SINGAPORE — Blame bizarre legal drafting for the Securities and Exchange Commission (SEC) revocation of Rappler’s certificates of incorporation.
Readers ask me as someone who taught constitutional law. But I am also an international mergers and acquisitions lawyer taking the chartered financial analyst level 3.
My students reshared my past columns on Philippine depositary receipts (PDRs), financial instruments Rappler used in a “deceptive scheme to circumvent the Constitution,” in the SEC’s words (“Of PDRs and ‘foreign ownership’ of PH media,” Rappler, 26/7/2017; “Does the CIA own Rappler?” 6/2/2017).
Out of professional integrity, I must clarify to them that I would have written differently had it been disclosed that Rappler’s PDRs do not follow the template set since 1999 by ABS-CBN and GMA, and that Rappler was already meeting the SEC to defend its PDRs at the time I wrote my July 2017 piece.
Our Constitution limits “ownership and management” of mass media to Filipinos. Genuine PDRs raise capital by giving financial returns but not ownership and management.
I cannot sell an ABS-CBN share to a foreigner. But he may pay me P34 now in exchange for its future dividends and price increases.
The contract’s defining characteristic is it is solely between us. The foreigner is a stranger to ABS-CBN. I still own and vote the share; he only gets future income.
But not in PDRs Rappler sold to Omidyar Network in 2015. These prohibit Rappler shareholders from changing its articles of incorporation or bylaws, or raising money to pay taxes, without two-thirds of PDR holders’ approval.
Suddenly, the foreigner indirectly votes. This link contradicts the essential separation between company and PDR holder.
“It is not a true PDR in the spirit,” concluded BDO Capital president Eduardo Francisco, who has seen more corporate structures than most lawyers.
The SEC may choose to factor these negative covenants or veto rights in gauging some management or control, a subjective, contextual analysis in law and audit around the world. Control is not based solely on who elects the board of directors.
Finally, the SEC clearly never approved the PDRs in 2015. Rappler sent a simple notice that it had less than 20 investors, an exemption from registration (Sec. 10.1(k), Securities Regulation Code). The SEC counted investors, not approved a complex contract.
But the SEC must clarify that Rappler’s blunder sows no uncertainty over everyone else’s contracts.
First, it must clarify its “piercing the corporate veil” critique.
Rappler created a second corporation, Rappler Holdings, to issue PDRs. This is actually what makes PDRs work, what separates the PDR holder—and ownership and management—from Rappler.
In fact, the SEC order upheld a second set of Rappler PDRs to North Base Media that also used two corporations but no vetoes.
The SEC must explicitly reaffirm the standard ABS-CBN and GMA PDRs, which also use two corporations.
Second, the SEC’s “zero-percent control” theory cannot invalidate standard veto rights in loans and joint ventures.
Veto rights rarely intend to grant control. If ABS-CBN borrows from a foreign bank, the bank asks to veto further loans which may strain its finances. This is to protect repayment, not control it.
Lastly, the SEC should reconsider its framework that in “a violation of special laws, intent is immaterial.”
Intent is inherent in a fraud charge. We cannot equally punish hiding information and bad typos and honest mistakes.
Was it a nefarious scheme? Likely, Rappler was a startup with no legal budget that tweaked complex financial contracts with no idea what it was doing.
One hopes Rappler can still revise or cancel its PDRs after a severe SEC scolding. We must reassure other internet startups, which may make mistakes out of ignorance.
Most importantly, we must reassure foreign investors by ending all talk of criminal prosecution under the Anti-Dummy Law.
I disfavor rewriting corporate law using human rights law. But under both, no one should go to jail over bizarre legal drafting.
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