The Grandfather Rule was originally conceived to look into the citizenship of the

individuals who ultimately own and control the shares of stock of a corporation for
purposes of determining compliance with the constitutional requirement of Filipino
ownership

Narra Nickel Mining and Development Corp. vs. Redmont Consolidated Mines Corp.
GR No. 195580. January 28, 2015

FACTS:

Respondent Redmont Consolidated Mines Corp. (Redmont) is a domestic corporation organized

and existing under Philippine laws. Sometime in December 2006, it 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.

The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on
November 6, 2006, assigned to petitioner McArthur. Petitioner Narra acquired its MPSA from
Alpha Resources and Development Corporation and Patricia Louise Mining & Development
Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Region
IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12
covering an area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra,
Palawan. Subsequently, PLMDC conveyed, transferred and/or assigned its rights and interests
over the MPSA application in favor of Narra. Another MPSA application of SMMI was filed with
the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402
hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan.
SMMI subsequently conveyed, transferred and assigned its rights and interest over the said
MPSA application to Tesoro.

Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for
the denial of petitioners’ applications for MPSA designated as AMA-IVB-153, AMA-IVB-154 and
MPSA IV-1-12. 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.

ISSUE: Whether petitioner corporations are Filipino owned, and thus, can validly be issued MPSA
and EP

RULING:

No. Under the SEC Rules, 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.
WARITIME TEST

The sequestration or seizure of properties is not an act for the confiscation of an enemy
property, but rather it is for the conservation of it.

Haw Pia vs China Banking Corporation

FACTS:
• The Plaintiff-appellant instituted an action against China Banking Corp. at the Court of First
Instance of Manila, compelling the latter to execute a deed of cancellation of the mortgage on
the properties of the plaintiff-appellant as well as the delivery of the transfer of certificate of
title.
• Such cause of action was also due to the claim of the Plaintiff-appellant that its debt to China
Banking Corporation in the amount of P5,103.35 has already been paid including its
interest from October 7, 1942, to August 29, 1944, through the defendant which is Bank of
Taiwan, ltd.
o The defendant bank herein was appointed by the Japanese Military Authorities as the
liquidator of the China Banking Corporation.
• China Banking Corporation now then summons and demands payment including the
interests from the plaintiff within 90 days from and after the date Executive Order No. 32
on moratorium, series of 1945, has been repealed, of said amount – by way of overdraft
together with its interests at the rate of 9 per annum.
TRIAL COURT RULING:
• After the hearing, the trial court ruled that there is no evidence showing that China Banking
Corp authorizes the Bank of Taiwan to accept the payments made by the plaintiff on behalf of
China Banking Corp.
• Moreover, the Bank of Taiwan as an agency of the Japanese Invading Army was not
authorized under the international law to liquidate the business of the China Banking
Corporation.
o Meaning, the debt of the plaintiff has not been extinguished under Article 1162 of the
Civil Code.
• Plaintiff was now ordered to pay for the debt he owes against the China Banking Corporation,
and in case of failure, the properties owned by former will be mortgaged and sold at a public
auction.
ISSUE/s
1. Whether the Japanese Military Administration had authority to order the liquidation or
winding up of the business of defendant-appellee China Banking Corporation, and to
appoint the Bank of Taiwan liquidator authorized as such to accept the payment by the
plaintiff-appellant to said defendant-appellee
2. Whether such payment by the plaintiff-appellant has extinguished her obligation to said
defendant-appellee
RULING:

