SPECIAL THIRD DIVISION
G.R. No. 195580, January 28, 2015
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC., AND MCARTHUR MINING, INC., Petitioners, v. REDMONT CONSOLIDATED MINES CORP., Respondent.
R E S O L U T I O N
VELASCO JR., J.:
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)
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.
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
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:chanRoblesvirtualLawlibrary
x x x x
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:chanRoblesvirtualLawlibrary
x x x x
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.
x x x x
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)
[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.
x x x x
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.
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?
x x x x
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.
x x x x
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)
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.
x x x x
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 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)
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)
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)
1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their foreign partner;chanrobleslaw
2. That the foreign investors undertake to provide practically all the technological support for the joint venture;chanrobleslaw
3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.
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.
x x x x
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.cralawred
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.
Name | Nationality | Number of Shares | Amount Subscribed | Amount Paid |
Sara Marie Mining, Inc. | Filipino | 5,997 | P5,997,000.00 | P825,000.00 |
MBMI Resources, Inc.16 | Canadian | 3,998 | P3,998,000.00 | P1,878,174.60 |
Lauro L. Salazar | Filipino | 1 | P1,000.00 | P1,000.00 |
Fernando B. Esguerra | Filipino | 1 | P1,000.00 | P1,000.00 |
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 |
Total | 10,000 | P10,000,000.00 | P2,708,174.60 |
Name | Nationality | Number of Shares | Amount Subscribed | Amount Paid |
Olympic Mines & Development Corp.17 | Filipino | 6,663 | P6,663,000.00 | P0.00 |
MBMI Resources, Inc. | Canadian | 3,331 | P3,331,000.00 | P2,794,000.00 |
Amanti Limson | Filipino | 1 | P1,000.00 | P1,000.00 |
Fernando B. Esguerra | Filipino | 1 | P1,000.00 | P1,000.00 |
Lauro Salazar | Filipino | 1 | P1,000.00 | P1,000.00 |
Emmanuel G. Hernando | 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 |
Total | 10,000 | P10,000,000.00 | P2,800,000.00 |
66.67 (Filipino equity in Sara Marie) x59.97 (Sara Marie’s share in Tesoro) = 39.98%Foreign participation in petitioner Tesoro: 59.99%
100
39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)
=40.01%
=====
33.33 (Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%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.
100
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual SHs in Tesoro)
= 59.99%
=====
Name | Nationality | Number of Shares | Amount Subscribed | Amount Paid |
Madridejos Mining Corporation | Filipino | 5,997 | P5,997,000.00 | P825,000.00 |
MBMI Resources, Inc.[18 | Canadian | 3,998 | P3,998,000.00 | P1,878,174.60 |
Lauro Salazar | Filipino | 1 | P1,000.00 | P1,000.00 |
Fernando B. Esguerra | Filipino | 1 | P1,000.00 | P1,000.00 |
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 |
Total | 10,000 | P10,000,000.00 | P2,708,174.60 |
Name | Nationality | Number of Shares | Amount Subscribed | Amount Paid |
Olympic Mines & Development Corp.19 | Filipino | 6,663 | P6,663,000.00 | P0.00 |
MBMI Resources, Inc. | Canadian | 3,331 | P3,331,000.00 | P2,803,900.00 |
Amanti Limson | Filipino | 1 | P1,000.00 | P1,000.00 |
Fernando B. Esguerra | Filipino | 1 | P1,000.00 | P1,000.00 |
Lauro Salazar | Filipino | 1 | P1,000.00 | P1,000.00 |
Emmanuel G. Hernando | 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 |
Total | 10,000 | P10,000,000.00 | P2,809,900.00 |
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%
=====
Name | Nationality | Number of Shares | Amount Subscribed | Amount Paid |
Patricia Lousie Mining and Development Corp. | Filipino | 5,997 | P5,997,000.00 | P1,677,000.00 |
MBMI Resources, Inc.[20 | Canadian | 3,996 | P3,996,000.00 | P1,116,000.00 |
Higinio C. Mendoza, Jr. | Filipino | 1 | P1,000.00 | P1,000.00 |
Henry E. Fernandez | Filipino | 1 | P1,000.00 | P1,000.00 |
Ma. Elena A. Bocalan | Filipino | 1 | P1,000.00 | P1,000.00 |
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 | P10,000,000.00 | P2,800,000.00 |
Name | Nationality | Number of Shares | Amount Subscribed | Amount Paid |
Palawan Alpha South Resource Development Corp. | Filipino | 6,596 | P6,596,000.00 | P0 |
MBMI Resources, Inc.[21 | Canadian | 3,396 | P3,396,000.00 | P2,796,000.00 |
Higinio C. Mendoza, Jr. | Filipino | 1 | P1,000.00 | P1,000.00 |
Fernando B. Esguerra | Filipino | 1 | P1,000.00 | P1,000.00 |
Henry E. Fernandez | Filipino | 1 | P1,000.00 | P1,000.00 |
Ma. Elena A. Bocalan | Filipino | 1 | P1,000.00 | P1,000.00 |
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 | P10,000,000.00 | P2,804,000.00 |
66.02 (Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%Foreign participation in petitioner Narra: 60.36%
100
39.59% + .05% (shares of individual Filipino SHs in McArthur)
=39.64%
====
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%
=====
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.
