CA rejects anew Rappler bid on foreign investor

The Court of Appeals has stood by its ruling that Rappler violated the constitutional ban on foreign ownership of mass media, the argument the Securities and Exchange Commission (SEC) used to order the online news company’s closure.

A three-member division of the court, however, reiterated its order to the SEC to evaluate whether the subsequent donation by foreign investor Omidyar Network of all its shares to Rappler’s Filipino staff had settled the matter.

In a decision dated Feb. 21 but released only on Monday, the appeals court affirmed its ruling on July 26, 2018, that upheld the SEC’s revocation of the business registration of Rappler and its holding company for violation of the foreign-equity restriction on mass media.

It denied Rappler’s motion for reconsideration filed in August last year, insisting that the company was not “100 percent Filipino-owned.”

No-control argument

The court contradicted Rappler’s position that its main investor, Omidyar Network, was not a stockholder and had no voting rights, so it did not exercise control over the news organization.

Rappler Holdings Corp. (RHC) “cannot claim that it fully owns the Rappler shares since it does not exclusively exercise the right to vote on the Rappler shares,” it said.

It pointed out that Omidyar Network was granted the power “to direct the voting on the Rappler shares.”

“Mere grant of control, regardless of the actual exercise of such control, already constitutes a violation of the foreign equity restriction on mass media,” the court said.

Again, it denied Rappler’s appeal to overturn the SEC closure order for supposedly violating its right to due process.

The commission, it said, observed “substantial compliance” of due process and that its actions fell under its regulatory functions, “hence a trial-type proceeding is not necessarily required.”

The court again chose not to resolve whether the donation made by Omidyar Network of all its Philippine Depositary Receipts (PDRs) to the Rappler staff had cured the constitutional violation in media operations.

PDRs refer to derivative instruments that are based on the value of equities as underlying assets but do not grant ownership to the holder.

SEC to decide on donation

The court remanded the case to the SEC to evaluate the legal effect of Omidyar Network’s donation.

“This may warrant a reexamination of the sanction of revocation of petitioners’ certificates of incorporation imposed by the SEC en banc,” it said.

The court ruling was rendered by Associate Justices Rafael Santos, Apolinario Bruselas Jr. and Germano Legaspi, who comprised the Former Special Twelfth Division.

Last year, the SEC found legal loopholes in the structure of PDRs issued by Rappler Inc.’s controlling stockholder, RHC, to Omidyar Network Fund LLC, an offshore fund created by eBay founder Pierre Omidyar and his wife.

The corporate watchdog voided the PDRs.

RHC itself had issued PDRs not just to Omidyar but also to Washington-based NBM Rappler LP, a unit of North Base Media.

The SEC, however, voided only the Omidyar PDRs, which were issued in exchange for an estimated $1-million stake in Rappler. It said the issuance was a “fraudulent” transaction under the Securities Regulation Code, as it violated the antidummy law.

Right to veto

It noted that the PDRs had carried provisions for “negative control,” or the right to veto certain corporate actions by Rappler.

The foreign equity restriction on mass media prohibited anything less than 100 percent control, the SEC said.

It defined “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, “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,” the SEC said in January last year.

Two months after the SEC voided the Omidyar PDRs, an American investor, which owned a controversial $1.5-million investment in Rappler, announced that it had donated its interests to 14 Filipino managers of the online news site.

“This, I think, is a politically motivated attack. It is not a point of law. And so we feel that by making the decision, by donating the PDR, we are essentially taking away any barrier which has been put in place,” Stephen King, a partner at Omidyar Network. had told journalists in a conference call.

He said the donation completely eliminated the sole basis of the SEC ruling against Rappler Inc. and RHC.