How the SEC Decision Might Be Good for Media

ILLUSTRATOR Jasrelle Serrano

The press, or mass media, is sometimes known as the Fourth Estate, the unofficial fourth pillar holding power and significant influence over society, and serving as a vanguard against corruption, untruths, and personal agenda. It is for this reason that the 1987 Constitution took great lengths to protect the independence and integrity of a free press, declaring that no law shall be passed abridging the freedom of speech, of expression or of the press.

And it is also the reason why the Securities and Exchange Commission was right when it revoked the certificate of incorporation of Rappler, Inc. and Rappler Holdings Corporation. 

But before we get ahead of ourselves, the SEC would probably be the first to say that it issued its ruling on the merits, as the arbiter of all things related to corporations and securities; and on that account, it would be completely correct. Strictly on the merits, the SEC has Rappler (the corporation, not the mass media website) by the balls, so to speak.


The Decision
The gist of the SEC’s Decision is that Rappler, Inc., a corporation operating mass media, is partially controlled by foreign entities in direct violation of Article XVI, Section 11 (1) of the Constitution, which states that “[T]he ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens.”  However, if one will go by the outstanding shares of Rappler, Inc., it is 100% owned by Filipino nationals. To be precise, 98.84% percent of its shares are owned by Rappler Holdings Corporation, which is likewise a corporation fully owned by Filipino nationals. How, then, is Rappler, Inc. partially owned or controlled by foreign entities?


This is where it gets interesting.

In July 2011, Rappler, Inc. was registered as a domestic corporation, which owns and operates the Rappler website and the mass media network that it entailed. Then, in December 2014, Rappler Holdings Corporation was registered. Sometime in 2015, Rappler, Inc. increased its capital stock and sold practically all its shares to Rappler Holdings Corporation.

Rappler Holdings Corporation, now effectively the owner of Rappler, Inc., then turned around and issued Philippine Depositary Receipts (PDR) to two foreign nationals, North Base Media, Ltd. (Cayman Islands) and Omidyar Network Fund LLC (Delaware, USA) in an effort to secure additional funding of over one million dollars. These PDRs covered the outstanding shares of stock of Rappler, Inc.

What are PDRs, in the first place? Depositary Receipts are securities that grant the holder a right to the delivery sale of underlying shares of stock (in this case, shares of Rappler, Inc.). They are essentially derivatives, deriving their value from the value of the shares of stock that they cover. In essence, the PDRs issued in favor of North Base and Omidyar are directly linked to the shares of stock of Rappler, Inc.

In the Decision, the SEC goes on to explain that there is no prohibition against issuing derivatives in the form of PDRs in itself, as they do not constitute actual ownership of the underlying shares of stock, and have been a recognized way to raise additional capital without having to issue any new shares. The complication, however, is that the PDRs issued to Omidyar included this very peculiar provision which effectively required Rappler, Inc. to seek approval from the Omidyar PDR holders on certain matters:

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“The Issuer (Rappler Holdings Corporation) undertakes to cause the Company (Rappler, Inc.)… not to, without prior good faith discussion with ON PDR Holders, and without the approval of PDR Holders holding at least two thirds (2/3s) of all issued and outstanding PDRs, alter, modify or otherwise change the Company Articles of Incorporation or By-Laws or take any other action where such alteration, modification, change or action will prejudice the rights in relation to the ON PDRs.” 

In the eyes of SEC, this is the smoking gun: Rappler, Inc. surrendered partial control of its corporate matters to a foreign entity. After all, in the 2015 Implementing Rules and Regulations of the Securities Regulation Code (IRR-SRC), the SEC defined “control” as the “power to determine the financial and operating policies of an entity in order to benefit from its activities,” and also clarified that “control” exists whenever one entity has the power “to govern the financial and operating policies of [another] entity under a statute or agreement.”

All this having happened under its watch, the SEC was bound to bring the hammer down, which it did quite dramatically on January 15 when it published the Decision.

