The Rappler-SEC controversy

The recent decision of the Securities and Exchange Commission to revoke the corporate license of Rappler, an online news media outlet in the Philippines, has triggered a controversy. 

Rappler is a known online media critic of President Rodrigo Duterte.  President Duterte’s dislike for Rappler is public knowledge.

The Office of the Solicitor General is mandated by law to challenge the legality of the ownership and investor profile of any corporation in the country.  Pursuant to that mandate, the OSG asked the SEC to investigate the corporate personality of Rappler.  The SEC is authorized to revoke the license of a corporation which operates in violation or circumvention of the Constitution or the laws.

According to the OSG, Rappler has alien ownership and management interests, which is in violation of the constitutional mandate that ownership and management of mass media in the country shall be limited to Filipino citizens, or to business entities fully owned and managed by Filipino citizens.  If the OSG is correct, then the SEC should revoke the corporate license of Rappler.    

Once Rappler loses its corporate license, it will have no legal existence, and all its transactions will be illegal.  Operating it as an unincorporated organization is impractical, considering issues of wages and tax liabilities.  Unlike a corporation where the financial liability of its stockholders is limited to their proportionate investments in the corporation, an unincorporated organization will have unlimited financial liability to its creditors.

Last week, the SEC revoked the corporate license of Rappler, precisely on the ground cited by the OSG.  The SEC said that although Filipino citizens own all of the stock of Rappler, the enterprise issued Philippine Depository Receipts to certain American business entities based abroad that want to invest in Rappler. 

According to the SEC, the terms governing the PDRs provide that Rappler cannot amend its articles of incorporation and by-laws without the prior approval of the holders of those PDRs.  The SEC also stressed that since the PDRs are owned by alien investors, then Rappler misused its corporate existence to circumvent the constitutional ban against alien ownership and management of mass media in the Philippines.

Although the SEC revoked the corporate license of Rappler, it did not prohibit Rappler from continuing with its news dissemination.  After all, the SEC has no authority to regulate the dissemination of news.  The revocation order is not yet final because Rappler can still file a motion for reconsideration.

Rappler denounced the SEC directive as a curtailment of press freedom through economic sanctions.  Rappler adds that the timing of the SEC order is suspicious because it comes in the wake of President Duterte’s public expression of his disdain for Rappler. 

Although Rappler admits that it issued PDRs to American business entities wishing to invest in its trailblazing online media operations,  Rappler denies that the alien holders of the PDRs have a say in its operations.  Rappler says that all the PDR holders can do is to make suggestions to the Rappler management, and if those suggestions are not heeded, the PDR holders can opt out of the enterprise anytime.

Likewise, Rappler disclosed that two of the biggest television networks in the country also issued PDRs to alien investors, and that a big law firm processed the legal documentation for both Rappler and one of those networks. 

Rappler also lamented that the SEC did not give it a chance to be heard before it issued the revocation order.

For its part, the SEC denies that the revocation order was for the purpose of silencing Rappler and disabling its news dissemination operations.

Not everyone in the media community agrees with Rappler.  Even the Commission on Human Rights has issued an equivocal statement on the issue.  Foreign institutions, however, have expressed support for Rappler.

To fully understand the controversy, the legal restrictions on media ownership and management in the country must be discussed.

Under Section 11 (1), Article XVI of the Constitution, “the ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens.”  In other words, the mass media industry in the Philippines is one-hundred percent nationalized, which means that aliens are not allowed to have anything to do with the operations of any medium of mass communication in the country.

There is also the legal principle that what cannot be done directly, cannot be done indirectly.  This means that any circumvention of the Constitution, even by any clever means, should not be tolerated by the State.

Under Philippine law, aliens may lend money to a Filipino-owned corporation.  In most instances, the lender is given a say in the operations of the debtor corporation in order to safeguard the interests of the lender. 

The situation is different when the corporation concerned is in the mass media industry, which is fully nationalized. While an alien may lend money to a media corporation, the alien creditor should not have a say in the management and operations of the corporation.  To allow otherwise is a circumvention of the constitutional prohibition against aliens.   

No creditor in his right mind will lend millions of pesos to a corporation without having a say in the way that corporation will be managed and operated.  Moreover, lending money to a corporation is an investment in that corporation, and investment in a corporation is a badge of corporate ownership. 

It is, therefore, very difficult to believe that holders of PDRs issued by a media corporation have no investment interest or control in the management of that media corporation.  Also, the fact that media corporations in the Philippines other than Rappler have issued PDRs to aliens does not justify the practice.   

At the very least, the ongoing Rappler-SEC controversy has invited public attention to the PDR as a possible vehicle for circumventing the Constitution.  Therefore, it’s time for the SEC to rethink its policies on this controversial corporate instrument. 

Topics: Securities and Exchange Commission , Rappler
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