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does not create a lawyer-client relationship between

Alburo Alburo and Associates Law Offices (or any of its lawyers) and the
reader. It is still best for you to engage the services of your own lawyer to
address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with

the law, rules, and jurisprudence prevailing at the time of writing and
posting, and do not include any future developments on the subject matter
under discussion.

After learning about foreign equity, know more about the Key Notes on The
Revised Corporation Code of The Philippines
The Law is found on the first paragraph of Section 2, Article XII of the 1987
Philippine Constitution, to wit:

“Section 2.  All lands of the public domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna,
and other natural resources are owned by the State. With the exception of agricultural lands, all
other natural resources shall not be alienated. The exploration, development, and utilization of
natural resources shall be under the full control and supervision of the State. The State may
directly undertake such activities, or it may enter into co-production, joint venture, or
production-sharing agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law. In cases of water rights for
irrigation, water supply, fisheries, or industrial uses other than the development of water power,
beneficial use may be the measure and limit of the grant.” (emphasis supplied)
Now, how do we determine the nationality of a corporation? Laws and
jurisprudence would provide the following tests:

1. Incorporation Test – It is determined by the place of incorporation regardless of

the nationality of its stockholders.
2. Domiciliary Test – It is determined by the principal place of business of the
corporation.
3. Control Test – It is determined by the nationality of the controlling stockholders
or members. This test is applied in times of war.
4. Grandfather Rule – Nationality is attributed to the percentage of equity in the
corporation used in nationalized or partly nationalized area. As further defined by
Dean Cesar Villanueva, the Grandfather Rule is “the method by which the
percentage of Filipino equity in a corporation engaged in nationalized and/or
partly nationalized areas of activities, provided for under the Constitution and
other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder.”
 1. Said rule is applied specifically in cases where the corporation has
corporate stockholders with alien stockholdings, otherwise, if the rule
is not applied, the presence of such corporate stockholders could
2. diminish the effective control of Filipinos.
The first three tests are self-explanatory. Let’s talk about the fourth.

The Rule was thoroughly discussed in the case of “Narra Nickel Mining and
Development Corporation vs. Redmont Consolidated Mines Corporation (G.R. No. 195580,
January 28, 2015)”
The aforementioned case stemmed from a dispute over the mining and
exploration of certain areas in Palawan. The respondent Redmont
Consolidated Mines, Inc. (Redmont henceforth) questioned the nationality of the
three petitioner corporations (Narra Nickel, Tesoro, and McArthur) which are prior
applicants for Mineral Production and Sharing Agreements (MPSA) on the
same area. Redmont alleged that these three corporations are not qualified
as they do not meet the “at least 60% owned by Filipinos” requirement
under the cited provision of the Constitution. It further argued that at least
60% of the capital stock of Narra Nickel, Tesoro and MacArthur are owned
and controlled by MBMI Resources, Inc. (MBMI henceforth), which is a 100%
Canadian corporation. 
The Supreme Court ruled on the dispute by giving an answer to the
question, “When should the Grandfather Rule be applied?” It then provided that it
should be applied only when:
 the corporation’s Filipino equity falls below the constitutional threshold of 60
percent or;
 there exists a “doubt” as to the Filipino to Foreign equity.
How would we know that a corporation’s Filipino equity falls bellow the
threshold of 60 percent or that there exists a “doubt” as to the Filipino to
Foreign equity? We must first apply the third test which is the Control Test.
As mentioned, Control Test is determined by the nationality of the
controlling stockholders. When after applying the Control Test and there
exists a “doubt” as to the Filipino – Foreign equity, meaning, even when the
equity does not fall below the threshold but reasonable grounds to doubt the
true ownership exists, Grandfather Rule butts in.  Grandfather Rule
determines the actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the corporation. In
essence, Grandfather Rule supplements the Control Test.

The “doubt” demanding the application of the Grandfather Rule is not

confined or refer to the fact that the apparent Filipino ownership of the
corporation’s equity falls below the 60% constitutional threshold.
Rather, “doubt” refers to various indicia that the “beneficial
ownership” and “control” of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders which actually gave rise to the
legislation on the Anti-Dummy Law.
In the present case, the doubt exists as to the extent of control and
beneficial ownership of MBMI over the petitioners and their investing
corporate stockholders. In applying the Grandfather Rule, the Supreme
Court looked into the actual ownership of MBMI in each of the three
corporations. It further checked the structure of the other shareholder
corporations of each company.   Through the application of the Grandfather
Rule, the Supreme Court held that petitioners Narra Nickel, Tesoro and
MacArthur Mining are not considered Philippine nationals since MBMI, a 100
percent Canadian corporation, owns 60 percent or more of their equity
shares interests. Hence, as non-Philippine nationals, they are disqualified to
participate in the exploitation, utilization and development of the Philippines’
natural resources