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
Remedial Law
Issue 2: W/N the case has become moot as a result of the MPSA conversion to FTAA
Full Text
Narra Nickel Mining vs Redmont, 2015: Grandfather Rule may be Applied Cumulatively
with the Control Test in Determining the Ownership of Corporations Engaged in Nationalized
Activities

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 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. ##

Grandfather Rule; a supplement to the Control Test

Taxwise or Otherwise
By Elinor E. de Gracia, 2 July 2015
Certain provisions of the Philippine Constitution were crafted to protect the rights of Filipino citizens to utilize our
natural resources and to engage in nationalized activities. However, this should not deter foreign economic
investments that would allow the country to efficiently explore these natural resources and effectively operate public
utilities or reserved activities.
In determining compliance with the minimum Filipino equity requirement, there are two acknowledged tests. One is
the control test or the liberal rule. The other is the Grandfather Rule, which is known to be the stricter and more
stringent test. In applying these tests, there had been confusion as to whether one method excludes the use of the
other.

The control test provides that shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered of Philippine nationality. This test is straightforward and does not
scrutinize further the ownership of the Filipino shareholdings.
On the other hand, the Grandfather Rule determines the actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the corporation.
According to the January 2015 Resolution of the Supreme Court in the case of Narra Nickel Mining and
Development Corp. vs. Redmont Consolidated Mines Corp. (G.R. No. 195580), the Grandfather test was originally
intended 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.
The shareholdings should ideally be traced (i.e. grandfathered) to the point where natural persons hold the shares.
However, this may be impractical and a limit must be set when tracing through the corporate layers to attribute
nationality. Citing a memorandum from the Securities and Exchange Commission (SEC), the Supreme Court noted
the suggestion of the SEC to apply the Grandfather Rule on two levels of corporate relations for publicly-held
corporations or where shares are traded in the stock exchange, and to three levels for closely held ones or those
which are not traded in any stock exchange. Clearly, the limits should not go beyond the level of what is reasonable.
The Supreme Court clarified the role of these tests in determining compliance with the required Filipino equity
threshold. The Court explained that the use of the Grandfather Rule is a supplement to the Control Test in
implementing the wisdom of the Filipinization provisions of the Constitution.
The Supreme Court recognized the intention of the framers of the Constitution to apply the Grandfather Rule in
cases where there is corporate layering. It likewise noted that corporate layering, while admittedly allowed by the
Foreign Investment Act, becomes illegal if used to circumvent the Constitution and other applicable laws.
The Court further discussed that the Grandfather Rule applies only when the 60-40 Filipino-foreign ownership is in
doubt or where there is reason to believe that there is non-compliance with the provisions of the Constitution on the
nationality restriction.
How then we do we determine the existence of doubt? In its Resolution, the high court clarified that doubt does not
automatically mean the mere failure of the Filipino ownership to meet the 60% threshold of the corporations equity.
Doubt refers to various indicia that the beneficial ownership and control of the corporation do not in fact reside
in Filipino shareholders but in foreign stakeholders.
To demonstrate these signs of doubt, the Court referred to the indicators of a dummy status as identified in a
Department of Justice Opinion on the Anti-Dummy Law. These would be where the foreign investors provide
practically all the funds and technological support for a joint venture undertaken with their Filipino partners, and
where such foreign investors get to manage the company even while being minority stockholders.
In the Narra Nickel Mining case, 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.
In a fitting ending, the Supreme Court enunciated its original April 2014 decision that the Control Test is still the
prevailing mode of determining whether or not a corporation is a Filipino corporation. It is only in case of doubt,
based on the attendant facts and circumstances of the case, that the Grandfather Rule is applied.