In fact, it can even be said that Rappler, Inc. surrendered beneficial ownership of its shares to Omidyar. Under the implementing rules and regulations of the Foreign Investments Act of 1991 (RA 7402), “[F]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino entity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential.” A “beneficial owner”, in turn, was further defined in the IRR SRC as “[A]ny person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power (which includes the power to vote or direct the voting of such security) and/or investment returns or power (which includes the power to dispose of, or direct the disposition of such security).” By having approving power over the corporate decisions of Rappler, Inc., Omidyar enjoyed the power to direct the voting of the former’s securities.


According to the Decision, by agreeing to consult with, and secure approval of, Omidyar for any matters, Rappler, Inc. gave “negative control” over a mass media corporation to a foreign entity. One can argue that this “negative control” extends only to the corporate actions of Rappler, Inc.—not its news operations—but the SEC is not allowed to make that distinction. The agency had to resolve the issue on the basis of corporate control, in accordance with the Constitution and applicable laws. And as it happens, the Constitution is absolute inasmuch as it will not allow even a modicum of ownership or management of Philippine mass media to fall into the hands of a foreign entity. As the Decision succinctly said, “The Foreign Equity Restriction is very clear. Anything less than One Hundred Percent (100%) Filipino control is a violation. Conversely, anything more than exactly Zero Percent (0%) foreign control is a violation.” Hence, the form of control was irrelevant; whether by the carrot or the stick, the mule tends to will go where it is told. After all, one would surmise that there would be consequences for the breach of the conditions in the Omidyar PDR—including the cancellation of the PDR investments—and a million dollars is a quite big stick to ignore.

And yet, the SEC went even one step further. The Decision stated that there was intent on the part of Rappler, Inc. to sidestep the constitutional prohibition against foreign equity by first selling almost all its shares to the holding company, and having the holding company issue the PDRs to the foreign entities almost immediately thereafter. The Decision goes on to say that “there is substantial evidence that [the Rappler corporations] intentionally created an elaborate scheme, upon which its receipt of over a million dollars from a foreign investor would be theoretically defensible… but [they] would still be able to give him his money’s worth in the form of negative control and cash distributions, all through a private contractual agreement.”       


All this having happened under its watch, the SEC was bound to bring the hammer down, which it did quite dramatically on January 15 when it published the Decision.

It has been argued that the SEC acted on the matter with undue haste. However, to be fair to the SEC, the investigation started back in December 2016, and the Rappler corporations were called to a conference in February 2017, almost a year before the Decision came out. SEC proceedings are administrative in nature, and a resolution within a year’s time is not that unusual. Furthermore, the SEC issued a show cause order directing the Rappler corporations to submit their explanation on the issue of foreign ownership, but it was only in December 2017, 4 months later, that the Rappler corporations submitted the waivers purportedly executed by the holders of the Omidyar PDRs. I say “purportedly” because the waivers were apparently mere photocopies, and they were not subscribed under oath. It can be said that the Rappler corporations were given enough time and opportunity to divest itself of foreign control, but failed to do so timely or properly.

Rappler’s lawyers also argued that there was a lack of opportunity for Rappler to respond to the charges or cure the defective corporate structure. Citing the Supreme Court case of Gamboa vs. Teves which earlier ruled on the foreign ownership of PLDT, Rappler argues that the Supreme Court gave PLDT sufficient time to cure its foreign entity issue, which the SEC should have done. This is not entirely accurate. What the Gamboa case did was define the meaning of the term “capital” under the constitutional restrictions on public utilities, and direct the SEC to investigate the matter and implement a plan of action using this definition. Whatever ruling the Supreme Court issued, it was nevertheless clear that it recognized that the SEC had the “power and function to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations.”


The SEC certainly hit the Rappler corporations, but it is also clear that the SEC acted within its authority and jurisdiction, and in accordance with its legal mandate. The question is, was its action correct, all other things considered?


The Fourth Estate in the Spotlight
The Decision was decried as an attack on free press and a blatant violation of the Constitutional provision on free speech. On the other hand, the SEC also had to contend with the other constitutional provision which prohibited foreign equity for mass media. The Decision is now being touted as a heavyweight match between two constitutional mandates. But does one really have to prevail over the other? This shouldn’t be the case. 

To be strict about it, there is no actual suppression of free press to begin with. As much as Rapper would like to play the persecuted soldier, there is nothing preventing Rappler’s writers and reporters to tell the news as it sees fit. Even if the Rappler revocation is upheld, the avenues for full freedom of expression are all still available.  

