SECURITIES AND EXCHANGE COMMISSION, PETITIONER, VS. SUBIC BAY GOLF AND COUNTRY CLUB, INC. AND UNIVERSAL INTERNATIONAL GROUP DEVELOPMENT CORPORATION, RESPONDENTS.

Securities and Exchange Commission versus Subic Bay Golf and Country Club

The Case

This is a petition for review on certiorari filed by the Securities and Exchange Commission against Subic Bay Golf and Country Club, Inc. and Universal International Group Development Corporation. The Commission asks the Supreme Court to reverse the Court of Appeals, which had declared void the Commission's order directing the two corporations to refund the purchase price of shares of stock bought by two investors. The case matters because it draws the dividing line between two jurisdictions that are easy to confuse: the regulatory and administrative power of the Securities and Exchange Commission over violations of the securities laws, on one hand, and the jurisdiction of the designated Regional Trial Courts over intra-corporate controversies, on the other. The Court holds that the transfer of intra-corporate jurisdiction to the trial courts does not strip the Commission of its power to determine whether its administrative rules and regulations were violated.

Procedural History

The matter began with a letter-complaint filed with the Corporation Finance Department of the Securities and Exchange Commission. That Department conducted an ocular inspection, then issued an order giving due course to the complaint. It ordered the corporations to refund the purchase price of the shares, to amend the prospectus, to suspend the certificate of registration and permit to sell, and to pay a fine. The corporations elevated the matter to the Securities and Exchange Commission en banc, which affirmed the Department. Their motion for reconsideration was denied. They then went to the Court of Appeals on a petition for review. The Court of Appeals declared the Commission's decision void insofar as it ordered the refund, holding that the matter was an intra-corporate controversy within the jurisdiction of the Regional Trial Court. The Commission then came to the Supreme Court through this petition for review on certiorari.

Facts

The Subic Bay Golf Course was operated by the Subic Bay Metropolitan Authority. A Taiwanese corporation, Universal International Group, was chosen to implement the plan to privatize the golf course, and in May 1995 it entered into a Lease and Development Agreement with the Authority. Universal International Group Development Corporation later succeeded to those interests. In April 1996, that corporation assigned its rights in the development, operations, and marketing of the golf course to Subic Bay Golf and Country Club, Inc., and the two entered into a Development Agreement under which the developer would finance, construct, and develop the golf course in consideration of shares of stock.

The Securities and Exchange Commission issued an order for the registration of three thousand no par value shares, and the club was issued a certificate of permit to offer securities for sale to the public. The shares were sold at 425,000 pesos per share, and the proceeds were to be used to pay the developer for the development of the golf course. The prospectus promised an eighteen hole golf course meeting the highest standards, an illuminated nine hole executive course, a swimming pool and tennis courts, golf villas and a residential condominium hotel, a driving range, and club facilities with restaurants and furnished rooms.

In November 2002, two investors, Regina Filart and Margarita Villareal, wrote the Director of the Corporation Finance Department. They had been asking for a refund of their payments, and their requests were not acted upon. They alleged that the promised amenities were never delivered, yet they were being charged monthly dues and were threatened with the auction of their shares over alleged back dues. They asked that their letter be treated as a formal complaint. The corporations answered that they had substantially complied and that the other developments were not part of the rights purchased with member shares. An ocular inspection in January 2003 found that the additional nine hole course had not started, the swimming pool had no water, and the promised condominiums, villas, hotel, and conference center did not exist. The Corporation Finance Department then ordered the refund, the amendment of the prospectus, the suspension of the permit, and the payment of a fine.

Issues

• Whether or not the controversy is an intra-corporate dispute that falls under the jurisdiction of the designated Regional Trial Court rather than the Securities and Exchange Commission.
• Whether or not the Securities and Exchange Commission may order the refund of the purchase price of securities upon a finding of fraudulent representations in the prospectus.

Applicable Provisions

Section 5 of Presidential Decree No. 902-A, as it stood, conferred on the Commission original and exclusive jurisdiction over the enumerated cases, including this one:

Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission.

This is the historical source of the Commission's adjudicative power over fraud and misrepresentation, which the later law transferred to the trial courts.

Section 5.2 of Republic Act No. 8799, the Securities Regulation Code, effected that transfer:

The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court.

This provision is the basis for holding that intra-corporate disputes now belong to the designated Regional Trial Courts.

Section 13 of the Securities Regulation Code preserves the Commission's regulatory power over registration:

The Commission may reject a registration statement and refuse registration of the security thereunder, or revoke the effectivity of a registration statement and the registration of the security thereunder after due notice and hearing by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that the issuer has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed.

This shows that the Commission retains administrative authority to act against violations, fraud, and misrepresentations in securities registration.

Ruling

On the first issue, the Court ruled that the controversy is indeed an intra-corporate dispute. It applied two tests. Under the relationship test, the dispute must be between the corporation and its stockholders, among stockholders, or between the entity and the state regarding its franchise or license. Under the nature of the controversy test, the action must involve the enforcement of corporate rights and obligations. The Court held that the nature of the action is determined by the allegations and reliefs in the complaint. Here, the investors' right to a refund rested on the corporation's failure to abide by its representations in the prospectus, which is a shareholder's right under corporate rules. Jurisdiction therefore lies with the designated Regional Trial Court.

On the second issue, however, the Court ruled that the presence of intra-corporate allegations does not oust the Commission of its regulatory and administrative jurisdiction. The Commission administers the Securities Regulation Code, whose policy is to protect investors and ensure full and fair disclosure. Its regulatory power covers the approval, rejection, suspension, and revocation of registrations for violations, fraud, and misrepresentations. The Court distinguished the two powers: the Commission may determine whether administrative rules were violated and impose administrative sanctions, but it may not adjudicate private rights or award a refund, which is a matter for the trial court.

Doctrine

First, intra-corporate disputes fall under the jurisdiction of the designated Regional Trial Courts, and a dispute is intra-corporate only if it satisfies both the relationship test and the nature of the controversy test. Second, the transfer of that jurisdiction does not deprive the Securities and Exchange Commission of its regulatory and administrative power to determine whether its rules and regulations were violated and to impose administrative sanctions such as fines, suspension, or revocation of registration. Third, the Commission cannot order the refund of the purchase price of shares, because that relief partakes of an adjudication of private rights belonging to the trial court.

Disposition

The Court ruled for Subic Bay Golf and Country Club and Universal International Group Development Corporation, sustaining the Court of Appeals' declaration that the order to refund the purchase price was void for lack of jurisdiction.

Remember This

Memorize this line: the transfer of intra-corporate jurisdiction to the trial courts does not oust the Securities and Exchange Commission of its power to determine whether administrative rules and regulations were violated. Examiners use this case to test the boundary between the Commission's regulatory sanctions and the trial court's power to adjudicate private rights and order refunds.