Grandfather Rule Rules When the Required 60-40 Filipino-
020 Series of 2005 (paragraph 7)
foreign Equity Ownership is In Doubt (Narra vs Redmont, 2014)
Narra Nickel Mining vs Redmont
Case Digest GR 185590, Apr 21 2014
Facts:
Redmont is a domestic corporation interested 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 PLMC (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).
Aside from the MPSA, the three corporations also applied for FTAA
with the Office of the President. In their answer, they countered that
(1) the liberal Control Test must be used in determining the nationality
of a corporation as based on Sec 3 of the Foreign Investment Act
which as they claimed admits of corporate layering schemes, and
that (2) the nationality question is no longer material because of their
subsequent application for FTAA.
Commercial / Political Law
Issue 1: W/N the Grandfather Rule must be applied in this case
Yes. It is the intention of the framers of the Constitution to apply the
Grandfather Rule in cases where corporate layering is present.
First, as a rule in statutory construction, when there is conflict
between the Constitution and a statute, the Constitution will prevail.
In this instance, specifically pertaining to the provisions under Art. XII
of the Constitution on National Economy and Patrimony, Sec. 3 of the
FIA will have no place of application. Corporate layering is
admittedly allowed by the FIA, but if it is used to circumvent the
Constitution and other pertinent laws, then it becomes illegal.
Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather
Rule must be applied when the 60-40 Filipino-foreign equity
ownership is in doubt. Doubt is present in the Filipino equity
ownership of Narra, Tesoro, and MacArthur since their common
investor, the 100% Canadian-owned corporation MBMI, funded
them.
Under the Grandfather Rule, it is not enough that the corporation
does have the required 60% Filipino stockholdings at face value. To
determine the percentage of the ultimate Filipino ownership, it must
first be traced to the level of the investing corporation and added to
the shares directly owned in the investee corporation. Applying this
rule, it turns out that the Canadian corporation owns more than 60%
of the equity interests of Narra, Tesoro and MacArthur. Hence, the
latter are disqualified to participate in the exploration, development
and utilization of the Philippines natural resources.
CORPO - Foreign Corp Narra Nickel Mining vs. Redmont Page 1 of 3
1 DOJ Opinion No.
2 SEC Opinion May 13, 1990
Remedial Law
Issue 2: W/N the case has become moot as a result of the MPSA
conversion to FTAA
No. There are certain exceptions to mootness principle and the
mere raising of an issue of mootness will not deter the courts from
trying a case when there is a valid reason to do so.
The SC noted that a grave violation of the Constitution is being
committed by a foreign corporation through a myriad of corporate
layering under different, allegedly, Filipino corporations. The intricate
corporate layering utilized by the Canadian company, MBMI, is of
exceptional character and involves paramount public interest since it
undeniably affects the exploitation of our Countrys natural resources.
The corresponding actions of petitioners during the lifetime and
existence of the instant case raise questions as what principle is to
be applied to cases with similar issues. No definite ruling on such
principle has been pronounced by the Court; hence, the disposition
of the issues or errors in the instant case will serve as a guide to the
bench, the bar and the public. Finally, the instant case is capable of
repetition yet evading review, since the Canadian company, MBMI,
can keep on utilizing dummy Filipino corporations through various
schemes of corporate layering and conversion of applications to skirt
the constitutional prohibition against foreign mining in Philippine soil.
##
Grandfather Rule may be Applied Jointly with the Control Test to
Determine Corporate Ownership (Narra vs Redmont, 2015)
Narra Nickel Mining vs Redmont
G.R. No. 195580, January 28, 2015
Facts:
Narra and its co-petitioner corporations Tesoro and MacArthur, filed
a motion before the SC to reconsider its April 21, 2014
Decision which upheld the denial of their MPSA applications. The SC
affirmed the CA ruling that there is a doubt to their nationality, and
that in applying the Grandfather Rule, the finding is that MBMI, a
100% Canadian-owned corporation, effectively owns 60% of the
common stocks of petitioners by owning equity interests of the
petitioners other majority corporate shareholders. Narra, Tesoro and
MacArthur argued that the application of the Grandfather Rule to
determine their nationality is erroneous and allegedly without basis in
the Constitution, the FIA, the Philippine Mining Act, and the Rules
issued by the SEC. These laws and rules supposedly espouse the
application of the Control Test in verifying the Philippine nationality of
corporate entities for purposes of determining compliance with Sec.
2, Art. XII of the Constitution that only corporations or associations at
least 60% of whose capital is owned by such Filipino citizens may
enjoy certain rights and privileges, like the exploration and
development of natural resources.
Issue: W/N the application by the SC of the grandfather resulted to
the abandonment of the control test
Held:
No. The control test can be applied jointly with the Grandfather Rule
to determine the observance of foreign ownership restriction in
nationalized economic activities. The Control Test and the
Grandfather Rule are not incompatible ownership-determinant
methods that can only be applied alternative to each other. Rather,
these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged
in fully or partly nationalized activities, as the mining operation
involved in this case or the operation of public utilities.
