HAHN v.

CA The Supreme Court held that agency is shown when Hahn claimed he took orders for BMW
G.R. No. 113074; January 22, 1997 cars and transmits them to BMW. Then BMW fixes the down payment and pricing charges
Ponente: J. Mendoza and will notify Hahn of the scheduled production month for the orders, and reconfirm the
orders by signing and returning to Hahn the acceptance sheets.

FACTS:
Petitioner Alfred Hahn is a Filipino citizen doing business under the name and style "Hahn-
Manila". On the other hand, private respondent (BMW) is a nonresident foreign corporation
existing under the laws of the former Federal Republic of Germany, with principal office at
Munich, Germany.
On March 7, 1967, petitioner executed in favor of private respondent a "Deed of Assignment
with Special Power of Attorney. Per the agreement, the parties "continue[d] business
relations as has been usual in the past without a formal contract."
But on February 16, 1993, in a meeting with a BMW representative and the president of
Columbia Motors Corporation (CMC), Jose Alvarez, petitioner was informed that BMW was
arranging to grant the exclusive dealership of BMW cars and products to CMC, which had
expressed interest in acquiring the same.
The payment is made by the buyer directly to BMW. Title to cars purchased passed directly to
the buyer and Hahn never paid for the purchase price of BMW cars sold in the Philippines.
Hahn was credited with a commission equal to 14% of the purchase price upon the invoicing
of a vehicle order by BMW. Upon confirmation in writing that the vehicles had been
registered in the Philippines and serviced by him, Hahn received an additional 3% of the full
purchase price. Hahn performed after-sale services, including, warranty services. for which
he received reimbursement from BMW. All orders were on invoices and forms of BMW.
Moreover, the Court distinguished an agent from a broker. The court ruled that an agent
receives a commission upon the successful conclusion of a sale. On the other hand, a broker
earns his pay merely by bringing the buyer and the seller together, even if no sale is
eventually made.

On February 24, 1993, petitioner received confirmation of the information from BMW which,
in a letter, expressed dissatisfaction with various aspects of petitioner's business, mentioning
among other things, decline in sales, deteriorating services, and inadequate showroom and
warehouse facilities, and petitioner's alleged failure to comply with the standards for an
exclusive BMW dealer.

Nonetheless, BMW expressed willingness to continue business relations with the petitioner
on the basis of a "standard BMW importer" contract, otherwise, it said, if this was not
acceptable to petitioner, BMW would have no alternative but to terminate petitioner's
exclusive dealership effective June 30, 1993.

Because of Hahn's insistence on the former business relations, BMW withdrew on March
26, 1993 its offer of a "standard importer contract" and terminated the exclusive dealer
relationship effective June 30, 1993.

On April 29, 1993, BMW proposed that Hahn and CMC jointly import and distribute BMW
cars and parts.

Hahn found the proposal unacceptable. On May 14, 1993, he filed a complaint for specific
performance and damages against BMW to compel it to continue the exclusive dealership.

ISSUE:
Whether petitioner Alfred Hahn is the agent or distributor in the Philippines of private
respondent BMW

HELD:

Alfred Hahn is an agent of BMW.


WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES
G.R. No. 176579, promulgated June 28, 2011
I. THE FACTS
This is a petition to nullify the sale of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting
through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based
investment management and holding company and a shareholder of the Philippine Long
Distance Telephone Company (PLDT).
The petitioner questioned the sale on the ground that it also involved an indirect sale of 12
million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by
PTIC to First Pacific. With the this sale, First Pacific’s common shareholdings in PLDT
increased from 30.7 percent to 37 percent, thereby increasing the total common
shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner,
violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more than 40%.
II. THE ISSUE
Does the term “capital” in Section 11, Article XII of the Constitution refer to the total
common shares only, or to the total outstanding capital stock (combined total of common
and non-voting preferred shares) of PLDT, a public utility?
III. THE RULING
[The Court partly granted the petition and held that the term “capital” in Section 11, Article
XII of the Constitution refers only to shares of stock entitled to vote in the election of directors
of a public utility, or in the instant case, to the total common shares of PLDT.]
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates
the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines. (Emphasis supplied)
The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock comprising both common and non-
voting preferred shares [of PLDT].
xxx xxx xxx
Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation. In the absence
of provisions in the articles of incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters, on the theory that the preferred shareholders are
merely investors in the corporation for income in the same manner as bondholders. xxx.
Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term “capital” in Section 11, Article
XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term “capital” shall include such
preferred shares 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. In short, the
term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock that
can vote in the election of directors.
xxx xxx xxx
Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the corporation is “considered as
non-Philippine national[s].”
xxx xxx xxx
To construe broadly the term “capital” as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the “State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.” A broad definition unjustifiably disregards who
owns the all-important voting stock, which necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term “capital.” Let
us assume that a corporation has 100 common shares owned by foreigners and 1,000,000
non-voting preferred shares owned by Filipinos, with both classes of share having a par value
of one peso (P1.00) per share. Under the broad definition of the term “capital,” such
corporation would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more than 99.999
percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in
the election of directors, even if they hold only 100 shares. The foreigners, with a minuscule
equity of less than 0.001 percent, exercise control over the public utility. On the other hand,
the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of
directors and hence, have no control over the public utility. This starkly circumvents the
intent of the framers of the Constitution, as well as the clear language of the Constitution, to
place the control of public utilities in the hands of Filipinos. It also renders illusory the State
policy of an independent national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in
the present case.
xxx xxx xxx
[O]nly holders of common shares can vote in the election of directors [of PLDT], meaning
only common shareholders exercise control over PLDT. Conversely, holders of preferred
shares, who have no voting rights in the election of directors, do not have any control over
PLDT. In fact, under PLDT’s Articles of Incorporation, holders of common shares have voting
rights for all purposes, while holders of preferred shares have no voting right for any purpose
whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet
(GIS), which is a document required to be submitted annually to the Securities and Exchange
Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold
only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number
of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the
common shares equates to control, it is clear that foreigners exercise control over PLDT. Such
amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership
of public utilities expressly mandated in Section 11, Article XII of the Constitution.
As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of PLDT common shares
is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other
words, preferred shares have twice the par value of common shares but cannot elect
directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the
preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the
preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock
of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but with the common shares,
blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipinos in accordance with the constitutional mandate. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is constitutionally required for the State’s grant of authority to operate a public
utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are
non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly
violates the constitutional requirement of 60 percent Filipino control and Filipino beneficial
ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent
of the dividends, of PLDT. This directly contravenes the express command in Section 11,
Article XII of the Constitution that “[n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to x x x corporations
x x x organized under the laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens x x x.”
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over
PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the
voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned
by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares earn; (5) preferred shares have twice the par value of common shares; and
(6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common
shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock
market value of P2,328.00 per share, while PLDT preferred shares with a par value of P10.00
per share have a current stock market value ranging from only P10.92 to P11.06 per share, is
a glaring confirmation by the market that control and beneficial ownership of PLDT rest with
the common shares, not with the preferred shares.
xxx xxx xxx
WHEREFORE, we PARTLY GRANT the petition and rule that the term “capital” in Section 11,
Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the
total outstanding capital stock (common and non-voting preferred shares). Respondent
Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition
of the term “capital” in determining the extent of allowable foreign ownership in respondent
Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article
XII of the Constitution, to impose the appropriate sanctions under the law.
Wilson Gamboa vs Secretary Margarito Teves (2011)
Mercantile Law – Corporation Code – Capital – What “Capital” means
In 1928, the Philippine Long Distance Telephone Company (PLDT) was granted a franchise to
engage in the business of telecommunications. Telecommunications is a nationalized area of
activity where a corporation engaged therein must have 60% of its capital be owned by
Filipinos as provided for by Section 11, Article XII (National Economy and Patrimony) of the
1987 Constitution, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; xxx
In 1999, First Pacific, a foreign corporation, acquired 37% of PLDT common shares. Wilson
Gamboa opposed said acquisition because at that time, 44.47% of PLDT common shares
already belong to various other foreign corporations. Hence, if First Pacific’s share is added,
foreign shares will amount to 81.47% or more than the 40% threshold prescribed by the
Constitution.
Margarito Teves, as Secretary of Finance, and the other respondents argued that this is okay
because in totality, most of the capital stocks of PLDT is Filipino owned. It was explained that
all PLDT subscribers, pursuant to a law passed by Marcos, are considered shareholders (they
hold serial preferred shares). Broken down, preferred shares consist of 77.85% while
common shares consist of 22.15%.
Gamboa argued that the term “capital” should only pertain to the common shares because
that is the share which is entitled to vote and thus have effective control over the
corporation.
ISSUE: What does the term “capital” pertain to? Does the term “capital” in Section 11, Article
XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?
HELD: Gamboa is correct. Capital only pertains to common shares. It will be absurd for capital
to pertain as inclusive of non-voting shares. This is because a corporation consisting of
1,000,000 capital stocks, 100 of which are common shares which are foreign owned and the
rest (999,900 shares) are preferred shares which are non-voting shares and are Filipino
owned, would seem compliant to the constitutional requirement – here 99.999% is Filipino
owned. But if scrutinized, the controlling stock – the voting stock – or that miniscule .001% is
foreign owned. That is absurd.
In this case, it is true that at least 77.85% of the capital is owned by Filipinos (the PLDT
subscribers). But these subscribers, who hold non-voting preferred shares, have no control
over the corporation. Hence, capital should only pertain to common shares.
Thus, to be compliant with the constitution, 60% of the common shares of PLDT should be
Filipino owned. That is not so in this case as it appears that 81.47% of the common shares are
already foreign owned (split between First Pacific (37%) and a Japanese corporation).
When may preferred shares be considered part of the capital share?
If the preferred shares are allowed to vote like common shares.
G.R. No. 207246, November 22, 2016
JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND
EXCHANGE COMMISSION, AND PHILILIPPINE LONG DISTANCE TELEPHONE COMPANY,
Respondents.
FACTS OF THE CASE:
This is a case of special civil action for certiorari under Rule 65 of the Rules of Court
seeking to annul Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8)issued by the
SEC for allegedly being in violation of the Court's Decision ("Gamboa Decision") and
Resolution ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. 176579
