NARRA NICKEL MINING v.

REDMONT CONSOLIDATED MINES

CORP. 

RESOLUTION

VELASCO JR., J.:

Beforethe Court is the Motion for Reconsideration of its April 21, 2014
Decision, which denied the Petition for Review on Certiorari under Rule 45
jointly interposed by petitioners Narra Nickel and Mining Development
Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
McArthur Mining Inc. (McArthur), and affirmed the October 1, 2010
Decision and February 15, 2011 Resolution of the Court of Appeals (CA) in
CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court's ruling
that petitioners, being foreign corporations,are not entitled to Mineral
Production Sharing Agreements (MPSAs). In reaching its conclusion, this
Court upheld with approval the appellate court's finding that there was
doubt as to petitioners' nationality since a 100% Canadian-owned firm,
MBMI Resources, Inc. (MBMI), effectively owns60% of the common stocks
of the petitioners by owning equity interest of petitioners' other majority
corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014,

petitioners-movants argued, in the main, that the Court's Decision was not
in accord with law and logic.In its September 2, 2014 Comment, on the
other hand, respondent Redmont Consolidated Mines Corp. (Redmont)
countered that petitioners' motion for reconsideration is nothing but a
rehash of their arguments and should, thus, be denied outright for being
pro-forma. Petitioners have interposed on September 30, 2014 their Reply
to the respondent's Comment.

After considering the parties' positions, as articulated in their respective

submissions, We resolve to deny the motion for reconsideration.
 I.
The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a
substantive issue, which, as argued, has supposedly been rendered moot by
the fact that petitioners' applications for MPSAs had already been
converted to an application for a Financial Technical Assistance Agreement
(FTAA), as petitioners have in fact been granted an FTAA. Further, the
nationality issue, so petitioners presently claim, had been rendered
moribund by the fact that MBMI had already divested itself and sold all its
shareholdings in the petitioners, as well as in their corporate stockholders,
to a Filipino corporation DMCI Mining Corporation (DMCI).

As a counterpoint, respondent Redmont avers that the present case has not
been rendered moot by the supposed issuance of an FTAA in petitioners'
favor as this FTAA was subsequently revoked by the Office of the President
(OP) and is currently a subject of a petition pending in the Court's First
Division. Redmont likewise contends that the supposed sale of MBMI's
interest in the petitioners and in their "holding companies" is a question of
fact that is outside the Court's province to verify in a Rule 45 certiorari
proceedings. In any case, assuming that the controversy has been rendered
moot, Redmont claims that its resolution on the merits is still justified by
the fact that petitioners have violated a constitutional provision, the
violation is capable of repetition yet evading review, and the present case
involves a matter of public concern.

Indeed, as the Court clarified in its Decision, the conversion of the MPSA
application to one for FTAAs and the issuance by the OP of an FTAA in
petitioners' favor are irrelevant. The OP itself has already cancelled and
revoked the FTAA thus issued to petitioners. Petitioners curiously have
omitted this critical fact in their motion for reconsideration. Furthermore,
the supposed sale by MBMI of its shares in the petitioner-corporations and
in their holding companies is not only a question of fact that this Court is
without authority to verify, it also does not negate any violation of the
Constitutional provisions previously committed before any such sale.

We can assume for the nonce that the controversy had indeed been
rendered moot by these two events. As this Court has time and again
declared, the "moot and academic" principle is not a magical formula that
automatically dissuades courts in resolving a case.[1]  The Court may still
take cognizance of an otherwise moot and academic case, if it finds that (a)
there is a grave violation of the Constitution; (b) the situation is of
exceptional character and paramount public interest is involved; (c) the
constitutional issue raised requires formulation of controlling principles to
guide the bench, the bar, and the public; and (d) the case is capable of
repetition yet evading review.[2]  The Court's April 21, 2014 Decision
explained in some detail that all four (4) of the foregoing circumstances are
present in the case. If only to stress a point, we will do so again.

First, allowing the issuance of MPSAs to applicants that are owned and
controlled by a 100% foreign-owned corporation, albeit through an
intricate web of corporate layering involving alleged Filipino corporations,
is tantamount to permitting a blatant violation of Section 2, Article XII of
the Constitution. The Court simply cannot allow this breach and inhibit
itself from resolving the controversy on the facile pretext that the case had
already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to

make it appear that there is compliance with the minimum Filipino
ownership in the Constitution is deftly exceptional in character. More
importantly, the case is of paramount public interest, as the corporate
layering employed by petitioners was evidently designed to circumvent the
constitutional caveat allowing only Filipino citizens and corporations 60%-
owned by Filipino citizens to explore, develop, and use the country's natural
resources.

