NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC.

, and

MCARTHUR MINING, INC., Petitioners,

vs.
REDMONT CONSOLIDATED MINES
CORP. April 21, 2014

FACTS

Redmont is a domestic corporation which took interest 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 Patricia Louise Mining & Dev Corp (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).

It alleged that at least 60% of the capital stockif McArthur, Tesoro and Narra are owned and controlled by MBMI
Resources, Inc., a 100% Canadian corporation. And so, since MBMI is considerable stockholder of petitioners, it
was the driving force behind petitioners’ filing of the MPSAs over the areas covered by the applications since it
knows it can only participate in mining activities thru corporations which are deemed Filipino citizens.

Petitioners countered that:

- they were qualified persons under Sec 3(aq) of the Phil. Mining Act of 1995;

- that their nationality is immaterial because they also applied for Financial or Technical Assistance
Agreements (FTAA) for Narra;

- that the issue on nationality should not be raised since McArthur, Tesoro and Narra are in fact Phil.
nationals as 60% of their capital is owned by citizens of the PH.

They asserted that although MBMI owns 40% of the shares of PLMC, 40% of the shares of MMC and 40% of
the shares of SLMC, the shares of MBMI will not make it the owner of at least 60% of the capital stock of each
of petitioners.

They added that the best tool used in determining the nationality of a corporation is the “control test”, embodied
in Sec 3 of the Foreign Investment Act of 1991.

The POA issued a Resolution, disqualifying petitioners from gaining MPSAs for being considered as foreign
corporations, being effectively controlled by MBMI, a 100% Canadian corporation and declared their MPSAs null
and void.

Eventually, it reached the CA which upheld the findings and ruled that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation composed of
100% Canadians. Pursuant to the 1st sentence of par 7 of DOJ Opinion No. 020 Ser. Of 2005, adopting the SEC
rules which implemented the Constitution and other pertaining to the exploration of natural resources, the CA
used the “grandfather rule” to determine the nationality of petitioners.

In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders, it yielded that MBMI in effect owned majority of the common stocks of the
petitioners as well as at least 60% equity interest of other majority shareholders of petitioners thru JVA.

It found that thru a “web corporate layering”, the one common controlling investor in all mining corporations
involved is MBMI.

ISSUE: WON petitioners NArra, Tesoro and McArthur are Phil. nationals

HELD: No. The SC said that 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, pertains to the
controlling rule and the 2nd par of the same pertains to the grandfather rule.

1st par: “shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as Phil. nationality” (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.

2nd par: “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 Phil. nationality” (Grandfather
rule)

- the combined totals in the Investing Corporation and the Investee Corporation must be traced. IOW, the
Grandfather rule applies only where the 60-40 Filipino-foreign equity ownership is in doubt.

The petitioners invoked the corporate layering scheme under Sec 3 of the FIA, which the SC said that it is
admittedly allowed by the FIA, but if it used to circumvent the Constitution and pertinent laws, then it becomes
illegal.

Applying the grandfather rule in this case, doubt is present in the corporate ownership of petitioners since
their common investor, the 100% Canadian corporation—MBMI, funded them.

As asserted by petitioners that there is “doubt” only when the stockholdings of Filipinos are less than 60%,
which the SC found reasoning ludicrous since the corporations interested in circumventing the law would clearly
strive to have “60% Filipino ownership” at face value. Thus, to determine, therefore, the actual participation,
direct or indirect, of MBMI, the grandfather rule must be used.

The SC by looking at the structure of MMC, it has a similar structure and composition of McArthur.
MBMI is also a major investor and “controls”. And also has similar nominal shareholders: Esguerra,
Salazar and Mason and Cawkell.
The SC noticed that Olympic Mines & Devp Corp did not pay any amount with respect to the no of
shares they subscribed to in the corporation, which is quite absurd since Olympic is the major
stockholder in MMC. As demonstrated in the 1st corporation, McArthur, when it is grandfathered,
company layering was utilized by MBMI to gain control over McArthur. MBMi has more than 60% or
more equity interest in McArthur, making the latter a foreign corporation.

The structure of Tesero shows exactly the same as McArthur’s. Tesoro: Sara Marie (59.97% of the 10k
common shares); MBMI (39.98%)
59.97%-- Patricia; MBMI paid
In conclusion, the SC ruled that petitioners McArthur, Tesoro and Narra are not Filipino since MBMi, a
100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived
from grandfathering petitioners’ corporate owners: MMI, SMMI and PLMDC Patricia Louise Mining).