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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.
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 Constitution on National
Economy and Patrimony, Sec. 3 of the FIA will have no place of application. Corporate layering is admittedly allowed
by the FIA, but if it is used to circumvent the Constitution and other pertinent laws, then it becomes illegal.
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Second, under the SEC Rule and DOJ Opinion , the Grandfather Rule must be applied when the 60-40 Filipinoforeign 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
Philippines natural resources.
1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)
2 SEC Opinion May 13, 1990
WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES
G.R. No. 176579, promulgated June 28, 2011
X-----------------------------------------------------------------------------X

DECISION
CARPIO, J.:
I.

THE FACTS
This is a petition to nullify the sale of shares of stock
Corporation (PTIC) by the government of the Republic of the
Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc.
Limited (First Pacific), a Hong Kong-based investment management
Philippine Long Distance Telephone Company (PLDT).

of Philippine Telecommunications Investment


Philippines, acting through the Inter-Agency
(MPAH), an affiliate of First Pacific Company
and holding company and a shareholder of the

The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or
about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale,
First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total
common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11,
Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more
than 40%.
II.

THE ISSUE
Does the term capital in Section 11, Article XII of the Constitution refer to the total common shares only, or
to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public
utility?

III. THE RULING


[The Court partly granted the petition and held that the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, or in the instant
case, to the total common shares of PLDT.]
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied)
The term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in
the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital
stock comprising both common and non-voting preferred shares [of PLDT].
xxx

xxx

xxx

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights
to preferred shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and
on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in
the same manner as bondholders. xxx.
Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only
to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of directors. In short, the term capital in Section 11,
Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.
xxx

xxx

xxx

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the Constitution. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is considered as nonPhilippine national[s].

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xxx

xxx

xxx

To construe broadly the term capital as the total outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the State shall
develop a self-reliant and independent national economy effectively controlled by Filipinos. A broad definition
unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public
utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume that a
corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition of
the term capital, such corporation would be considered compliant with the 40 percent constitutional limit on foreign
equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital
stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent,
exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to place
the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the present
case.
xxx

xxx

xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT], meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the
election of directors, do not have any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of
common shares have voting rights for all purposes, while holders of preferred shares have no voting right for any
purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares
of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document required to be
submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of
PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total
number of PLDTs common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares
equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11,
Article XII of the Constitution.
As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00
per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have
twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common
shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule
0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT
while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the
non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the States grant of authority
to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are nonvoting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that
[n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted

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except to x x x corporations x x x organized under the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73%
of PLDTs common shares, constituting a minority of the voting stock, and thus do not exercise control over PLDT; (3)
preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This
kind of ownership and control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value
of P2,328.00 per share, while PLDT preferred shares with a par value of P10.00 per share have a current stock
market value ranging from only P10.92 to P11.06 per share, is a glaring confirmation by the market that control and
beneficial ownership of PLDT rest with the common shares, not with the preferred shares.
xxx

xxx

xxx

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in Section 11, Article XII of
the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present
case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred
shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition
of the term capital in determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.

In Steelcase, Inc. vs. Design International Selections, Inc., G.R. No. 171995, 18 April 2012, the Philippine Supreme Court
declared that a foreign corporation doing business in the Philippines without the requisite license may sue in Philippine Courts
against a Philippine citizen or entity who had contracted with and benefited by said corporation. In other words, a party is
estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it.
Background
Petitioner Steelcase, Inc. ("Steelcase") is a foreign corporation existing under the laws of Michigan, United States of America
(U.S.A.), and engaged in the manufacture of office furniture with dealers worldwide. Respondent Design International
Selections, Inc. ("DISI") is a corporation existing under Philippine Laws and engaged in the furniture business, including the
distribution of furniture.
Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement whereby Steelcase granted DISI the
right to market, sell, distribute, install, and service its products to end-user customers within the Philippines. The business
relationship continued smoothly until it was terminated sometime in January 1999 after the agreement was breached with neither
party admitting any fault. Steelcase filed a complaint for sum of money against DISI alleging, among others, that DISI had an
unpaid account of US$600,000.00. Steelcase prayed that DISI be ordered to pay actual or compensatory damages, exemplary
damages, attorneys fees, and costs of suit. Among the counter-arguments raised, DISI alleged that the complaint failed to state a
cause of action and to contain the required allegations on Steelcases capacity to sue in the Philippines despite the fact that
Steelcase was doing business in the Philippines without the required license to do so. Consequently, it posited that the complaint
should be dismissed because of Steelcases lack of legal capacity to sue in Philippine courts.