which jurisprudentially established the proper interpretation of Section 11, Article XII of the
Constitution.
On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of
which reads:
WHEREFORE, we PARTLY GRANT the petition and rule that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares). Respondent
Chairperson of the Securities and Exchange Commission is DIRECTED to
apply this definition of the term "capital" in determining the extent of
allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of
the Constitution, to impose the appropriate sanctions under the law.
On May 20, 2013, the SEC, through Chairperson Herbosa, issued SEC-MC No. 8
entitled "Guidelines on Compliance with the Filipino-Foreign Ownership Requirements
Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized
and Partly Nationalized Activities." Section 2 of SEC-MC No. 8 provides:
Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or not entitled to
vote in the election of directors.
On June 10, 2013, Roy, as a lawyer and taxpayer, filed the Petition, assailing the
validity of SEC-MC No. 8 for not conforming to the letter and spirit of the Gamboa Decision
and Resolution and for having been issued by the SEC with grave abuse of discretion.
Petitioner Roy also questions the ruling of the SEC that respondent Philippine Long Distance
Telephone Company ("PLDT") is compliant with the constitutional rule on foreign ownership.
He prays that the Court declare SEC-MC No. 8 unconstitutional and direct the SEC to issue
new guidelines regarding the determination of compliance with Section 11, Article XII of the
Constitution in accordance with Gamboa.
ISSUE: Whether the petitioner has standing to question the validity of the subject act or
issuance, i.e., he has a personal and substantial interest in the case that he has sustained, or
will sustain, direct injury as a result of the enforcement of the act or issuance
RULING:
 Petitioners have no legal standing to question the constitutionality of SEC-MC No.
8. The personal and substantial interest that enables a party to have legal standing is one
that is both material, an interest in issue and to be affected by the government action, as
distinguished from mere interest in the issue involved, or a mere incidental interest, and real,
which means a present substantial interest, as distinguished from a mere expectancy or a
future, contingent, subordinate, or consequential interest.
As to injury, the party must show that (1) he will personally suffer some actual or
threatened injury because of the allegedly illegal conduct of the government; (2) the injury is
fairly traceable to the challenged action; and (3) the injury is likely to be redressed by a
favorable action.
To establish his standing, petitioner Roy merely claimed that he has standing to
question SEC-MC No. 8 "as a concerned citizen, an officer of the Court and as a taxpayer" as
well as "the senior law partner of his own law firm[, which] x x x is a subscriber of PLDT."
The Court has previously emphasized that the locus standi requisite is not met by
the expedient invocation of one's citizenship or membership in the bar who has an interest in
ensuring that laws and orders of the Philippine government are legally and validly issued as
these supposed interests are too general, which are shared by other groups and by the whole
citizenry. Per their allegations, the personal interest invoked by petitioners as citizens and
members of the bar in the validity or invalidity of SEC-MC No. 8 is at best equivocal, and
totally insufficient.
Petitioners' status as taxpayers is also of no moment. As often reiterated by the
Court, a taxpayer's suit is allowed only when the petitioner has demonstrated the direct
correlation of the act complained of and the disbursement of public funds in contravention of
law or the Constitution, or has shown that the case involves the exercise of the spending or
taxing power of Congress. SEC-MC No. 8 does not involve an additional expenditure of public
funds and the taxing or spending power of Congress.
The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous.
It is unclear whether his law firm is a "subscriber" of PLDT's shares of stock or of its various
telecommunication services. Petitioner Roy has not identified the specific direct and
substantial injury he or his law firm stands to suffer as "subscriber of PLDT" as a result of the
issuance of SEC-MC No. 8 and its enforcement. Moreover, in the most practical sense, a PLDT
subscriber loses or gains nothing in the event that SEC-MC No. 8 is either sustained or struck
down by [the Court].
Heirs of Gamboa v. Teves, et al., G.R. No. 176579, 09 October 2012
FACTS
Movants Philippine Stock Exchange’s (PSE) President, Manuel V. Pangilinan, Napoleon L.
Nazareno, and the Securities and Exchange Commission (SEC) contend that the term “capital”
in Section 11, Article XII of the Constitution has long been settled and defined to refer to the
total outstanding shares of stock, whether voting or non-voting. In fact, movants claim that
the SEC, which is the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution and various statutes, has
consistently adopted this particular definition in its numerous opinions. Movants point out
that with the 28 June 2011 Decision, the Court in effect introduced a “new” definition or
“midstream redefinition” of the term “capital” in Section 11, Article XII of the Constitution.
ISSUE
Whether the term “capital” includes both voting and non-voting shares.
RULING
NO.
