In a landmark decision, the Supreme Court of the Philippines addressed the intricate issue of determining corporate nationality in the context of mining rights, specifically Mineral Production Sharing Agreements (MPSAs). The Court upheld the Court of Appeals’ decision, emphasizing that the nationality of corporations applying for rights to exploit the Philippines’ natural resources must be meticulously scrutinized to prevent foreign entities from circumventing constitutional restrictions. This ruling clarifies the application of the ‘Grandfather Rule’ when the control of a corporation is in question, ensuring that the exploitation of the country’s natural resources remains predominantly in the hands of Filipino citizens or corporations.

Web of Deceit: Can Foreign Entities Exploit Loopholes to Mine Philippine Resources?

The case revolves around Narra Nickel Mining and Development Corp., Tesoro Mining and Development, Inc., and McArthur Mining, Inc. (petitioners) and their applications for MPSAs. Redmont Consolidated Mines Corp. (respondent) challenged these applications, alleging that the petitioners were effectively controlled by MBMI Resources, Inc., a 100% Canadian corporation, thus violating the constitutional mandate that only Filipino citizens or corporations with at least 60% Filipino ownership can engage in the exploitation of natural resources. The central legal question was whether the petitioners met the nationality requirements for MPSAs, considering the complex corporate structures and the involvement of a foreign investor. This case hinged on the correct application of the ‘Control Test’ versus the stricter ‘Grandfather Rule’ to determine the true extent of Filipino ownership and control.

The Panel of Arbitrators (POA) initially disqualified the petitioners, declaring their MPSAs null and void, a decision later reversed by the Mines Adjudication Board (MAB) but eventually reinstated by the Court of Appeals. The petitioners argued that they were qualified as Philippine Nationals, asserting that 60% of their capital was owned by Filipino citizens and invoking the ‘Control Test’ under the Foreign Investments Act of 1991. They further contended that the POA lacked jurisdiction and that Redmont engaged in forum shopping. Petitioners also emphasized the conversion of their MPSA applications to Financial or Technical Assistance Agreements (FTAA) as a way to get out of the case.

The Supreme Court, however, found the petition to be without merit. Rejecting the claim of mootness, the Court emphasized the grave violation of the Constitution, the paramount public interest involved, the need for guiding principles, and the potential for repetition of similar cases. The Court pointed out petitioners’ strategy to have the case dismissed by changing applications and alleged corporate structures. The Court scrutinized the actions of the petitioners after the case was filed against them by respondent and held that the changing of applications by petitioners from one type to another just because a case was filed against them, in truth, would raise not a few sceptics’ eyebrows.

A critical aspect of the Court’s analysis was the application of the ‘Grandfather Rule.’ The Court emphasized that while the ‘Control Test’ is generally used to determine corporate nationality, the ‘Grandfather Rule’ becomes applicable when there is doubt regarding the 60-40 Filipino equity ownership. The Court elaborated on the two tests in determining the nationality of a corporation. First is the “control test” or the liberal rule where, “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.” Second is the “Grandfather Rule,” or the stricter rule which states that “if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality”.

The Court delved into the corporate structures of McArthur, Tesoro, and Narra, revealing a web of corporate layering with MBMI, a 100% Canadian corporation, exerting significant control through joint venture agreements and equity interests. For instance, McArthur Mining, Inc. had its MPSA application from MMC which acquired its application from SMMI. MBMI held 3,998 shares out of 10,000. SMMI and MMC both had almost identical structures and compositions.

“On September 9, 2004, the Company and Olympic Mines & Development Corporation (“Olympic”) entered into a series of agreements including a Property Purchase and Development Agreement (the Transaction Documents) with respect to three nickel laterite properties in Palawan, Philippines (the “Olympic Properties”).  The Transaction Documents effectively establish a joint venture between the Company and Olympic for purposes of developing the Olympic Properties.  The Company holds directly and indirectly an initial 60% interest in the joint venture.  Under certain circumstances and upon achieving certain milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue royalty.”