Third, the facts of the case, involving as they do a web of corporate layering
intended to go around the Filipino ownership requirement in the
Constitution and pertinent laws, require the establishment of a definite
principle that will ensure that the Constitutional provision reserving to
Filipino citizens or "corporations at least sixty per centum of whose capital
is owned by such citizens" be effectively enforced and complied with. The
case, therefore, is an opportunity to establish a controlling principle that
will "guide the bench, the bar, and the public."

Lastly, the petitioners' actions during the lifetime and existence of the
instant case that gave rise to the present controversy are capable of
repetition yet evading review because, as shown by petitioners' actions,
foreign corporations can easily utilize dummy Filipino corporations
through various schemes and stratagems to skirt the constitutional
prohibition against foreign mining in Philippine soil.

II.

The application of the Grandfather Rule is justified by the

circumstances of the case to determine the nationality of
petitioners.

To petitioners, the Court's application of the Grandfather Rule to determine

their nationality is erroneous and allegedly without basis in the
Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine
Mining Act of 1995,[3] and the Rules issued by the Securities and Exchange
Commission (SEC). These laws and rules supposedly espouse the
application of the Control Test in verifying the Philippine nationality of
corporate entities for purposes of determining compliance with Sec. 2, Art.
XII of the Constitution that only "corporations or associations at least
sixty per centum of whose capital is owned by such [Filipino] citizens" may
enjoy certain rights and privileges, like the exploration and development of
natural resources.

The application of the Grandfather Rule in the

present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import
of, the Court's April 21, 2014 Decision. Nowhere in that disposition did the
Court foreclose the application of the Control Test in determining which
corporations may be considered as Philippine nationals. Instead, to borrow
Justice Leonen's term, the Court used the Grandfather Rule as a
"supplement" to the Control Test so that the intent underlying the averted
Sec.2, Art. XII of the Constitution be given effect. The following excerpts of
the April 21, 2014 Decision cannot be clearer:

In ending, the "control test" is still the prevailing mode of

determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. 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."(emphasis supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control
Test is not proscribed by the Constitution or the Philippine Mining Act of
1995.

The Grandfather Rule implements the intent of

the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,

development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital
is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining
Act of 1995considers a "corporation xxx registered in accordance with law
at least sixty per cent of the capital of which is owned by citizens of the
Philippines" as a person qualified to undertake a mining operation.
Consistent with this objective, the Grandfather Rule was originally
conceived to look into the citizenship of the individuals who ultimately own
and control the shares of stock of a corporation for purposes of determining
compliance with the constitutional requirement of Filipino ownership.It
cannot, therefore, be denied that the framers of the Constitution have not
foreclosed the Grandfather Rule as a tool in verifying the nationality of
corporations for purposes of ascertaining their right to participate in
nationalized or partly nationalized activities. The following excerpts from
the Record of the 1986 Constitutional Commission suggest as much:

MR. NOLLEDO:  In Sections 3, 9 and 15, the Committee stated local or

Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS:  That is right.

x xxx

MR. NOLLEDO:  Thank you.

With respect to an investment by one corporation in another corporation,

say, a corporation with 60-40 percent equity invests in another corporation
which is permitted by the Corporation Code, does the Committee adopt
the grandfather rule?

MR. VILLEGAS:  Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the

method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and other nationalization
laws, 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."[4] Thus, to arrive at the actual Filipino
ownership and control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.

This concept of stock attribution inherent in the Grandfather Rule to

determine the ultimate ownership in a corporation is observed by the
Bureau of Internal Revenue (BIR) in applying Section 127 (B)[5] of the
National Internal Revenue Code on taxes imposed on closely held
corporations, in relation to Section 96 of the Corporation Code[6] on close
corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares
held:

In the case of a multi-tiered corporation, the stock attribution

rule must be allowed to run continuously along the chain of
ownership until it finally reaches the individual
stockholders. This is in consonance with the "grandfather rule"
adopted in the Philippines under Section 96 of the Corporation
Code (Batas Pambansa Blg. 68) which provides that notwithstanding the
fact that all the issued stock of a corporation are held by not more than
twenty persons, among others, a corporation is nonetheless not to be
deemed a close corporation when at least two thirds of its voting stock or
voting rights is owned or controlled by another corporation which is not a
close corporation.[7]

