who, in breach of duty of trust and confidence, misappropriated material, nonpublic information from any source, and uses that information to her advantage in securities transactions, is guilty of insider trading. Q: What is an example of a person who can be held for misappropriation of confidential information ? A: In the Winans case 2 a Wall Street Journal reporter, R. Foster Winans was held liable for insider trading for misappropriating a WSJ's confidential information about what stocks would be mentioned in the column by tipping others to the information. Q: Is the misappropriation theory applicable in the Philippines ? A: Our laws are clear as to who shall be considered insiders but silent as to whether the misappropriation theory is applicable in the Philippines. However, if the person who misappropriated the information can be found to fall in any of the four classes of insiders, clearly the theory may be applicable in the Philippines. Q: What are the reasons for considering the misappropriation of non-information insider trading? A: Former US Chief Justice Burger explained in his dissenting opinion in the Chiarelli case (which eventually became the foundation of the misappropriation theory in subsequent cases) explained that by obtaining material, non-public information by unlawful means, the person who misappropriated clearly breached a duty to his employer thereby subjecting him to the same duty as an insider to disclose the misappropriated information or to abstain from trading. The other reasons propounded was the "equal access theory" suggested in Texas Gulf Sulfur case which simply contended that the duty to disclose arose "as a result of the 'inherent unfairness' of turning secret information to account for personal profit." SIGNIFICANT INFORMATION Q: What is significant information ? A: Sec. 30 (c) of the RSA cite two instances when a fact can be considered of "special significance" if. (a) in addition to being material it would be likely, on being made generally available, to affect the market price of a security to a significant extent, or (b) a reasonable person would consider it especially important under the circumstances in determining his course of action in the light of such factors as the degree of specificity, the extent of its difference from information generally available previously, and its nature and reliability. Q: Is material information sufficient to be considered specially significant? A: No . While in the US material information is sufficient, in the Philippines, the material information must be accompanied by a movement in the market price of the security by a significant extent. Q: What is "material' information ? A: Material information is that which induce or tends to induce or otherwise affect the sale or purchase of the issuers securities. Q: What are the examples of material information : According to Chapter 5, number 1 of the Listing Guidelines of the Philippine Stock Exchange: "Material information shall include information relating to the issuer's financial condition, prospects, development projects, contracts entered into in the ordinary course of the business or otherwise, and other information with significant impact on the issuer's operations such as, but not limited to the following: a. Declaration of a cash dividend; b. Declaration of stock dividend or pre-emptive rights; c. Capitalization issues, directors/officers/employee stock option plans, warrants, stock splits and reverse splits; d. All material resolutions taken up in a stockholders' meeting of the issuer; e. All call to be made on unpaid subscriptions to the capital stock of the issuer; f. Any change of address of the registered office of the issuer or of its transfer agents; g. Any change in the directors, officers, auditors or transfer agent of the issuer; h. Any proposed amendment to the Articles of Incorporation and the By-Laws; i. Any change in shareholdings of directors, officers and stockholders owning more than 10% of any class of any security as provided for under Sec. 36, Chapter IV of the RSA; j. Any action filed in court, or any application filed with the SEC, to dissolve or wind-up the issuer or any of its subsidiaries, or any amendment to the Articles of Incorporation shortening its corporate term; or any significant litigation that will affect the corporation; k. The appointment of a receiver or liquidator for the issuer or any of its subsidiaries; l. Any acquisition of shares of another corporation or any transaction resulting in such corporation becoming a subsidiary of the issuer; m. Any acquisition by the issuer of shares resulting in its holding 10% or more of the paid-up capital of another listed corporation or where the total value of its holdings exceeds 5% of net assets of an unlisted corporation; n. Joint ventures, mergers and acquisitions; o. Any sale made by the issuer, of its shareholdings in another listed or unlisted corporation, i. resulting in such corporation ceasing to be its subsidiary; ii. resulting in its shareholding falling below 10% of the issued capital stock; p. Firm evidence of significant improvement or deterioration in near-term earning prospects; q. The purchase or sale of significant assets; r. A new product or discovery; s. The public or private sale of a significant amount of additional securities; t. A call for redemption of securities; u. The borrowing of a significant amount of funds; v. Events of default under financing or