SEC En Banc Case No. 01-18-437 Calata Corporation Appellant, - versus - The Philippine Stock Exchange, Inc. Appellee.

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

COMMISSION EN BANC

CALATA CORPORATION, Appellant,

EXCHANGE, INC., THE PHILIPPINE - versus - Appellee. STOCK Appeal of PSE Decision SEC EB Case No. 01-18-437

DECISION

22 November 2017 of THE PHILIPPINE STOCK EXCHANGE, INC. (PSE) (CALATA), assailing the Decision dated 3 November 2017 and the Order dated This is an appeal to the Commission En Banc by CALATA CORPORATION

RELEVANT FACTS

CALATA is a corporation duly-registered with the Commission.

the purpose of operating a stock exchange, and aiso a self-regulatory organization empowered to regulate the corporations listed and traded therein. PSE is a corporation duly-registered with the Commission, established for

CALATA, for the development and operation of Mactan Leisure City (MLC). Gaming Investment Group, LLC (SINO) and the Macau Resources Group Limited (MRG) for the creation of a Real Estate Investment Trust (REIT), owned by disclosed to the PSE that it was entering into a partnership with Sino-American On 23 August 2016, 26 August 2016, and 5 September 2016, CALATA

by January 2017; and (c) it would be completed by mid-2020. REIT would be incorporated by September 2016; (b) the site works would begin CALATA also disclosed the following milestones in the MLC project: (a) the

it was "working diligently to create a commitment with another group." investors" have "decided to retract their commitment" to the MLC project, and that On 15 March 2017, CALATA disclosed that "a particular group of foreign

Chairman/CEO/President of CALATA, made multiple trades of CALATA shares. The corporation disclosed these transactions on 23 June 2017. Between 29 November 2016 and 16 March 2017, Joseph H. Calata,

trades of CALATA shares. The corporation disclosed these transactions on 7 July 2017. Between 20 April 2017 to 20 June 2017, Mr. Calata again made multiple

CALATA CORPORATION v. PSE SEC En Banc Case No. 01-18-437 Page 2 of 11

attached to the Audited Financial Statements for 2016. Gonzaga, signed CALATA's Statement of Management's Responsibility (SMR) On 26 April 2017, Joseph H. Calata, along with Acting CFO Rose Ann P.

Joseph H. Calata traded CALATA shares on 26 April 2017

On 27 April 2017, CALATA disclosed an increase in annual revenues.

Greenhouse, in order to improve the quality of locally-grown crops. The Calata was negotiating with a leading greenhouse greenhouse project would also include the Yupangco Group. entitled, "Calata, Israeli firm talks for greenhouse tie-up." The article stated that On 30 April 2017, CALATA was featured in a Manila Bulletin article solution provider, Netafim

to pursue the greenhouse project with Netafim and the Yupangco Group. On 2 May 2017, CALATA disclosed to the PSE that indeed they were going

Joseph H. Calata traded CALATA shares on 2 May 2017.

against CALATA, serving notices on the latter on 19 July 2017 via PSE EDGE and on 21 July 2017 via courier. On 12 July 2017, the PSE initiated Involuntary Delisting proceedings

with a written request for hearing. On 9 August 2017, CALATA filed its Position Paper with the PSE, along

the Supplemental Position Paper. submitted its Supplemental Position Paper and its Manifestation re: Errors in On 31 August 2017 and 4 September 2017, respectively, CALATA

CALATA seven (7) days from the last hearing to file its Memorandum. Delisting Panel formed by the PSE to hear the case against CALATA. The PSE gave On 5 September 2017 and on 2 October 2017, Hearings were held by the

On 11 October 2017, CALATA filed its Memorandum with the PSE.

for decision. On 13 October 2017, the PSE notified CALATA that the case was submitted

Disclosure Rules. CALATA liable for multiple violations of Sections 13.1 and 13.2 of the PSE On 3 November 2017, the PSE issued the assailed Decision, finding the

On 8 November 2017, CALATA filed a Motion for Reconsideration

CALATA's Motion for Reconsideration. On 22 November 2017, the PSE issued the assailed Order denying

registry of the PSE. On 11 December 2017, CALATA's shares were delisted from the official

Commission En Banc. On 8 January 2018, CALATA filed its Memorandum of Appeal with the

CALATA CORPORATION v. PSE SEC En Banc Case No. 01-18-437 Page 3 of 11

On 16 May 2017, the Commission En Banc issued an Order to File Comment to the PSE. This was returned unserved, after being inadvertently sent to the PSE's previous address indicated in the Memorandum of Appeal.

