CORPORATE LAYERING

Questions on the validity of corporate layering as a means of structuring the ownership of companies have
been raised following a spate of Supreme Court decisions relating to companies where minimum Filipino
ownership is required by our Constitution and laws.

Applying the control test, the Supreme Court recently recognized corporate layering in the case of Narra
Nickel Mining and Development Corp. v. Redmont Consoidated Mines Corp. (G.R. No. 195580, April 21,
2014).
The control test basically provides that shares belonging to corporations or partnerships at least 60
percent of the capital of which is owned by Filipino citizens shall be considered of Philippine nationality.
At the same time, the Supreme Court said that while [c]orporate layering is admittedly allowed by the
[Foreign Investments Act] if it is used to circumvent the Constitution and pertinent laws, then it
becomes illegal.
In such case, the grandfather rule will be used to determine compliance with the nationality requirement
prescribed by our Constitution and laws.
Under the grandfather rule, the citizenship of the individuals who ultimately own or control the shares of
stock of the corporation must be looked into for purposes of determining compliance with the Filipino
ownership requirement.
According to the Supreme Court, where the 60-40 Filipino-foreign equity ownership is not in doubt, the
Grandfather Rule will not apply.
But where there exists doubt as to the proper representation of the Filipino-foreign equity participation,
the grandfather rule will be used in lieu of the control test to determine compliance with the nationality
requirement.
In Redmont, the Supreme Court found serious doubt as to the true nationality of the corporations
involved due to the following: 1) the presence of a common major investor, a one hundred percent
Canadian corporation, in three mining corporations; 2) the similarities of the corporate structures of the
corporations; 3) the presence of the same nominal shareholders in the corporations; and 4) the paid-in
capital of the corporate owners being paid only by the foreign investor, among many other indicators
showing the desire to circumvent the nationality requirement in mining activities.
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of
the grandfather rule since doubt prevails and persists in the corporate ownership of petitioners. Also,
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, the Supreme Court said.
Thus, the Supreme Court ruled that the foreign corporation, MBMI, owns majority of the common stocks
of the mining corporations through a web of corporate layering, in violation of the nationality
requirement prescribed by our Constitution for mining companies.

As shown above, the control test is still the general rule. Only when there exists genuine doubt as to the
true ownership of the stockholdings in a corporation will the grandfather rule be used to determine
compliance with the Filipino ownership requirement prescribed by our Constitution and laws.
Aside from avoiding the pitfalls like those identified by the Supreme Court in the Redmont case, the
minimum requirement to ensure that the control test will be applied to corporate layering is to comply
with the two-tiered test of the Securities and Exchange Commission (SEC) under Memorandum Circular
No. 8, series of 2013, otherwise known as the Guidelines on Compliance with the Filipino-Foreign
Ownership Requirements.
Under this circular, compliance with the necessary percentage of Filipino ownership is required in BOTH
(a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b)
the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.