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The Regional Trial Court (RTC) dismissed the complaint and granted the temporary restraining order prayed for by DISI. The
RTC stated that in requiring DISI to meet the Dealer Performance Expectation and in terminating the dealership agreement with
DISI based on its failure to improve its performance in the areas of business planning, organizational structure, operational
effectiveness, and efficiency, Steelcase unwittingly revealed that it participated in the operations of DISI. Despite a showing that
DISI transacted with the local customers in its own name and for its own account, the RTC stated that any doubt in the factual
environment should be resolved in favor of a pronouncement that a foreign corporation was doing business in the Philippines,
considering the twelve-year period that DISI had been distributing Steelcase products in the Philippines. The RTC concluded that
Steelcase was "doing business" in the Philippines, as contemplated by the Foreign Investments Act of 1991, and since it did not
have the license to do business in the country, it was barred from seeking redress from our courts until it obtained the requisite
license to do so. Steelcase moved for the reconsideration of the dismissal but the same was denied.
Aggrieved, Steelcase appealed the case to the Court of Appeals. The Court of Appeals rendered its Decision affirming the RTC
orders, ruling that Steelcase was a foreign corporation doing or transacting business in the Philippines without a license. Steelcase
filed a motion for reconsideration but it was denied by the Court of Appeals.
Steelcase filed a Petition for Review with the Supreme Court. The issues in the Supreme Court petition are: (a) whether or not
Steelcase is doing business in the Philippines without a license; and (b) whether or not DISI is estopped from challenging the
Steelcases legal capacity to sue.
Supreme Courts Ruling
The Supreme Court ruled in favor of Steelcase.
Steelcase is an unlicensed foreign corporation not doing business in the Philippines
According to the Supreme Court, the following acts shall not be deemed "doing business" in the Philippines: (a) mere investment
as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such
investor; (b) having a nominee director or officer to represent its interest in such corporation; (c) appointing a representative or
distributor domiciled in the Philippines which transacts business in the representative's or distributor's own name and account; (d)
the publication of a general advertisement through any print or broadcast media; (e) maintaining a stock of goods in the
Philippines solely for the purpose of having the same processed by another entity in the Philippines; (f) consignment by a foreign
entity of equipment with a local company to be used in the processing of products for export; (g) collecting information in the
Philippines; and (h) performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis,
such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training
domestic workers to operate it, and similar incidental services.
Based on this list, the Supreme Court said that the appointment of a distributor in the Philippines is not sufficient to constitute
"doing business" unless it is under the full control of the foreign corporation. If the distributor is an independent entity which
buys and distributes products, other than those of the foreign corporation, for its own name and its own account, the latter cannot
be considered to be doing business in the Philippines.

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Applying these rules, the Supreme Court said that DISI was founded in 1979 and is independently owned and managed. In
addition to Steelcase products, DISI also distributed products of other companies including carpet tiles, relocatable walls and
theater settings. The dealership agreement between Steelcase and DISI had been described by the owner himself as a buy and sell
arrangement. This clearly belies DISIs assertion that it was a mere conduit through which Steelcase conducted its business in the
country. From the preceding facts, the only reasonable conclusion that can be reached is that DISI was an independent contractor,
distributing various products of Steelcase and of other companies, acting in its own name and for its own account. As a result,
Steelcase cannot be considered to be doing business in the Philippines by its act of appointing a distributor as it falls under one of
the exceptions under R.A. No. 7042.
DISI is estopped from challenging Steelcase's capacity to sue
On this point, the Supreme Court declared that if indeed Steelcase had been doing business in the Philippines without a license,
DISI would nonetheless be estopped from challenging the formers legal capacity to sue xxx A foreign corporation doing
business in the Philippines may sue in Philippine Courts although not authorized to do business here against a Philippine citizen
or entity who had contracted with and benefited by said corporation. To put it in another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering into a contract with it. And the doctrine of estoppel
to deny corporate existence applies to a foreign as well as to domestic corporations. One who has dealt with a corporation of
foreign origin as a corporate entity is estopped to deny its corporate existence and capacity.
Relevance
Although the foreign corporation in this case was declared to be not doing business in the Philippines, this case, nonetheless,
explicitly declares another exception to the rule provided in Section 133 of the Corporation Code of the Philippines that [n]o
foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines Following the
ruling in this case, a foreign corporation doing business in the Philippines without a license may maintain suit in the Philippines
against a domestic corporation or person who is party to a contract as the domestic corporation or person is deemed estopped
from challenging the personality of the foreign corporation.

What constitutes doing business in the Philippines?


The term doing business is defined in Section 3(d) of Republic act No. 7042 or the Foreign Investments Act of 1991. In the
said law, doing business includes:
x x x soliciting orders, service contracts, opening offices, whether called liaison offices or branches; appointing representatives
or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity
or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That
the phrase doing business shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account.

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The Supreme Court had the occasion to interpret the said provision in the case of B.Van Zuiden Bros., Ltd. vs. GTVL
Manufacturing Industries, Inc. (GR No. 147905). In the said case, Petitioner which is a foreign corporation entered into various
transactions with the respondent. The respondent made several purchases of lace products from the petitioner with the instruction
to deliver these products to Kenzar Ltd, a Hong Kong corporation. Under the said transaction, the products are considered sold
upon delivery to Kenzar. However, the respondent failed to make good on its obligation to pay various purchases. Hence a
complaint for sum of money was filed in Philippine court.
According to the Supreme Court, one of the indications of doing business in the Philippines is the actual performance of
specific commercial contracts within the territory of the Philippines.
To constitute doing business in the Philippines, the foreign corporation must actually transact business in the Philippines. It
must perform specific business transactions within the Philippine territory on a continuing business on its own name and on its
own account. If no such transaction takes place then the foreign corporation is not deemed to be doing business in the
Philippines.
The Supreme Court said that The series of transactions between petitioner and respondent cannot be classified as doing
business in the Philippines under Section 3(d) of RA 7042. An essential condition to be considered as doing business in the
Philippines is the actual performance of specific commercial acts within the territory of the Philippines for the plain reason that
the Philippines has no jurisdiction over commercial acts performed in foreign territories. Here, there is no showing that petitioner
performed within the Philippine territory the specific acts of doing business mentioned in Section 3(d) of RA 7042. Petitioner
did not also open an office here in the Philippines, appoint a representative or distributor, or manage, supervise or control a local
business. While petitioner and respondent entered into a series of transactions implying a continuity of commercial dealings, the
perfection and consummation of these transactions were done outside the Philippines.
The Supreme Court added that As earlier stated, the series of transactions between petitioner and respondent transpired and were
consummated in Hong Kong. We also find no single activity which petitioner performed here in the Philippines pursuant to its
purpose and object as a business organization. Moreover, petitioners desire to do business within the Philippines is not
discernible from the allegations of the complaint or from its attachments. Therefore, there is no basis for ruling that petitioner is
doing business in the Philippines.

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