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-
31),the SEC applied the Grandfather Rule even if the corporation engaged
in mining operation passes the 60-40 requirement of the Control Test, viz:
You allege that the structure of MML's ownership in PHILSAGA is as
follows: (1) MML owns 40% equity in MEDC, while the 60% is ostensibly
owned by Philippine individual citizens who are actually MML's controlled
nominees; (2) MEDC, in turn,owns 60% equity in MOHC, while MML owns
the remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while
MML owns the remaining 40%. You provide the following figure to
illustrate this structure:

xxxx

We note that the Constitution and the statute use the concept "Philippine
citizens." Article III, Section 1 of the Constitution provides who are
Philippine citizens: x x x This enumeration is exhaustive. In other words,
there can be no other Philippine citizens other than those falling within the
enumeration provided by the Constitution. Obviously, only natural persons
are susceptible of citizenship. Thus, for purposes of the Constitutional and
statutory restrictions on foreign participation in the exploitation of mineral
resources, a corporation investing in a mining joint venture can never be
considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San
Jose Petroleum [Inc.]. The Court held that a corporation investing in
another corporation engaged in a nationalized activity cannot beconsidered
as a citizen for purposes of the Constitutional provision restricting foreign
exploitation of natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the

individual stockholders, i.e. natural persons, of that investor-corporation in
order to determine if the Constitutional and statutory restrictions are
complied with. If the shares of stock of the immediate investor corporation
is in turn held and controlled by another corporation, then we must look
into the citizenship of the individual stockholders of the latter
corporation. In other words, if there are layers of intervening
corporations investing in a mining joint venture, we must delve
into the citizenship of the individual stockholders of each
corporation. This is the strict application of the grandfather rule, which
the Commission has been consistently applying prior to the 1990s.

Indeed, the framers of the Constitution intended for the

"grandfather rule" to apply in case a 60%-40% Filipino-Foreign
equity corporation invests in another corporation engaging in an
activity where the Constitution restricts foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture
is 87.04 % foreign owned, while it is only 12.96% owned by Philippine
citizens. Thus, the constitutional requirement of 60% ownership by
Philippine citizens is violated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v.

McArthur Mining Inc., et al.,[8] the SEC en banc applied the Grandfather
Rule despite the fact that the subject corporations ostensibly have satisfied
the 60-40 Filipino equity requirement. The SEC en banc held that to
attain the Constitutional objective of reserving to Filipinos the
utilization of natural resources, one should not stop where the
percentage of the capital stock is 60%. Thus:

[D]oubt, we believe, exists in the instant case because the foreign

investor, MBMI, provided practically all the funds of the
remaining appellee-corporations. The records disclose that: (1)
Olympic Mines and Development Corporation ("OMDC"), a domestic
corporation, and MBMI subscribed to 6,663 and 3,331 shares, respectively,
out of the authorized capital stock of Madridejos; however, OMDC paid
nothing for this subscription while MBMI paid P2,803,900.00 out of its
total subscription cost of P3,331,000.00; (2) Palawan Alpha South
Resource Development Corp. ("Palawan Alpha"), also a domestic
corporation, and MBMI subscribed to 6,596 and 3,996 shares, respectively,
out of the authorized capital stock of Patricia Louise; however, Palawan
Alpha paid nothing for this subscription while MBMI paid P2,796,000.00
out of its total subscription cost of P3,996,000.00; (3) OMDC and MBMI
subscribed to 6,663 and 3,331 shares, respectively, out of the authorized
capital stock of Sara Marie; however, OMDC paid nothing for this
subscription while MBMI paid P2,794,000.00 out of its total subscription
cost of P3,331,000.00; and (4) Falcon Ridge Resources Management Corp.
("Falcon Ridge"), another domestic corporation, and MBMI subscribed to
5,997 and 3,998 shares, respectively, out of the authorized capital stock of
San Juanico; however, Falcon Ridge paid nothing for this subscription
while MBMI paid P2,500,000.00 out of its total subscription cost of
P3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the
Grandfather Rule must be used.

xxxx

The avowed purpose of the Constitution is to place in the hands

of Filipinos the exploitation of our natural resources.
Necessarily, therefore, the Rule interpreting the constitutional
provision should not diminish that right through the legal fiction
of corporate ownership and control. But the constitutional provision,
as interpreted and practiced via the 1967 SEC Rules, has favored foreigners
contrary to the command of the Constitution. Hence, the Grandfather
Rule must be applied to accurately determine the actual
participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.

