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Rappler CEO says SEC decision is ‘political pressure’

Published January 16, 2018 4:12pm

Updated January 16, 2018 6:57pm

Maria Ressa, the chief executive officer of embattled news site Rappler, said on Tuesday that the
Securities and Exchange Commission (SEC) decision revoking its certificates of incorporation
had nothing to do with foreign ownership restrictions on mass media companies, but rather a
form of “political pressure.”

“I don't think this is about PDRs (Philippine Depositary Receipts). I don’t think this is about
foreign ownership,” Ressa said in an interview on CNN Philippines.

The Philippine Stock Exchange defines depositary receipt as security grating grants the holder
the right to the delivery of sale of the underlying share. PDRs are not evidences or statements
nor certificates of ownership of a corporation.

“If you take a look at the government’s own position on foreign ownership, it is right now
trying to liberalize telcos to take away any foreign-ownership restrictions,” Ressa noted.

“It’s actually stated that within another year, this was a year ago, they will take away foreign
restrictions on media for charter change ... As I have stated that this is about political pressure,”
she emphasized.

The SEC said on Monday that Rappler can continue operating as a mass media company
because the decision is not yet final and executory.

The Economic Journalists Association of the Philippines decried the SEC decision and labeled it
as “a small step to a bigger, darker agenda.”

Presidential spokesperson Harry Roque earlier said that President Rodrigo Duterte had nothing
to do with the SEC decision covering certificates of registration of Rappler Inc. and Rappler
Holdings Corp.
Ressa, however, claimed there was someone “who was running the SEC on a daily basis for its
decision that is adverse to Rappler."

Asked to identify the person, she “that’s off the record. What we know is that this is political
and if it wasn’t this, it would be something else. There is a strong move to shutdown Rappler.”

Ressa also acknowledge SEC for transparency when the regulator put on record that it was the
Office of the Solicitor General that prompted the probe on Rappler’s ownership structure.

According to the SEC, Rappler welcomed Omidyar Network—which the media organization
said is the fund created by eBay founder and entrepreneur Pierre Omidyar and his wife Pam—
as an investor in the online mass media outlet.

The SEC said Omidyar caused the insertion of certain provisions that assure control over other
PDR holders and over corporate policies of Rappler Inc. and its alter ego Rappler Holdings.

Ressa insisted that PDRs issued to foreign investors are not shares, saying that PDR holders
“can’t tell the company what to do. They can’t be on any board, they can’t be involved in
operation, they can’t vote, they can’t be involved in policy-making.”

The National Union of Journalists of the Philippines said it supports Rappler and “all other
independent media outfits that the state has threatened and may threaten to shut down.”

Read the full SEC decision. —Ted Cordero/VDS, GMA News

Philippine Depository Receipts

On September 29, 1999, the Company offered 132,000,000 PDRs relating to 132,000,000 ABS-
CBN shares. Each PDR was issued for a total consideration of 46.00, which consists of a deposit
of 45.90 and a PDR option price of 0.10.

Each PDR grants the holders, upon payment of the exercise price and subject to certain other
conditions, the delivery of one ABS-CBN share or the sale of and delivery of the proceeds of
such sale of one ABS-CBN share. The Company remains to be the registered owner of the ABS-
CBN shares covered by the PDRs. The Company also retains the voting rights over the ABS-
CBN shares.

The ABS-CBN shares are still subject to ownership restrictions on shares of corporations
engaged in mass media and ABS-CBN may reject the transfer of shares to persons other than
Philippine nationals. The PDRs were listed in the Philippine Stock Exchange on October 7, 1999,
and it may be exercised at any time from said date. Any cash dividend or other cash
distributions distributed in respect of ABS-CBN shares received by the Company (or the
Security Agent on its behalf) shall be applied towards the operating expenses then due of the
Company (including but not limited to applicable taxes, fees and maintenance costs charged by
the Philippine Stock Exchange shown as “Operating Expenses” in the statements of income) for
the current and preceding years. Any further amount equal to the Operating Expenses in the
preceding year (the “Operating Fund”) shall be set aside to meet operating or other expenses for
the succeeding years. Any amount in excess of the aggregate of the Operating Expenses paid
and the Operating Fund for such period (referred to as “Interest”) shall be distributed to
Holders pro-rata on the day after such cash dividends are received by the Company.

Upon exercise of the PDRs, an exercise price of 0.10 per share is paid by the PDR holders.

Immediately prior to the closing of the PDR offering described above, the Lopez, Inc., to which
the Company is affiliated, transferred 132,000,000 ABS-CBN shares to the Company in relation
to which the PDRs were issued. For as long as the PDRs are not exercised, these shares
underlying the PDRs are, and will continue to be registered in the name of and owned by, and
all rights pertaining to these shares, including voting rights, shall be exercised by the Company.
The obligations of the Company to deliver the ABS-CBN shares on exercise of the right
contained in the PDRs are secured by the Pledge of Shares in favor of the Security Agent acting
on behalf of each holder of a PDR over the ABS-CBN shares.
At any time after the initial offering, a PDR Holder may, at his option and from time to time,
deliver shares to the Company in exchange for an equal number of PDRs. The exchanges are
based on prevailing traded values of ABS-CBN shares at the time of transaction with the
corresponding PDR option price.

