A day after the Securities and Exchange Commission (SEC) revoked the registration of Rappler, which allegedly used a “deceptive scheme” to violate constitutional rules that require media companies to be fully owned by Filipinos, international groups came to the online news organization’s rescue. Condemning the SEC’s decision, they said “the order to close Rappler amounts to a direct assault on freedom of the press in the Philippines.”
The National Press Club of the Philippines, however, said the legal troubles faced by Rappler do not constitute media repression. In a statement released on Tuesday, the press club agreed with the SEC, which ruled that Rappler violated constitutional restrictions on foreign ownership of media companies in the Philippines.
In our quest to find the best analysis of the corporate watchdog’s decision, we came across Atty. Peter Michael Dizon’s breakdown of the case. (Read “Why did the SEC revoke Rappler’s registration?” at https://pmdizon.com). The lawyer said SEC revoked Rappler’s registration as a Philippine corporation because it disobeyed the rules on foreign participation in media companies. The 1987 Constitution provides that a media company must be owned and controlled 100 percent by Filipinos.
This was what happened to Rappler: Rappler’s board of directors and shareholders are 100 percent Filipino. In 2013 and 2014 Rappler got commitments from foreign investors. In December 2014 Rappler needed to legalize the receipt of foreign money. But it could not issue shares of stock or seats at its board. It spun off a new corporation called Rappler Holdings for the purpose of issuing Philippine Depositary Receipts (PDRs). The PDRs are derivative instruments that derive their value from equity.
Rappler Holdings bought the shares of Rappler in 2015 and then issued PDRs to North Base Media and Omidyar Network. Dizon said there’s nothing wrong with issuance of PDRs. And the SEC found nothing wrong with the PDRs issued to North Base Media. The problem lies with the PDRs issued to the Omidyar Network, or what Rappler called the “ON PDRs.”
The ON PDRs had provisions that granted a measure of control over both Rappler Holdings and Rappler Inc. The provisions included a condition that Rappler and Rappler Holdings cannot alter, modify or change their Articles of Incorporation and Corporate By-Laws without discussion with ON PDR holders, and obtaining the approval of at least two-thirds of holders of all issued PDRs.
Dizon said: “Philippine foreign equity restrictions require that Filipino control should be 100 percent. If a foreigner gets greater than zero-percent control over the company, then there is a violation of Philippine law on ownership and control of a media corporation. With the provisions on the ON PDR’s, there was definitely more than zero-percent control of foreigners. This is a violation of Philippine law on media companies.”
The SEC said that control isn’t just about ownership of stock. The Securities Regulation Code (SRC) has a very broad definition of control, which goes beyond ownership of shares. In the case of PDRs, they are derivative instruments covered by the SRC, so the law’s provisions govern any transaction in connection to PDRs. And the SEC found that Rappler has control issues. The SEC said that it does not matter when the foreigner exercises control, or in what instances the foreigner would step in. What matters is that there be none.
Rappler defended itself, saying that the PDR provisions are not enough to be considered as “control” of the corporation. Also, it said that control is actually defined as ownership of shares, not simply management control. On this, the SEC declared that any control is control.
One of Rappler’s defenses is that it is not a media company. It stated that what it does is not part of mass media. The SEC threw this defense out the door.
Rappler also submitted on December 22, 2017, a piece of paper saying that the holders of the PDR are waiving their rights to the control provision of the PDR. The piece of paper was ignored because it was not even authenticated.
In the end, there was enough basis for the SEC to conclude that Rappler issued the PDRs to illegally skirt the strict ownership and control requirements of Philippine law. Because of this, the ON PDRs were declared void and Rappler’s Certificate of Registration with the SEC was revoked. The PDRs are not evidence of foreign ownership because it is the contractual provisions in the PDR that will determine foreign control and/or ownership. In Rappler’s case, the PDRs granted its investors some control. The Philippine Constitution prohibits any control. That’s why the SEC revoked Rappler’s registration.
After this case, we urge the SEC to continue looking into other companies that may have been abusing the PDR technicality.