Narra Nickel Mining and Development Corp. v.

Redmont Consolidated
Mines Corp.
GR No. 195580, 21 April 2014, Velasco, Jr., J. • Corporation Law

FACTS
 Redmont Consolidated Mines Corp (Redmond, the respondent) is a domestic corporation
that wanted to mine and explore areas in Palawan. However, it learned that the areas in was
interested in were already covered by Mineral Production Sharing Agreement (MPSA)
applications of Narra Nickel Mining Corp, Tesoro Mining and Development Inc., and
McArthur Mining, Inc. (Petitioners).
 Redmont filed before the Panel of Arbitrators of DENR 3 separate petitions for denial of the
petitioners’ applications for MPSA.
o Redmont alleged that at least 60% of the capital stock of the petitioners are owned
and controlled by MBMI Resources Inc. (MBMI) a 100% Canadian corp. Since MBMI
is a major stockholder, it was the driving force behind pets’ filing of the MPSAs. Thus,
since the stocks of petitioners were owned mostly by MBMI, they were disqualified
from engaging in mining activities through MPSAs, which are reserved for Filipino
citizens.
 Petitioners argued:
o They are qualified under RA 7942 or the Mining Act, sec 3(aq), which defines a
“qualified person” to include corps 60% of whose capital is owned by Filipinos. They
are qualified because 60% of their capital is owned by Filipinos.
o They also argued that the best tool to determine nationality of a corporation is the
“control test” embodied in Sec. 3, RA 7042 or the Foreign Investments Act.

 The Panel of Arbitrators ruled that the petitioners were foreign corporations because they
were “effectively controlled” by MBMI and declared their MPSAs null and void. It also gave
due course to Redmont’s application.

 Appeals were filed by pets in the Mines Adjudication Board (MAB). In their respective
memos, they informed the MAB that they converted their individual MPSA applications to
Financial and Technical Assistance Agreements (FTAAs).

 While the appeal was pending in the MAB, Redmont filed a complaint with the SEC to
revoke the certificates of registration of the pets on the ground that they are foreign-owned
or controlled corps engaged in mining, in violation of Philippine laws.

 Redmont later filed application for a TRO with the RTC. While this was pending, MAB
granted the appeals of the petitioners.

 Redmont then filed petition for review of the MAB decision with CA.

 CA found that there was doubt as to the nationality of pets when it realized that they had a
common major investor, MBMI.
 CA applied the “grandfather rule” to determine nationality of the pets. It found that through a
web of “corporate layering,” it is clear that MBMI is the one common controlling investor in all
mining operations. Thus, the petitioners are in partnership with or privies of MBMI.
 CA also found the conversion of MPSAs to FTAAs are suspicious.
 While the CA petitions were pending, Redmont filed with the Office of the President (OP) a
petition to cancel pets’ FTAAs.

 OP cancelled the FTAAs. It agreed with the POA that filing the FTAA applications 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, which
is why they sought the help of MBMI.

Petitioners’ arguments before SC:

1. Case is moot because the MPSA applications were already converted to FTAAs
2. POA has no jurisdiction to determine nationality of the pet corporations
3. Redmont committed forum shopping
4. Application of the “grandfather rule” is unlawful, particularly against the Foreign Investments Act
(FIA)

ISSUES & HOLDING

1. WON the conversion of the MPSAs to FTAAs render the petition moot? – NO. The suspicious
circumstances surrounding the conversion to FTAAs made such conversion dubious.

2. Are the petitioner corporations Filipino or foreign? – FOREIGN. The “grandfather rule” was
correctly applied. The rule calls for application in this case where the 60-40 Filipino equity
ownership of the petitioners corporations are doubtful.

RATIO
1. The conversion to FTAA was filed only during the pendency of Redmont’s petition to deny the
MPSA applications. Filing the application conversion is an admission that indeed MBMI is not
Filipino but of foreign nationality who is disqualified by law.
- Moreover, the action of MBMI in selling all its shares and interest in the petitioner corporations
(which it deemed “holding companies”) to DMCI proves that they were actually not Filipino
corporations from the start.

2. There are two acknowledge tests in determining a corporation’s nationality: the control test and
the grandfather rule.
- Both rules are embodied in par. 7, DOJ Opinion No. 20:
 “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”  refers to the
control test

 x x x “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 refers to the grandfather rule

1. Petitioners argued: The grandfather rule should not be applied because the definition of a
“Philippine National” under Sec. 3 of the Foreign Investments Act does not provide for it.
Moreover, the last portion of the same provision admits the “corporate layering” scheme of
corporations.

SC: Disagrees.
a. The FIA allows corporate layering, but this becomes unlawful when it is used to
circumvent the Constitution and other pertinent laws.
b. Also, the “grandfather rule” cannot be deemed abandoned. Under Sec. 2, Art. 12 Const.,
agreements for exploration, development and utilization of natural resources may only be
entered with corporations 60% of whose capital is owned by Filipinos. There is a need
 therefore to determine the nationality of a corporation with whom such agreement was
entered.
a. From the records of the ConCom, it is apparent that the framers meant to apply
the grandfather rule in cases where corporate layering is present.
b. Also, according to par. 7, DOJ Opinion 20 (2005), the Grandfather Rule applies
when the 60-40 Filipino-foreign equity ownership is in doubt. Doubt is present in
this case since the common investor of the pets corps, MBMI, a 100% Canadian
corp, funded them.