The PDRs unlocked the share value of ABS-CBN, allowing foreigners to participate in a media
enterprise whose ownership is constitutionally limited to Filipinos. With foreigners allowed to
buy PDRs, ABS-CBN shares which have long been undervalued, can now play catch-up with
regional media counterparts.

SEC stands firm on decision to strip Rappler's license

This comes amid public outrage over the regulator's decision, with some condemning it and
calling it an obvious attack on press freedom

MANILA, Philippines – Despite calls from local and global organizations to reverse its order,
the Securities and Exchange Commission (SEC) stood firm on its decision to strip Rappler
Incorporated's of its license to do business, citing clear violation to "foreign equity restrictions in
mass media."

Local and foreign journalist groups, as well as some senators, condemned the corporate
securities regulator's move, calling it an obvious attack on press freedom.

But Armand Pan, officer-in-charge of the Office of the Commission Secretary, denied the
accusations, saying SEC "just did what it has to do based on its mandate as an corporate
securities regulator."

He said a provision in the Philippine Depositary Receipts (PDRs) issued to Omidyar Network
Fund LLC – which seeks approval of 2/3 of PDR holders on corporate matters – "is a violation
of Foreign Equity Restriction of the Philippine Constitution."

"It stated in the 12.2-2 [clause] of the Omidyar PDR itself that Omidyar must have prior
approval when it comes to changing the articles of incorporation or by-laws of the company.
That means, Rappler cannot even change the principal office address, the date of meeting, so
those are operational policies of corporations. That means PDR holders exercise right of
ownership," Pan said in an interview with ANC on Tuesday, January 16.

He added that the mere act of giving Omidyar the right to participate in the management of
Rappler is enough to validate its decision to revoke the media organization's incorporation
papers. "They need not exercise the right," Pan added.
For Rappler's part, its acting managing editor Chay Hofileña said PDR holders have "no
involvement, no say in Rappler's day-to-day operations, especially in editorial."

'More harsh' than previous rulings

Rappler chief executive officer Maria Ressa said SEC made the decision "without due process,"
as it was made in "less than 5 months" since the media outlet received a show-cause order from
the regulator in August.

SEC chairwoman Teresita Herbosa, meanwhile, explained that the probe was initiated after her
office received a "referral letter" from the Office of the Solicitor General (OSG) on December 22,
2016, asking it to conduct an investigation into Rappler "for any possible contravention of the
strict requirements of the 1987 Constitution."

Although the show-cause order was only issued in August 2017, Herbosa said her office
undertook an "internal, inter-departmental investigation into Rappler" between December 2016
to July 2017.

"We take cognizance of any complaint, tip, or referral if there is," she said in a text message.
(READ: Supreme Court upholds SEC foreign ownership rules)

On a related matter, a few days before SEC received the OSG referral letter to probe Rappler's
ownership structure, the Supreme Court (SC) upheld the foreign ownership guidelines set by
the SEC, which a lawyer alleged was made to accommodate PLDTIncorporated, which then
exceeded the 40% foreign ownership cap to public utilities mandated by the 1987 Constitution.

By a vote of 8-5, the SC on November 22, 2016 denied the petition filed by Jose Judd Roy III, a
former dean of the Pamantasan ng Lungsod ng Maynila, who questioned the constitutionality
of SEC Memorandum Circular 8, series of 2013, or Guidelines on Compliance with the Filipino-
Foreign Ownership Requirements.

The circular gives corporations, like PLDT, which were not compliant with the nationality
requirement one year to cure the violation. PLDT was then able to issue preferred voting shares
to BTF Holdings Incorporated and adhere to the foreign ownership rule.

But in the case of Rappler, Herbosa told the Philippine Daily Inquirer that the Securities
Regulation Code "does not provide for it (one-year curing period) in case of violation of any of
its provisions."

The Philippine Center for Investigative Journalism (PCIJ) denounced this move, saying the SEC
treated Rappler "more harshly" than PLDT when it faced the foreign-ownership violation
"The SEC seem to have glossed over the fact that the harshest penalty of revoking the corporate
registration of the Rappler would have impaired its delivery of news and information on
matters of public concern, or even the Constitutional guarantees of press freedom and the
people's right to know," PCIJ said in a statement.

Meanwhile, Rappler said it will exhaust legal means to reverse the SEC order. –

An Introduction To Depositary Receipts By Reem Heakal | January 10, 2018 — 2:25 PM EST


A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded
on a local stock exchange but represents a security, usually in the form of equity, that is issued
by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to
hold shares in equity of other countries. One of the most common types of DRs is the American
depositary receipt (ADR), which has been offering companies, investors and traders global
investment opportunities since the 1920s.

Tutorial: ADR Basics

Since that time, DRs have spread to other parts of the globe in the form of global depositary
receipts (GDRs) (the other most common type of DR), European DRs and international DRs.
ADRs are typically traded on a U.S. national stock exchange, such as the New York Stock
Exchange (NYSE), while GDRs are commonly listed on European stock exchanges such as the
London Stock Exchange. Both ADRs and GDRs are usually denominated in U.S. dollars, but can
also be denominated in euros.

