Narra Nickel Mining vs Redmont Constitution on National Economy and Patrimony, Sec.

3 of the FIA will

have no place of application. Corporate layering is admittedly allowed by
Case Digest GR 185590, Apr 21 2014 the FIA, but if it is used to circumvent the Constitution and other pertinent
laws, then it becomes illegal.

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.
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 Philippine’s natural
resources.
1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)
2 SEC Opinion May 13, 1990

Commercial / Political Law

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Hide

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

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Narra Nickel Mining vs Redmont
G.R. No. 195580, January 28, 2015
→ Full Text ←
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
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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.
**********
Commercial law; Tests to determine the nationality of a corporation. 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, adopts the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the
controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens. The first part of paragraph 7, DOJ
Opinion No. 020, stating “shares 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,” pertains to the control test or the
liberal rule. On the other hand, the second part of the DOJ Opinion which
provides, “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 Philippine nationality,” pertains to the
stricter, more stringent grandfather rule.
Application of the Grandfather Rule. 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.
HELD: No. The parity rights agreement is not applicable to SJP. The parity
rights are only granted to American business enterprises or enterprises
Existence of doubt. The assertion of petitioners that “doubt” only exists
directly or indirectly controlled by US citizens. SJP is a Panamanian
when the stockholdings are less than 60% fails to convince this Court. DOJ
corporate citizen. The other owners of SJO are Venezuelan corporations,
Opinion No. 20, which petitioners quoted in their petition, only made an
not Americans. SJP was not able to show contrary evidence. Further, the
example of an instance where “doubt” as to the ownership of the
Supreme Court emphasized that the stocks of these corporations are being
corporation exists. It would be ludicrous to limit the application of the said
traded in stocks exchanges abroad which renders their foreign ownership
word only to the instances where the stockholdings of non-Filipino
subject to change from time to time. This fact renders a practical
stockholders are more than 40% of the total stockholdings in a
impossibility to meet the requirements under the parity rights. Hence, the
corporation. The corporations interested in circumventing our laws would
tie up between SJP and SJO is illegal, SJP not being a domestic
clearly strive to have “60% Filipino Ownership” at face value. It would be
corporation or an American business enterprise contemplated under the
senseless for these applying corporations to state in their respective Laurel-Langley Agreement.
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. *****************

*****************
G.R. No. L-14441 Case Digest

G.R. No. L-14441, December 17, 1966

Pedro Palting vs San Jose Petroleum, Inc.
Pedro R. Palting

vs Sanjose Petroleum Inc.

18 SCRA 924 – Business Organization – Corporation Law – Parity Rights –
Nationality – Nationalized Areas of Activity Ponente: Barrera

In 1956, San Jose Petroleum, Inc. (SJP), a mining corporation organized
under the laws of Panama, was allowed by the Securities and Exchange
Commission (SEC) to sell its shares of stocks in the Philippines.
Apparently, the proceeds of such sale shall be invested in San Jose Oil
Company, Inc. (SJO), a domestic mining corporation. Pedro Palting
opposed the authorization granted to SJP because said tie up between SJP
and SJO is violative of the constitution; that SJO is 90% owned by SJP;
that the other 10% is owned by another foreign corporation; that a mining
corporation cannot be interested in another mining corporation. SJP on the
other hand invoked that under the parity rights agreement (Laurel-Langley
Agreement), SJP, a foreign corporation, is allowed to invest in a domestic
corporation.
ISSUE: Whether or not SJP is correct.
Facts:
San Jose Petroleum a corporation organized and existing in the Republic of
Panama, PETROLEUM filed with the Philippine Securities and Exchange
Commission a sworn registration statement, for the registration and
licensing for sale in the Philippines Voting Trust Certificates.
It was alleged that the entire proceeds of the sale of said securities will be
devoted or used exclusively to finance the operations of San Jose Oil
Company, Inc. which is a domestic mining corporation. Pedro R. Palting
and others, allegedly prospective investors in the shares of SAN JOSE
PETROLEUM, filed with the Securities and Exchange Commission an
opposition to registration and licensing of the securities on the grounds
that the tie-up between SAN JOSE PETROLEUM, and SAN JOSE OIL,