On 10 July 2018, the Commission En Banc issued a Second Order to File Comment to the PSE, which was received by the latter on 11 July 2018.

On 26 July 2018, the PSE filed its Comment on CALATA's Memorandum on Appeal.

On 7 September 2018, the Commission En Banc issued an Order submitting this case for decision.

Hence this appeal.

DISCUSSION

The PSE's rule-making power as a Self-Regulatory Organization (SRO) is well-settled, and so is the validity on the PSE Disclosure Rules and Delisting Rules that were duly-approved by the Commission.

SEC. 3-11, Rule III, Part V of 2016 SEC Rules of Procedure provides the review standard for Decisions of the PSE, an SRO, viz.

SEC. 3-11. Review Standard. Findings of fact by the

the Self-Regulatory Organization shall not be disturbed by the Commission En Banc, unless serious Operating Department, the Special Hearing Panel, or

errors of fact have been committed.

In the assailed PSE Decision, CALATA was held liable for multiple violations of PSE Disclosure Rules 13.1 and 13.2, in relation to Section 2 of the Penalties and Fines of the PSE Disclosure Rules and Paragraphs (a) and (i) of the PSE Delisting Rules.

Section 13.1 of the PSE Disclosure Rules states that:

SECTION 13. Disclosure on Transactions of Directors and Principal Officers in the Issuer's Securities -

Issuers must disclose to the Exchange the direct and indirect ownership of its directors and principal 13.1 Notwithstanding Section 17.5 of these Rules.

officers in its securities within five (5) Trading Days after:

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c. any acquisition, disposal, or change in the shareholdings of the Directors and Officers.

CALATA CORPORATION v. PSE SEC En Banc Case No.01-18-437 Page 4 of 11

Section 13.2 of the PSE Disclosure Rules, also known as the "Blackout Rule," states that:

SECTION 13. Disclosure on Transactions of Directors and Principal Officers in the Issuer's Securities -

13.2. A Director or Principal Officer of an Issuer must not deal in the Issuer's securities during the period within which a material non-public information is obtained and up to two (2) full Trading Days after the price sensitive information is disclosed.

Section 2 of the Penalties and Fines of the PSE Disclosure Rules states that:

SECTION 2. Penalty for Non-Compliance with

of the terms and conditions of the Listing Agreement Unstructured Disclosure Requirements -- Any violation and of any other provisions of these Rules committed within a twelve-month period shall make the Issuer liable for the following penalties:

First P50,000.00

Violation nature Third Fourth Violation Second Violation of a similar Violation P75,000.00 issue for a period of one Ground for Suspension of trading the delisting (1) month

Paragraphs (a) and (i) of the PSE Delisting Rules states that:

Criteria for Delisting - A listed company that is experiencing one of the following conditions shall be considered for delisting:

(a) The listed company has failed to comply with the Listing Agreement or the Listing and Disclosure Rules of the Exchange, now or hereinafter in effect, despite notice and after the lapse of the period specified;

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(i) The listed company repeatedly fails to make timely, adequate, and accurate disclosures of information, or fails to submit any reportorial requirement to the Exchange, its shareholders and the investing public in accordance with the Disclosure Rules of the Exchange, or willfully makes a false statement in the financial statements[.]

CALATA CORPORATION v. PSE SEC En Banc Case No. 01-18-437 Page 5 of 11

SECTION 13.1 VIOLATIONS

Section 13.1 holds the listed corporation liable for its failure to timely disclose the change in shareholdings of its Director and Principal Officers. Section 2 of the Penalties and Fines of the PSE Disclosure Rules states that the Fourth (and Subsequent) Violations would be a Ground for Delisting.

The Commission En Banc adopts the findings of fact of the PSE, insofar as there being twenty-nine (29) distinct violations of Section 13.1 of the PSE Disclosure Rules, composed of two sets of undisclosed transactions.

Under Section 13.1(c), Directors and Principal Officers of a listed company must disclose to the PSE any "acquisition, disposal, or change" in their shareholdings within five (5) trading days.

Here, Joseph H. Calata, a Director and Principal Officer, made multiple trades of CALATA shares between 29 November 2016 and 16 March 2017 but the corporation only disclosed this first set of undisclosed transactions on 23 June 2017, which is manifestly beyond five (5) trading days.

to 20 June 2017 but the corporation only disclosed this second set of undisclosed transactions on 7 July 2017, which is manifestly beyond five (5) trading days. Mr. Calata also made multiple trades of CALATA shares from 20 April 2017

Intent is immaterial in Section 13.1 violations.