The method employed in the Grandfather Rule of attributing the

shareholdings of a given corporate shareholder to the second or even the
subsequent tier of ownership hews with the rule that the "beneficial
ownership" of corporations engaged in nationalized activities must reside
in the hands of Filipino citizens. Thus, even if the 60-40 Filipino equity
requirement appears to have been satisfied, the Department of Justice
(DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that
may distort the actual economic or beneficial ownership of a
mining corporation may be struck down as violative of the
constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter

into a mining service contract with a foreign company granting the latter a
share of not more than 40% from the proceeds of the operations?

xxxx
By law, a mining lease may be granted only to a Filipino citizen, or
to a corporation or partnership registered with the [SEC] at least
60% of the capital of which is owned by Filipino citizens and
possessing x x x. The sixty percent Philippine equity requirement
in mineral resource exploitation x x x is intended to insure,
among other purposes, the conservation of indigenous natural
resources, for Filipino posterity x x x. I think it is implicit in this
provision, even if it refers merely to ownership of stock in the corporation
holding the mining concession, that beneficial ownership of the right
to dispose, exploit, utilize, and develop natural resources shall
pertain to Filipino citizens, and that the nationality requirement
is not satisfied unless Filipinos are the principal beneficiaries in
the exploitation of the country's natural resources. This criterion of
beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463, above-
quoted, which limits the service fee in service contracts to 40% of the
proceeds of the operation, thereby implying that the 60-40 benefit-sharing
ration is derived from the 60-40 equity requirement in the Constitution.

xxxx

It is obvious that while payments to a service contractor may be justified as

a service fee, and therefore, properly deductible from gross proceeds, the
service contract could be employed as a means of going about or
circumventing the constitutional limit on foreign equity
participation and the obvious constitutional policy to insure that
Filipinos retain beneficial ownership of our mineral resources.
Thus, every service contract scheme has to be evaluated in its entirety, on a
case to case basis, to determine reasonableness of the total "service fee" x x
x like the options available to the contractor to become equity participant in
the Philippine entity holding the concession, or to acquire rights in the
processing and marketing stages. x x x (emphasis supplied)

The "beneficial ownership" requirement was subsequently used in

tandem with the "situs of control" to determine the nationality of a
corporation in DOJ Opinion No. 84, S. of 1988, through the
Grandfather Rule, despite the fact that both the investee and investor
corporations purportedly satisfy the 60-40 Filipino equity requirement:[9]
This refers to your request for opinion on whether or not there may be an
investment in real estate by a domestic corporation (the investing
corporation) seventy percent (70%) of the capital stock of which is owned
by another domestic corporation with at least 60%-40% Filipino-Foreign
Equity, while the remaining thirty percent (30%) of the capital stock is
owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is
implicit in the constitutional provisions, even if it refers merely to
ownership of stock in the corporation holding the land or natural resource
concession, that the nationality requirement is not satisfied unless
it meets the criterion of beneficial ownership, i.e. Filipinos are
the principal beneficiaries in the exploration of natural
resources (Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in
applying the same "the primordial consideration is situs of
control, whether in a stock or non-stock corporation" (Op. No.
178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97
Phil. 58), obviously to insure that corporations and associations allowed to
acquire agricultural land or to exploit natural resources "shall be controlled
by Filipinos." Accordingly, any arrangement which attempts to
defeat the constitutional purpose should be eschewed (Op. No 130,
s. 1985).

We are informed that in the registration of corporations with the [SEC],

compliance with the sixty per centum requirement is being monitored by
SEC under the "Grandfather Rule" a method by which the percentage of
Filipino equity in corporations engaged in nationalized and/or partly
nationalized areas of activities provided for under the Constitution and
other national laws is accurately computed, and the diminution if said
equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is
applied specifically in cases where the corporation has corporate
stockholders with alien stockholdings, otherwise, if the rule is
not applied, the presence of such corporate stockholders could
diminish the effective control of Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows:
xxx the total foreign equity in the investing corporation is 58% while the
Filipino equity is only 42%, in the investing corporation, subject of your
query, is disqualified from investing in real estate, which is a nationalized
activity, as it does not meet the 60%-40% Filipino-Foreign equity
requirement under the Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of

control" in determining what constitutes "capital" has been adopted by this
Court in Heirs of Gamboa v. Teves.[10]In its October 9, 2012 Resolution, the
Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100%
of the capital stock is held by "a trustee of funds for pension or other
employee retirement or separation benefits," the trustee is a Philippine
national if "at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals." Likewise, Section 1(b) of the Implementing Rules
of the FIA provides that "for stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights, is essential."
(emphasis supplied)

In emphasizing the twin requirements of "beneficial ownership" and

"control" in determining compliance with the required Filipino equity in
Gamboa, the en banc Court explicitly cited with approval the SEC en
banc's application in Redmont Consolidated Mines, Corp. v. McArthur
Mining, Inc., et al. of the Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily

empowered to issue rules and opinions on behalf of SEC, has adopted the
Grandfather Rule in determining compliance with the 60-40 ownership
requirement in favor of Filipino citizens mandated by the Constitution for
certain economic activities. This prevailing SEC ruling, which the
SEC correctly adopted to thwart any circumvention of the
required Filipino "ownership and control," is laid down in the 25
March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al. xxx(emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v.

