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.