(29) distinct violations of Section 13.1, in excess of four violations. The first and second set of undisclosed transactions add up to twenty-nine

violations of Section 13.1 of the PSE Disclosure Rules. Therefore, CALATA may be validly Delisted because of twenty-nine (29)

SECTION 13.2 VIOLATIONS

Section 13.2 holds the listed corporation liable for trades by its Directors and Principal Officers executed during a "Blackout Period," where only they are in

Fines of the PSE Disclosure Rules states that the Fourth (and Subsequent) possession of material non-public information. Section 2 of the Penalties and

Violations would be a Ground for Delisting.

there being twenty-six (26) distinct violations of the Blackout Rule, i.e. Section 13.2 of the PSE Disclosure Rules, within two Blackout Periods. The Commission En Banc adopts the findings of fact of the PSE, insofar as

triggering the corresponding Blackout Periods, which extend to two (2) trading Here, the following are deemed material non-public information,

days after the disclosure of such information, viz.

(1) The disclosure of the indefinite delays in the MLC project due to foreign investors having retracting their commitment,

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blackout period); Blackout Period between 1 October 2016 and 17 March 2017 (first

and the Yupangco group, Blackout Period between 30 April 2017 to 4 May 2017 (collectively, second blackout period). (2) The disclosure of increase in annual revenues, Blackout Period between 26 April 2017 and 29 April 2017, along with the disclosure of a greenhouse project between CALATA, Netafim.

have admitted that this information is material and disclosable."1 Company, by its act of disclosing its partnership with Sino and MRG, is deemed to Regarding the MLC project, we agree with the PSE that: "Even the

Intent is immaterial in Section 13.2 violations.

shares, which is attributable to the corporation as twenty-six (26) distinct violations of Section 13.2, in excess of four violations. During these two Blackout Periods, Joseph H. Calata traded his CALATA

violations of Section 13.2 of the PSE Disclosure Rules. Therefore, CALATA may be validly Delisted because of twenty-six (26)

DISQUALIFICATIONS

multiple violations of Sections 13.1 and 13.2 of the PSE Disclosure Rules have been established. The PSE correctly invoked the Corporation Code and the Code of Corporate Governance to hold the Directors of CALATA personally liable, viz. We affirm in toto the disqualifications imposed by the PSE, considering that

Under the Corporation Code, the corporate powers of all corporations shall be exercised by the Board of

compliance with all the relevant rules and Directors. As such, directors of the Company are expected to oversee and ensure the Company's

regulations.

control system is in place, and establishing policies and procedures which ensure comprehensive, individually, the duties of ensuring the Company's compliance with relevant and pertinent laws and rules, overseeing that [the] appropriate internal accurate, reliable, and timely disclosures and reports Further, the Code of Corporate Governance for Publicly Listed Companies ("CCGPLC") is replete with provisions imposing on the Board of Directors, as a whole, and on the directors themselves.

to shareholders and other stakeholders.2

efficient, and transparent market by way of ascertaining, among others, that the Directors and Principal Officers, pursuant to its "mandate to ensure a fair, orderly, Indeed, the PSE has discretion on the penalties to impose on erring

2 Page 41 of PSE's Comment. 1 Page 28 of PSE's Comment.

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track record to dutifully perform their obligations."3 Such discretion, however. gatekeepers of a listed company are suitable and have the integrity, capability, and

must conform to the PSE Rules and the Securities Regulation Code (SRC).

The PSE ruled that "the concomitant penalty of disqualification is relationship-based, i.e. it is imposed upon the directors and executive officers of the company."4 The violations of the corporation must thus be borne by its Directors and Principal Officers in proportion to their involvement. a company that has been delisted, by virtue of their positions in, or affiliation with,

material non-public information, under Section 13.2 of the PSE Disclosure Rules; Essentially, CALATA's violations are: (a) trading while in possession of

and (b) failure to disclose the changes in equity of a Director or Principal Officer. under Section 13.1 of the PSE Disclosure Rules. The illicit trades pertain to approximately 125 Million shares of CALATA.

