SEC Jurisdiction Over Corporate Controversies: The Lozano v. De Los Santos Test

The Securities and Exchange Commission (SEC) does not automatically have jurisdiction over every dispute involving corporations or associations. In Lozano v. De Los Santos (G.R. No. 125221, June 19, 1997), the Supreme Court laid down a clear two-element test to determine when the SEC—not the regular courts—should hear a corporate controversy. The case is a useful guide for officers, members, and lawyers who need to know which forum has authority over their dispute.

The Facts of the Case

Reynaldo Lozano was president of KAMAJDA, a jeepney drivers' association, while Antonio Anda headed SAMAJODA, a separate association. In August 1995, they agreed to consolidate their associations into a single entity called UMAJODA. They also agreed to elect one set of officers who would have the sole authority to collect daily dues from members.

Elections were held on October 29, 1995. Lozano won as president. Anda protested, alleging fraud, and refused to recognize the results. He also continued collecting dues from his association's members despite demands to stop.

Lozano filed a complaint for damages and an injunction before the Municipal Circuit Trial Court (MCTC). Anda moved to dismiss, arguing that the SEC had exclusive jurisdiction over the dispute as an intracorporate controversy. The MCTC denied the motion, but on certiorari, the Regional Trial Court (RTC) reversed and ordered the MCTC to dismiss the case for lack of jurisdiction.

The Issue

The central question was whether the SEC had jurisdiction over a dispute between the presidents of two separate associations who had agreed to consolidate but had not yet completed the consolidation process.

The SEC Jurisdiction Test

The Supreme Court ruled that SEC jurisdiction under Section 5 of Presidential Decree No. 902-A requires the concurrence of two elements:

1. Status or relationship of the parties. The controversy must arise out of intracorporate or partnership relations—between and among stockholders, members, or associates; between any of them and the corporation or association of which they are members; or between the corporation and the State concerning its franchise.

2. Nature of the question. The dispute must be intrinsically connected with the regulation of the corporation or deal with its internal affairs.

Both elements must be present. If either is missing, the SEC has no jurisdiction, and the case belongs in the regular courts.

Why the SEC Had No Jurisdiction Here

Applying the test, the Court found that no intracorporate relation existed between Lozano and Anda. They were presidents of two separate, distinct associations, each duly registered with the SEC. Their dispute was not within either association—it was between members of different entities.

The proposed consolidation was still a proposal. Under Sections 78 and 79 of the Corporation Code, consolidation becomes effective only upon the issuance of a certificate of consolidation by the SEC. Mere agreement between members is not enough. Since no certificate had been issued, UMAJODA did not yet exist as a juridical entity, and no intracorporate relationship could arise from it.

The Court also rejected the argument that the parties were a corporation by estoppel. That doctrine, found in Section 21 of the Corporation Code, applies when persons assume to form a corporation and deal with third persons. Here, no third person was involved, and the conflict arose only between the parties who knew the consolidation had not been registered. Jurisdiction, the Court stressed, is fixed by law and cannot be conferred by agreement, waiver, or estoppel.

Practical Takeaways

• Check both elements first. Before assuming the SEC has jurisdiction, verify (1) that the parties share an intracorporate relationship and (2) that the dispute concerns internal corporate affairs. Both must be present.
• A proposed merger or consolidation does not create jurisdiction. Until the SEC issues a certificate of consolidation, the constituent entities remain separate, and disputes between their members are not intracorporate.
• Jurisdiction cannot be waived or created by estoppel. The parties cannot confer jurisdiction on a tribunal by agreement, and the doctrine of corporation by estoppel will not override jurisdictional rules.
• Pleadings matter. The complaint's allegations determine jurisdiction. If the dispute is essentially between individuals from different entities over money claims, the regular courts may be the proper forum.
• Since the 2019 Revised Corporation Code, SEC jurisdiction over intracorporate disputes has been transferred to the Regional Trial Courts designated as special commercial courts. The two-element test in Lozano, however, remains instructive for identifying what qualifies as an intracorporate controversy.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.