SEC Admin Case No. 10-10-216 Re: Pacific Star Properties, Inc. versus CRMD

PICC Secretariat Building, PICC Complex, Pasay City Securities and Exchange Commission Republic of the Philippines Department of Finance

COMMISSION EN BANC

PACIFIC STAR PROPERTIES, INC. Appellant,

- versus SEC En Banc Case No. 10-10-216

MONITORING DEPARTMENT COMPANY REGISTRATION AND Appellee.

DECISION

Authorized Capital Stock. of the Company Registration and Monitoring Department (CRMD), which revoked Pacific Star Properties, Inc's Certificate of Approval of Increase of This is an Appeal of the Letter-Orders dated 23 July 2010 and 25 August 2010

RELEVANT FACTS

had an initial Authorized Capital Stock of PHP 50 Million. registered with the Commission (SEC Reg. No. A199813548) on 8 September 1998. It Pacific Star Properties, Inc. (PACIFIC STAR) is a domestic corporation duly-

Stock to PHP 150 Million, where eighteen (18) parcels of land (lots) would be transferred to it by the subscriber,1 in consideration of the shares. Sometime in 2002, PACIFIC STAR applied for increase its Authorized Capital

Authorized Capital Stock. On 27 July 2004, the CRMD issued a Certificate of Approval of Increase of

transfer the 18 lots to PACIFIC STAR's name within the 90-day period from approval Ownership Registration as Paid-up Capital (SEC Guidelines) dated 15 November STAR to explain why the Certificate of Approval should not be revoked for failure to prescribed by the SEC Guidelines Covering the Use of Properties that Require 1994 On 11 August 2005, the CRMD issued a Show Cause Order directing PACIFIC

that it was having difficulty securing the Bureau of Internal Revenue (BIR) Tax Clearance for the property-for-stock transaction, as it paid the property taxes at the wrong BIR venue. On 21 September 2005, PACIFIC STAR appeared before the CRMD, alleging

delay, but it did not file such a report. The CRMD directed PACIFIC STAR to submit a Report on the reason for the

1 Dolmar Real Estate Development Corporation

PACIFIC STAR PROPERTIES, INC. v. CRMD SEC En Banc Case No. 10-10-216 Page 2 of 6

Was returned unserved since PACIFIC STAR had changed its address. On 13 February 2009, the CRMD issued another Show Cause Order, which

revoked PACIFIC STAR's Certificate of Approval of Increase of Authorized Capital Stock, viz. On 23 July 2010, the CRMD issued the first assailed Letter-Order, which

PROPERTIES, INC. is hereby REVOKED for its failure to use of properties that require ownership registration as Exchange Commission under Batas Pambansa Blg. 68 [The Corporation Code], P.D. 902-A as amended, and other existing laws, the Certificate of Approval of Increase of Authorized Capital Stock approved by the Commission on July 27, 2004 of PACIFIC STAR Guidelines adopted on November 15, 1994, covering the paid-up capital.2 Pursuant to the authority to suspend or revoke, after comply with the conditions set forth in the Commission's proper notice and hearing, vested in the Securities and

the CRMD, raising substantial compliance and good faith. On 13 August 2010, PACIFIC STAR filed a Motion for Reconsideration with

dismissed PACIFIC STAR's Motion for Reconsideration as a prohibited pleading, viz. On 25 August 2010, the CRMD issued the second assailed Letter-Order, which

Securities and Exchange Commission. The proper Please be informed that your motion is a prohibited pleading under the 2006 Rules of Procedure of the procedure is to file an appeal with the Commission En Banc pursuant to the said rule.3

that: On 11 October 2010, PACIFIC STAR filed its Memorandum on Appeal, arguing

(1) It substantially complied with the requirement to technical discrepancies" (i.e. payment of property transfer title, considering it exerted utmost efforts completing the last transfer by "some legal and taxes at the wrong BIR venue, and being penalized by the BIR due to such error);4 and and succeeded in transferring title to 17 out of the intended 18 lots, but was prevented from

(2) It was in good faith and did not "disregard" the never received the same.5 Show Cause 0rder dated 13 February 2009, as it

argued that: On 29 October 2010, the CRMD filed its Reply Memorandum. The CRMD

3 CRMD Letter-Order dated 25 August 2010 5 Pages 7-8 of Memorandum on Appeal 4 Pages 4-7 of Memorandum on Appeal 2 Page 2 of CRMD Letter-Order dated 23 July 2010