primarily liable because: (1) he is the Director and Principal Officer who traded through its Compliance Officer, of his transactions in CALATA shares. on CALATA shares while in possession of material non-public information; and (2) he is the Director and Principal Officer who failed to inform the corporation, Joseph H. Calata, in his capacity as Chairman, CEO, and President, is

Atty. Jose Maria Fabella, in his capacity as Compliance Officer, is primarily liable (1) for the trades performed by a Director or Principal Officer while in possession of material non-public information, and (2) for failing to inform the PSE of the transactions of a Director or Principal Officer.

pleadings. Nevertheless, CALATA consistently admitted that trades were executed while in possession of material non-public information and that there was a failure to disclose the same to the PSE. appeal to the Commission En Banc, where there was again an exchange of PSE, where pleadings were exchanged and hearings held, and in the present CALATA was afforded due process while the case was pending before the

imposed on Mr. Calata and Atty. Fabella, because the violations committed are analogous to those in Section 27 of the SRC, which may be punished by The Commission confirms the penalties of perpetual disqualifications

disqualification in Section 54.1(iii) thereof, viz.

Section 27. Insider's Duty to Disclose When Trading. - 27.1. It shall be uniawful for an insider to sell or buva security of the issuer while in possession of material information with respect to the issuer or the security that is not _generally available...to the

party, or (ii) that he had reason to believe that the or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other public, unless: (a) The insider proves that the information was not gained from such relationship;

other party otherwise is also in possession of the information. A purchase or sale of a security of the

3 Page 38 of PSE's Comment. 4 Page 40 of PSE's Comment.

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issuer made by an insider defined in Subsection 3.8, or such insider's spouse or relatives by affinity or consanguinity within the second degree, legitimate or information if transacted after such information came into existence but prior to dissemination of such common-law, shall be presumed to have been effected while in possession of material nonpublic

information to the public and the lapse of a reasonable time for market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was aware of the material nonpublic information at the time of the purchase or sale.

"material nonpublic"if: (a) It has not been generally market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (blwould be considered by a reasonable_person important under the circumstances in determining his course of action whether to buy sell or hold a security. 27.2. For_purposes of this Section, information is disclosed to the public and would likely_affect the

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after due notice and hearing, the Commission finds its orders; (b) xxx; (c) Any registrant or other person has, in a registration statement or in other reports, required by law or rules to be filed with the Section 54. Administrative Sanctions. - 54.1. If. that: (a) There is a violation of this Code its rule or applications, accounts, records or documents

Commission. made any untrue statement of a material fact, or omitted to state any material fact required to be stated their or necessary to make the statements therein not misleading; or, in the case of an underwriter, has failed to conduct an inquiry with reasonable diligence to insure that a registration statement is accurate and complete in all material

subject only to the limitations hereinafter prescribed. respects; or (d) xxx, it shall. in its discretion, and

impose any or all of the following sanctions as may be appropriate in light of the facts and circumstances:

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officer. member of the Board of Directors, or person performing similar functions, of an issuer required to file reports under Section 17 of this Code (iii) In the case of a violation of Sections 19.2..20. 24, 26 and 27. disqualification from being an

CALATA CORPORATION v. PSE SEC En Banc Case No. 01-18-437 Page 9 of 11

the Commission[.] (Emphasis supplied) or any other act. rule or regulation administered by

to disclose, may also be held liable because they bound themselves to ensure that CALATA would not commit any violation of the PSE Disclosure Rules. This duty is echoed in the Listing Agreement between CALATA and the PSE. The other directors, although they neither illicitly-traded nor failed

any of the following events occurred: executive officers, promoters or control person" if, during the past five (5) years. question relating to the integrity or capability of the Issuer or any of its directors. We note that under the PSE's "Suitability Rule," there is a "serious

Commission or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self-regulatory organization. to have violated a securities or commodities law, and vacated.5 (Emphasis supplied) Being found by a domestic or foreign court of the judgment has not been reversed, suspended, or competent jurisdiction (in a civil action), the

would be deemed suitable to assume office in any listed corporation. "serious question" as to the integrity of each and every director. None of them CALATA was found to have violated the securities laws, and there is thus a

degrees proportionate to their involvement in the offense: (1) upon Mr. Calata as Chairman/CEO/President, (2) upon Atty. Fabella as Compliance Officer, and (3) upon the other directors of CALATA, who bound themselves to ensure that no violations of the PSE Disclosure Rules would be committed. Therefore, there is nothing irregular in the penalties of disqualification, in