The Grandfather Rule, standing alone, should not be used to
determine the Filipino ownership and control in a corporation, as it
could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only
when the Control Test is first complied with that the Grandfather Rule
may be applied. Put in another manner, if the subject corporations
Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears.
In this case, using the control test, Narra, Tesoro and MacArthur
appear to have satisfied the 60-40 equity requirement. But the
nationality of these corporations and the foreign-owned common
investor that funds them was in doubt, hence, the need to apply the
Grandfather Rule. ##
When grandfather rules: Test in determining the nationality of a
corporation
TOPMIND By Elaine P. de Guzman (The Philippine Star) | Updated
November 18, 2014 - 12:00am
Foreign investments are vital to the economic growth of the
Philippines. The government encourages foreign investments to curb
unemployment through job-generation and to increase revenue.
While foreign investors are welcome, the Philippine Constitution
however, reserves some activities or industries to Filipinos only.
These nationalized or partly-nationalized industries require zero or these rules to the present case, the Court did not limit the application
a limited percentage of foreign participation. In these types of
industries or activities, the nationality of the investors is critical.
One activity which is nationalized is the exploration, development
and utilization of natural resources under Article XII, Section 2 of the
Philippine Constitution. Under the Constitution, these activities must
be under the full control and supervision of the State. The State,
however, may directly undertake such activities, or it may enter into
co-production, joint venture, or production-sharing agreements with
Filipino citizens, corporations or associations. For corporations or
associations, the fundamental law requires that at least 60 percent of
its capital is owned by Filipinos.
CORPO - Foreign Corp Narra Nickel Mining vs. Redmont Page 2 of 3
The determination of the 60 percent Filipino ownership in a
corporation is, thus, essential when engaging in activities reserved
for Filipinos, such as the exploration, development and utilization of
natural resources. The Supreme Court of the Philippines recently had
the occasion to rule on the determination of the nationality of
corporations interested in engaging in mining activities in the
Philippines. In the case of Narra Nickel Mining and Development,
Tesoro Mining and Development, Inc. and MacArthur Mining, Inc. vs.
Redmont Consolidated Mines Corp. (GR No. 195580), the Supreme
Court discussed the tests used to determine whether a corporation is
effectively Filipino-owned.
This subject case stemmed from a dispute over the mining and
exploration of certain areas in Palawan. The respondent Redmont
Consolidated Mines, Inc. (Redmont) questioned the nationality of
the three petitioner corporations, 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 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., which is a 100%
Canadian corporation.
In this case, the Supreme Court acknowledged that there are two
tests previously used in determining the nationality of a
corporation, the CONTROL TEST and the GRANDFATHER
RULE. The court quoted Paragraph 7 of the DOJ Opinion No. 020,
Series of 2005 wherein it provides that as follows:
Shares belonging to corporations or partnerships, at least
60 percent of the capital stock 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 percent, only the number of
shares corresponding to such percentage shall be counted
as of Philippine nationality. XXX
The High Court explained that the first part of the quoted paragraph
pertains to the control test or the liberal rule, while the second part
refers to the stricter and more stringent grandfather rule. In applying
of the grandfather rule to instances when the Filipino stockholdings
are less than 60 percent. It stated that when there is doubt over
the 60-40 Filipino equity ownership, the grandfather may be
applied, CONTRARY to the allegations by the petitioners that the
control test should be used as it was the test applied under Republic
Act 7042 as amended (otherwise known as the Foreign Investments
Act or FIA).
In applying the grandfather rule, the Supreme Court looked into the
actual ownership of MBMI in each of the three corporations by further
checking the actual structure of the other shareholder corporations of
each company. In MacArthur Mining Corporation, MBMI has 3998
shares while Madridejos Mining which is a Filipino corporation, has
5,997 shares. On its face, it would seem like the Filipino corporation
owns at least 60 percent of MacArthur. However, upon closer look on
the ownership of Madridejos, it can be seen that MBMI also has
substantial shares in it.
In this case, the Supreme Court acknowledges that while corporate
layering is allowed by the FIA, such practice becomes illegal if used
to circumvent the Constitution and pertinent laws.
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.
While the Supreme Court applied the grandfather rule instead of the
control test in this subject case, it must be clarified that the Court did
not totally abandon the control test.
The Court concluded that the control test is still the prevailing mode
of determining the nationality of a corporation, within the ambit of the
CORPO - Foreign Corp Narra Nickel Mining vs. Redmont Page 3 of 3
Constitution, as to who is entitled to participate in the exploration,
development and utilization of the natural resources of the
Philippines.
The grandfather rule would only apply if based on the surrounding
facts and circumstances, there is doubt on the 60-40 required
Filipino-equity ownership in the corporation.
As doubt may arise from several factors, it would therefore be
prudent to ensure that any corporate layering resorted to by an entity
would not result to the contravention of the Constitution. Although this
may prove to be quite difficult, it would always be better to be on the
side of caution.
Elaine P. de Guzman is a supervisor from the tax group of R.G.
Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG
International.
This article is for general information purposes only and should not
be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and
do not necessarily represent the views and opinions of KPMG
International or RGM&Co. For comments or inquiries, please
email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.