Bayantel Communications, Inc.,[11] denied the foreign creditors' proposal to
convert part of Bayantel's debts to common shares of the company at a rate
of 77.7%. Supposedly, the conversion of the debts to common
shares by the foreign creditors would be done, both directly and
indirectly, in order to meet the control test principle under the
FIA. Under the proposed structure, the foreign creditors would own 40%
of the outstanding capital stock of the telecommunications company on a
direct basis, while the remaining 40% of shares would be registered to a
holding company that shall retain, on a direct basis, the other 60% equity
reserved for Filipino citizens. Nonetheless, the Court found the
proposal non-compliant with the Constitutional requirement of
Filipino ownership as the proposed structure would give more than 60%
of the ownership of the common shares of Bayantel to the foreign
corporations, viz:

In its Rehabilitation Plan, among the material financial commitments made

by respondent Bayantel is that its shareholders shall relinquish the agreed-
upon amount of common stock[s] as payment to Unsecured Creditors as
per the Term Sheet. Evidently, the parties intend to convert the
unsustainable portion of respondent's debt into common stocks,
which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign
corporations, shall have control over 77.7% of Bayantel, a public
utility company. This is precisely the scenario proscribed by the
Filipinization provision of the Constitution. Therefore, the Court of
Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on
conversion. (emphasis supplied)

As shown by the quoted legislative enactments, administrative rulings,

opinions, and this Court's decisions, the Grandfather Rule not only finds
basis, but more importantly, it implements the Filipino equity requirement,
in the Constitution.

Application of the Grandfather

Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather

Rule in determining compliance with the minimum Filipino equity
requirement vis-à-vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the
other.
As exemplified by the above rulings, opinions, decisions and this Court's
April 21, 2014 Decision, the Control Test can be, as it has been,
applied jointly with the Grandfather Rule to determine the observance of
foreign ownership restriction in nationalized economic activities. The
Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be applied
alternative to each other. Rather, these methods can, if appropriate, be
used cumulatively in the determination of the ownership and
control of corporations engaged in fully or partly nationalized
activities, as the mining operation involved in this case or the operation of
public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the
Filipino ownership and control in a corporation, 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. Put
in another manner, if the subject corporation's Filipino equity falls below
the threshold 60%, the corporation is immediately considered foreign-
owned, in which case, the need to resort to the Grandfather Rule
disappears.

On the other hand, a corporation that complies with the 60-40

Filipino to foreign equity requirement can be considered a
Filipino corporation if there is no doubt as to who has the
"beneficial ownership" and "control" of the corporation. In that
instance, there is no need for a dissection or further inquiry on the
ownership of the corporate shareholders in both the investing and investee
corporation or the application of the Grandfather Rule.[12]As a
corollary rule, even if the 60-40 Filipino to foreign equity ratio is
apparently met by the subject or investee corporation, a resort to the
Grandfather Rule is necessary if doubt exists as to the locus of
the "beneficial ownership" and "control." In this case, a further
investigation as to the nationality of the personalities with the beneficial
ownership and control of the corporate shareholders in both the investing
and investee corporations is necessary.

As explained in the April 21, 2012 Decision, the "doubt" that demands the
application of the Grandfather Rule in addition to or in tandem with the
Control Test is not confined to, or more bluntly, does not refer to the fact
that the apparent Filipino ownership of the corporation's equity falls below
the 60% threshold. Rather, "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. As provided in DOJ Opinion No. 165, Series of 1984, which
applied the pertinent provisions of the Anti-Dummy Law in relation to the
minimum Filipino equity requirement in the Constitution, "significant
indicators of the dummy status" have been recognized in view of reports
"that some Filipino investors or businessmen are being utilized or [are]
allowing themselves to be used as dummies by foreign investors"
specifically in joint ventures for national resource exploitation. These
indicators are:

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, In the Matter of the Petition for Revocation of the Certificate of

Registration of Linear Works Realty Development Corporation,[13] the SEC
held that when foreigners contribute more capital to an
enterprise, doubt exists as to the actual control and ownership of
the subject corporation even if the 60% Filipino equity threshold
is met. Hence, the SEC in that one ordered a further investigation, viz:

x x x  The [SEC Enforcement and Prosecution Department (EPD)]

maintained that the basis for determining the level of foreign participation
is the number of shares subscribed, regardless of the par value. Applying
such an interpretation, the EPD rules that the foreign equity participation
in Linear works Realty Development Corporation amounts to 26.41% of the
corporation's capital stock since the amount of shares subscribed by foreign
nationals is 1,795 only out of the 6,795 shares. Thus, the subject
corporation is compliant with the 40% limit on foreign equity
participation. Accordingly, the EPD dismissed the complaint, and did not
pursue any investigation against the subject corporation.

