CORPORATION LAW

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and MCARTHUR MINING, INC., petitioners
vs.
REDMONT CONSOLIDATED MINES CORP., respondent

Ponente: Velasco, Jr., J.

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining, Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and
the February 15, 2011 Resolution of the Court of Appeals (CA).

Facts:
Sometime in December 2006, respondent Redmont Consolidated Mines Corp.
(Redmont), a domestic corporation organized and existing under Philippine laws, 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 were already covered by Mineral
Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur,
Tesoro and Narra are owned and controlled by the MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation. Redmont reasoned that since MBMI is a considerable stockholder of
petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas
covered by applications since it knows that it can only participate in mining activities through
corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’
capital stock were mostly owned by MBMI, they were likewise disqualified from engaging in
mining activities through MPSAs, which are reserved only for Filipino Citizens.
In their Answers, petitioners averred that they were qualified persons under Section 3 of
the Republic Act No. 7942 of the Philippine Mining Act of 1995. Additionally, they stated that
their nationality as applicants is immaterial because they also applied for Financial or Technical
Assistance Agreements (FTAA), which are granted to foreign-owned corporations. Nevertheless,
they claimed that the issue on nationality should not be raised since McArthur, Tesoro and
Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the
Philippines. They added that the best tool used in determining the nationality of a corporation
is the “control test,” embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991.
Finally, they stressed that Redmont has no personality to sue them because it has no pending
claim or application over the areas applied for by petitioners.

Panel of Arbitrators (POA) of the DENR- issued a resolution disqualifying petitioner from
gaining MPSAs. The POA considered petitioners as foreign corporations being effectively
controlled by MBMI, a 100% Canadian company and declared their MPSAs null and void. In the
same Resolution, it gave due course to Redmont’s EPAs.
CA- upheld the findings of the POA which considered petitioners as foreign corporations. Using
the grandfather rule, the CA discovered that MBMI in effect owned majority of the common
stocks of the petitioners as well as at least 60% equity interest of other majority shareholders of
petitioners through joint venture agreements. The CA found that through a “web of corporate
layering, it is clear that one common controlling investor in all mining corporations involved is
MBMI.”25 Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in
partnership with, or privies-in-interest of, MBMI.

While petition was pending with the CA, Redmont filed with the Office of the President
(OP) a petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP, in
affirming the cancellation of the issued FTAAs, agreed with Redmont stating that petitioners
committed violations against the abovementioned laws and failed to submit evidence to negate
them. The Decision further quoted the December 14, 2007 Order of the POA focusing on the
alleged misrepresentation and claims made by petitioners of being domestic or Filipino
corporations and the admitted continued mining operation of PMDC using their locally secured
Small Scale Mining Permit inside the area earlier applied for an MPSA application which was
eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the
FTAA applications by petitioners is a clear admission that they are “not capable of conducting a
large scale mining operation and that they need the financial and technical assistance of a
foreign entity in their operation, that is why they sought the participation of MBMI Resources,
Inc.”

Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and
Resolution with the CA, docketed as C.A.-G.R. S.P. No. 120409. In the CA Decision dated
February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter,
petitioners appealed the same CA decision to this Court which is now pending with a different
division.

Issue:
Whether or not the petitioner corporations are Filipino and can validly be issued MPSA
and  EP.

Held:
No. The SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the
shares in the Investee Corporation may be owned both by individual stockholders (‘Investing
Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus
provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.
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.
In this case, the Grandfather Rule must be applied, because it is the intention of the
framers of the Constitution to apply this rule in cases where corporate layering is present.
Applying this rule, it turns out that the Canadian corporation owns more than 60% of the equity
interests of Narra, Tesoro and McArthur. Hence, the latter are disqualified to participate in the
exploration, development and utilization of the Philippine’s natural resources.