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violates the Constitution of the Philippines, the Corporation Law and the
Petroleum Act of 1949.
Issue:
Whether or not the "tie-up" between the respondent SAN JOSE
PETROLEUM, and SAN JOSE OIL COMPANY, INC., is violative of the
Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949
Held:
Yes. In the 1946 Ordinance Appended to the Constitution, this right was
extended to citizens of the United States; states that to all forms of
business enterprises owned or controlled, directly or indirectly, by citizens
of the United States in the same manner as to, and under the same
conditions imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines, would have
the privilege of disposition, exploitation, development, and utilization of all
Philippine natural resources. However, respondent is owned, controlled,
directly and indirectly by Panamanian Corporation.
The Laurel-Langley Agreement also states that with respect to natural
resources in the public domain in the Philippines, only through the
medium of a corporation organized under the laws of the Philippines and at
least 60% of the capital stock of which is owned or controlled by citizens of
the United States.
Although it was claimed that the corporation has stockholders residing in
United States, there was no indication if they are all citizens of America,
how much percentage do they occupy as stockholders, and if they have the
same rules that apply to the conditions mentioned. In the circumstances,
the court ruled that the respondent SAN JOSE PETROLEUM, as presently
constituted, is not a business enterprise that is authorized to exercise the
parity privileges under the Parity Ordinance, the Laurel-Langley Agreement
and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently,
illegal.
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The parity rights agreement is not applicable to SJP. The parity rights are
only granted to American business enterprises or enterprises directly or
indirectly controlled by US citizens. SJP is a Panamanian corporate citizen.
The other owners of SJO are Venezuelan corporations, not Americans. SJP
was not able to show contrary evidence. Further, the Supreme Court
emphasized that the stocks of these corporations are being traded in stocks
exchanges abroad which renders their foreign ownership subject to change
from time to time. This fact renders a practical impossibility to meet the
requirements under the parity rights. Hence, the tie up between SJP and
SJO is illegal, SJP not being a domestic corporation or an American
business enterprise contemplated under the Laurel-Langley Agreement.
*********************
The Control Test for Corporate Nationality (Part 2)
Categories: Yellow Pad
Malaluan is a lawyer, co-founder and trustee of AER; Lumba is a lawyer,
teaches at the UP College of law and is a fellow of AER. This piece was
published in the August 1, 2011 edition of the BusinessWorld, pages S1/4 to
S1/5.
Control Test Remains in Force
But a closer look at Redmont reveals that the decision does not represent
an abandonment of the control test.
The application of the control test is further elaborated in DOJ Opinion No.
020, s. 2005 dated 5 May 2005:
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 stockholders [or 59%] invests in other joint venture
corporation which is either 60-40% Filipino-alien or 59% less Filipino).
Stated differently, where the 60-40 Filipino-foreign equity ownership is not
in doubt, the Grandfather Rule will not apply.”
In Redmont, the SEC found that out of the authorized capital stock of the
corporations in question, the domestic corporations paid nothing for the
stocks they subscribed to in each of the corporations, and the foreign
corporation “provided practically all the funds.” The SEC concluded that
doubt exists in this particular case, thus calling for the application of the
grandfather rule.
This is confirmed by new SEC Chairperson Teresita Herbosa in a letter to
Action for Economic Reforms dated 27 June 2011. She stated:
“We advise that the decision in the Redmont case amply elucidates the
Commission’s position on how to determine the qualification of a
corporation to engage in nationalized economic activities.
To reiterate and clarify, the Commission is not abandoning the
control test as the general rule. However, in cases where compliance
with the citizenship restrictions is doubtful, as in the Redmont case,
the Commission will apply the grandfather rule considering that
applying the control test would result in circumvention of the
Constitutional and statutory restrictions on foreign capital.” (emphasis
supplied)
More important, there was a change in position on the part of the SEC
Office of the General Counsel in a later opinion dated 19 April 2011 (SEC-
OGC Opinion No. 11-26). While not ruling on a query on the legality of
certain investments subject of the request for opinion, it discussed “for
purposes of information” the rules applicable to foreign participation in
investments. In its discussion, it reiterated the control test as a standing
rule.
The clarification made by the SEC Chairperson in the letter dated 27 June
2011, and the SEC OGC opinion dated 19 April 2011, put to rest any
doubt on the applicability of the control test occasioned
by Redmont and Medusa.
In sum, the control test remains in force.
SEC Cannot Unilaterally Abandon the Control Test
Indeed, the SEC, and much less the SEC OGC, cannot unilaterally
abandon the control test in favor of the grandfather rule.
First, there are obvious practical difficulties in abandoning the control test
that has been consistently applied by the SEC and relied upon by investors
for more than two decades.
Second, apart from these considerations, it is doubtful whether the SEC
can, at this time and by mere administrative fiat, legally do away with the
control test since it has been embodied in a law – the Foreign Investments
Act (FIA). To quote:
[T]he term Philippine national shall mean a citizen of the Philippines; or a
domestic partnership or association wholly owned by citizens of the
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Philippines;or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; x x x (Sec 3 (a), Republic Act No. 7042 as amended by
Republic Act No. 8179) (emphasis supplied)
As confirmed in several SEC opinions, (see SEC Opinion dated 23
November 1993 and SEC-OGC Opinion No. 17-07 dated 27 September
2007) the cited provision is the statutory embodiment of the control
test. What used to be a mere administrative practice has now beenelevated
to the level of a statutory imperative rendering it beyond the SEC’s
authority to abandon. The FIA itself states:
Section 12. Consistent Government Action. – No agency, instrumentality or
political subdivision of the Government shall take any action in conflict
with or which will nullify the provisions of this Act, or any certificate or
authority granted hereunder.
Moreover, it is the NEDA and not the SEC that is authorized to adopt the
appropriate metric because it is the sole entity vested with the power to
issue rules implementing the FIA. It has already issued said rules,
wherein, in Rule I, Section 1 (b), it adopted the control test.
The government has the discretion to select from a range of options what
would be in the best interest of the country, as long as it is consistent with
the relevant constitutional restriction to reserve control to Filipinos.
Assuming that the 60% Filipino equity in a corporation investing in
another corporation is not held by dummies, they can outvote the foreign
equity and control its entire equity in the corporation it invests in. This is
what the control test essentially means: control of a corporation results in
control over its equity in another corporation.
Consistency and Stability of Rules
In deciding an investment destination, investors look at how the
investment climate in the Philippines has improved over time, and also how
it stands vis-à-vis other countries.
The perception remains that rules here are more predisposed to changes.
The inconsistency and instability evoked by rulings or issuances such
as Redmontand Medusa give the Philippines this bad international
reputation.
We need to send a credible signal that rules and administrative
interpretations will be applied consistently. Such institutionalization and
stability of rules is a challenge not just for SEC, but the Philippine
government as a whole.
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