sale agreements; w. A significant change in capital investment plans; x. A significant dispute or disputes with subcontractors, customers or suppliers, or with other parties; and y. A tender offer, take-over and merger for another corporation's securities. Q: What if an insider bought securities based on a non-public information that a 40% stock dividend will be declared but upon disclosure the share prices did not move, is his purchase insider trading ? A: No, since the market price of the security did not increase by a significant extent. Q: What percentage of increase can be considered significant ? A: There is no rule as to what percentage of increase can be considered significant. Q: If there is no hard and fast rule in declaring an increase significant, what factors can be considered in determining if the increase is significant ? A: The historical pricing and movement of the security may be looked into, thus, if the increase and movement is unusual, the increase may be considered a significant movement. Q: Is all information a fact of special significance only if there is a corresponding significant movement ? A: No . A fact of special significance need not have a corresponding significant movement in its price if a reasonable person would consider the fact especially important under the circumstances in determining his course of action in the light of such factors as the degree of its specificity, the extent of its difference from information generally available previously, and its nature and reliability. (Sec 30-c(b), RSA). It must be noted that Sec. 30 c-b was designed primarily for the case where there is no market. Q: Is there an instance when a fact of special significance as defined in 30-c will be considered insider trading ? A: Yes . The fact that disclosure of insider information may be improper under some circumstances, as where the insider is disabled from disclosing in order to protect a corporate conference or preliminary negotiation, does not excuse transactions by the insider without disclosure. In such a circumstance, he has no alternative but to forego the transaction or be liable for insider trading. (SEC v. Texas Gulf, supra). cdt INFORMATION NOT GENERALLY AVAILABLE Q: When is information already considered "generally available "? A: In the Texas Gulf Case , an insider may not act at the moment the company makes a public announcement of the information, but must wait "until the news could reasonably have been expected to appear over the media of widest circulation. The US Federal Securities Code from which we copied our insider trading law clearly specified the a fact is "generally available" one week after is it disclosed by means of a filing or press release or in any other manner reasonably designed to bring it to the attention of the investing public, otherwise, the burden of proving that a fact is "generally available" is on the person who asserts. The Revised Securities Act of the Philippines has failed to specify when a fact is considered "generally available". Q: Do rumors make the information public? A: No as rumors are not specific and trustworthy 4 as an official statement from the Exchange. COUNTERVAILING FIDUCIARY DUTY Q: Is a broker exempted from insider trading if he sold his customers account based on his fiduciary obligation to his customers to sell in the event he comes into possession of adverse information? A: Brokers may not use his inside information to benefit his clients at the expense of the general public. aisadc PENALTIES Q: What penalties are provided against insider trading ? A: If the Exchange finds insider trading, its usual course is to file the report to the SEC under SEC. 45 of the RSA. If the person found liable for insider trading is within its jurisdiction, such as a member, the Exchange may, if evidence warrants, impose the penalties it may deem appropriate which may include expulsion of the member. However, since most insider trader found by the Exchange is outside their jurisdiction, the Exchange can only file its investigative report to the SEC for its proper action. The SEC can impose administrative sanctions or file for a criminal case. The Administrative sanction can include suspension or revocation of its certificate, fine or disqualification from being an officer or principal stockholder of an issuer. On the other hand, a conviction in the regular courts for insider trading may entail imprisonment of not less than 7 years nor more than 21 years imprisonment and or a fine of not less than P5,000.00 nor more than P500,000.00. In addition to the foregoing, civil actions for damages may be brought against the insider by the stockholders. Q: Can a class action be brought against insiders? A: It has been held that a class action could be brought on behalf of all person who purchased stock of a company on an Exchange during the period that defendants were selling that stock on the basis of inside information. 