SC: then proceeded to “grandfather” each of the petitioners.

What the court did basically was to look at the shareholders of each corp and determined
which shareholder had the most shares.

The court found the ff:

a. that the common thread among the 3 corporations was that the MBMI was the 2nd largest
shareholder while all the other shareholders other than the majority shareholders hold
only nominal shares and they were the same individuals among all the corporations
b. that the majority shareholder- corporations also had a corporate structure similar to the
petitioner corporations of which they are shareholders

c. that through MBMI’s Summary of Significant Accounting Policies statement noticeably,

the ownership of the "layered" corporations boils down to MBMI, In effect, whether
looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since
60% or more of their capital stocks or equity interests are owned by MBMI.

The Court concluded that because of the corporate layering scheme employed among the
petitioner corporations, MBMI effectively controlled 60% or more of the shares in these
corporations. Thus, they were disqualified for being foreign corporations.

DISPOSITIVE
Petition denied.

2015 MOTION FOR RECONSIDERATION CASE:

WON the application of the Grandfather Rule is justified? –YES
The application of the Grandfather Rule is justified by the circumstances of the case to
determine the nationality of petitioners.
- SC used the Grandfather Rule as a “supplement” to the Control Test
- The Grandfather Rule is “the method by which the percentage of Filipino equity in a corp
engaged in nationalized and/or partly nationalized activities, is computed, in cases where
corporate shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate shareholder
o To arrive at the actual ownership and control in a corporation, both the direct and
indirect shareholdings in the corporation are determined.
- The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control, 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.
o A corp that complies with the 60-40 requirement can be considered a Filipino corp if
there is no doubt as to who has the “beneficial ownership” and “control”. In that
instance, there is no need for the application of the Grandfather Rule.
 - Resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial
ownership” and “control”.
o “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

- DOJ Opinion No. 165, Series of 1984: significant indicators of the dummy status”
1. That the foreign investors provide practically all the funds for the joint investment
undertaken by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological
support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company
and prepare all economic viability studies.
- Thus, even if at first glance the petitioners comply with the 60-40 requirement, doubt exists
that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have
the requisite number of control and beneficial ownership in petitioners

- While the Rule was originally intended to trace the shareholdings to the point where natural
persons hold the shares, the SEC had already set up a limit as to the number of corporate
layers the attribution of the nationality of the corporate shareholders may be applied.
o In its 1977 internal memorandum, the SEC suggested applying the Grandfather Rule
on 2 levels of corporate relations for publicly-held corporations or where the shares
are traded in the stock exchanges, and to 3 levels for closely held corporations or the
shares of which are not traded in the stock exchanges

Application:
PETITIONER TESORO
- Supposedly Filipino corporation Sara Marie Mining, Inc. holds 59.97% of the 10,000 common
shares of Tesoro, the Canadian-owned MBMI, holds 39.98%
- Filipino corporation Olympic Mines & Development Corp. holds 66.63% of Sara
- Marie’s shares while MBMI holds 33.31% of Sara Marie’s shares. Nonetheless, it is admitted
that Olympic did not pay a single peso for its shares. On the contrary, MBMI paid for 99% of
the paid-up capital of Sara Marie.
o that MBMI had practically provided all the funds in Sara Marie and Tesoro creates
serious doubt as to the true extent of its control and ownership over both Sara Marie
and Tesoro since, , “a reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital
o Thus: Filipino equity in Sara Marie x Sara Marie’s share in Tesoro shares of
individual Filipino shareholders in Tesoro=Filipino participation: 40.01%;
o Foreign equity in Sara Marie x Sara Marie’s share in Tesoro + MBMI’s direct
participation in Tesoro + shares of foreign individual SHs in Tesoro= Foreign
participation: 59.99%

PETITIONER MCARTHUR
- Follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000common share is
owned by supposedly Filipino Madridejos Mining Corporation while 39.98% belonged to
MBMI.
- In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares
belonged to MBMI. Yet again, Olympic did not contribute to the paid-up
- capital and it was MBMI that provided 99.79% of the paid-up capital
o Again, the fact that MBMI had practically provided all the funds in Madridejos and
McArthur creates serious doubt as to the true extent of its control and ownership of
MBMI
o Same formula as above: Filipino participation:40.01% Foreign participation: 59.99%
PETITIONER NARRA
- 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation while
MBMI held 39.98% of its shares.
- PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development
Corporation which subscribed to 65.96% of PLMDC’s shares, and MBMI, which subscribed
to 33.96% of PLMDC’s shares.
o Again, PASRDC did not pay for any of its subscribed shares; MBMI contributed
99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as to the true
extent of MBMI’s control