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Is the Revocation by the Securities and Exchange Commission of Rappler’s

Registration a Violation of Press Freedom?

The Securities and Exchange Commission (SEC) revoked the

registration of Rappler, Inc. (Rappler) and Rappler Holdings Corporation
(RHC) as Philippine corporations because of violation on the rules on
foreign participation in media companies.

The SEC Ruling

The 1987 Constitution and several Philippine laws provide that a

media company must be owned and controlled 100% by Filipinos. The
media company violates the law on control restrictions should it give
foreigners control of more than 0% of the company.

Rappler is a domestic stock corporation registered on 25 July 2011

with Board of Directors and shareholders who are 100% Filipino. In 2013
and 2014, it got commitments from foreign investors. In December 2014, it
had to legalize the receipt of foreign investment. However, it is barred
from issuing shares of stock or giving seats at its board.

A new corporation, RHC, was set up as a vehicle for issuing Philippine

Depositary Receipts (PDRs). The PDRs are derivative instruments that
derive their value from equity.

RHC is a domestic stock corporation registered on 12 December

2014. It bought the shares of Rappler in 2015 and presently owns 98.84%
of the corporation. Then, it issued PDRs to North Base Media and Omidyar
Network. Both are foreign juridical entities.

In general, there is nothing wrong with issuance of PDRs. Anent to

that, the SEC found no irregularity with the PDRs issued to North Base
Media. However, it is a different story with regards to the PDRs issued to
the Omidyar Network, or the “ON PDRs.”

In particular, ON PDRs have provisions that grant a measure of

control over both Rappler and RHC. In particular, Rappler and RHC cannot
alter, modify, or change their Articles of Incorporation and Corporate By-
Laws without discussion with ON PDR holders, and without obtaining the
consent of at least two-thirds of all issued PDRs.
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With the provisions on the ON PDR’s, there is a clear violation of

Philippine laws 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 found that Rappler has control issues. Control is not just
about ownership of stock. The Securities Regulation Code (SRC) has a very
broad definition of control which goes beyond ownership of shares. The
PDRs are derivative instruments covered by the SRC, hence, the law’s
provisions govern any transaction in connection to PDRs.

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

The SEC concluded that Rappler issued the PDRs to illegally skirt the
strict ownership and control requirements of Philippine law. The ON PDRs
were declared void and Rappler’s Certificate of Registration with the SEC
was revoked.

The Defenses of Rappler before the SEC

As its defense, Rappler reasoned that the PDR provisions are not
enough to be considered as “control” of the corporation. In addition, it
alleged that “control” is actually defined as ownership of shares, not simply
management control. On this, the SEC stated that “any” control is

Another contention by Rappler is that it is not a media company. It

assailed that what it does is not part of mass media. The SEC did not give
merit to this argument. What Rappler does have been considered within
the ambit of the definition of “mass media” since the Tobacco Regulation
Law was passed in 2003. Furthermore, Rappler have been outing itself
publicly as a mass media firm in legal terms and in its press releases.

In December 22, 2017, Rappler submitted a photocopy of a

purported waiver saying that the holders of the PDR are waiving their rights
to the control provision of the PDR. The submitted document was ignored
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because it is a private one and not subscribed before a Notary or a

Philippine Consulate.

Arguments of Rappler to the Court of Appeals

In a petition filed before the Court of Appeals, Rappler refuted the

SEC's position saying it violated the Constitution by issuing PDR to foreign
investor Omidyar Network and giving it control over the media outfit. As
the petition stated, “This clause does not give Omidyar the power to decide
when and how the articles of incorporation or by-laws of Rappler, or any
other corporate matter, are to be made. Therefore, Omidyar has no control
over the actions of RHC, and also Rappler.” Furthermore, Rappler said the
SEC ruling is baseless, since it has no findings that Omidyar actually
exercised control over the company. The petition invoked that Rappler and
RHC cannot be punished, in any way for a violation that never occurred.

The petition also assailed that Rappler and RHC were deprived of its
right to due process when the SEC hastily decided to cancel its Certificates
of Incorporation. It argued that a different procedure, which was not made
known to Rappler and RHC, was applied in their case. Adding that the SEC
en banc did not consider the evidence presented to counter the claims and
that it should have been allowed to fix the contentious provision in
Omidyar's PDR.

With regards to the issue of violating the Constitution on foreign

ownership limits, Rappler cannot be held liable as it is not engaged in the
business of mass media. It argued that the “mass media” referred to in
Section 11 of Article 16 of the Constitution pertains only to print and
broadcast media. According to Rappler, it has distinguished itself from
traditional mass media entities. That it should not be treated in the same
way as companies engaged in print media or broadcast media such as ABS-
CBN, GMA Network, Inc., TV5 Network, Inc., Philippine Daily Inquirer,
Manila Bulletin and the like. That its activities are more akin to the way
Facebook, Twitter, YouTube and blogs operate.

It is also contended that the revocation of the Certificates of

Incorporation of Rappler and RHC is a penalty that is too severe and grossly
disproportionate to the supposed wrong committed. Lastly, the petition
concluded assailing that given the serious procedural and substantive
irregularities in the questioned decision, there can be no other conclusion
but that its real purpose is to silence Rappler and muzzle free expression.
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The main issue of the case boils down to whether or not Rappler is
engage in mass media. And the answer is in the affirmative. Consequently,
the constitutional prohibition against foreign ownership is violated by
Rappler. Thus, the SEC ruling should be upheld.

Rappler is undeniably engaged in mass media. If it is not a media

entity, as it argued, then how is freedom of the press under attack? By
claiming that it is not a media entity, Rappler is only serving its own
interests to circumvent the Constitution.

Strictly speaking, there is no actual suppression of free press to begin

with. As much as Rappler would like to play the victim card, there is
nothing preventing its writers and reporters to tell the news as it sees fit.
The avenues for full freedom of expression are all still available even if the
SEC’s ruling is upheld.

Press freedom was never a license to operate outside the bounds of

law. Rappler placed itself outside the bounds of the Constitution by
opening to foreign control, intentionally or otherwise. It had laid itself
vulnerable to attack. The SEC could not be blamed for performing its duty.

There is a reason why the Constitution prohibited foreign control

over mass media. 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 framers of the Constitution sought to ensure that mass media will
always be independent and beyond censure, especially from any
insinuation of control, foreign or otherwise.

While understandably necessary, contextualizing this case as a press

freedom issue is a disservice to the complexity and depth of the
Constitution. Furthermore, the SEC ruling is being painted as the conflict
between an embattled champion of free speech and the government when,
in fact, it should be seen more as a fight of the government versus an
allegedly unconstitutional corporation.

The SEC, in a strict legal sense, had the full discretion and authority
to revoke the certificates of incorporation of Rappler and RHC. But was the
penalty too harsh? Of course it was. Nevertheless, it may have been
necessary. Otherwise, it would have given the impression that it was valid
for corporations in the mass media to surrender control to foreign entities,
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at least temporarily, in exchange for funding, at least until the SEC ordered
them to be divest such foreign control.

In promulgating its decision, the SEC may have done more than
exercising its regulatory functions. It may have unintentionally reinforced
mass media by ensuring its practitioners’ integrity, independence and
nationality. It has also reminded the nation of the importance of press
freedom. That it is a matter worth discussing and worth fighting for. In the
end, the power of the press must prevail as a vital element in a free society,
but always, and necessarily, in accordance with law and the Constitution.

Prepared By:

Student #: 1566-17
Section Plato
February 28, 2018