5 Q: How shall damages be measured by the courts ? A: The US Court applied two approaches in determining the damages: (1) "The Draconian liability" leaves it to the course the "fashioning of appropriate relief, including the proper measure of damages," (2) "The Disgorgement approach" states that any uninformed investor may sue for the difference between what he paid (or received) for his stock and the market value that it reached a reasonable time after public disclosure of the inside information, but the total recovery by all such persons is limited to "the amount gained by the insider as a result of his selling or purchasing at the earlier date rather than delaying his sale or purchase until the parties could trade on an equal information basis." The Disgorgement approach seems to be the more reasonable compromise between imposing the "Draconian liability or "no liability at all. Q: Is profit necessary to establish insider trading liability ? A: No . FINAL ADVISE: ABSTAIN UNTIL DISCLOSURE!!! "Short-Swing" Liability Q: Do we have a policy against "short-swing"? A: The policy against "short-swing" can be found in Sec. 36 a & b of the RSA which requires every person who beneficially owns, directly or indirectly, more than 10% of any class of any equity security which is registered pursuant to this act, or who is a director or an officer of the issuer of such security to file with the SEC and, if listed, with the Exchange (a) at the time of the registration or listing or within 10 days after he acquires such status if the acquisition was after registration or listing, a statement indicating the amount of all equity securities of such issuer of which he is a beneficial owner, and (b) at the end of any month in which he acquires or disposes any equity security of that company, a statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during the calendar month. For the purpose of preventing the unfair use of information which may have been obtained by any such officer, director or 10% shareholder, the issuer or any of its stockholder suing on its behalf may recover any "profit" realized by any of the foregoing person from any purchase and sale or sale and purchase, of any equity security of the company within a period of less than six months. Q: Is the 10-day calendar disclosure required even if no changes in ownership happened during the month ? A: No. The disclosure is required only if there has been a change in such ownership during such month. Q: In suing for "short-swing" profits, is it necessary to show that the beneficial owner, director or officer actually took advantage of inside information? A: In suing for short-swing, it is not necessary to show that the defendant actually took advantage of, or had access to, inside information. 1 PROFITS Q: For Sec . 30-b, when is there profit ? A: Profits in "short-swing" exists whenever there is a purchase that can be matched against a sale at a higher price that is made less than six months after, or before, the purchase. (Smolowe v. Delendo, infra). Q: What happens when the defendant engages in a series of transactions at varying prices ? A: In these instances, the profit recoverable by the company is determined by matching the highest-price sales against the lowest-price purchases. This is allowed notwithstanding an overall trading loss during the six-month period involved. 2 Q: Can sales of common shares be matched against purchases of other type of securities ? A: Yes . There is no need to trace certificates in short-swings. For this purpose, securities are fungible, thus, sales of common stock can be matched against purchases of debentures convertible into common stock to produce a "profit". OFFICER AND DIRECTOR Q: Who are officers for short-swing purposes? A: Officers shall mean the president, the principal financial and accounting officers, any vice-president in charge of a principal business unit, division or function, and any other officer or person who performs similar policy-making functions for the issuer. 3 Q: Can a purchase or sale of a director or officer before he assumed that position or after be resigned be sued for "short-swing" liability ? A: It depends. A purchase or sale made by a person while he is a director or officer can under certain circumstances be matched against a sale or purchase made within 6 months but before he assumed that position or after he resigned. 4 However, if both the purchase and sale were made within the 6-month period following resignation as a director, the purchase and sale will not be covered. 5 Q: Is the preceding rule applicable to 10% beneficial owners ? A: No. Sec. 30-b explicitly excludes from liability any transaction by a 10% holder if he was not both at the time of the purchase and sale, or the sale and purchase, of the security involved. The words 'at the time of' being interpreted to mean 'simultaneously with' the purchase and sale, not before or after. Hence, the purchase which makes a person 10% shareholder cannot be matched against a subsequent sale to create a liability 6 even if the purchase and sale was all within the 6-month period. aisadc PURCHASE AND SALE Q: What shall be considered purchase and sale ? A: The exercise of an option is NOT a purchase of sale for "short-swing" but a put or call option on common stock, or of securities convertible into common stock is. Surrender of securities of one company for another company as in mergers" may constitute purchase and sale if the insider had power to put through the merger and there was a possibility for use of inside information 7 but if the insider was the "forced seller" (defeated tender-offeror) the disposition of his shares shall not be considered for "short-swing". EXEMPTED TRANSACTIONS FROM SHORT-SWING Q: What transactions are exempted from short-swing ? A: Sec. 30 b specifically exempts securities acquired in good faith in connection with a debt previously contracted. Likewise, US Courts have ruled that transactions by officers and