1. YES. The court ruled that the Japanese Military Administration had the authority or power
under the International law to order the liquidation of the China Banking Corporation and
to appoint and authorize the Bank of Taiwan as liquidator to accept the payment in
question, because such liquidation is not a confiscation of the properties of the bank
appellee, but a mere sequestration of its assets which required the liquidation or
winding up of the business of said bank.
.
The cause of action being looked upon against the China Banking Corporation with regard
to the liquidation or winding up of the affairs based on the allegations is in order to
determine its liabilities and net assets to be sequestrated or controlled, was an act of
confiscation or appropriation of private property contrary to Article 46, section III of the
Hague Regulations of 1907. The provisions of the Hague Regulations, section III, on
Military Authority over Hostile Territory, which is a part of the Hague Convention respecting
the laws and customs of war on land states are intended to serve as a general rule of
conduct for the belligerents in their relations with each other and with the
inhabitants…
Section III of the Hague Regulations only prohibits the confiscation of private property by
order of the military authorities (article 46), and pillage or stealing and thievery thereof by
individuals (article 47); and as regards public property, article 53 provides that cash funds,
and property liable to requisition and all other movable property belonging to the State
susceptible of military use or operation, may be confiscated or taken possession of as a
booty and utilized for the benefit of the invader's government.
China Banking Corporation falls under the class “enemy” under the Trading with the
Enemy Acts of Civilized Countries because it was not only incorporated under the laws of
a country with which Japan was at war but also it is controlled by the Japan’s Enemies.
However, the sequestration or seizure of properties is not an act for the confiscation
of an enemy property, but rather it is for the conservation of it, subject to further
disposition by treaty between the belligerents at the end of the war. And such enemy
banks, appears that the Japan does not intend to confiscate or appropriate the assets of
said banks or the debts due them from their debtors, and thus violate article 46 or any
other article of the Hague Regulations

2. YES. It is already evident enough as mentioned above that the Japanese Military Forces
had the power to sequestrate over the assets and funds of China Banking Corporation,
and that it shows under Article 1162 of the Civil Code that the payments made by the
debtors through a person and in this case, the Bank of Taiwan, who was given the
authority to receive on behalf of China Banking Corporation have already extinguished.
 Section 5, Article XIII, of the Constitution, which limit the acquisition of land in the
Philippines to its citizens, or to corporations or associations at least ixty per centum of
the capital stock of which is owned by such citizens, adopted after the enactment of said
Act No. 271.

THE REGISTER OF DEEDS OF RIZAL, petitioner and appellee, vs. UNG Siu Si TEMPLE,
respondent and appellant.
[No. L-6776. May 21, 1955]

FACTS:
- Register of Deeds for the province of Rizal refused to accept for record a deed of donation
executed in due form by Jesus Dy, a Filipino citizen, conveying a parcel of residential land,
in Caloocan, Rizal 11267, in favor of the unregistered religious organization "Ung Siu Si
Temple", operating through three trustees all of Chinese nationality.
- The donation was duly accepted by Yu Juan, of Chinese nationality, founder and
deaconess of the Temple, acting in representation and in behalf of the latter and its
trustees.
- The refusal of the Registrar was elevated en Consulta , in which the the Court upheld the
action of the Rizal Register of Deeds : under sections 1 and 5 of Article XIII of the
Constitution of the Philippines limiting the acquisition of land in the Philippines to its
citizens, or to corporations or associations at least sixty per centum of the capital stock of
which is owned by such citizens
- Not satisfied with the ruling of CFI counsel for the donee Uy Siu Si Temple has appealed
to this Court, (1) claiming that the acquisition of the land in question, for religious purposes,
is authorized and permitted by Act No. 271 of the old Philippine Commission (2) and that
the refusal of the Register of Deeds violates the freedom of religion clause of our
Constitution

ISSUE:
1. WON whether a deed of donation of a parcel of land executed in favor of a religious
organization whose founder, trusteesand administrator are Chinese citizens should be
registered or not?

RULING:

We are of the opinion that the Court below has correctly held that in view of the absolute terms of
section 5, Title XIII, of the Constitution, the provisions of Act No. 271 of the old Philippine
Commission must be deemed repealed since the Constitution was enacted, in so far as
incompatible therewith. In providing that,—

"Save in cases of hereditary succession, no private agricultural land shall be transferred or

assigned except to individuals, corporations or associations qualified to acquire or hold lands of
the public domain in the Philippines",

NO. The fact that the appellant religious organization has no capital stock does not suffice to
escape the Constitutional inhibition, since it is admitted that its members are of foreign nationality.
The purpose of the sixty per centum requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to exploit natural resources shall be controlled
by Filipinos; and the spirit of the Constitution demands that in the' absence of capital stock, the
controlling membership should be composed of Filipino citizens.

To permit religious associations controlled by non-Filipinos to acquire agricultural lands would be

to drive the opening wedge to revive alien religious land holdings in this country.
 A corporation sole being a creature prior to the constitution, has no nationality. If a
nationality is sought to be determined, the same depends of the nationality of the
majority of the lay members and not on the nationality of the sole corporator.

Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds
of Davao
G.R. No. L-8451, December 20, 1957
Felix, J.:

FACTS:
• Nature of case: Petition for mandamus filed by the Roman Catholic Apostolic
Administrator of Davao seeking the reversal of a resolution issued by the Land
Registration Commissioner
• Mateo Rodis, A Filipino citizen and resident of the City of Davao executed a deed of sale
of a parcel of land located in the same city covered by Transfer Certificate No. 2263, in
favor of the Roman Catholic Apostolic Administrator of Davao Inc., s corporation sole
organized and existing in accordance with Philippine Laws, with Msgr. Clovis Thibault,
a Canadian citizen, as actual incumbent.
• The Register of Deeds required said corporation sole to submit an affidavit declaring that
60% of the members thereof were Filipino citizens (similar to a previous resolution wherein
the Carmelite Nuns of Davao were made to prepare the same when they sought to register
in favor of their congregation).
• The vendee agreed but not in the same tenor because the 2 cases were not similar,
explaining the ff. differences:
CARMELITE NUNS CORPORATION SOLE
Congregation
Has 5 incorporators Has only 1
Articles of Incorporation
Carmelite Nuns became the owner In the case at bar, the totality of the
Catholic population of Davao would
become the owner of the property sought
to be registered.
• The matter was referred to Land Registration Commissioner en consulta which held that
in view of secs. 1 and 5 of Article XIII of the Constitution, the vendee was not qualified to
acquire private lands in the PH in the absence of proof that at least 60% of the capital,
property, or assets was actually owned or controlled by Filipino citizens (present
incumbent was Canadian), and that sec. 159 of the Corporation Law relied upon by the
vendee was rendered inoperative by the aforementioned provisions of the Constitution.
o It ordered the Register of Deeds of Davao to deny registration of the deed of sale
in absence of proof of compliance.
o Motion to reconsider resolution was denied. With that, an action for mandamus
was instituted with the Court by said corporation sole.
• Petitioner’s contentions: Under the Corporation Law, the Canon Law as well as the
settled jurisprudence on the matter, the deed of sale is actually in favor of the Catholic
Church which is qualified to acquire private agricultural lands for the establishment and
maintenance of places of worship and prayed that the resolution of the LRC be set aside.
o It maintained that a corporation sole irrespective of the citizenship of its incumbent,
is not prohibited or disqualified to acquire and hold real properties.
 o The Corporation Law and the Canon Law are explicit in their provisions that a
corporation sole or "ordinary" is not the owner of the properties that he may acquire
but merely the administrator thereof.
o In elaborating the composition of the Philippine Catholic Church, it explained that
as a religious society, it is divided into the clergy or religious members and the
faithful or lay members: Figures showed that there were 277,551 Catholics in
Davao and 3,465 resident aliens. Even granting that all these foreigners are
Catholics, petitioner contends that Filipino citizens form more than 80% of the
entire Catholics population of that area. As to its clergy and religious composition,
Filipino clergy and women novices comprise already 60.5% of the group.
Therefore, the constitutional requirement was fully met and satisfied.
• Respondent’s contentions: Although it might be true that Petitioner is not the owner of
the land purchased, yet he has control over the same, exercising all rights of ownership
over the properties.
o The theory that properties registered in the name of the corporation sole are held
in trust for the benefit of the Catholic population of a places, as of Davao in the
present case, should not be sustained because a conglomeration of persons
cannot just be pointed out as the cestui que trust or recipient of the benefits from
the property allegedly administered in their behalf. Neither can it be said that the
mass of people referred to as such beneficiary exercise any right of ownership
over the same.
o The beneficiary of ecclesiastical properties are not the members or faithful of the
church but someone else (quoting a portion of the oath of fidelity subscribed by a
bishop wherein he promises to render to the Pontifical Father or his successors an
account of his pastoral office and of all things appertaining to the state of this
church).
o In construing the constitutional provision calling for 60% Filipino citizenship, the
criterion is not membership in the society but ownership of the properties or
assets thereof.

ISSUE:
Whether or not Roman Catholic Apostolic Administrator of Davao is qualified to acquire private
agricultural lands in the Philippines, pursuant to Art. XIII of the Constitution?

RULING:
YES. Sections 1 and 5 of Art. XIII of the Constitution provide that only persons or corporations
are qualified to acquire of hold hands of the public domain in the Philippines may acquire or be
assigned and hold private agricultural lands.

