SPECIAL THIRD DIVISION

G.R. No. 195580 21 April 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND

DEVELOPMENT, INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

R E S O L U T I O N VELASCO, JR., J.:

Doctrine: It is apparent that it is the intention of the framers of the Constitution to

apply the grandfather rule in cases where corporate layering is present.

In ending, the "control test" is still the prevailing mode of determining whether or
not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the
1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the
Court there is doubt, based on the attendant facts and circumstances of the case,
in the 60-40 Filipino-equity ownership in the corporation, then it may apply the
"grandfather rule."

FACTS: Redmont Consolidated Mines, Inc. (Redmont) filed before the Panel of
Arbitrators (POA) of the DENR separate petitions for denial of McArthur Mining, Inc.
(McArthur), Tesoro and Mining and Development, Inc. (Tesoro), and Narra Nickel
Mining and Development Corporation (Narra) applications Mineral Production Sharing
Agreement (MPSA) on the ground that they are not “qualified juridical persons” and thus
disqualified from engaging in mining activities through MPSAs reserved only for Filipino
citizens.

McArthur Mining, Inc., is composed, among others, by Madridejos Mining Corporation

(Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc. (Canadian)
owning 3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000 shares of
Madridejos Mining Corporation.

Tesoro and Mining and Development, Inc., is composed, among others, by Sara Marie
Mining, Inc. (Filipino) owning 5,997 out of 10,000 shares, and MBMI Resources, Inc.
(Canadian) owning 3,998 out of 10,000 shares; MBMI also owns 3,331 out of 10,000
shares of Sara Marie Mining, Inc.

Narra Nickel Mining and Development Corporation is composed, among others, by

Patricia Louise Mining & Development Corporation (Filipino) owning 5,997 out of
10,000 shares, and MBMI Resources, Inc. (Canadian) owning 3,998 out of 10,000
shares; MBMI also owns 3,396 out of 10,000 shares of Patricia Louise Mining &
Development Corporation.
ISSUE: The main issue in this case is centered on the issue of petitioners’ nationality,
whether Filipino or foreign. In their previous petitions, they had been adamant in
insisting that they were Filipino corporations, until they submitted their Manifestation and
Submission dated October 19, 2012 where they stated the alleged change of corporate
ownership to reflect their Filipino ownership. Thus, there is a need to determine the
nationality of petitioner corporations.

HELD: NO.

It is apparent that it is the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present.

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%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less
than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in
their petition, only made an example of an instance where "doubt" as to the ownership
of the corporation exists. It would be ludicrous to limit the application of the said word
only to the instances where the stockholdings of non-Filipino stockholders are more
than 40% of the total stockholdings in a corporation. The corporations interested in
circumventing our laws would clearly strive to have "60% Filipino Ownership" at face
value. It would be senseless for these applying corporations to state in their respective
articles of incorporation that they have less than 60% Filipino stockholders since the
applications will be denied instantly. Thus, various corporate schemes and layerings are
utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To
determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather
rule must be used.

Concluding from the above-stated facts, it is quite safe to say 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, namely:

MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint venture" agreements
that it entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro,
PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or
corporations under the "Alpha" group wherein MBMI has joint venture agreements with,
practically exercising majority control over the corporations mentioned.

In effect, whether looking at the capital structure or the underlying relationships between
and among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests are
owned by MBMI.

In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED.

NARRA NICKEL MINING AND DEVELOPMENT CORP. VS. REDMONT

CONSOLIDATED MINES CORP. 748 SCRA 455, JANUARY 28, 2015
Resolution: VELASCO, JR., J.:

Doctrine: 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.

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: Whether the application by the SC of the grandfather resulted to the

abandonment of the ‘control test’

Held: No. The Supreme Court found that while the petitioning corporations complied
with the Control Test, factual circumstances nonetheless raise doubt as to their true
nationality and therefore requires the application of the Grandfather Rule.

Some of the indicators of “doubt” found by the Court in the said case are the following:
(1) the three mining corporations had the same 100% Canadian owned foreign investor,
(2) the similar corporate structure and shareholder composition of the three
corporations, (3) a major Filipino shareholder within the corporate layering did not pay
any amount with respect to its subscription, and (4) the dubious act of the foreign
investor in conveying its interests in the mining corporations to another domestic
corporation, among others. These instances demonstrate that corporate layering was
utilized to allow a foreign corporation to gain control of these mining corporations in the
Philippines.

After applying the Grandfather Rule, the Supreme Court was able to trace and conclude
that the Filipino shareholders did not actually have the required amount of control and
beneficial ownership in the mining companies, and consequently failed to comply with
the nationality requirement under the Constitution.

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 corporation’s 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.