How Does a Depositary Receipt Work?

The DR is created when a foreign company wishes to list its already publicly traded shares or
debt securities on a foreign stock exchange. Before it can be listed to a particular stock exchange,
the company in question will first have to meet certain requirements put forth by the exchange.
Initial public offerings (IPOs), however, can also issue a DR. DRs can be traded publicly or over-
the-counter (OTC). Let us look at an example of how an ADR is created and traded:


Say a gas company in Russia has fulfilled the requirements for DR listing and now wants to list
its publicly traded shares on the NYSE in the form of an ADR. Before the gas company\'s shares
are traded freely on the exchange, a, through an international office or a local
brokerage house in Russia, would purchase the domestic shares from the Russian market and
then have them delivered to the local (Russian) custodian bank of the depository bank. The
depository bank is the American institution that issues the ADRs in America. In this example,
the depository bank is the Bank of New York. Once the Bank of New York\'s local custodian
bank in Russia receives the shares, this custodian bank verifies the delivery of the shares by
informing the Bank of New York that the shares can now be issued in the United States. The
Bank of New York then delivers the ADRs to the broker who initially purchased them.

Based on a determined ADR ratio, each ADR may be issued as representing one or more of the
Russian local shares, and the price of each ADR would be issued in U.S. dollars converted from
the equivalent Russian price of the shares being held by the depository bank. The ADRs now
represent the local Russian shares held by the depository, and can now be freely traded equity
on the NYSE.

After the process whereby the new ADR of the Russian gas company is issued, the ADR can be
traded freely among investors and transferred from the buyer to the seller on the NYSE,
through a procedure known as intra-market trading. All ADR transactions of the Russian gas
company will now take place in U.S. dollars and are settled like any other U.S. transaction on
the NYSE. The ADR investor holds privileges like those granted to shareholders of ordinary
shares, such as voting rights and cash dividends. The rights of the ADR holder are stated on the
ADR certificate.

Depositary Receipt Pricing and Cross-Trading

When any DR is traded, the broker will aim to find the best price of the share in question. They
will therefore compare the U.S. dollar price of the ADR with the U.S. dollar equivalent price of
the local share on the domestic market. If the ADR of the Russian gas company is trading at
US$12 per share and the share trading on the Russian market is trading at $11 per share
(converted from Russian rubles to dollars), a broker would aim to buy more local shares from
Russia and issue ADRs on the U.S. market. This action then causes the local Russian price and
the price of the ADR to reach parity. The continual buying and selling in both markets,
however, usually keeps the prices of the ADR and the security on the home market in close
range of one another. Because of this minimal price differential, most ADRs are traded by
means of intramarket trading. (Learn more about ADRs in ADRs: Invest Offshore Without
Leaving Home.)

A U.S. broker may also sell ADRs back into the local Russian market. This is known as cross-
border trading. When this happens, an amount of ADRs is canceled by the depository and the
local shares are released from the custodian bank and delivered back to the Russian broker who
bought them. The Russian broker pays for them in roubles, which are converted into dollars by
the U.S. broker.

The Benefits of Depositary Receipts

The DR functions as a means to increase global trade, which in turn can help increase not only
volumes on local and foreign markets but also the exchange of information, technology,
regulatory procedures as well as market transparency. Thus, instead of being faced with
impediments to foreign investment, as is often the case in many emerging markets, the DR
investor and company can both benefit from investment abroad. (Learn more about investing in
emerging markets in Equity Valuation In Emerging Markets.)

Let's take a closer a look at the benefits:

For the Company

A company may opt to issue a DR to obtain greater exposure and raise capital in the world
market. Issuing DRs has the added benefit of increasing the share's liquidity while boosting the
company's prestige on its local market ("the company is traded internationally"). Depositary
receipts encourage an international shareholder base, and provide expatriates living abroad
with an easier opportunity to invest in their home countries. Moreover, in many countries,
especially those with emerging markets, obstacles often prevent foreign investors from entering
the local market. By issuing a DR, a company can still encourage investment from abroad
without having to worry about barriers to entry that a foreign investor might face.
For the Investor

Buying into a DR immediately turns an investors' portfolio into a global one. Investors gain the
benefits of diversification while trading in their own market under familiar settlement and
clearance conditions. More importantly, DR investors will be able to reap the benefits of these
usually higher risk, higher return equities, without having to endure the added risks of going
directly into foreign markets, which may pose lack of transparency or instability resulting from
changing regulatory procedures. It is important to remember that an investor will still bear
some foreign-exchange risk, stemming from uncertainties in emerging economies and societies.
On the other hand, the investor can also benefit from competitive rates the U.S. dollar and euro
have to most foreign currencies.

The Bottom Line

Giving you the opportunity to add the benefits of foreign investment while bypassing the
unnecessary risks of investing outside your own borders, you may want to consider adding
these securities to your portfolio. As with any security, however, investing in DRs requires an
understanding of why they are used, and how they are issued and traded.

Read more: An Introduction To Depositary Receipts

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