Section 1. All agricultural, timber, and mineral lands of the public domain, water, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy, and other natural resources of
the Philippines belong to the State, and their disposition, exploitation, development, or utilization
shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per
centum of the capital of which is owned by such citizens, SUBJECT TO ANY EXISTING RIGHT,
grant, lease, or concession AT THE TIME OF THE INAUGURATION OF THE GOVERNMENT
ESTABLISHED UNDER CONSTITUTION. Natural resources, with the exception of public
agricultural land, shall not be alienated, and no license, concession, or leases for the exploitation,
development, or utilization of any of the natural resources shall be granted for a period exceeding
twenty-five years, renewable for another twenty-five years, except as to water rights for irrigation,
water supply, fisheries, or industrial uses other than the development of water power, in which
cases other than the development and limit of the grant.
Section 5. Save in cases of hereditary succession, no private agricultural land shall be transferred
or assigned except to individuals, corporations, or associations qualified to acquire or hold lands
of the public domain in the Philippines.

A Corporation Sole is a special form of corporation usually associated with the clergy. According
to Corporation Law, it is organized and composed of a single individual, the head of any religious
society or church, for the Administration of the temporalities of such society or church. By
“temporalities” is meant estate and properties not used exclusively for religious worship.

The RCC provisions and canon Law provide that the bishops or archbishops, as corporation’s
sole are merely administrators of the church properties that come to their possession, and which
they hold in trust for the church.

Considering that there is no provision conferring ownership of church properties on the Pope nor
on the corporation sole or heads of dioceses as they are admittedly mere administrators of said
properties, ownership of these temporalities logically fall and develop upon the church, diocese
or congregation acquiring the same.

The power of a corporation sole real property, like the power exercised in the case at bar, is not
restricted although the power to sell or mortgage sometimes is, depending upon the rules,
regulations, and discipline of the church concerned represented by said corporation sole. Also,
the capacity of a corporation sole, like petitioner herein, to register lands belonging to it is
acknowledged, and title thereto may be issued in its name.

Under the circumstances of this case, it is safe to state that even before the establishment of the
Philippine Commonwealth and of the Republic of the Philippines, every corporation sole then
organized and registered had the necessary power and qualification private lands located in the
territory in which it exercised its functions or ministry and for which it to purchase in its name was
created, independently of the nationality of its incumbent unique and single member and
head, the bishop of the dioceses. It can be also maintained that the Roman Catholic Apostolic
Church in the Philippines has no nationality and that the framers of the Constitution did not have
in mind the religious corporations sole when they provided that 60% of the capital thereof be
owned by Filipino citizens.

In the implementation of Sec. 13 of Public Act No. 1459, and made applicable to a form of
corporation recognized by the same law, Sec. 159 expressly allowed the corporation sole to
purchase and hold real as well as personal properties necessary for the promotion of the objects
for which said corporation sole is created.

Respondent LRC, however, maintained that since the Constitution is a later enactment than
Public Act No. 1459, the provisions of Section 159 in amplification of Section 13 thereof, as regard
real properties, should be considered repealed by the former.

But that is not the case of corporations sole in the PH for they are mere administrators.

Section 13. Every corporation has the power: (5) To purchase, hold, convey, sell, lease, lot,
mortgage, encumber, and otherwise deal with such real and personal property as the purpose for
which the corporation was formed may permit, and the transaction of the lawful business of the
corporation may reasonably and necessarily require, unless otherwise prescribed in this Act: . . .
Section 159. Any corporation sole may purchase and hold real estate and personal; property for
its church, charitable, benevolent, or educational purposes, and may receive bequests or gifts of
such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an
order for that purpose from the Court of First Instance of the province in which the property is
situated; but before making the order proof must be made to the satisfaction of the Court that
notice of the application for leave to mortgage or sell has been given by publication or otherwise
in such manner and for such time as said Court or the Judge thereof may have directed, and that
it is to the interest of the corporation that leave to mortgage or sell must be made by petition, duly
verified by the bishop, chief priest, or presiding elder acting as corporation sole, and may be
opposed by any member of the religious denomination, society or church represented by the
corporation sole: Provided, however, That in cases where the rules, regulations, and discipline of
the religious denomination, society or church concerned represented by such corporation sole
regulate the methods of acquiring, holding, selling and mortgaging real estate and personal
property, such rules, regulations, and discipline shall control and the intervention of the Courts
shall not be necessary.

