Case title: Narra Nickel Mining and Development Corp v Redmont Consolidated Mines Corp.

Citation: G.R. No. 195580 April 21, 2014

Facts:
Redmont, a domestic corporation organized and existing under Philippine laws, took interest in mining
and exploring certain areas of the province of Palawan. However, 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 Narra, Tesoro Mining and Development, Inc. and McArthur
Mining, Inc

Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions
for the denial of petitioners’ applications for MPSA.

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.

The POA issued a Resolution disqualifying petitioners from gaining MPSAs. Aggrieved, Narra, Tesoro and
McArthur appealed before the Mines Adjudication Board (MAB). In their respective memorandum,
petitioners emphasized that they are qualified persons under the law.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint with
the Securities and Exchange Commission (SEC), seeking the revocation of the certificates for
registration of petitioners on the ground that they are foreign-owned or controlled corporations
engaged in mining in violation of Philippine laws.

Subsequently, Redmont filed before the Regional Trial Court of Quezon City a Complaint for injunction
with application for issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction Redmont prayed for the deferral of the MAB proceedings pending the resolution
of the Complaint before the SEC. But before the RTC can resolve Redmont’s Complaint and applications
for injunctive reliefs, the MAB issued an Order finding the appeal meritorious. The court granted its
petition.

The CA upheld the findings of the POA which considered McArthur, Tesoro and Narra as foreign
corporations. Nevertheless, the CA determined that the POA’s declaration that the MPSAs of McArthur,
Tesoro and Narra are void is highly improper.

Issue:
Whether or not Narra, Tesoro and McArthur are foreign corporations.
Ruling:
Yes.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control
test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967
SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the
controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino
citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, 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. Thus, if 100,000 shares are registered
in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other
50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second
part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation
or partnership is less than 60%, only the number of shares corresponding to such percentage shall be
counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of the
"control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act
(FIA), rather than using the stricter grandfather rule.

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further claim
that the grandfather rule "has been abandoned and is no longer the applicable rule." They also opined
that the last portion of Sec. 3 of the FIA admits the application of a "corporate layering" scheme of
corporations. Petitioners claim that the clear and unambiguous wordings of the statute preclude the
court from construing it and prevent the court’s use of discretion in applying the law. They said that
the plain, literal meaning of the statute meant the application of the control test is
obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners
that the grandfather rule has already been abandoned must be discredited for lack of basis.

There are two cases in determining the nationality of the Investee Corporation.
The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990
Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares
belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no
need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and 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.

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.

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails
and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is present in the
60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their common
investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners also claim that
there is "doubt" only when the stockholdings of Filipinos are less than 60%.