directors pursuant to employee stock option plans and other employee benefit plans are exempt if the plan is approved by the shareholders. WITHIN ANY PERIOD OF LESS THAN SIX-MONTHS Q: How should the 6-month period be counted ? A: In the US case of Stella v. Graham-Paige, 132 F. Supp 100 (SDNY 1955), the court defined the six-month period by taking the date on which the stock was purchased, finding the corresponding date six months later, and then subtracting one day to determine the date on which the six-month period terminates. For example if the purchase of stock was made on March 27, the six-month period would end on September 26, and the purchaser could sell on that date without incurring liability because that period would constitute exactly 6-months, not less than 6-months. SUITS Q: When must the action to recover such profit be instituted ? A: The action to recover such profit may be instituted in any court of competent jurisdiction within two years after the date such profit was realized. Q: When may a stockholder bring an action for profits in short-swing ? A: If the issuer shall fail or refuse to bring such suit within 60 days after request or fail diligently to prosecute the same thereafter, the stockholder may bring the action in the name and in behalf of the issuer. Quick Guide on Corporate Disclosures The purpose of this checklist is to set guidelines for corporate disclosures. The key objectives are (1) to guide the listed companies on proper disclosures, (2) a sensitivity to the gray areas, (3) a set of good disclosure and compliance practices and (4) to propose to management on how they should handle sensitive, nonpublic informations. GENERAL RULE REGARDING DUTY TO DISCLOSE * All listed companies are required by the securities laws of the Philippines to disclose all structured and unstructured material information. A company must disclose when: a. A major decision has been made during a corporate meeting . Under the Listing Rules of the Exchange, a listed company must disclose material information (i.e. declaration of dividends, call on unpaid subscriptions, change in officers, directors, etc.) immediately after it was discussed during a corporate meeting. b. Prior disclosures are no longer accurate . Previous disclosures made to the Exchange which are no longer accurate must be updated by the company at all times so as not to mislead the investing public. c. A material information is already made known to a select group of people . d. A disclosure has been partially made on the topic . A listed company must submit a complete disclosure regarding the topic so as not to be misleading. e. Rumors or leaks are already circulating regarding the company . A company must always confirm or deny the rumors circulating about them to prevent the creation of a false market. f. False statements has been made by a third party (i . e . the media) . A company must always correct and update false statements made by third parties such as analysts and the business media. g. Unusual trading happens . A company must always disclose immediately to the exchange any material non-public information if there is an unusual trading activity. h. When requested by the Exchange thru the Compliance and Surveillance Department . FUNDAMENTALS OF MATERIAL INFORMATION * News should never be withheld on the basis that it is already available in the market, since a formal confirmation from the listed company is important to investors. * An information is likely to be material when it diverts from public expectations and perceptions especially if it is inconsistent with prior disclosures. * An information is probably material when one spends time deciding whether or not it is material. * Check the market's reaction on previous disclosures. The true test of an information's materiality is when it has an effect on the market when it is made public. SOFT INFORMATION * General Rule : Soft Information is not required to be disclosed but if any disclosure is to be made, it must be done in good faith and have a reasonable and factual basis. * Disclosure of Soft Information must later on be updated or corrected when a company revises or confirms its projections. * Use prudent language so as not to mislead the public. It is important to stress the uncertain nature of the information and avoid undue investor reliance which can lead to litigation. * Consider consulting with counsel first before disclosing any soft information. * Consider a review of your company's projections by an independent consultant. * Disclose or abstain: Consider the need to disclose soft information when the company purchases or sells its own securities. ANALYSTS AND ANALYSTS REPORTS * Give equal treatment to all analysts and do not favor them over the investing public, the media or the market in general. * Schedule regular meetings and conference calls with analysts. * Anticipate the questions that may be asked. * NON Material Nonpublic information may be disclosed provided it is consistent with prior disclosures. * Material Nonpublic information may be disclosed provided it is released to the public simultaneously. * Take note of the information to be furnished to the analysts. * Analysts' statements should not be adopted as one's own. * Adopt a policy of "no comment" on reports made by analysts. * Offer general statements in writing to rectify inaccurate analysts' reports. SHAREHOLDER INQUIRIES * All investors, no matter what the size of the