TENDER OFFER AS EXIT STRATEGY

intended by PSE as an exit strategy for CALATA's shareholders, because they are presently unable to sell their shares. In the guise of investor protection the PSE corporation to buy-back any and all shares tendered by its shareholders. CALATA to immediately submit a tender offer (buy back) plan, which was adapted its procedure for voluntary delisting, which would compel the delisting In the assailed Decision dated 3 November 2017, the PSE required

unrestricted retained earnings, would bankrupt the corporation. despite its lack of retained earnings. But CALATA argued that the presence of sufficient unrestricted retained earnings is an absolute requirement before a Tender Offer can be enforced, and that compelling the same, despite the lack of The PSE further ruled that a tender offer (buy back) by CALATA is viable

provisions of the SRC and its Implementing Rules, viz. Pursuant to Section 40.2 of the SRC, the PSE is mandated to abide by the

the provisions of this Code, the rules and regulations Every self-regulatory organization shall comply with

5 Section 1(c)(iv) of Part I-B of the PSE Consolidated Listing and Disclosure Rules.

CALATA CORPORATION v. PSE SEC En Banc Case No. 01-18-437 Page 10 of 11

provisions of the Corporation Code to the contrary, by its members, persons associated with its members of its participants. thereunder. and its own rules, and enforce compliance therewith. notwithstanding any

retained earnings, the Commission imposed the requirement in Rule 19.4 of the 2015 SRC Implementing Rules (SRC Rule 19.4), viz. Even though Section 19 of the SRC does not explicitly require unrestricted

19.4 Tender Offer by an Issuer or Buy Back

undertaken for any of the following purchases: its own securities shall only_be_made if such Issuer cover the amount of shares to be_purchased, and is has unrestricted retained earnings in its books to 19.4.1 Reacquisition or repurchase by an Issuer of

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stockholders entitled to payment for their securities under the Corporation Code{.] (Emphasis supplied) 19.4.1.3 To pay dissenting or withdrawing

a tender offer (buy back) initiated by CALATA would be sourced from capital. This not only violates SRc Rule 19.4, but it goes against the Trust Fund Doctrine, which essentially states that the assets of the corporation are held in trust for its creditors, before any distribution can be made to its shareholders. Since CALATA does not have sufficient unrestricted retained earnings

The Supreme Court ruling in Ong Yong v. Tiu is instructive, viz.

in the procedure for the distribution of capital assets. embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital Court in the 1923 case of Philippine Trust Co. vs. their claims. This doctrine is the underlying principle The Trust Fund Doctrine first enunciated by this Rivera, provides that subscriptions_ to_the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of

stock,(2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and eventua! liquidation of the corporation Furthermore, the doctrine is articulated in Section 41

the _distribution of corporate assets and property on_the power of a corporation to acquire its own shares and in Section 122 on the prohibition against unless the_ stringent requirements therefor are complied with.

6 G.R. No. 144476, 8 April 2003.

CALATA CORPORATION v. PSE SEC En Banc Case No. 01-18-437 Page 11 of 11

Doctrine. (Emphasis supplied) remain nothing but a dream because this time, it will be the creditors turn._to engage in sguabbles and litigations should the_.court order an.unlawful distribution in blatant disregard of the Trust Fund of the stockholders, officers or directors of the conditions and procedures for the protection of corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by the court will cannot be made to depend on the whims and caprices corporation, or even, for that matter, on the earnest desire_of the court a quo to prevent further squabbles and future litigations unless the indispensable The distribution of corporate assets and property

establish that the corporation does not have sufficient unrestricted retained earnings to buy back all the outstanding shares. In this regard, the latest reports filed by CALATA with Commission

Thus, we set aside the Tender Offer (Buy Back) ordered by the PSE.

CONCLUSION

trades, and because these acts are imputed to the corporation and not just the Directors and Principal Officers involved, we affirm the ruling of the PSE except for the tender offer (buy back) requirement. Considering that CALATA has admitted to the non-disclosures and illicit

Tender Offer (Buy Back) requirement imposed by the PSE. 2017 and Order dated 22 November 2017 are hereby AFFIRMED, except for the WHEREFORE, premises considered, the PSE's Decision dated 3 November

SO ORDERED.

Pasay City, Philippines; 25 October 2018.

EMI WQuinO

Chairperson

ANTONIETA F. IBE * Commissioner EPHYRO LUIS B. AMATONG Commissioner JAVEY PAUL D. FRANCISCO Commissioner *On Leave