ASG Law

Tag: Grandfather Rule

  • Navigating Foreign Ownership in Philippine Mining: Narra Nickel and the Grandfather Rule

    The Supreme Court upheld the denial of Mineral Production Sharing Agreements (MPSAs) to Narra Nickel, Tesoro Mining, and McArthur Mining, affirming their classification as foreign corporations due to significant Canadian ownership. This ruling emphasizes the strict enforcement of constitutional restrictions on foreign involvement in natural resource exploitation, ensuring that Filipino citizens retain control and benefit from the country’s resources. The decision underscores the importance of scrutinizing corporate structures to prevent circumvention of Filipino ownership requirements in nationalized industries, impacting how mining companies operate and structure their investments in the Philippines.

    Unveiling Corporate Veils: Can Foreign Entities Exploit Philippine Resources Through Layered Ownership?

    At the heart of the Narra Nickel case lies a critical examination of how Philippine law safeguards its natural resources from foreign control. The central question is whether companies can circumvent constitutional restrictions on foreign ownership through complex corporate structures. This case specifically concerns the mineral wealth of the Philippines, a sector explicitly reserved for Filipino citizens and corporations with substantial Filipino equity. The Supreme Court, in its resolution, addressed the motion for reconsideration of its earlier decision, which denied the petitions of Narra Nickel Mining and Development Corp., Tesoro Mining and Development, Inc., and McArthur Mining, Inc. The Court delved into the intricacies of corporate ownership to determine whether these companies were indeed controlled by Filipino interests or were, in effect, foreign entities attempting to exploit Philippine resources.

    The petitioners argued that the case had been rendered moot because their applications for Mineral Production Sharing Agreements (MPSAs) were converted to applications for a Financial Technical Assistance Agreement (FTAA) and that MBMI Resources, Inc. (MBMI) divested its shareholdings. The Court, however, clarified that the conversion to FTAA was irrelevant as the Office of the President had already revoked the FTAA issued to petitioners. Moreover, the supposed sale by MBMI of its shares was deemed a question of fact that the Court could not verify and did not negate prior constitutional violations. The Court emphasized that the principle of mootness does not automatically prevent courts from resolving a case, especially when grave violations of the Constitution are at stake. The Court reiterated that allowing the issuance of MPSAs to entities controlled by a 100% foreign-owned corporation, even through complex corporate structures, would violate Section 2, Article XII of the Constitution, which reserves the exploration, development, and utilization of natural resources to Filipino citizens or corporations with at least 60% Filipino ownership. This case was deemed exceptional due to the elaborate corporate layering employed to circumvent the constitutional requirement, making it a matter of paramount public interest.

    Building on this principle, the Court justified its application of the Grandfather Rule to determine the nationality of the petitioners. The petitioners argued that the Control Test, as espoused by the Foreign Investments Act of 1991 (FIA) and the Philippine Mining Act of 1995, should be the sole method for verifying Philippine nationality. The Court clarified that the Grandfather Rule was used as a “supplement” to the Control Test, not to supplant it, to ensure the effective implementation of Section 2, Article XII of the Constitution. The Court quoted its previous decision, stating,

    “In ending, the ‘control test’ is still the prevailing mode of determining whether or not a corporation is a Filipino corporation…When in the mind of the Court, 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.’”

    This highlights that the Control Test remains primary, but the Grandfather Rule steps in when doubt arises about the true control and beneficial ownership.

    The Grandfather Rule, as defined by Dean Cesar Villanueva, is the method of computing the percentage of Filipino equity in a corporation engaged in nationalized activities by attributing the nationality of the second or subsequent tier of ownership to determine the nationality of the corporate shareholder. This ensures that both direct and indirect shareholdings are considered when assessing compliance with Filipino ownership requirements. The Bureau of Internal Revenue (BIR) also observes this concept of stock attribution in applying Section 127 (B) of the National Internal Revenue Code and Section 96 of the Corporation Code, especially in multi-tiered corporations, as noted in BIR Ruling No. 148-10. The Securities and Exchange Commission (SEC) has similarly applied the Grandfather Rule, even when a corporation passes the 60-40 requirement of the Control Test, to look into the citizenship of individual stockholders and prevent circumvention of constitutional restrictions, as evidenced by SEC-OGC Opinion No. 10-31.

    Further emphasizing this point, the Supreme Court cited the SEC en banc ruling in Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al., which applied the Grandfather Rule despite apparent compliance with the 60-40 Filipino equity requirement. The SEC held that one should not stop where the percentage of the capital stock is 60%, especially when the foreign investor provides practically all the funds of the remaining appellee-corporations. The DOJ Opinion No. 144, S. of 1977, stated that any agreement that may distort the actual economic or beneficial ownership of a mining corporation may be struck down as violative of the constitutional requirement. This pairing of “beneficial ownership” and the “situs of control” has been adopted by the Court in Heirs of Gamboa v. Teves, which emphasized that “full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential.”