The Constitution expressly declares as State policy the development of an economy
“effectively controlled” by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals, who
are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or
associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The
FIA’s implementing rules explain that “[f]or stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights is essential.” In effect, the FIA clarifies, reiterates and confirms the interpretation that
the term “capital” in Section 11, Article XII of the 1987 Constitution refers to shares with
voting rights, as well as with full beneficial ownership. This is precisely because the right to
vote in the election of directors, coupled with full beneficial ownership of stocks, translates
to effective control of a corporation.
Gamboa v. Teves etal., GR No. 176579, October 9, 2012
Facts:
The issue started when petitioner Gamboa questioned the indirect sale of shares involving
almost 12 million shares of the Philippine Long Distance Telephone Company (PLDT) owned
by PTIC to First Pacific. Thus, First Pacific’s common shareholdings in PLDT increased from
30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners
in PLDT to about 81.47%. The petitioner contends that it violates the Constitutional provision
on filipinazation of public utility, stated in Section 11, Article XII of the 1987 Philippine
Constitution, which limits foreign ownership of the capital of a public utility to not more than
40%. Then, in 2011, the court ruled the case in favor of the petitioner, hence this new case,
resolving the motion for reconsideration for the 2011 decision filed by the respondents.
Issue: Whether or not the Court made an erroneous interpretation of the term ‘capital’ in its
2011 decision?
Held/Reason: The Court said that the Constitution is clear in expressing its State policy of
developing an economy ‘effectively controlled’ by Filipinos. Asserting the ideals that our
Constitution’s Preamble want to achieve, that is – to conserve and develop our patrimony ,
hence, the State should fortify a Filipino-controlled economy. In the 2011 decision, the Court
finds no wrong in the construction of the term ‘capital’ which refers to the ‘shares with
voting rights, as well as with full beneficial ownership’ (Art. 12, sec. 10) which implies that the
right to vote in the election of directors, coupled with benefits, is tantamount to an effective
control. Therefore, the Court’s interpretation of the term ‘capital’ was not erroneous. Thus,
the motion for reconsideration is denied.
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.
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 Philippine’s natural resources.
1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)
2 SEC Opinion May 13, 1990
Narra Nickel Mining vs Redmont
G.R. No. 195580, January 28, 2015
→ Full Text ←
Facts:
Narra and its co-petitioner corporations – Tesoro and MacArthur, filed a motion before the
SC to reconsider its April 21, 2014 Decision which upheld the denial of their MPSA
applications. The SC affirmed the CA ruling that there is a doubt to their nationality, and that
in applying the Grandfather Rule, the finding is that MBMI, a 100% Canadian-owned
corporation, effectively owns 60% of the common stocks of petitioners by owning equity
interests of the petitioners’ other majority corporate shareholders. Narra, Tesoro and
MacArthur argued that the application of the Grandfather Rule to determine their nationality
is erroneous and allegedly without basis in the Constitution, the FIA, the Philippine Mining
Act, and the Rules issued by the SEC. These laws and rules supposedly espouse the
application of the Control Test in verifying the Philippine nationality of corporate entities for
purposes of determining compliance with Sec. 2, Art. XII of the Constitution that only
corporations or associations at least 60% of whose capital is owned by such Filipino citizens
may enjoy certain rights and privileges, like the exploration and development of natural
resources.
Issue: W/N the application by the SC of the grandfather resulted to the abandonment of the
‘control test’
Held:
No. The ‘control test’ can be applied jointly with the Grandfather Rule to determine the
observance of foreign ownership restriction in nationalized economic activities. The Control
Test and the Grandfather Rule are not incompatible ownership-determinant methods that
can only be applied alternative to each other. Rather, these methods can, if appropriate, be
used cumulatively in the determination of the ownership and control of corporations
engaged in fully or partly nationalized activities, as the mining operation involved in this case
or the operation of public utilities.
The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign corporation
rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only
when the Control Test is first complied with that the Grandfather Rule may be applied. Put in
another manner, if the subject corporation’s Filipino equity falls below the threshold 60%,
the corporation is immediately considered foreign-owned, in which case, the need to resort
to the Grandfather Rule disappears.
In this case, using the ‘control test’, Narra, Tesoro and MacArthur appear to have satisfied
the 60-40 equity requirement. But the nationality of these corporations and the foreign-
owned common investor that funds them was in doubt, hence, the need to apply the
Grandfather Rule. ##