PACIFIC STAR PROPERTIES, INC. v. CRMD SEC En Banc Case No. 10-10-216 Page 3 of 6

(1) The SEC Guidelines nowhere state that substantial be sufficient, because insufficient ' or partial stock that is prohibited by law;6 and compliance with the required transfer of titles would consideration for shares amounts to watered

(2) The Show Cause Order was properly served on the admits that the process served noted "R.T.S. Moved Out 2/20/09").7 last known address of PACIFIC STAR, where it was served with the previous orders (However, the CRMD

Manifestation). and able to substitute cash in lieu of the Subject Title" to the 18th lot (2017 On 3 June 2017, PACIFIC STAR filed a Manifestation that it is "ready, willing.

Manifestation), expressly stating that it has still only transferred title to 17 out of the 18 lots, viz. On 22 May 2018, PACIFIC STAR filed another Manifestation (2018

transferred to the latter.: Meanwhile, the records will bear that except for the property covered by the Subject Title, the seventeen (17) other properties proposed to be conveyed by [Dolmar Real Estate Development Corporation, the subscriber] to [PACIFICSTAR] were successfullyand timely

Hence this appeal.

DISCUSSION

Approval of Increase of Authorized Capital Stock. The only issue is whether or not the CRMD erred in revoking the Certificate of

Ownership Registration as Paid-up Capital of the Corporation (SEC Guidelines) corporation [Par. 1.a.], as well as the penalty of revocation of approval if such transfers are not completed within 90 days [Par. 2], viz. dated 15 November 1994 provides for a 90-day period for transferring title to the The SEC Guidelines Covering the Use of Properties that Require

the application extendible for justifiable reasons. shall be held in escrow by the Commission and shall be released only after proof of the transfer of the certificate of ownership thereon, in the name of the transferee-corporation, is submitted to this Commission within ninety (90) days from the date of approval of 1.a. Where the payment is made in the form of land, the corresponding shares of stock to be issued thereon

6 Pages 1-2 of Reply Memorandum 7 Pages 2-3 of Reply Memorandum 8 Page 5 of 2018 Manifestation

PACIFIC STAR PROPERTIES, INC. v. CRMD SEC En Banc Case No. 10-10-216 Page 4 of 6

XXX XXX XXX

as the Commission may deem fit under the 2. That the non-submission of the documents above, hearing, shall be sufficient ground for the revocation of the related application Commission or for the institution of appropriate action circumstances. within the prescribed period, after due notice and approved by the

of ownership within 90 days, and (2) an opportunity to be heard. Under the Guidelines, there must be (1) a failure to submit the proof of transfer

STAR was not able to provide proof of transfer of ownership over all of the lots within the 90-day period, transferring title to only 17 out of the intended 18 lots. The first requirement, Failure to Submit Proof of Transfer, is present. PACIFIC

this indivisible obligation was also the basis for the issuance of the certificate of approval of increase in authorized capital stock, viz. only comprises 1 subscription contract, as alleged by PACIFIC STAR itself, and The 18 lots in consideration of an additional PHP 1009 Million equity

PACIFIC STAR was incorporated on September 8, 1998 subscription thereto to be paid by way of the 27, 2004, the Securities and Exchange Commission approved the application and issued a Certificate of Approval of Increase of Authorized Capital Stock.10 (Emphasis supplied) with an initial capitalization of Fifty Million Pesos (PHP50,000,000.00). Thereafter, PACIFIC STAR sought to increase its authorized capital stock to One Hundred Fifty Million Pesos (PHP 150,000,000.00) with the assignment of eighteen (18) parcels of land. On July

PACIFIC STAR as "property-for-stock," is only 1 indivisible obligation to transfer 18 lots in exchange for an additional PHP 100 Million equity. That is what PACIFIC STAR transfer of all 18 lots would result in revocation. watered stock which is prohibited by law. The subscription contract, described by applied for, and that is what CRMD approved. It follows that non-fulfillment of the As correctly argued by the CRMD, insufficient or partial consideration leads to

and since PACIFIC STAR did not apply for approval of "18 lots or cash," it cannot now change terms. The approval pertains to the terms of the subscription contract presented to CRMD, revoked the approval of 18 Iots as consideration, because there were only 17 lots cash for the remaining land title, does not affect the CRMD's revocation. The CRMD Similarly, PACIFIC STAR's 2017 Manifestation, where it offered to substitute

amount of the subscription is acceptable as consideration for shares, viz. Section 63 of the Revised Corporation Code provides that only the full