xxxx

x x x [I]n this respect we find no error in the assailed order made by the
EPD. The EPD did not err when it did not take into account the par value of
shares in determining compliance with the constitutional and statutory
restrictions on foreign equity.
However, we are aware that some unscrupulous individuals
employ schemes to circumvent the constitutional and statutory
restrictions on foreign equity. In the present case, the fact that
the shares of the Japanese nationals have a greater par value but
only have similar rights to those held by Philippine citizens
having much lower par value, is highly suspicious. This is because a
reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital
than him. Thus, it is reasonable to suspect that there may be secret
arrangements between the corporation and the stockholders wherein the
Japanese nationals who subscribed to the shares with greater
par value actually have greater control and economic
rights contrary to the equality of shares based on the articles of
incorporation.

With this in mind, we find it proper for the EPD to investigate the subject
corporation. The EPD is advised to avail of the Commission's subpoena
powers in order to gather sufficient evidence, and file the necessary
complaint.

As will be discussed, even if at first glance the petitioners comply with the
60-40 Filipino to foreign equity ratio, doubt exists in the present
case 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 Narra, Tesoro, and McArthur. Hence, a further
investigation and dissection of the extent of the ownership of the corporate
shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule

is impractical as tracing the shareholdings to the point when natural
persons hold rights to the stocks may very well lead to an investigation ad
infinitum. Suffice it to say in this regard that, while the Grandfather 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.

In a 1977 internal memorandum, the SEC suggested applying the

Grandfather Rule on two (2) levels of corporate relations for publicly-held
corporations or where the shares are traded in the stock exchanges, and to
three (3) levels for closely held corporations or the shares of which are not
traded in the stock exchanges.[14] These limits comply with the requirement
in Palting v. San Jose Petroleum , Inc.[15]that the application of the
Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and

beneficial ownership of MBMI over the petitioners
and their investing corporate stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather
Rule to determine the matter of true ownership and control over the
petitioners as doubt exists as to the actual extent of the participation of
MBMI in the equity of the petitioners and their investing corporations.

We considered the following membership and control structures and like

nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie)

holds 59.97% of the 10,000 common shares of petitioner Tesoro while the
Canadian-owned company, MBMI, holds 39.98% of its shares.

Number
Amount Amount
Name Nationality of
  Subscribed Paid
Shares
Sara Marie Mining,
Filipino 5,997 P5,997,000.00 P825,000.00
Inc.
MBMI Resources,
Canadian 3,998 P3,998,000.00 P1,878,174.60
Inc.[16]
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B.
Filipino 1 P1,000.00 P1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
P10,000,000.0
Total 10,000 P2,708,174.60
0

In turn, the Filipino corporation Olympic Mines & Development Corp.

(Olympic) holds 66.63% of Sara Marie's shares while the same Canadian
company 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.

Number
Amount
Name Nationality of Amount Paid
Subscribed
Shares
Olympic Mines &
Development Filipino 6,663 P6,663,000.00 P0.00
Corp.[17]
MBMI
Canadian 3,331 P3,331,000.00 P2,794,000.00
Resources, Inc.
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B.
Filipino 1 P1,000.00 P1,000.00
Esguerra
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G. 1
Filipino P1,000.00 P1,000.00
Hernando
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00P2,800,000.00

The fact that MBMI had practically provided all the funds in Sara
Marie and Tesoro creates serious doubt as to the true extent of
its (MBMI) control and ownership over both Sara Marie and
Tesoro since, as observed by the SEC, "a reasonable investor would expect
to have greater control and economic rights than other investors who
invested less capital than him." The application of the Grandfather Rule is
clearly called for, and as shown below, the Filipinos' control and economic
benefits in petitioner Tesoro (through Sara Marie) fall below the threshold
60%, viz:

Filipino participation in petitioner Tesoro: 40.01%

66.67 (Filipino equity in Sara Marie)  x59.97 (Sara Marie's share in Tesoro)

= 39.98%
100

39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)

=40.01%
  =====
Foreign participation in petitioner Tesoro: 59.99%

33.33 (Foreign equity in Sara Marie)  x  59.97 (Sara Marie's share in

Tesoro) = 19.99%
100

19.99% + 39.98% (MBMI's direct participation in Tesoro) + .02% (shares of

foreign individual SHs in Tesoro)
= 59.99%
   =====
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner Tesoro
does not comply with the minimum Filipino equity requirement imposed in
Sec. 2, Art. XII of the Constitution. Hence, the appellate court's observation
that Tesoro is a foreign corporation not entitled to an MPSA is apt.

