The SEC revoked the registration of Rappler as a Philippine corporation because it disobeyed the rules on foreign participation in media companies.
This is a summary of the SEC case. I’ll write another article with my opinion later.
Summary
Under the 1987 Constitution and several Philippine laws, a media company must be owned and controlled 100% by Filipinos. If a media company gave foreigners control of more than 0% of the company, then the media company violates the law on control restrictions. This was what happened to Rappler.
Rappler’s Board of Directors and shareholders are 100% 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 Madia and Omidyar Network.
There is 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 all issued PDRs.
Philippine foreign equity restrictions require that Filipino control should be 100%. If foreigner get greater than 0% 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 0% control of foreigners. This is a violation of Philippine law on media companies.
As stated by the SEC,
“It is neither 100% control by the Filipino stockholders, nor is it 0% control by the foreigner PDR holders.”
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.
“It does not matter if control is available only in certain occasions; there must be no occasion.”
Rappler’s defense
Rappler defended itself, saying that 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. In the first place, what it does has been considered by legislators as part of mass media since the tobacco law was passed in 2003. In the second and third place, Rappler had been outing itself publicly as a mass media firm in legal terms and in its press releases.
Rappler also submitted in 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.
What the SEC did
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.
Note that PDRs are not evidence of foreign ownership. 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.
Our law prohibits ANY control.
And that was why Rappler’s registration was revoked.
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