Furthermore, Article XVI, Section 11 of the Constitution merely states how a mass media organization should be incorporated, but does not dictate how it should operate or report its news. It is unfortunate that a mass media entity (the corporations, not the website) was effectively weakened by regulatory action, but press freedom was never a license to operate outside the bounds of law in the first place. By opening themselves to foreign control, intentionally or otherwise, the Rappler corporations placed themselves outside the bounds of the Constitution, and laid themselves vulnerable to attack. The SEC could not be faulted for performing its duty; certainly, it should not have turned a blind eye simply because the subject of the inquiry was a mass media entity.  


There’s a reason why the Constitution prohibited foreign control over mass media. First of all, it is related to the state policy under Article II, Section 19 of the Constitution which states that “[T]he state shall develop a self-reliant and independent national economy effectively controlled by Filipinos.” Also, knowing the level of power and influence that the press has in a free society, and the public and national interest it is imbued with, the Constitutional Commission sought to ensure that mass media will always be independent and beyond reproach, especially from any insinuation of control, foreign or otherwise.

The freedom of the press from foreign control is arguably more relevant in today’s global society, where international investments are more common than ever. Could a news report be more slightly skewed on one side, if it favors a major foreign investor? In this situation, foreign negative control, or the mere hint of it, could put into the question the integrity of mass media. And in the long run, that could be more damaging than any attempt, perceived or otherwise, to close down a mass media entity.

Free speech must be absolutely free, or it is not free at all; it cannot be subjected to some kind of vague standard or qualification, as to do so would be to suppress it.

Put simply, there should be no conflict between the freedom of speech and the constitutional prohibition on foreign equity—one need not balance these interests against each other when they can both stand on the podium. Framing this as a “freedom of the press” issue, while understandably necessary, is nevertheless a disservice to the complexity and depth of the Constitution.

Also, it diverts the focus from the erring corporations to the website itself, to dangerous effect. All of a sudden, someone is proposing that the Constitution should be amended to state that “no law shall be passed abridging the responsible exercise of freedom of speech, of expression, or of the press.” Free speech must be absolutely free, or it is not free at all; it cannot be subjected to some kind of vague standard or qualification, as to do so would be to suppress it. And yet, this absurd proposal came about because the SEC Decision is being portrayed as the war between an embattled champion of free speech and the government when, in fact, it should be seen more as a case of the government versus an allegedly unconstitutional corporation. 


Strictly in a legal sense, the SEC had the full discretion and authority to revoke the Rappler corporations’ certificates of incorporation. But was the Decision too harsh? Of course it was; and yet it may have been necessary. Otherwise, it would have given the message that it was ok for mass media corporations to surrender control to foreign entities, at least temporarily, in exchange for funding, at least until the SEC directed them to be divest such foreign control.

Could the SEC have imposed a lesser penalty? Of course it could have, and it would have been more peaceful for everyone if it did. But if it were true—as the Decision claims—that the Rappler corporations intentionally skirted the Constitutional prohibition on foreign equity, the SEC could not have let it pass with a mere slap on the wrist without violating its mandate under the Securities Regulation Code.

The Fourth Estate is powerful, and deservingly so. It may be the last light shining if ever the darkest hours come. If so, that light has to be brighter and clearer than anything that can be thrown against it. In issuing its Decision, the SEC may have done more than simply follow its mandate to regulate corporations in the country. Unintentionally, it may have strengthened mass media by preserving the integrity, independence and nationality of its practitioners. It also put the importance of press freedom once again in the spotlight, reminding the nation that it is a matter worth discussing and worth fighting for. In the end, the power of the press must prevail as a vital cog in a free society, but always, and necessarily, in accordance with law and the Constitution.


 The Rappler corporations will file the appropriate appeals, and the legal issues will remain unresolved for the next few months. However, the SEC has already put the country on notice that no one is above the law. Quis custodiet ipsos custodes? Who watches the watchmen? This time, surprisingly, the burden fell upon the SEC, and mass media may very well be the better for it.




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Richard Clarin
Atty. Richard Clarin is a practicing lawyer with extensive experience in the field of litigation and corporate law.
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