shareholdings, should be entitled to the same information and treatment. * Handle institutional investors with extreme care. Inquiries should be anticipated and answers to questions about the company's recent disclosure should be prepared. Be ready for questions about management's action that may be regarded as not maximizing the short term value of the company's stock. * Follow the same rules for analysts and media inquiries. PREPARING FOR THE CORPORATE DISCLOSURE CRISIS * Set procedures in advance. One can never predict when certain management changes and sudden drop in the stock value would occur. * Monitor trading closely. * Disclosures should top the agenda for a crisis response. * Seek the assistance of counsel and the members of the Board of Directors when determining whether an information or an event is material or not. * Stop company transactions and prohibit trading by management until disclosure procedures have been made and acted upon. * It is permissible to include information on management's action plans. * At times, even if disclosure is not required, it is better to disclose in order to maintain the credibility with the market or investors. * Prepare a press release and a script for senior management and personnel. AVOID INSIDER TRADING LIABILITY * The company nor its insiders can trade in the company's securities if they possess material nonpublic information about the company. * Do not tip/disclose nonpublic material information about the company to those who do not have a valid reason for being told. * The "misappropriation" doctrine. Fiduciary principles prohibit the improper use of any confidential information obtained from or through the company. Confidential information regarding a third party is also subject to the prohibitions of trading and tipping. * Protect the confidentiality of non public information. When there is a need to disclose nonpublic material information to anybody, make sure that it is made clear to them that the information is confidential and if possible. have them sign a confidentiality agreement. * Before an insider trades, he must make sure that the information has already been disclosed and they should ask themselves why they want to trade. cdt * Avoid trading on information that has been disclosed but has not been disseminated. * Each company should have an insider trading policy which must be approved by a legal counsel and implemented by the Board of Directors. It should be known by all employees. It should be enforced by disciplinary procedures. It should address confidential information regarding third parties and prohibit any trading in the securities of customers, suppliers and joint venture partners. It should prohibit short selling on company's stock. It should be reviewed annually. * Insiders should have a controlled means of trading in the company's securities. There should be an established trading period and a pre-clearance procedure. cd PRESS RELEASES * All Press Releases must secure the approval of the Securities and Exchange Commission (SEC). Press Releases without SEC approval will not be honored by the Exchange. * All Press Releases, whether aimed at customers, industry groups, or investors, must be regarded as communications with the financial markets. * Stick to the facts; avoid boosterism. Premature announcements of new products, exaggerated claims, unwarranted promises, and overly optimistic assessments of current conditions or future prospects are centerpieces of plaintiffs' securities fraud lawsuits. DISCLOSING BAD NEWS Bad news should not be buried or concealed; it must be disclosed in the same manner and with the same clarity and emphasis as good news. Bad news must not be minimized by misleading statements about the uncertainty of its impact. Continuing Listing Requirements General (1) Generally, the issuer must promptly submit to the Exchange for publication any material information affecting such issuer which is of interest to investors. (2) Material information not yet disclosed to the Exchange should not be divulged by the issuer, its agent and its advisers to any other party. (3) All notices to the Exchange as referred to in this Chapter must be sent to the attention of the Compliance and Surveillance Department. Any notice addressed to other Departments and officials of this Exchange shall not be considered notice to the Exchange. Immediate Disclosure to be Made to the Exchange (1) The issuer shall keep the Exchange and the Commission promptly informed by phone or fax immediately within ten (10) minutes and confirmed in writing within two (2) hours, of any material information or corporate act, development, or event, the knowledge of which: (a) Is necessary to enable the investors to appraise the condition of the issuer; (b) Is necessary to avoid the creation of a false market for its securities; and (c) May reasonably be expected to materially affect market activity in, and the price of, its securities. Material information means that which induces or tends to induce or otherwise affect the sale or purchase of the securities. Without limiting the generality of the term, it shall also include information relating to the issuer's financial condition, prospects, development projects, contracts entered into in the ordinary course of the business or otherwise, and other information with significant impact on the issuer's operation such as, but not limited to the following : (a) Any declaration of a cash