The decision on Rappler
EYES WIDE OPEN - Iris Gonzales (The Philippine Star) - January 18, 2018 - 12:00am

A young hipster lawyer, relatively new at the Securities and Exchange Commission (SEC) but considered among the best, was among the first to see what the SEC described as legal loopholes in Rappler’s certificate of incorporation, my sources said.

The lawyer then brought it to the attention of the rest of the SEC’s legal team, to the concerned departments, and then to the en banc. In the end, and after studying the case, they all agreed with the young lawyer.

 The SEC, chaired by the no non-sense Teresita Herbosa, an appointee of former president Benigno Aquino III, ruled that Rappler violated the Constitution. And it believes that it has an airtight case against the online media company.

 Rappler’s PDRs

 One of Rappler’s Philippine Depository Receipts (PDRs) did it, the SEC said in its 29-page decision.

 PDRs are instruments that give foreign investors a passive economic interest in a Philippine company.

 On Oct. 2, 2015, Rappler Holdings Corp., the parent company of Rappler Inc. issued 7,217,257 PDRs covering shares of Rappler Inc. to a foreign company, Omidyar Network LLC, in exchange for over a million dollars.

 Omidyar is a company owned by eBay founder Pierre Omidyar.

 Upon investigation, the SEC found that the Omidyar PDRs contain a provision wherein the company is required the seek approval of Omidyar PDR holders on corporate matters.

 “The Issuer (Rappler Holdings Inc.) undertakes to cause the company from the date hereof and while the ON PDRs are outstanding…without the approval of PDR Holders holding at least two thirds 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,” the Omidyar PDRs stated.

 This means that Rappler stockholders – although they are all Filipinos – must have prior discussion with and approval of at least two thirds of the PDR holders, for decisions on corporate policies.

 “The stockholders have become, in effect, subservient to the holder. It is neither 100 percent control by the Filipino stockholders, nor is it zero percent control by the foreigner PDR holders,” the SEC said in its decision.

 The SEC said this violated the Constitution because where mass media is concerned, no control whatsoever may be granted to foreign investors.

 “100 percent Filipino control means zero foreign control. Control is any influence over corporate policy and not limited to ownership of stock,” the SEC said.

 But Rappler, in its explanation to the SEC, said all their stockholders are Filipinos and that any economic benefits derived by foreign holders from the Omidyar PDRs are mere “distributions” and not strictly “dividends.”

 The SEC did not accept Rappler’s defense because of the clause — the need to get the approval of at least two thirds of PDR holders.

 “It does not matter what capacity or device gives the foreigner control as stockholder or holder or otherwise, there must be none. It does not matter if control is only available in certain occasions, there must be no occasion,” the SEC said.

 Be careful with your PDRs

 It seems that Rappler’s lawyers didn’t do their homework. In contrast, the SEC was doing its job and under different circumstances, the public may even cheer its swift actions on a company.

 But as fate would have it, it just had to be Rappler, the online news site that has published articles critical of the Duterte administration.

 In Duterte’s kingdom, Rappler is the little boy who yelled, “But the Emperor has no clothes!”

 Thus, it’s no surprise that the public would denounce this as an attack against press freedom.

 PD 1018

 Corporate lawyer Francis Lim said the penalty slapped by the SEC was too severe and anti-investor.

 When I asked an SEC lawyer about the penalty, he said it was what was stated in Presidential Decree 1018 or the Mass Media Law.

 Attack on press freedom

 Rappler denounced it as an attack against press freedom, arguing that the SEC itself approved the issuance of the PDRs in 2015.  

But SEC’s Herbosa said the SEC approved the issuance of the PDRs as an exempt transaction, but not its provisions.

 Exempt securities are securities that do not need to be registered with the SEC. There are several types of exempt securities, as stated in Section 10.1 of the Securities Regulation Code.   

Among the exempt transactions are those that are sold to less than 19 qualified investors.  Rappler did not provide the SEC copies of these PDRs.

 In contrast, other companies such as GMA and ABS-CBN presented their PDRs to the SEC for clearance – even if they didn’t need to – just to be sure, SEC insiders said.

 And this is how Rappler found itself in a legal mess. The SEC said Rappler wrongly assumed that control is limited to stock ownership.

 Wittingly or unwittingly, Rappler violated the Constitution, the SEC concluded.

Conspiracy theory

 But still in the end, it’s hard not to see this whole investigation as an attack against Rappler, which has published stories critical of the Duterte administration. Why in the first place would the Office of the Solicitor General ask the SEC to look into Rappler’s incorporation papers?

How this will end is still anybody’s guess. We’ll have to wait and see. 

 Iris Gonzales e-mail address is

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