In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed its opposition to the applications for Mineral Production Sharing Agreements (MPSA) of O Corp., P Corp., and Q Corp. which were pending before the Panel of Arbitrators (POA) of the Department of Environment and Natural Resources (DENR). The three corporations wanted to undertake exploration and mining activities in the province of Isabela. The oppositor alleged that at least 60% of the capital shareholdings of the applicants are owned by B Corp., a 100% Chinese corporation, in violation of Sec. 2, Art. XII of the Constitution. The applicants countered that they are qualified corporations as defined under the Philippine Mining Act of 1995 and the Foreign Investments Act of 1991 since B Corp. holds only 40% of the capital stocks in each of them and not 60% as alleged by R Corp.
The Summary of Significant Accounting Policies statement of B Corp. reveals that the joint venture agreements of B Corp. with Sigma Corp. and Delta Corp. involve the 0 Corp., P Corp., and Q Corp. The ownership of the layered corporations and joint venture agreements show that B Corp. practically exercises control over the 0, P and Q corporations. 0, P and Q corporations contend that the control test should be applied and its MPSA applications granted. On the other hand, R Corp. argues that the “grandfather rule” should be applied. Decide with reasons. (5%)
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The Grandfather Rule should be applied in deciding R Corporation's opposition. Under Section 2, Article XII of the Constitution and jurisprudence, the Control Test is the prevailing mode to determine foreign equity in mining entities. However,
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Quick check
When does the Grandfather Rule apply to determine compliance with constitutional foreign equity limits?
The Grandfather Rule applies as a supplement when doubt exists as to true beneficial ownership and control.
Under Section 2, Article XII of the Constitution, what minimum Filipino ownership is required for MPSA applicants?
Section 2, Article XII mandates that at least sixty percent of capital must be owned by Philippine citizens.
What was the landmark ruling in Narra Nickel Mining & Development Corp. versus Redmont Consolidated Mines Corp.?
Narra Nickel established that the Grandfather Rule applies to resolve doubt regarding beneficial ownership.
Under the Control Test, how is a corporate shareholder classified if Filipinos own sixty percent of its capital stock?
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Which primary statute governs mineral exploration, development, and MPSA allocations in the Philippines?
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Learn more about these topics
1. Grandfather Rule Supplemental
Under Section 2, Article XII of the 1987 Philippine Constitution and Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines Corp., the Control Test is the primary rule for determining foreign equity compliance. However, where doubt exists as to the true locus of beneficial ownership and control of corporate shares, the Grandfather Rule applies as a mandatory supplement. By tracing the ultimate nationality of stock held through corporate layers and joint venture agreements, courts determine whether the required sixty percent Filipino equity ownership is genuinely satisfied.
2. Control Test Application
Under the Foreign Investments Act of 1991 (Republic Act Number 7042), the Control Test considers a corporation Filipino-owned if at least sixty percent of its capital stock outstanding and entitled to vote is held by Philippine citizens. If a corporate shareholder is sixty percent Filipino-owned, its entire shareholding in a project company is tallied as Filipino capital. Nevertheless, when corporate layering is intentionally utilized to circumvent constitutional foreign equity restrictions, the Control Test yields to the Grandfather Rule.
3. Mining Equity Limits
Under Section 2, Article XII of the Constitution and the Philippine Mining Act of 1995 (Republic Act Number 7942), the exploration, development, and utilization of natural resources are reserved exclusively to Philippine citizens or corporations whose capital is at least sixty percent owned by Filipinos. Mineral Production Sharing Agreements (MPSA) granted to entities failing to satisfy this constitutional minimum are null and void. Corporate structures that surrender effective control to foreign entities violate constitutional mining restrictions.