dividend, stock dividend and pre-emptive rights by the Board of Directors; (b) The holding of any stockholders' meeting; (c) A tender offer, take-over or reverse take-over and a merger for another corporations securities. (d) Capitalization issues, options, directors/officers/employee stock option plans, warrants, stock splits and reverse splits; (e) All material resolutions taken up in a stockholders' meeting of the issuer; (f) All call to be made on unpaid subscriptions to the capital stock of the issuer; (g) Any change of address of the registered office of the issuer or of its transfer agents; (h) Any change in the directors, officers, auditors or transfer agent of the issuer; (i) Any proposed amendment to the Articles of Incorporation and By-Laws; (j) Any change in shareholdings of directors, officers and stockholders owning more than 10% of any class of any security, as provided for under Sec. 36, Chapter IV of the Revised Securities Act; (k) Any action filed in court, or any application filed with the SEC, to dissolve or wind-up the issuer or any of its subsidiaries, or any amendment to the Articles of Incorporation shortening its corporate term; or any significant litigation that will affect the corporation; (l) The appointment of a receiver or liquidator for the issuer or any of its subsidiaries; (m) Any acquisition of shares of another corporation or any transaction resulting in such corporation becoming a subsidiary of the issuer; (n) Any acquisition by the issuer of shares resulting in its holding 10% or more of the paid-up capital of another listed corporation or where the total value of its holdings exceeds 5% of net assets of an unlisted corporation; (o) Joint ventures, mergers, consolidation, take-overs, reverse take-overs and acquisitions; (p) Any sale made by the issuer of its shareholdings in another listed or unlisted corporation, i. resulting in such corporation ceasing to be its subsidiary; ii. resulting in its shareholding falling below 10% of the issued capital stock; (q) Firm evidence of significant improvement or deterioration in near-term earnings prospects; (r) The purchase or sale of significant assets; (s) A new product or discovery; (t) The public or private sale of a significant amount of additional securities; (u) A call for redemption of securities; (v) The borrowing of a significant amount of funds; (w) Default of financing or sale agreements; (x) A significant change in capital investment plans; (v) A significant dispute or disputes with subcontractors, customers or suppliers, or with any other parties. (2) The issuer shall notify the Exchange of the holding of any stockholders meeting and its agenda, by giving the Exchange at least ten (10) trading days prior written notice thereof. (3) The issuer shall submit the list of stockholders who are entitled to notice and to vote at a regular or special stockholders meeting not later than five (5) trading days after the record date fixed by the issuer for the holding of such meeting; and the issuer shall also give the Exchange ten (10) trading days notice prior to the closing of transfer books. Clarification or Confirmation of Rumors or Reports (1) A public dissemination of information by any means, either correct or false, which has not been substantiated by the issuer and which is likely to have, or has had, an effect on the price of the issuer's securities or would likely to have a bearing on investment decisions by investors must be promptly and properly clarified or confirmed with the Exchange . (2) If rumors indicate that material information has been leaked, a frank and explicit announcement thereof is required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified. (3) Generally, the issuer is not required to respond to rumors or report predicting future sales, earnings or other data required. However, if such report is manifestly erroneous, or if the issuer or its officers is falsely cited as the source, the issuer must promptly deny or correct such rumor, report or attribution. Unusual Trading Activity Unusual trading activity involving an issuer's securities occurs without any apparent reason gives rise to the presumption that there is insider trading or a rumor or report, whether true or false, about the company. Whenever there is unusual trading activity in an issuer's securities, the issuer must respond promptly to any inquiries made by the Exchange concerning the unusual trading activity. In this connection: (1) If the unusual trading activity results from the "leak" of material information, the information in question must be material information, the information in question must be announced promptly. If the unusual trading activity results form a false rumor or report, the Exchange's policy on correction of such rumors and reports should be complied with; and (2) If the listed issuer is unable to determine the cause of the unusual trading activity, the exchange may suggest that the issuer make a public announcement to the effect that there are no undisclosed recent developments affecting the issuer that would account for the unusual trading activity. Policy on Thorough Public Dissemination (1) Disclosure of material information should normally be made after trading hours. If the disclosure is made during trading hours, the Exchange may halt the trading of the listed issuers securities to provide an opportunity for the material information to be properly disseminated. Trading would resume after