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as

59.97% of its 10, 000 common shares is owned by supposedly Filipino
Madridejos Mining Corporation (Madridejos), while 39.98% belonged to
the Canadian MBMI.

Number
Amount Amount
Name Nationality of
Subscribed Paid
Shares
Madridejos Mining Filipino 5,997 P5,997,000.00 P825,000.00
Corporation
MBMI Resources,
Canadian 3,998 P3,998,000.00 P1,878,174.60
Inc.[18]
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B.
Filipino 1 P1,000.00 P1,000.00
Esguerra
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
P10,000,000.0
Total 10,000 P2,708,174.60
0

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 of Madridejos and it was MBMI that provided 99.79% of
the paid-up capital of Madridejos.

Number
Amount
Name Nationality of Amount Paid
Subscribed
Shares
Olympic Mines &
Development Filipino 6,663 P6,663,000.00 P0.00
Corp. [19]

MBMI Resources,
Canadian 3,331 P3,331,000.00P2,803,900.00
Inc.
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B.
Filipino 1 P1,000.00 P1,000.00
Esguerra
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G.
Filipino 1 P1,000.00 P1,000.00
Hernando
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00P2,809,900.00

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 over both
Madridejos and McArthur. The application of the Grandfather Rule is
clearly called for, and as will be shown below, MBMI,along with the other
foreign shareholders, breached the maximum limit of 40% ownership in
petitioner McArthur, rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67 (Filipino equity in Madridejos)  x  59.97 (Madridejos' share in

McArthur) = 39.98%
100

39.98% + .03% (shares of individual Filipino SHs in McArthur)

=40.01%
  =====

Foreign participation in petitioner McArthur: 59.99%

33.33 (Foreign equity in Madridejos)  x  59.97 (Madridejos' share in

McArthur) = 19.99%
100

19.99% + 39.98% (MBMI's direct participation in McArthur) + .02%

(shares of foreign individual SHs in McArthur)
= 59.99%
  =====

As with petitioner Tesoro, with only 40.01% Filipino ownership in

petitioner McArthur, as compared to 59.99% foreign ownership of its
shares, it is clear that petitioner McArthur does not comply with the
minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the
Constitution. Thus, the appellate court did not err in holding that petitioner
McArthur is a foreign corporation not entitled to an MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise

Mining & Development Corporation (PLMDC), while Canadian MBMI held
39.98% of its shares.

Name NationalityNumber Amount Amount Paid

 of
Subscribed
Shares
Patricia Lousie
Mining and Filipino 5,997 P5,997,000.00 P1,677,000.00
Development Corp.
MBMI
Canadian 3,996 P3,996,000.00 P1,116,000.00
Resources, Inc.[20]
Higinio C. Mendoza,
Filipino 1 P1,000.00 P1,000.00
Jr.
Henry E. Fernandez Filipino 1 P1,000.00 P1,000.00
Ma. Elena A.
Filipino 1 P1,000.00 P1,000.00
Bocalan
Michael T. Mason American 1 P1,000.00 P1,000.00
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H. Agabin Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00P2,800,000.00

PLMDC's shares, in turn, were held by Palawan Alpha South Resources

Development Corporation (PASRDC), which subscribed to 65.96% of
PLMDC's shares, and the Canadian MBMI, which subscribed to 33.96% of
PLMDC's shares.

Number
Amount
Name Nationality of Amount Paid
Subscribed
Shares
Palawan Alpha
South Resource
Filipino 6,596 P6,596,000.00 P0
Development
Corp.
MBMI
Canadian 3,396 P3,396,000.00 P2,796,000.00
Resources, Inc.[21]
Higinio C. Mendoza,
Filipino 1 P1,000.00 P1,000.00
Jr.
Fernando B.
Filipino 1 P1,000.00 P1,000.00
Esguerra
Henry E. Fernandez Filipino 1 P1,000.00 P1,000.00
Ma. Elena A.
Filipino 1 P1,000.00 P1,000.00
Bocalan
Michael T. Mason American 1 P1,000.00 P1,000.00
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H. Agabin Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00P2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while
MBMI contributed 99.75% of PLMDC's paid-up capital. This fact creates
serious doubt as to the true extent of MBMI's control and
ownership over both PLMDC and Narra since "a reasonable investor
would expect to have greater control and economic rights than other
investors who invested less capital than him." Thus, the application of the
Grandfather Rule is justified. And as will be shown, it is clear that the
Filipino ownership in petitioner Narrafalls below the limit prescribed in
both the Constitution and the Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02 (Filipino equity in PLMDC)  x  59.97 (PLMDC's share in Narra) =

