Narra Nickel Mining vs Redmont

Case Digest GR 185590, Apr 21 2014

Facts:
Redmont is a domestic corporation interested in the mining and exploration of some areas in
Palawan. Upon learning that those areas were covered by MPSA applications of other three
(allegedly Filipino) corporations Narra, Tesoro, and MacArthur, it filed a petition before the Panel of
Arbitrators of DENR seeking to deny their permits on the ground that these corporations are in reality
foreign-owned. MBMI, a 100% Canadian corporation, owns 40% of the shares of PLMC (which
owns 5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997 shares of McArthur) and
40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro).

Aside from the MPSA, the three corporations also applied for FTAA with the Office of the President.
In their answer, they countered that (1) the liberal Control Test must be used in determining the
nationality of a corporation as based on Sec 3 of the Foreign Investment Act which as they
claimed admits of corporate layering schemes, and that (2) the nationality question is no longer
material because of their subsequent application for FTAA.

Commercial / Political Law

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Issue 1: W/N the Grandfather Rule must be applied in this case
Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule
in cases where corporate layering is present.

First, as a rule in statutory construction, when there is conflict between the Constitution
and a statute, the Constitution will prevail. In this instance, specifically pertaining to the
provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3
of the FIA will have no place of application. Corporate layering is admittedly allowed by
the FIA, but if it is used to circumvent the Constitution and other pertinent laws, then it
becomes illegal.

Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather Rule must be applied
when the 60-40 Filipino-foreign equity ownership is in doubt. Doubt is present in the
Filipino equity ownership of Narra, Tesoro, and MacArthur since their common investor,
the 100% Canadian-owned corporation MBMI, funded them.

Under the Grandfather Rule, it is not enough that the corporation does have the
required 60% Filipino stockholdings at face value. To determine the percentage of the
ultimate Filipino ownership, it must first be traced to the level of the investing
corporation and added to the shares directly owned in the investee corporation.
Applying this rule, it turns out that the Canadian corporation owns more than 60% of the
equity interests of Narra, Tesoro and MacArthur. Hence, the latter are disqualified to
participate in the exploration, development and utilization of the Philippines natural
resources.