SEC on Rappler case: Foreign control should not be present in any form

The Securities and Exchange Commission (SEC) early this week ordered the revocation of incorporation of media firm Rappler Inc. and Rappler Holdings Corp., which owns the online news site Rappler, for allegedly circumventing laws that prohibit foreign ownership in a Philippine media entity.

In a decision released by the regulator, the SEC pointed to the 7.22-million Philippine depository receipt (PDR) that Rappler issued to Omidyar Network Fund Llc., which, it said, carries a provision that cedes control of the media entity to the foreign fund.

A PDR is a type of security that allows an investor to hold economic interest in a business without the investor holding control over the business itself.

Other listed firms like ABS-CBN Corp. and GMA Network Inc. also have their own PDRs.

“The issue is limited to the unique terms found only in the ON PDRs (Omidyar PDR). The ON PDRs contain a provision wherein the ‘company’ is required to seek approval of the ON PDR holders on corporate matters,” the SEC’s decision said.

“As already discussed, the company is Rappler Inc. Thus, the ON PDR imposes obligations not just on the issuer of the derivative, Rappler Holdings Corp., but also on the company which issued the underlying shares, Rappler Inc.,” it added.

The SEC said the provision in the PDR issued to Omidyar that requires Rappler to first secure Omidyar’s consent through “good faith discussion” and approval by at least “two-thirds of PDR holders” before any change can be made on the company’s articles of incorporation is proof that foreign entities have control over the company.

“The ON PDR instrument may be categorized as an equity derivatives, since its value is dependent on the underlying equity. It follows that legal and economic rights granted on the ON PDR holders can be traced back to the legal and economic rights originally reserved to the shareholders. The foreign-equity restriction will prevent the grant of minimal control through the ON PDR,” the SEC said.

“Here, the stockholders must have prior discussion with and approved of at least two-thirds of the PDR holders, meaning Rappler is, at the very least, under obligation to consult with Omidyar Network. The stockholder has become, in effect, subservient to the holder,” it added.

The SEC said Rappler wrongly assumed that “control” is limited to stock ownership.

“As already stated, the commission has already interpreted ‘control’ as embracing not only stock ownership, but also other schemes that grant influence over corporate policy, action and structure—even ‘sometimes,’” it said.

“It does not matter what capacity or device gives the foreigner control, as stockholder or holder or otherwise, there must be none. It does not matter if control is only available in certain occasions, there must be no occasion…. In other words, Omidyar Network specifically wanted to have some degree of control over Rappler’s corporate policy,” it added.

The said move has pushed other media organizations to condemn the action.

“January 15 will be remembered in Philippine press history in infamy. It is the day that a government built on democratic principles struck a blow on one of the pillars of Asia’s most vibrant democracy: A free press,” a statement from the Economic Journalists Association of the Philippines Inc. said.

“In decades past, the muzzling of the Philippine press was brazen and brutal. Journalists were imprisoned and media entities were shuttered—printing offices padlocked and broadcast media were cut off the air.

“Now, it is more sinister. Efforts to quiet the press are clothed in hair-splitting legalities, a smoke screen on this underhanded attack on the free press conceivably to temper public outcry,” it said.

The National Union Journalists Association of the Philippines (NUJP) also joined the fray and called for mass action against the move.

“Wear black shirts or black arm bands to school or your place of work on Friday, January 19.

“Join us, too, at the Boys Scout Circle at 6 p.m., as we kick off our Black Friday Protests for Press Freedom.

“NUJP will announce upcoming fora and other events to discuss and map out what we need to do to defend our country and people from the Duterte administration’s sinister plans,” it said.

“The threatened closure of Rappler has proven that Rodrigo Duterte and his minions will stop at nothing to shut down critical voices, even as they rush to amend the Constitution to produce an abomination that will not only perpetuate themselves in power but emasculate our rights and liberties,” it added.



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