Grand Gas Corporation, a publicity listed company, discover after extensive drilling a rich deposit of natural gas along the coast of Antique. For five (5) months, the company did not disclose the discovery so that it could quietly and cheaply acquire neighboring land and secure mining information. Between the discovery and its disclosure of the information to the Securities and Exchange Commission, all the directors and key officer of the company bought shares in the company at very low prices. After the disclosure, the price of the shares went up. The directors and officers sold their shares at huge profits.

1. What provision of the Securities Regulation Code (SRC) did they violate, if any? Explain. (4%)

2. Assuming that the employees of the establishment handling the printing work of Grand Gas Corporation saw the exploration reports which were mistakenly sent to their establishment together with other materials to be printed. They too bought shares in the company at low prices and later sold them at huge profits. Will they be liable for violation of the SRC? Why? (3%)

SUGGESTED ANSWER:

1. The directors and key officers violated the provisions prohibiting insider trading.

Under the Securities Regulation Code, it shall be unlawful for an insider to sell or buy a 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 public.

In the given case, the directors and key officers are such insiders, they being directors and officers of Grand Gas Corporation, the issuer. As such, their act of purchasing company shares while in possession of material non-public information.

Hence, the directors and key officers are guilty of insider trading in violation of the Securities Regulation Code.

2. Yes, they are liable.

Under the Securities Regulation Code, a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or security that is not generally available to the public is likewise an insider.

In the case at bar, it can be readily seen that the employees of the printing company received the material information through its relationship with Grand Gas Corporation as its printer. They are therefore insiders. When they purchased the shares while in possession of material non-public information, they committed insider trading.

Hence, they can be held liable for violation of the Securities Regulation Code.

1. Can a distressed corporation file a petition for corporate rehabilitation after the dismissal of its earlier petition for insolvency? Why? (2%)

2. Can the corporation file a petition for rehabilitation first, and after it is dismissed file a petition for insolvency? Why? (2%)

3. Explain the key phrase "equality is equity" in corporate rehabilitation proceedings. (2%)

SUGGESTED ANSWER:

1. Yes, a distressed corporation can file a petition for corporate rehabilitation after the dismissal of its earlier petition for insolvency. This is because a petition for corporate rehabilitation is granted upon different grounds as a petition for insolvency. It is possible that the petition for insolvency was not granted because the ground relied upon is insufficient to warrant a declaration of a state of insolvency, but that the same ground may be obtaining in a petition for corporate rehabilitation.

2. Yes, the corporation can file a petition for corporate rehabilitation first and after it is dismissed, file a petition for insolvency, for the same reason as above. The grounds relied upon are different. For as long as the first petition is no longer pending but is already terminated, the second petition based on a ground incompatible with the first may still be filed.

3. "Equality is equity" means that whenever a distressed corporation asks the Securities and Exchange Commission for rehabilitation and suspension of payments, preferred creditors may no longer assert preference, but shall stand in equal footing with other creditors. It is for this reason that during corporate rehabilitation, all pending claims, whether secured or unsecured, are suspended. However, the preferred status of secured creditors still remain so that when the corporation is declared insolvent and its assets are distributed, the secured creditors continue to be preferred over the unsecured ones.