BOOK RULING (Simplified):

A corporation sole would have no nationality at all to disqualify it from owning land in the
Philippines even though its only corporator was a Canadian citizen. Studying the history of the
Roman Catholic Apostolic Church in the Philippines, the Court held that –

Under the circumstances of the present case, it is safe to state that even before the establishment
of the Philippine Commonwealth and of the Republic of the Philippines, every corporation sole
then organized and registered by express provision of law the necessary power and qualification
to purchase in its name private lands located in the territory in which it exercised its functions or
ministry and for which it was created, independently of the nationality of its incumbent unique and
single member and head, the bishop of the diocese. It can be also maintained without fear of
being gainsaid that the Roman Catholic Apostolic Church in the Philippines has no nationality and
that the framers of the Constitution did not have in mind the religious corporation sole when they
provided that 60 per centum of the capital thereof be owned by Filipino citizens.

The Court classified a corporation sole as a special corporation associated with the clergy
designed to facilitate the exercise of the functions of ownership of the church which was regarded
as property owner.

It is created not only to administer the temporalities of the church or religious society where the
sole corporator belongs, but also to hold and transmit the same to his successor in said office.

But the Court states that even if nationality is ascribed to a corporation sole, the nationality of
the constituents of the diocese, and not the nationality of the actual incumbent of the parish,
must be taken into consideration, because the corporation sole ordinarily holds the property in
trust for the benefit of the Roman Catholic faithful of their respective locality or diocese.
 The Constitution does not prohibit the mere formation of a public utility corporation
without the required proportion of Filipino capital.

People v. Quasha
No. L – 6055 June 12, 1953

FACTS:
• William Quasha, a Philippine Bar member, was charged with the crime of falsification of
public and commercial documents.
• He was entrusted with preparing and registering the articles of incorporation of Pacific
Airways Corporation.
• He caused it to appear that Arsenio Baylon, a Filipino citizen, had subscribed to and was
the owner of 60.005% of subscribed capital stock of the corporation.
• The truth is that the owners of the portion of the capital stock subscribed to by Baylon and
the money paid therein were American citizens whose names did not appear in the articles
of incorporation.
• The purpose of the false statement was to circumvent the Constitutional mandate that no
corporation shall be authorized to operate as a public utility in the Philippines unless 60%
of its capital is owned by Filipinos.
o Primary purpose: to carry on the business of a common carrier by air, land or water
• Baylon did not have the controlling vote because of the difference in voting power between
the preferred shares and the common shares.

LC: Found guilty after trial and sentenced to a term of imprisonment and a fine
- Quasha appealed to this Court

ISSUE: Whether a corporation to be entitled to operate a public utility necessary that it be

organized with 60 percent of its capital owned by Filipinos from the start?

RULING: NO.

The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation that
Baylon was a mere trustee of the Americans, thus giving the impression that Baylon subscribed
to 60% of the capital stock. But contrary to the lower court’s assumption, the Constitution does
not prohibit the mere formation of a public utility corporation without the required proportion of
Filipino capital. What it does prohibit is the granting of a franchise or other form of
authorization for the operation of a public utility to a corporation already in existence but
without the requisite proportion of Filipino capital (Sec. 8, Art. XIV)

For the mere formation of the corporation, such revelation was not essential and the corporation
law does not require it. Therefore, Quasha was under no obligation to make it. In the absence of
such obligation and of the alleged wrongful intent, Quasha cannot be legally convicted of the
crime with which he is charged.

NOTES:
A corporation formed with capital that is entirely alien may subsequently change the nationality of
its capital through transfer of shares to Filipino citizens. The converse may also happen.

Thus for a corporation to be entitled to operate a public utility, it is not necessary that it be
organized with 60% of its capital owned by Filipinos from the start. Said condition, may at any
time be attained through the necessary transfer of stocks. The moment for determining whether
a corporation is entitled to operate as public utility is when it applies for a franchise,
certificate or any other form of authorization for that purpose and that can only be done
after the corporation has already come into being not while being formed.
 “The right of transfer or assignment may be restricted by statute or the constitution, or
be made subject to the approval of the grantor or a governmental agency, such as a
public utilities commission, except that an existing right of assignment cannot be
impaired by subsequent legislation.”

KILOSBAYAN INCORPORATED VS. GUINGONA, JR.

