Narra Nickel Mining and Dev’t Corp., et al. v. Redmont Consolidated Mines Corp., G.R. No.

195580, 21 April 2014

DOCTRINE
Grandfather Rule Proper pertains to the portion in said Paragraph 7 of the 1967 SEC Rules
which states, "but if the percentage of Filipino ownership in the 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 or Grandfather Rule Proper, the combined
totals in the Investing Corporation and the Investee Corporation must be traced (i.e.,
"grandfathered") to determine the total percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee Corporation.

FACTS
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a
domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed
an application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences
Bureau (MGB), DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays
Calategas and San Isidro, Municipality of Narra, Palawan.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it
was the driving force behind petitioners' filing of the MPSAs over the areas covered by
applications since it knows that it can only participate in mining activities through corporations
which are deemed Filipino citizens. Redmont argued that given that petitioners' capital stocks
were mostly owned by MBMI, they were likewise disqualified from engaging in mining
activities through MPSAs, which are reserved only for Filipino citizens.

They claimed that the issue on nationality should not be raised since McArthur, Tesoro and
Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the
Philippines.

ISSUE
Is the Grandfather Rule applicable?

RULINGS
YES.
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, therefore, the
actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

The Strict Rule or the Grandfather Rule pertains to the portion in Paragraph 7 of the 1967 SEC
Rules which states, “but if the percentage of Filipino ownership in the 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 or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e.,
“grandfathered”) to determine the total percentage of Filipino ownership.
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in
doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders
with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation
which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-
40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply.

In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the natural resources of
the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."