MANILA -- The Court of Appeals denied news website Rappler's petition to reverse a Securities and Exchange Commission that revoked its business articles of incorporation for alleged violation of ownership restrictions.

But the CA also remanded the case to the SEC, directing the regulator to evaluate the "legal effect" of Omidyar Network's donation of all its Philippine Depositary receipts to Rappler staff.

The SEC had ruled that Rappler violated the constitutional restrictions on foreign ownership in mass media by allowing the fund of eBay co-founder Pierre Omidyar to hold PDRs.

The donation of the PDRs is a "supervening" event that happened after the SEC revoked Rappler's papers, the CA said.

"Thus, it is incumbent upon the SEC to evaluate the terms and conditions of said supervening donation and its legal effects, particularly, whether the same has the effect of mitigating, if not curing, the violation it found petitioners to have committed. If so, this may warrant a re-examination of the sanction of revocation of petitioners' Certificates of Incorporation imposed by the SEC en banc," it said.

In a 72-page decision handed down on Thursday, July 26, penned by Associate Justice Rafael Antonio Santos, the appellate court’s Special 12th Division ruled that “foreign equity restriction on mass media implies ‘zero’ foreign control” which “includes any appearance of control.”

Associate Justices Apolinario Bruselas Jr. and Germano Francisco Legaspi concurred in the ruling.

The SEC ordered the revocation of Rappler’s registration in a decision issued on January 11 for violation of the Foreign Equity Restrictions in Mass Media enshrined in the 1987 Constitution, and enforceable through the Mass Media Law, Anti-Dummy Law, and the Foreign Investment Act. The state regulator explained that over US $ 1-million in Philippine Depositary Receipts (PDRs) Rappler Holdings Corporation (RHC) sold to US-based Omidyar Network Fund LLC contain a provision wherein Rappler “is required to seek approval of the [Omidyar] PDR Holders on corporate matters.”

Rappler maintained that the PDRs “[do] not confer upon Omidyar control, much less ownership and management,” as it explained that Omidyar’s approval is required only when the actions taken by Rappler “will prejudice” Omidyar’s rights in relation to the Omidyar PDR.

The appellate court disagreed. “[I]t does not matter whether the approval from Omidyar is required only when the actions taken by Rappler will prejudice the rights of Omidyar, because RHC will still nonetheless be required to secure the approval of at leat 2/3 of the PDR Holders before Rappler can carry out or implement any action which has the effect of altering, modifying or otherwise changing Rappler’s 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 Omidyar PDR.”

The appellate court found “some control” on the part of Omidyar over Rappler based on a clause in the Omidyar PDR stating the right to vote is shared between the two parties.

“[W]hile the 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 CA decision stated.

The appellate court further explained that the shared RHC-Omidyar right to vote under Clause 12.2.2 of the PDR subjects amendments to Rappler’s Articles of Incorporation or By-laws to “prior discussion and approval of Omidyar, a foreign entity” whereas it is supposed to be a “fundamental corporate action reserved by law to the board of directors and stockholders of a corporation.”

‘VOTING RIGHTS’ EQUALS ‘EFFECTIVE CONTROL’

Rappler’s argument that Clause 12.2.2 is merely a “negative covenant (requires a party to refrain from doing something)” to safeguard Omidyar’s interests failed to convince the CA, as it found that the said clause “is more than just a negative covenant.”

“In loan agreements, the usual consideration why negative covenants are put in place is to ensure that the creditors will be paid of the loan. Here, the consideration for the insertion of Clause 12.2.2 effectively allows Omidyar to participate in the corporate actions and decisions of Rappler,” the CA said.

In its order, the SEC explained that “control,” as defined under Rule 3.1.8 of the 2015 Implementing Rules and Regulations of Republic Act No. 8799 (Securities Regulation Code), is “the power to determine the financial and operating policies of an entity in order to benefit from its activities” and is “intentionally broad and does not equate with either ownership of shares of stock or with management as director or officer.”

In the case of Rappler, the SEC stressed “[i]t is neither 100% control by the Filipino stockholders, nor is it 0% control by the foreigner PDR holders.”

Citing the Supreme Court decision in the case of Gamboa (PLDT ownership case), the CA pointed out that “voting rights” equate to “effective control” because the “right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors” and “it is the board of directors that controls or manages the corporation.”

SEC ACCORDED RAPPLER DUE PROCESS

Rapper’s claim that it was denied due process by the SEC was also thumbed down by the appellate court.

“[T]he Special Panel recommended the imposition of revocation on Rappler and RHC directly to the [SEC en banc]. No formal charge was filed against Rappler and RHC as required by the SEC Rules,” Rappler said in its petition with the CA.

But the appellate court ruled that “a substantial compliance with the requirements of due process was observed by the SEC.”

The SEC 2016 Rules of Procedure provide the manner by which the regulator conducts investigation proceedings and administrative actions. The Rules provide that a probe for possible violation of laws, rules, regulations, circulars and orders being implemented by the state regulator may be commenced by the Operating Department that has the authority over the specific subject matter - either motu proprio or upon a filed formal complaint.