    The Court addressed the ongoing debate about the roles of the Grandfather Rule and the Control Test, stating that they are not incompatible methods but can be used cumulatively to determine the ownership and control of corporations engaged in nationalized activities. The Control Test is applied first, and only when there is doubt as to who has the beneficial ownership and control does the Grandfather Rule come into play. As explained in the April 21, 2012, Decision, “doubt” refers to various indicia that the beneficial ownership and control do not reside in Filipino shareholders but in foreign stakeholders. Significant indicators of “dummy status” include foreign investors providing practically all the funds and technological support for the joint investment, as well as managing the company and preparing all economic viability studies.

    In the specific cases of Narra, Tesoro, and McArthur, the Court found that MBMI had practically provided all the funds in Sara Marie, Madridejos, and Patricia Louise, creating serious doubt as to the true extent of its control and ownership over these entities and the petitioners. This called for the application of the Grandfather Rule, which revealed that the Filipinos’ control and economic benefits in the petitioners fell below the threshold 60%. For example, Filipino participation in petitioner Tesoro was only 40.01%, while foreign participation was 59.99%. Similarly, Filipino participation in McArthur was 40.01%, with foreign participation at 59.99%. In Narra, Filipino participation was 39.64%, while foreign ownership was 60.36%. These computations were based on common shareholdings, as Section 6 of the Corporation Code of the Philippines explicitly provides that no share may be deprived of voting rights except those classified as “preferred” or “redeemable” shares.

    Petitioners also questioned the jurisdiction of the Panel of Arbitrators (POA) of the Department of Environment and Natural Resources (DENR) to determine petitioners’ nationalities, citing Gonzales v. Climax Mining Ltd. and Philex Mining Corp. v. Zaldivia. The Court clarified that while the POA’s jurisdiction is limited to mining disputes involving questions of fact, it has the authority to make a preliminary finding of the required nationality of the corporate applicant in order to determine its right to a mining area or a mineral agreement. This is consistent with Section 77 of the Philippine Mining Act of 1995 and the Court’s ruling in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp. The Court emphasized that in resolving disputes involving rights to mining areas, the POA’s ruling on Redmont’s assertion that petitioners are foreign corporations is a necessary incident of its disposition of the mining dispute presented before it, i.e., whether the petitioners are entitled to MPSAs.

    FAQs

    What was the key issue in this case? The central issue was whether Narra Nickel, Tesoro Mining, and McArthur Mining met the constitutional requirement of at least 60% Filipino ownership to be granted Mineral Production Sharing Agreements (MPSAs).
    What is the Control Test? The Control Test is a method of determining the nationality of a corporation by examining whether at least 60% of the corporation’s capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. This is the primary test used to determine if a corporation qualifies as a Philippine national.
    What is the Grandfather Rule? The Grandfather Rule is a method used to supplement the Control Test by attributing the nationality of the second or subsequent tier of ownership to determine the nationality of the corporate shareholder. It’s applied when there is doubt about the true control and beneficial ownership of a corporation.
    Why did the Court apply the Grandfather Rule in this case? The Court applied the Grandfather Rule because there was doubt as to whether the Filipino shareholders truly controlled and benefited from the corporations, given that a Canadian company, MBMI, provided most of the funding. This raised suspicions of potential circumvention of Filipino ownership requirements.
    What is the significance of “beneficial ownership” in this case? Beneficial ownership refers to the actual control and economic benefits derived from the corporation, not just legal title. The Court emphasized that Filipinos must have both legal and beneficial ownership to comply with constitutional requirements.
    What was the outcome of the case? The Supreme Court denied the motion for reconsideration, affirming the Court of Appeals’ decision that Narra Nickel, Tesoro Mining, and McArthur Mining were foreign corporations and thus not entitled to MPSAs. This decision was final.
    What is the jurisdiction of the Panel of Arbitrators (POA) in mining disputes? The POA has jurisdiction over disputes involving rights to mining areas and mineral agreements. This includes the authority to make preliminary findings on the nationality of corporate applicants to determine their eligibility for mining rights.
    What is the practical implication of this ruling for foreign investments in the Philippines? This ruling underscores the strict enforcement of Filipino ownership requirements in nationalized industries, particularly mining. Foreign investors must ensure that their corporate structures genuinely comply with these requirements to avoid being disqualified from participating in resource exploitation.

    In conclusion, the Supreme Court’s decision in Narra Nickel serves as a firm reminder of the Philippines’ commitment to protecting its natural resources by strictly enforcing constitutional and statutory limitations on foreign ownership. The case highlights the necessity for transparency and genuine Filipino control in corporations seeking to exploit the country’s mineral wealth. This landmark ruling has significant implications for foreign investments in the Philippines, particularly in nationalized industries. It prompts a call to action for companies to thoroughly review their corporate structures to ensure full compliance with Filipino ownership requirements.

    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, January 28, 2015

  • Unveiling Corporate Nationality: The Grandfather Rule vs. Control Test in Philippine Mining Rights

    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