Philippine Depositary Receipts:
A Tale of Alleged Constitutional Violation
On January 11, 2018, the Securities and Exchange Commission revoked Rappler, Inc.’s registration for violating the Constitution and the Anti-Dummy Law. Mass media entities are mandated to be owned and controlled by Filipinos only. Rappler violated constitutional restrictions on ownership and control of mass media entities because of funds coming from Omidyar Network, a fund created by eBay founder and entrepreneur Pierre Omidyar. (Rappler.com, https://bit.ly/2DA3eId)
How did these foreign entities infuse funds into the supposedly 100% Filipino company? This was done through the issuance of Philippine Depositary Receipts or PDRs. Public disclosures of Rappler shows that it followed the practice of ABS-CBN. Two years after Rappler got entangled with this legal mess, ABS-CBN is now facing a much worse problem that strikes at the very core of its business: its legislative franchise. Although both have same problem on PDR issuance, Rappler stands to suffer less since it is still able to continue its operations after filing an appeal of the SEC’s decision. Rappler is better off since it does not need a legislative franchise to publish its news. On the other hand, ABS-CBN lifeline depends entirely on the approval of its franchise since broadcast networks like ABS-CBN needs to secure a franchise granting the privilege of using state-owned frequencies which are scarce and need to be allocated through the issuance of a franchise.
What is a PDR? A Philippine Depositary Receipt(s) (PDR) is a security which grants the holder the right to the delivery of sale of the underlying share. A PDR consists of a deposit price and an option price, which is considered as payment when the buyer opts to exercise his option of converting said PDRs to a corporation’s share. PDRs are not evidences or statements nor certificates of ownership of a corporation. However, each PDR represents a share, even in a restricted company, and when bought by a foreign entity, gives the buyer the right to all the dividends due the shares of stock acquired. (Lorenzo E. Delgado, San Beda Alabang Law Journal, https://bit.ly/2BQvzcM)
PDR’s were invented to allow foreign entities to invest even in business reserved exclusively for Filipinos. To avoid a direct violation of the Constitution, a 100% Filipino-owned holding company is set up for the purpose of acquiring the shares of stock of the mass media entity. These shares of stock are used as the underlying asset that supports the issuance of PDR by the holding company. PDR issuers argue that there is no violation of the Constitution because PDR holders do not become owners of the mass media entity. PDR holders do not also become shareholders of the holding company. What PDR holders get out of their acquisition of the PDR is the right to receive the dividends of the underlying share.
While direct ownership of shares is not readily visible on corporate records, the control of the mass media entity by foreigners is concealed in a layer or series of contracts separate from the PDRs.
In the case of ABS-CBN, the Technical Working Group of the House Committee on Legislative Franchises found that ABS-CBN Holdings owns more than one-third (34.67%) of all outstanding shares of stock of ABS-CBN, thus, leaving only 65.03% to the remaining owners. Under the Revised Corporation Code, the remaining 65.03% will not be enough to effect fundamental changes in the corporation such as amend of its articles of incorporation, removal of director or trustee, extending or shortening corporate term, etc. This situation allows ABS-CBN Holdings to frustrate any attempt of approving fundamental corporate changes without its nod. The next question to consider now is whether or not ABS-CBN Holdings is free to vote for the approval of the fundamental corporate changes. It appears that its hands are tied on this matter because ABS-CBN Holdings admitted to have pledged almost two-thirds of its ABS-CBN shares to non-Filipinos. This pledge, according to the TWG appears to have allowed foreigners a measure of control on 62% of ABS-CBN shares held by ABS-CBN Holdings.
The cases of Rappler and ABS-CBN are cases of first impression. Any decision that the Supreme Court will render on appeal will certainly settle the murky issues of PDRs. However, Congress may also settle this issue by enacting a law on the issuance of PDRs. Let’s see how these issues develop in the near future.