one (1) hour from the announcement or dissemination or the next market day. (2) Public disclosure of material information should be made by an announcement released to the Exchange. Should the release be in the form of a press or news release, the SEC approval to the same pursuant to the SEC Rules must be submitted to the Exchange prior to its release. Content and Preparation of Public Announcement The content of a press or other public announcement is as important as its timing. Each announcement should: (1) Be factual, clear and succinct and avoid boosterism; (2) Contain sufficient quantitative information to allow investors to evaluate its relative importance to the activities of the listed issuer. (3) Bad news should not be buried or concealed. It must be disclosed in the same manner and with the same clarity and emphasis as good news. Its impact must not be minimized by equivocal or misleading statements. Update Prior Statements Which Are No Longer Accurate Should subsequent events make a prior disclosure inaccurate, the issuer must update and correct the prior disclosures. Reporting Requirement (1) Audited Annual Financial Report The issuer shall furnish the Exchange not later than 105 days after the end of its fiscal year, two hundred (200) copies of its Audited Annual Financial Report which shall contain the requirements as required in SEC Circular 7 Series of 1988, and among other things, the following: (a) a consolidated balance sheet showing assets and liabilities at the end of the latest concluded fiscal year, with comparative figures from the previous year; (b) a consolidated income and expense account for the latest fiscal year, with comparative figures; (c) an analysis of surplus account(s) covering the latest fiscal year, with comparative figures; (d) a similar set of financial statements: (i) for the issuer as a separate corporate entity; and (ii) for each subsidiary owned directly or indirectly; (e) a review of operations, if any; (f) the existence of management contracts if any and the amount of the management fees. (2) Annual Report The issuer shall furnish the Exchange within fifteen (15) days from its annual meeting, two hundred (200) copies of its Annual Report as required by SEC Circular no. 7 Series of 1988. (3) Semi-Annual Report The issuer shall also furnish the Exchange two hundred (200) copies of its Semi-Annual Report within sixty (60) days from the end of the first semester of its fiscal year containing similar information as provided in par. 508 section (1) including among others the following information: (a) An updated list of the top twenty (20) shareholders and their corresponding number of shares. (b) A distribution schedule indicating number and percentage of shareholders per range of shares, e.g. 200 shareholders (20%) with 1,000 to 10,000 shares, under the following format,: Shareholdings No. of Total Percentage of Holders Shares Total Issued & Outstanding Below 1,000 shares 1,000 10,000 shares 10,001 100,000 shares 100,001 500,000 shares 500,001 1,000,000 shares (4) Quarterly Reports The issuer shall also furnish the Exchange two hundred (200) copies of its Quarterly Reports within thirty (30) days from the end of each quarter as required in SEC-BED Circular No. 1, Series of 1987. (5) Report on Beneficial Ownership as required by Sec. 36 of the Revised Securities Act, which shall be filed 10 days from the end of the month. (6) Certified copy of the Annual Verification of the Bureau of Mines for mining companies. (7) Certificate of Good Standing of the issuer by the SEC to be submitted within thirty (30) days after the end of the calendar year. (8) Duplicate original of every other information, documents and reports submitted to the SEC pursuant to Sec. 11 of the Revised Securities Act. Inspection and Monitoring The issuer agree to allow authorized representatives of the Exchange to inspect and obtain copies of documents relevant to the requirements of listing and the representation in the prospectus. Role of Market Surveillance While an issuer should monitor the trading in its securities to detect any unusual trading activity, the Compliance Department also monitors trading in the Exchange. Where there is unusual trading activity in a listed security, and it appears to the Compliance Department that the unusual trading activity cannot be explained by known factors, the Department will normally require the listed issuer to issue an announcement as soon as practicable. The announcement should state whether the issuer an its directors are aware of the reasons for the unusual trading activity and whether there is any material information which has not been publicly disclosed. Footnotes 1. In re Cady, Roberts & Co., 40 S.E.C. 907 (1961). 1a. 69 Am Jur 2d p. 1018. * means a legal relationship of trust and confidence, in which one person acts on behalf of another person. 2. U.S. v. Winans, 612 F. Supp. 827 (S.D.N.Y. 1985). 4. In Re Investors Management Co., 44 S.E.C. 633 (1971). 5. Shapiro v. Merrill Lynch, 495 F. 2d 228 (2d Cir. 1974). 1. Smolowe v. Delendo, 136 F. 2d 231 (2d Cir. 1943). 2. Chemical Fund v. Xerox, 377 F. 2d 107 (2d Cir. 1967). 3. CRA Realty Corp. v. Croty, 878 F. 2d 562 (2d Cir. 1989). 4. Alder v. Klawans, 267 F. 2d 840 (2d Cir. 1959); Feder v. Martin, 406 F. 2d 260 (2d Cir. 1969). 5. Levy v. Seaton, 458 F. Supp. 1 (S.D.N.Y. 1973). 6. Foremoset-McKesson v. Provident, 423 U.S. 232 (1976). 7. Newmark v. RKO, 425 F. 2d 348 (2d Cir. 1970).