10 Page 2 of Memorandum on Appeal 9 Increased ACS of PHP 150M minus Initial ACS of PHP 50M

PACIFIC STAR PROPERTIES, INC. v. CRMD SEC En Banc Case No. 10-10-216 Page 5 of 6

any is due, has been paid. interest and expenses (in case of delinquent shares), if No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with

incapable of partial fulfillment, which also means that it is not susceptible to substantial compliance. Applying this to the facts, only 18 transferred lots--no more, no less--can warrant the Approval of Increase in Authorized Capital Stock. The principle expressed here is that a subscription contract is indivisible and

shares. In this case, only 17 out 18 were actually received, and there is obviously insufficient consideration for the shares subject of the subscription contract. "property xxx actually received by the corporation" is acceptable as consideration for Meanwhile, Section 61 of the Revised Corporation Code adds that only

in watered stock,11 i.e. an issuance for less than the issued price of 18 lots. price was exactly 18 lots in exchange for an additional PHP 100 Million equity. Thus, issued price refers to the actual price of the subscription. In this case, the issued 17 lots cannot be accepted by the CRMD as substantial compliance, since it will result than the par or issued price thereof." While par is the minimum price for a share, the Section 61 also states that "Stocks shall not be issued for a consideration less

PACIFIC STAR ample opportunity to be heard. PACIFIC STAR duly-received the first Show Cause Order dated 11 August 2005. The second requirement, Due Process, was also satisfied. The CRMD gave

2005, where it raised the substantial compliance argument reiterated in this appeal. In response, PACIFIC STAR appeared before the CRMD on 21 September

Report on the cause of the delay, which it failed to submit to CRMD. After the conference, the CRMD gave PACIFIC STAR a chance to submit a

known address of PACIFIC STAR, where previous orders were served, but the latter the first, and did not raise any legal issues that PACIFIC STAR had not yet addressed at the conference. had apparently moved out on 20 February 2009. This second order merely reiterated The CRMD then attempted to serve a second Show Cause Order at the last

CRMD afforded ample opportunity to be heard, the Revocation complies with the SEC Guidelines Covering the Use of Properties Requiring Ownership Registration as Paid- up Capital. The CRMD also prevented partial payment of subscription and issuance of watered stock. Since PACIFIC STAR was unable to submit a timely Proof of Transfer, and since

Increase of Authorized Capital Stock. Therefore, the CRMD did not err in Revoking the Certificate of Approval of

stocks for a consideration less than its par or issued value xxx" 11 "Watered stock" is defined in Section 64 cf the Revised Corporation Code as "the issuance of

PACIFIC STAR PROPERTIES, INC. v. CRMD SEC En Banc Case No. 10-10-216 Page 6 of 6 NOT PRECLUDED FROM FILING FOR SUBSTITUTION OF PAYMENT

of the Commission has changed with regard to the substitution of another consideration, such as cash, if the applicant is prevented for some meritorious reason from transferring title within the prescribed period. Notwithstanding the correctness of the CRMD ruling back in 2010, the stance

provision to the SEC Guidelines Covering the Use of Properties Requiring Ownership Registration as Paid-up Capital, viz. SEC Memorandum Circular No. 14, Series of 2013 added the following

condition [i.e. filing of proof of transfer within the of payment xxx In the event of inability, to comply with the aforesaid prescribed period], the applicant corporation is not precluded from filing a verified petition for substitution

filing a verified petition with the CRMD to be allowed to increase its authorized capital stock by substituting cash for the 18th land title which could not be transferred. Thus, under the current SEC Guidelines, PACIFIC STAR is not precluded from

consider the matter further. intention to fulfill its obligation in cash, dictates that the operating department should This shift in the Commission's policy, coupled with PACIFIC STAR's manifest

proceedings. WHEREFORE, the matter is hereby REMANDED to the CRMD for further

cash, in lieu of real property, within ten (10) days from receipt of this Decision Failure to comply within the period specified shall automatically result in the CRMD's Letter-Orders dated 23 July 2010 and 25 August 2010 being affirmed. PACIFIC STAR is directed to file a verified petition for substitute payment in

SO ORDERED.

Pasay City, Philippines; 7 March 2019

EMILIO AQUINC

Che. Xy

Commissioner EPHYRO LUIS B. AMATONG Commissioner

JAVEY PAUL D. FRANCISCO Commissioner KELVN Commissioner ER KLEE

*Sick Leave