CA returns Rappler case to SEC for evaluation

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Rappler pushed against the revocation of its license by the Securities and Exchange Commission (SEC) in January.

Metro Manila (CNN Philippines, July 27) — The Court of Appeals may have junked Rappler's petition for review, but it also returned the case to the Securities and Exchange Commission for evaluation because the foreign investor's "negative control" earlier found objectionable may no longer be present.

The CA's July 26 decision ordered SEC to evaluate "the legal effect" of the donation made by Omidyar Network of all its Philippine Depositary Receipts to the online media firm's staff.

SEC earlier ruled that Rappler and Rappler Holdings Corporation violated the foreign equity restrictions in mass media under the Constitution. It revoked Rappler's certificate of incorporation, or their license to do business.

Were the sanctions appropriate?

Among the issues the CA raised is whether or not the mere inclusion of a clause in the Omidyar's PDRs was a violation of the foreign equity restrictions.

The clause in question, 12.2.2, reads:

<12.2 The Issuer undertakes to cause the Company from date hereof and while the ON PDRs are outstanding:

12.2.2 not to, without prior good faith discussion with ON PDR Holders and without the approval of PDR Holders holding at least two thirds (2/3s) of all issued and outstanding PDRs, alter, modify, or otherwise change the Company of 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 appeals court said Rappler had not amended or sought the amendments of its Articles of Incorporation since RHC issued the PDRs.

"Thus, Omidyar never had the opportunity to exercise its rights," it said.

It added that before the Omidyar could exercise its rights under the clause, it executed a waiver affirming that it "has never exercised its rights under Section 12.2.2" and "agrees to waive its rights under Section 12.2.2 of the PDR Instrument."

Also, Omidyar has donated all the Omidyar PDR to Rappler's 14 managers.

Related: Omidyar Network donates investment to Rappler's Filipino managers

"This is a new development which was not presented to, and considered by the Special Panel in issuing its Investigation Report, and the SEC En Banc in rendering the assailed Decision," the court noted.

The court found merit in Rappler's attempts to comply in good faith with the rules and regulations of the SEC -- through the donation and the waiver.

"In view of the donation made by Omidyar of all the Omidyar PDR to the Rappler staff, the negative foreign control found objectionable by the SEC appears to have been permanently removed," it added.

The CA then said the SEC should have given Rappler "reasonable time" to correct or modify the objectionable portions of the articles of incorporation. It added that revoking the certificate of registration should be the last resort.

The court also told the SEC to issue guidelines applicable to PDRs and similar instruments to avoid "future controversies in complying with the foreign equity restrictions of the Constitution."

Prohibition on foreign control of mass media

Rappler argued it was not engaged in the business of mass media which means foreign equity restriction does not apply to it.

But the court said Rappler cannot credibly claim that it is not engaged in the business of mass media through its "own actions and actuations."

The appeals court explains since the constitutional provision limits both ownership and management of mass media to Filipinos, the concept of "control" comes into play.

"In the case of mass media, no foreign control is permissible," it adds.

The court said the PDRs it issued to Omidyar do not make Omidyar a shareholder of Rappler.

SEC ruled that foreign control over Rappler was granted to Omidyar through a particular clause of the Omidyar PDR.  This clause, SEC said, obligates Rappler to hold prior discussions and approval with at least 2/3 of the holders of the PDRs with Rappler.

According to SEC, this clause granted Omidyar Network a "negative control" of Rappler.

The court ruled that while Omidyar PDR states that the right to vote on the Rappler shares is retained by RHC - said right to vote is being shared with or exercised jointly by RHC, as the owner of the shares, and Omidyar, through Clause 12.2.2.

"Thus, under a 'zero' foreign control standard, it would appear that this is tantamount to some foreign control," the court said.

Palace supports CA decision

Malacañang said the appellate court's decision supports their stance that the case does not involve press freedom but SEC's regulatory powers.

"The decision of the Court of Appeals affirms that the Securities and Exchange Commission was correct to revoke Rappler's registration based on its previous investigation," the Palace said said in a statement.

But Rappler CEO and Executive Editor Maria Ressa, in a separate statement, said the CA sided with them that the revocation of Rappler's license is wrong.

"Omidyar never exercised its right to the allegedly questionable clause in its Philippine Depositary Receipt and later even waived its right under that clause, according to the CA," Ressa said.

She claimed it was business as usual for the media outfit.

"We are here for the long haul — with you, inspired and reinvigorated by the mission of journalism," she said.