Of PDRs and 'foreign ownership' of PH media
The ownership of Rappler has been catapulted into a national issue. Upping the ante on Wednesday, July 26, Manila Times columnist Rigoberto Tiglao proposed that Rappler personnel should be jailed for up to 21 years for violating our Securities Regulation Code (SRC).
If Tiglao’s claims are true, these have severe implications for our entrepreneurs and nascent venture capital and private equity investors.
What the hell are PDRs?
The debate revolves around Philippine Depository Receipts or PDRs, which Rappler sold to two foreign investors in 2015.
These are financial instruments whose value is tied to the price of and dividends from shares in a company that the PDRs reference (such as Rappler’s shares). However, PDRs do not grant ownership over these shares. (Take a deep breath, read this paragraph a few times, and try to visualize what I just said.)
I summarized PDRs in “Does the CIA own Rappler?” (February 6, 2017). For the full explanation, you can download the 2014 prospectus of ABS-CBN’s PDRs or the 2007 prospectus of GMA-7’s PDRs. These PDRs are listed on the Philippine Stock Exchange, meaning all the information about these instruments is available on the internet.
The key is that PDRs do not grant ownership of the shares they reference. If you buy ABS-CBN PDRs instead of shares in ABS-CBN, you cannot go to the ABS-CBN stockholders’ meeting and demand to be let in as an owner.
The debate boils down to this very simple point.
Because PDRs do not grant ownership, companies that sell PDRs do not violate Article XVI, Section 11(1) of the Constitution, which reads: “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.”
The key word is “ownership.” If a Philippine media company contracts with a foreigner to broadcast Game of Thrones or the NBA championships, that does not violate Section 11(1). If a Philippine media company gets a loan from a foreign bank, that does not violate Section 11(1). The constitutional prohibition (which I disagree with) does not prohibit all financial dealings between mass media companies and foreigners.
Again, you can simply download the ABS-CBN and GMA prospectuses and find out how PDRs work in all their gory detail.
Rappler’s financial statements
Tiglao argues that Rappler’s PDR sale “is not reported in its financial statements submitted to the Securities and Exchange Commission.” (SEC)
This does not seem right.
Rappler’s financial statements and SEC general information statements have been posted on the internet. You can compare these financial statements to those in the prospectuses of ABS-CBN and GMA in the years these media companies sold PDRs, which show how PDRs are recorded by top audit firms.
This might be a fun exercise for any student interested in corporate law, accounting, investment banking or equity research.
Tiglao goes further and accuses Rappler of violating the SRC, which governs PDRs. Tiglao correctly points out that the SRC’s central provision, Section 8.1, states that securities (like PDRs) may not be offered or sold without registration with the SEC.
Tiglao argues: “The SEC has not authorized Rappler to issue any public securities for listing in the stock market, much less those special PDRs. It hasn’t been given an exemption for such registration by the SEC. Rappler isn’t even listed in the stock market. How can it issue PDRs?”
But Section 8 of the SRC (the registration requirement) is always read with Sections 9 and 10 (the exemptions from registration).
Rappler is not listed on the stock exchange and clearly meets Section 10.1(k), the basic exemption for sales of securities by the issuing company to less than 20 persons in a 12-month period.
Section 10.1(k) simply says that if you start your own company and sell shares to a handful of your family and friends – or in Rappler’s case, sell PDRs to two foreign investors – you are not going to jail. Because of this context, Section 10.1(k) is one of the most familiar and most important exemptions in the SRC.
(Section 10.1(k) reads: "Section 10. Exempt Transactions. – 10.1. The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions: ... (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period.")
Jailing foreign tourists
As a final point, remember that Article XVI, Section 11(1) of our 1987 Constitution refers to ownership of “mass media.” Especially since our Constitution predates the internet, why is a website defined as “mass media” and placed in the same bucket as a TV or radio station?
If we take this to an extreme, should we jail every foreign tourist who updates his blog or public Facebook page on Philippine soil?
The barbs thrown at Rappler and the accusations that it is a “bias,” money-losing “sorority blog” make for amusing online spats.
But let me restate the raison d’etre of my columns: When you fight on the internet, please, please use more accurate legal terminology. – Rappler.com
Oscar Franklin Tan is a legal opinion writer and won "The Outstanding Young Men" award for law in 2014. He holds a Master of Laws from Harvard Law School, a Bachelor of Laws from the University of the Philippines (where he was Chair of the Philippine Law Journal) and a double-major in BS Management Engineering and AB Economics (Honors) from the Ateneo de Manila. You may get in touch with him via email@example.com, Twitter @oscarfbtan, facebook.com/OscarFranklinTan.