It’s seen as either a blatant attack on press freedom or a corporate regulator’s crackdown against “deceptive” violation of the Constitution, which mandates Filipino control of mass media.
But outside of the conspiracy theories behind the Securities and Exchange Commission (SEC)’s controversial order to revoke the registration of online media outlet Rappler Inc. and its controlling stockholder Rappler Holdings Corp. (RHC), the SEC believes it has built an air-tight case on the basis of legal loopholes found on the structure of Philippine depositary receipts (PDRs) issued by RHC to Omidyar Network Fund LLC, an offshore fund created by eBay founder Pierre Omidyar and his wife.
In a 29-page SEC en banc ruling dated January 11, the SEC voided these PDRs issued by RHC to Omidyar.
Rappler, on the other hand, argued that the SEC had approved the issuance of these PDRs in the first place and claimed that the “kill order” had the hand of Malacanang, allegedly upset with certain articles critical of the Duterte administration, particularly a series about how the internet had been “weaponized” to intimidate critics.
“What was approved was the issuance of PDRs as an exempt transaction, not the validity of any of its provisions,” SEC chair Teresita Herbosa said in a text message on Tuesday, when asked whether the transaction had been previously cleared.
Exempt securities are financial instruments that do not need to be registered with the SEC, such as those sold to less than 19 qualified investors.
Depositary receipts refer to derivative instruments which are based on the value of equities as underlying assets but don’t grant ownership to the holder. They aren’t rare among Philippine corporate issuers, with blue chips like PLDT and SM Investments Corp., and even other mass media outlets like ABSCBN and GMA-7, having issued such kinds of instruments to foreign investors.
RHC itself has issued PDRs not just to Omidyar but to Washington DC-based NBM Rappler LP, a unit of North Base Media. However, only those PDRs issued to Omidyar in exchange for about a million dollars were voided by the SEC. These Omidyar PDRs were likewise tagged as a “fraudulent” transaction under the Securities Regulation Code (SRC) and cited as a ground for violation of the “anti-dummy” law, a criminal offense.
Unlike the PDRs issued to North Base or even the PDRs issued by media outfits like ABSCBN and GMA7 to foreign investors, the Omidyar PDRs were voided by the SEC because they carried provisions for “negative control.”
The SEC ruling said every security, including derivatives, must be evaluated on its unique terms and not just on the nomenclature. The corporate regulator also stressed that the foreign equity restriction on mass media prohibited anything less than 100 percent control and it defines “control” as “embracing not only stock ownership, but also other schemes that grant influence over corporate policy, actions and structure – even sometimes.”
To protect its investment, the SEC noted that “Omidyar Network had RHC agree to secure approval for at least two-thirds of all the PDR holders before RHC takes any action that would prejudice the rights of Omidyar Network…” This was thus interpreted as Omidyar Network specifically wanting to have some degree of control over Rappler’s corporate policy. As such, Rappler was accused of colluding to “grant control, or to become a dummy, as long as Omidyar was not given equity per se.”
In 2015, RHC filed a notice of application for exempt transaction three times, representing that:
264,601 PDRs were issued on May 29 to NBM Rappler;
11,764,117 PDRs were issued on July 29 to NBM Rappler; and,
7,217,257 PDRs were issued to Omidyar Network.
Asked whether the SEC had seen the contentious provisions before exempting these from registration requirements, Herbosa said: “Definitely, the handling lawyers or task force saw it for the first time when Rappler was asked to give copy during the proceeding already.”
On Dec. 22, 2016, the SEC received a letter from the Office of the Solicitor General requesting an investigation into Rappler and RHC “for any possible contravention of the strict requirements of the 1987 Constitution” with regard to the issuances of PDRs to NBN Rappler LP and Omidyar Network. It was upon further investigation that the SEC uncovered the violation on the PDRs issued to Omidyar Network, citing the verified explanation dated Aug. 29, 2017 submitted by the group.
But even assuming there’s violation, one securities law expert who declined to be identified said that the penalty meted out by the SEC was “grossly disproportionate” to the alleged violation.
“The SEC should have given Rappler time to cure the violation. It did the same under Memorandum Circular no.8, series of 2013, where it gave companies that were not compliant with the nationality requirement one year to cure the violation,” the lawyer said.
In the past, a landmark Supreme Court ruling stated that PLDT had exceeded the maximum 40 percent in foreign equity prescribed by the Constitution. The SC ruling essentially defined a company’s capital, stating that non-voting shares should not be counted as equity when computing Filipino ownership in relation to the 60-40 percent constitutional requirement for key industries. To cure this situation, PLDT issued new voting preferred shares to BTF Holdings Inc., a subsidiary of its employee beneficial trust fund, bringing down its foreign holdings to the prescribed level.
The SEC afterwards issued memorandum circular 8, series of 2013, then giving companies which were not compliant with the nationality requirement one year to cure the violation.
Asked whether giving Rappler group a curing period was ever an option, Herbosa said: “We discussed that but the SRC does not provide for it in case of violation of any of its provisions,” Herbosa said.
“And I don’t recall Rappler wanting to be given a curing period,” she added.