G.R. NO. 113375 MAY 5, 1994
FACTS:
• Pursuant to Sec. 1 of the charter of the PCSO (R.A. No. 1169, as amended by B.P. Blg.
42) which grants it the authority to hold and conduct “charity sweepstakes races, lotteries,
and other similar activities,” the PCSO has established an online lottery system –
increasing its revenue base and diversifying its sources of funds as the purpose.
• After they knew that PCSO was interested to established on-line lottery system, the
Berjaya Group Berhad become interested to offer their services and resources to PCSO.
• The Berhad Group organized with some Filipino Investors (the Philippine Gaming
Management Corp. – PGMC).
• PCSO issued a Request for Proposal for the Lease of Contract of an on-line lottery system
for PCSO.
• Considering the citizenship requirement in the ownership, PGMC claims that Berhad
Group undertook to reduce its equity stakes in PGMC to 40% by selling 35% out of the
original 75% foreign stockholdings to local investors.
• Later on August 1993, PGMC submitted its bid to the PCSO.
• Upon reaching to the Office of the President, they have given the go-signal to operate the
country’s on-line system lottery and the implementing contract shall be submitted for final
clearance and approval by the Chief Executive.
• November 4, 1993 – KILOSBAYAN sent an open letter to Pres. Ramos opposing the
setting up of the on-line lottery system on the basis of serious moral and ethical
considerations, the petitioner contends that it is immoral and illegal.
• The Petitioners submit that the PCSO cannot validly enter into the Contract of Lease with
PGMC because PCSO would hold and conduct the online lottery system in collaboration
with the PGMC which is a violation under the Section 1 (B) of RA No. 1169.
• The Respondents contends that “it is merely an independent contractor for a piece of work;
and PGMC is not a co-operator of the lottery franchise with PCSO, nor sharing the
franchise, in collaboration, association, or joint venture with PGMC.
• The PCSO charter seeks to prohibit is that arrangement akin to a joint venture or
partnership where there is community of interest in the business (doesn’t obtain in contract
of lease).
• The respondent also claims that the establishment of telecom system stipulated in
Contract of Lease doesn’t require a congressional franchise because PGMC will not
operate as a public utility.It can operate without legislative franchise because not every
public utility is required to secure a legislative franchise before it could establish, maintain,
operate the service.
ISSUE:

Whether or not the Contract of Lease is legal and valid pursuant to RA No. 1169 as
amended by BP blg. 42, which prohibits PCSO from holding and conducting lotteries “ in
collaboration, association, or joint venture with any person, association, company, or entity,
whether domestic or foreign.

RULING:

NO. Under the facts, PGMC is not only a Lessor, PCSO in least will be conducting the
lotteries “in collaboration, or association” and in the most joint venture with the PGMC, where the
PCSO only has its franchise to offer. The justification of the petitioners were not made the Court
to convinced with regard to advocate the rights of hypothetical third parties not before the court
by invoking the need to keep inviolate the Sec. 11, Article XII of the Constitution that imposes a
nationality requirement on operators of a public utility. The PGMC is a foreign owned and
controlled operation. It is a settled rule that "in all grants by the government to individuals or
corporations of rights, privileges and franchises, the words are to be taken most strongly against
the grantee .... [o]ne who claims a franchise or privilege in derogation of the common rights of
the public must prove his title thereto by a grant which is clearly and expressed, and he cannot
enlarge it by equivocal or doubtful provisions or by probable inferences. Whatever is not
unequivocally granted is withheld. Nothing passes by mere implication." A careful analysis and
evaluation of the provisions of the contract and a consideration of the contemporaneous acts of
the PCSO and PGMC indubitably disclose that the contract is not in reality a contrac t of lease
under which the PGMC is merely an independent contractor for a piece of work, but one where
the statutorily proscribed collaboration or association, in the least, or joint venture, at the most,
exists between the contracting parties. The contemporaneous acts of the PCSO and the PGMC
reveal that the PCSO had neither fund of its own nor the expertise to operate and manage an
on-line lottery system, and that although it wished to have the system, it would have it "at no
expense or risks to the government." Because of these serious constraints and unwillingness
to bear expenses and assume risks, the PCSO was candid enough to state in its RFP that it is
seeking for "a suitable contractor which shall build, at its own expense, all the facilities needed
to operate and maintain" the system; exclusively bear "all capital, operating expenses and
expansion expenses and risks."
UNDER DOJ OPINION NO. 95 S. 1999, the Secretary of Justice, taking its cue from Allied
Broadcasting, Inc. Federal Communications, 435 F. 2d 70, considered CATV as “a form of
mass media which must, therefore, be owned and managed by Filipino Citizens, or
corporations, cooperatives or associations, wholly-owned and managed by Filipino
citizens pursuant to the mandate of the constitution