Thus, the Court found that MBMI held more than 60% effective equity interest in McArthur, making it a foreign corporation. Similarly, Tesoro Mining had identical figures to McArthur, except for the name “Sara Marie Mining, Inc.” (SMMI). Again, the same players were present, such as Olympic, MBMI, Amanti Limson, Esguerra, Salazar, Hernando, Mason, and Cawkell. Finally, in Narra Nickel, the corporate structure is the same with MBMI, along with other nominal stockholders, was present. Again, Palawan Alpha South Resources and Development Corp. (PASRDC) was a 2nd tier stockholder.

“Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over the companies in the Alpha Group.”

The Supreme Court validated the Court of Appeals’ ruling that the Panel of Arbitrators (POA) had jurisdiction to settle disputes over mining rights. The Court also dismissed claims of forum shopping. Justice Leonen dissented in the case, asserting that “The so-called “Grandfather Rule” has no statutory basis. It is the Control Test that governs in determining Filipino equity in corporations.”

Section 77 of the Mining Act provides for the matters falling under the exclusive original jurisdiction of the DENR Panel of Arbitrators, as follows:

(a) Disputes involving rights to mining areas;

(b) Disputes involving mineral agreements or permit;

(c) Disputes involving surface owners, occupants and claimholders / concessionaires; and

(d) Disputes pending before the Bureau and the Department at the date of the effectivity of this Act.

The Supreme Court concluded that the “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino corporation. However, in the mind of the Court, when there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the “grandfather rule.” The Supreme Court affirmed the assailed Court of Appeals Decision.

FAQs

What was the key issue in this case?	The main issue was determining whether Narra, Tesoro, and McArthur met the nationality requirements for engaging in mining activities in the Philippines, specifically regarding the extent of Filipino ownership and control in their corporations.
What is a Mineral Production Sharing Agreement (MPSA)?	An MPSA is an agreement where the government grants a contractor the exclusive right to conduct mining operations within a contract area and shares in the gross output, with the contractor providing financing, technology, management, and personnel.
What is the ‘Control Test’ and when is it used?	The ‘Control Test’ considers a corporation as Philippine national if at least 60% of its capital stock is owned by Filipino citizens, without further tracing the ownership of those Filipino stockholders. It is generally used for determining corporate nationality.
What is the ‘Grandfather Rule’ and when is it applied?	The ‘Grandfather Rule’ traces the ownership of the corporation’s capital to determine the actual percentage of Filipino equity. It is applied when there is doubt about the 60-40 Filipino-foreign equity ownership.
Why did the Court apply the ‘Grandfather Rule’ in this case?	The Court applied the ‘Grandfather Rule’ because there was doubt about the true extent of Filipino ownership in Narra, Tesoro, and McArthur, given the complex corporate structures and the significant control exerted by the Canadian corporation, MBMI.
What role did MBMI Resources, Inc. play in this case?	MBMI Resources, Inc., a 100% Canadian corporation, was alleged to be the controlling entity behind Narra, Tesoro, and McArthur, providing substantial funding and exerting influence through joint venture agreements and equity interests.
Did the POA have the jurisdiction to rule on this case?	Yes, the Court affirmed that the Panel of Arbitrators (POA) had jurisdiction to settle disputes over rights to mining areas, which included the petitions filed by Redmont challenging the MPSA applications of Narra, Tesoro, and McArthur.
What was the practical outcome of this decision?	The decision reinforced the scrutiny of corporate nationality in mining applications, potentially impacting foreign investment strategies and highlighting the need for transparent and compliant corporate structures to align with Philippine constitutional requirements.

In conclusion, the Supreme Court’s decision in the Narra Nickel case underscores the importance of adhering to constitutional and statutory requirements regarding Filipino ownership and control in the exploitation of natural resources. By clarifying the application of the ‘Grandfather Rule,’ the Court has provided a crucial safeguard against potential circumvention by foreign entities, thereby upholding the nation’s patrimony.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, April 21, 2014