SEC DIRECTED TO EVALUATE EFFECT OF DONATION OF OMIDYAR PDRs

Omidyar announced on February 28 that it had donated its PDRs to 14 Rappler Filipino managers namely, Maria Ressa, Maria Rosario F. Hofileña, Jennifer V. Chua, Marie Fel D. Dalafu, Stacy Lynne M. de Jesus, Lilibeth Socorro L. Frondoso, Glenda M. Gloria, Dominic Gabriel L. Go, Miriam Grace A. Go, Natashya Marianne L. Gutierrez, Gemma B. Mendoza, Pauline Gel C. Occeñola, Libertad G. Pascual, and Anne Louise B. Yosuico.

"This donation completely eliminates the sole basis of the SEC ruling against Rappler Incorporated and Rappler Holdings Corporation. We therefore strongly believe that the companies should be allowed to continue operating unhindered in the Philippines," Omidyar partner Stephen King said.

President Rodrigo Duterte had repeatedly slammed Rappler in his public speeches, calling the social news network “a fake news outlet” whose articles “are rife with innuendos and pregnant with falsity.”

In a statement, Omidyar said Rappler’s woe "has been a clear and direct attack not only on Rappler Inc. but also on independent journalism and press freedom in the Philippines.”

Rappler has denied all of Mr. Duterte’s allegations, maintaining that it is committed to doing its job as a free and independent social news entity.

Malacañan said it did not have any hand in the Rappler-SEC issue, noting that the chair of the commission at the time Rappler’s registration was ordered revoked, Teresita Herbosa, was not an appointee of Mr. Duterte but of his predecessor, President Benigno S. Aquino.

The SEC probed Rappler’s ownership due to an “initial formal request” from Solicitor General Jose Calida.

RAPPLER SAYS IT SCORED POINTS IN CA RULING

In response to the ruling, Rappler said it believes it has scored points in the decision on its petition for the nullification of the SEC order revoking its articles of registration.

This, despite the appellate court’s junking of Rappler’s petition.

Rappler CEO Maria Ressa told reporters the "CA sided with us on 3 issues:

"1. that the SEC’s revocation of our certificate of registration is wrong;

"2. SEC failed to apply its own rules and practices,went against the mandate of the law by not giving Rappler an opportunity to amend or correct any perceived error before revoking our certificate of corporation. In past cases some companies were given a year to change it;

"3. the SEC needs to reinvestigate the case given Omidyar’s donation of the PDRs to Rappler staff."

"We are here for the long haul, we are here, we are with you, we are inspired and reinvigorated by our mission of journalism.

"For Rappler it is business as usual. I thank you for standing with Rappler. Thank you for standing for freedom,” Ressa said.

Ressa was referring to the portion of the CA decision that noted the SEC, in a notice on May 4, 2015, “relaxed the policy” against delinquent corporations which failed to comply with the reportorial requirements provided in the Corporation Code.

The CA said, instead of immediately issuing an order of revocation, under the new “relaxed policy," the SEC first hands down an order of suspension. The order of suspension is published, and the corporation has 30 days from the date of publication to comply with the missed requirements. If the corporation still fails to comply, the order of suspension remains effective until the submission of the corporation’s latest reports and its payment of the fines and penalties.

Rappler insists it was not accorded this process.

The appellate court said that for future use, the state regulator “may also find it necessary to issue pertinent guidelines or regulations applicable to PDRs and similar instruments to obviate future controversies in complying with the foreign equity restrictions of the Constitution.”

Despite this observation on the regulator’s approach in the Rappler case, the appellate court still sustained the SEC’s “substantial compliance with the requirements of due process.”

“Accordingly, the Court rules that in the present case, a substantial compliance with the requirements of due process was observed by the SEC,” the CA decision stated.

The CA cited the following actions of the SEC to support its ruling:

First, petitioners (Rappler Inc. and Rappler Holdings Corp.) were properly notified of the charges against them through the show cause order directing them to submit a sworn statement/explanation within fifteen days from receipt, as to why they should not be held liable for violation of the foreign equity restriction enshrined in the 1987 Constitution and other laws;

Second, petitioners were able to explain their side when they filed their verified explanation on Aug. 26, 2017 in response to the show cause order;

Third, petitioners were given the opportunity to be heard when they participated in the SEC proceedings by appearing on February 28, 2017 before the SEC Company Registration and Monitoring Department in response to a notice of conference, and filed a verified compliance and supplemental verified compliance in response to the order for the production of documents issued by the SEC Special Panel;

Fourth, petitioners were given the opportunity to appeal the adverse decision of the SEC en banc when they filed the petition before the CA.

The CA said its order to remand the case to the SEC is for the purpose of evaluating the “legal effect of the alleged supervening donation" made by Omidyar of subject PDRs to Rappler staff."