Narra Nickel Mining and Dev’t Corp., et al. v.

ISSUES

Redmont Consolidated Mines Corp., G.R. No. (1) Is the Grandfather Rule applicable?
195580, 21 April 2014 (2) Whether McArthur, Tesoro and Narra are Filipino nationals.
18 Apr
RULINGS
[VELASCO, JR., J.]
(1) YES.
FACTS
The instant case presents a situation which exhibits a scheme employed by stockholders
to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
Redmont Consolidated Mines, Inc. (Redmont) filed before the Panel of Arbitrators
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule
(POA) of the DENR separate petitions for denial of McArthur Mining, Inc. (McArthur),
must be used.
Tesoro and Mining and Development, Inc. (Tesoro), and Narra Nickel Mining and
Development Corporation (Narra) applications Mineral Production Sharing Agreement
The Strict Rule or the Grandfather Rule pertains to the portion in Paragraph 7 of the
(MPSA) on the ground that they are not “qualified persons” and thus disqualified from
1967 SEC Rules which states, “but if the percentage of Filipino ownership in the
engaging in mining activities through MPSAs reserved only for Filipino citizens.
corporation or partnership is less than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine nationality.” Under the Strict Rule
McArthur Mining, Inc., is composed, among others, by Madridejos Mining
or Grandfather Rule Proper, the combined totals in the Investing Corporation and the
Corporation (Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc.
Investee Corporation must be traced (i.e., “grandfathered”) to determine the total
(Canadian) owning 3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000
percentage of Filipino ownership.
shares of Madridejos Mining Corporation;
(2) NO.
Tesoro and Mining and Development, Inc., is composed, among others, by Sara Marie
Mining, Inc. (Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc.
[P]etitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100%
(Canadian) owning 3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000
Canadian corporation, owns 60% or more of their equity interests. Such conclusion is
shares of Sara Marie Mining, Inc.;
derived from grandfathering petitioners’ corporate owners. xxx Noticeably, the
ownership of the “layered” corporations boils down to xxx group wherein MBMI has
Narra Nickel Mining and Development Corporation, is composed, among others, by
joint venture agreements with, practically exercising majority control over the
Patricia Louise Mining & Development Corporation (Filipino) owning 5,997 out of
corporations mentioned. In effect, whether looking at the capital structure or the
10,000 shares, and MBMI Resources, Inc. (Canadian) owning 3,998 out of 10,000
underlying relationships between and among the corporations, petitioners are NOT
shares; MBMI also owns 3,396 out of 10,000 shares of Patricia Louise Mining &
Filipino nationals and must be considered foreign since 60% or more of their capital
Development Corporation;
stocks or equity interests are owned by MBMI.
Notes: equity. “Doubt” refers to various indicia that the “beneficial ownership” and
“control” of the corporation do not in fact reside in Filipino shareholders but
 Layering of corporations - using corporations as stockholders of other in foreign stakeholders.
corporations in different stages of organization.  In a fitting ending, the Supreme Court enunciated its original April 2014
 In determining compliance with the minimum Filipino equity requirement, decision that “the Control Test is still the prevailing mode of determining
there are two acknowledged tests. One is the control test or the liberal rule. whether or not a corporation is a Filipino corporation”. It is only in case of
The other is the Grandfather Rule, which is known to be the stricter and more doubt, based on the attendant facts and circumstances of the case, that the
stringent test. In applying these tests, there had been confusion as to whether Grandfather Rule is applied.
one method excludes the use of the other.
 The control test provides that shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by Filipino citizens shall be
considered of Philippine nationality. This test is straightforward and does not
scrutinize further the ownership of the Filipino shareholdings.
 On the other hand, the Grandfather Rule determines the actual Filipino
ownership and control in a corporation by tracing both the direct and indirect
shareholdings in the corporation.
 According to the January 2015 Resolution of the Supreme Court in the case of
Narra Nickel Mining and Development Corp. vs. Redmont Consolidated
Mines Corp. (G.R. No. 195580), “the Grandfather test was originally intended
to look into the citizenship of the individuals who ultimately own and control
the shares of stock of a corporation for purposes of determining compliance
with the constitutional requirement of Filipino ownership”.
 The Supreme Court clarified the role of these tests in determining compliance
with the required Filipino equity threshold. The Court explained that the use
of the Grandfather Rule is a supplement to the Control Test in implementing
the wisdom of the “Filipinization” provisions of the Constitution.
 The Supreme Court recognized the intention of the framers of the Constitution
to apply the Grandfather Rule in cases where there is corporate layering. It
likewise noted that corporate layering, while admittedly allowed by the
Foreign Investment Act, becomes illegal if used to circumvent the
Constitution and other applicable laws.
 The Court further discussed that the Grandfather Rule applies only when the
60-40 Filipino-foreign ownership is in doubt or where there is reason to
believe that there is non-compliance with the provisions of the Constitution on
the nationality restriction.
 How then we do we determine the existence of doubt? In its Resolution, the
high court clarified that “doubt” does not automatically mean the mere failure
of the Filipino ownership to meet the 60% threshold of the corporation’s