ALLIED BROADCASTING, INC. V. FEDERAL COMMUNICATIONS COMMISSION

United States Court of Appeals, District of Columbia Circuit
FACTS :
• This is an appeal from an order of the Federal Communications Commission affirming a
decision of its Review Board awarding a license for a new AM radio station in Lorain, Ohio,
to Lorain Community Broadcasting Company (Intervenor) and denying the applications
of Allied Broadcasting Inc., and Midwest Broadcast Company.
• The decision of the Review Board, affirmed by order of the Commission, granted the
application of Lorain Community and denied those of appellant Allied and Midwest, after
an analysis of the applicants' standing under the criteria set out in the Policy Statement
on Comparative Broadcast Hearings
• In applying the Policy Statement to the facts of this particular case, the Board pointed out
that the two primary objectives toward which the process of comparative hearings of this
type are directed are:
(1) the best practical service to the public; and
(2) a maximum diffusion of control of mass communications media.
• In this case, three applicants possessed the requisite qualifications to be licensees of the
Commission. From a comparative standpoint, our choice must, therefore, be between
Lorain Community (clearly to be preferred on the diversification criterion) and Allied
(slightly to be preferred on the `best practicable service criterion'). In these circumstances
we conclude that over all the public interest, convenience and necessity would best be
served by granting the application of Lorain Community.
• The ownership by the dominant stockholders of the appellant Allied in Lorain Cable, the
CATV enterprise, was thus considered to be a substantial demerit in achieving the public
policy objective of diversification of control in mass media of communication.
• Appellant Allied therefore contends that:
(1) a CATV system is not or, at least, Lorain Cable in its embryonic state at
the time of the hearing was not a medium of mass communication; and

(2) even if Lorain Cable can be properly considered a medium of mass

communication, Allied had no notice that its dominant stockholders' CATV
interest in Lorain Cable would be considered significant for the purposes of this
comparative hearing on an AM radio license.

RULING:

(1) As to whether CATV is now one of the mass media of communication, we have no
difficulty in saying that it is. AM and FM radio, TV, newspapers, and even motion
pictures have been held to be mass media of communication, within the policy
objectives of the Federal Communications Commission to secure by its licensing
procedures a diversity of control of mass media of communication.
 A similar answer is obtained by evaluating Appellant's argument that a CATV system like
Lorain Cable is not a medium of mass communication at all, because it lacks one of the
"essential aspects of a mass communications media, i.e., the freedom to be selective in
the choice of what is to be printed or broadcast."

There are at least two ways in which Lorain Cable could have exercised some editorial
selection in what it distributed over its yet to be built CATV system, thus making it a
medium of mass communication even within appellant Allied's definition. While at the time
of the hearing the only signals Lorain Cable was authorized to carry were local signals,
yet Lorain had then applied to carry distant signals also. Although the Commission had
ordered all distant signal waiver cases held in abeyance, it was quite possible that Lorain
Cable along with other CATV systems might be granted this authority. If so, this would
enable Lorain Cable to select among the distant signals those which it would
transmit over its cable channels.

(2) We consider that the criteria discussed in the Policy Statement would logically include
CATV along with TV, AM and FM radio, newspapers and perhaps other media of mass
communication. In the Policy Statement the Commission identified the objective of
diversification of control of the media of mass communication as "a factor of primary
significance" in the evaluation of competing applicants in a comparative broadcast
hearing.

As in the past, we will consider both common control and less than controlling interests in
other broadcast stations and other media of mass communications. The less the degree
of interest in other stations or media, the less will be the significance of the factor. Other
interests in the principal community proposed to be served will normally be of most
significance, followed by other interests in the remainder of the proposed service area.

NOTE:
Mass media includes cable television because the Commission identified the objective of
diversification of control of the media of mass communication as "a factor of primary
significance". Furthermore, motion pictures have also been held to be a medium of
communication.