39.59%
100

39.59% + .05% (shares of individual Filipino SHs in McArthur)

=39.64%
  ====
Foreign participation in petitioner Narra: 60.36%

33.98 (Foreign equity in PLMDC)  x  59.97 (PLMDC's share in Narra) =

20.38%
100

20.38% + 39.96% (MBMI's direct participation in Narra) + .02% (shares of

foreign individual SHs in McArthur)
= 60.36%
  =====

With 60.36% foreign ownership in petitioner Narra, as compared to only

39.64% Filipino ownership of its shares, it is clear that petitioner Narra
does not comply with the minimum Filipino equity requirement imposed in
Section 2, Article XII of the Constitution. Hence, the appellate court did not
err in holding that petitioner McArthur is a foreign corporation not entitled
to an MPSA.

It must be noted that the foregoing determination and computation of

petitioners' Filipino equity composition was based on their common
shareholdings, not preferred or redeemable shares. 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." Further, as Justice Leonen puts it, there is "no
indication that any of the shares x x x do not have voting rights, [thus] it
must be assumed that all such shares have voting rights." [22] It cannot
therefore be gainsaid that the foregoing computation hewed with the
pronouncements of Gamboa, as implemented by SEC Memorandum
Circular No. 8, Series of 2013, (SEC Memo No. 8)[23]Section 2 of which
states:

Section 2. All covered corporations shall, at all times, observe the

constitutional or statutory requirement. For purposes of determining
compliance therewith, the required percentage of Filipino ownership shall
be applied to BOTH (a) the total outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of outstanding shares
of stock, whether or not entitled to vote in the election of directors.

In fact, there is no indication that herein petitioners issued any other class
of shares besides the 10,000 common shares. Neither is it suggested that
the common shares were further divided into voting or non-voting common
shares. Hence, for purposes of this case, items a) and b) in SEC Memo No.
8 both refer to the 10,000 common shares of each of the petitioners, and
there is no need to separately apply the 60-40 ratio to any segment or part
of the said common shares.

III.
In mining disputes, the POA has jurisdiction to pass upon the
nationality
of applications for MPSAs

Petitioners also scoffed at this Court's decision to uphold the jurisdiction of

the Panel of Arbitrators (POA) of the Department of Environment and
Natural Resources (DENR) since the POA's determination of petitioners'
nationalities is supposedly beyond its limited jurisdiction, as defined
in Gonzales v. Climax Mining Ltd.[24] and Philex Mining Corp. v. Zaldivia.
[25]

The April 21, 2014 Decision did not dilute, much less overturn, this Court's
pronouncements in either Gonzales or Philex Mining that POA's
jurisdiction "is limited only to mining disputes which raise questions of
fact," and not judicial questions cognizable by regular courts of justice.
However, to properly recognize and give effect to the jurisdiction vested in
the POA by Section 77 of the Philippine Mining Act of 1995, [26] and in
parallel with this Court's ruling in Celestial Nickel Mining Exploration
Corporation v. Macroasia Corp.,[27]the Court has recognized in its Decision
that in resolving disputes "involving rights to mining areas" and "involving
mineral agreements or permits," the POA has jurisdiction 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.

There is certainly nothing novel or aberrant in this approach. In ejectment

and unlawful detainer cases, where the subject of inquiry is possession de
facto, the jurisdiction of the municipal trial courts to make
a preliminary adjudication regarding ownership of the real property
involved is allowed, but only for purposes of ruling on the determinative
issue of material possession.

The present case arose from petitioners' MPSA applications, in which they
asserted their respective rights to the mining areas each applied for. Since
respondent Redmont, itself an applicant for exploration permits over the
same mining areas, filed petitions for the denial of petitioners' applications,
it should be clear that there exists a controversy between the parties and it
is POA's jurisdiction to resolve the said dispute. POA's ruling on Redmont's
assertion that petitioners are foreign corporations not entitled to MPSA is
but a necessary incident of its disposition of the mining dispute presented
before it, which is whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights

to mining areas," it necessarily follows that the POA likewise wields the
authority to pass upon the nationality issue involving petitioners, since the
resolution of this issue is essential and indispensable in the resolution of
the main issue, i.e., the determination of the petitioners' right to the mining
areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH

FINALITY. No further pleadings shall be entertained. Let entry of
judgment be made in due course.