Endnotes:
1Province of North Cotabato v. Government of the Republic of the Philippines Peace Panel on Ancestral Domain (GRP), G.R. No. 183591, October 14, 2008, 568 SCRA 402, 460.
2David v. Macapagal-Arroyo, G.R. No. 171396, etc., May 3, 2006, 489 SCRA 160; citing Province of Batangas v. Romulo, G.R. No. 152774, May 27, 2004, 429 SCRA 736; Lacson v. Perez, 410 Phil. 78 (2001); Albaña v. Comelec, 478 Phil. 941 (2004); Chief Supt. Acop v. Guingona Jr., 433 Phil. 62 (2002); SANLAKAS v. Executive Secretary Reyes, 466 Phil. 482 (2004).
3 Republic Act No. (RA) 7942, effective April 14, 1995.
4 Villanueva, Cesar Lapuz, Philippine Corporate Law (2001), p. 54. Emphasis and italicization supplied.
5 SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering. —
(B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. — There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange:chanRoblesvirtualLawlibrary
x x x x
For purposes of this Section, the term ‘closely held corporation’ means any corporation at least fifty percent (50%) in value of the outstanding capital stock of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals.
For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied:chanRoblesvirtualLawlibrary
(1) Stock not Owned by Individuals. — Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries. x x x
6 Sec. 96. Definition and applicability of Title. –
A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code.
7 Dated December 17, 2010; emphasis supplied. See also BIR Ruling Nos. 072-97, July 2, 1997 and 055-81, March 23, 1981.
8 SEC En Banc Case No. 09-09-177, March 25, 2010.
9 Dated April 26, 1988.
10 G.R. No. 176579, October 9, 2012.
11 G.R. Nos. 175418-20, December 5, 2012.
12See SEC-OGC Opinion No. 03-08 dated 15 January 2008.
13 SEC En Banc Case No. 07-10-205, November 25, 2010.
14 Villanueva, Cesar Lapuz. Philippine Corporate Law (2001), p. 54.
15 No. L-14441, December 17, 1966, 18 SCRA 924.
16 Emphasis supplied.
17 Emphasis supplied.
18 Emphasis supplied.
19 Emphasis supplied.
20 Emphasis supplied.
21 Emphasis supplied.
22 Dissenting Opinion, p. 41.
23 Otherwise known as the “Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities,” dated May 20, 2013 and Published on May 22, 2013.
24 492 Phil. 682 (2005).
25 150 Phil. 547 (1972).
26 Section 77 of RA 7942:chanRoblesvirtualLawlibrary
Within thirty (30) days, after the submission of the case by the parties for the decision, the panel shall have exclusive and original jurisdiction to hear and decide the following:chanRoblesvirtualLawlibrary
(a) Disputes involving rights to mining areas;
(b) Disputes involving mineral agreements or permits.
27 565 Phil 466 (2007). The Court held: “The phrase ‘disputes involving rights to mining areas’ refers to any adverse claim, protest, or opposition to an application for mineral agreement. The POA therefore has the jurisdiction to resolve any adverse claim, protest, or opposition to a pending application for a mineral agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and 41 of the DENR A 96-40 xxx.”
LEONEN, J.:
Section 77. Panel of Arbitrators – . . . . Within thirty (30) working days, after the submission of the case by the parties for decision, the panel shall have exclusive and original jurisdiction to hear and decide on the following:chanRoblesvirtualLawlibrary(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.
We now come to the meat of the case which revolves mainly around the question of jurisdiction by the Panel of Arbitrators: Does the Panel of Arbitrators have jurisdiction over the complaint for declaration of nullity and/or termination of the subject contracts on the ground of fraud, oppression and violation of the Constitution? This issue may be distilled into the more basic question of whether the Complaint raises a mining dispute or a judicial question.
A judicial question is a question that is proper for determination by the courts, as opposed to a moot question or one properly decided by the executive or legislative branch. A judicial question is raised when the determination of the question involves the exercise of a judicial function; that is, the question involves the determination of what the law is and what the legal rights of the parties are with respect to the matter in controversy.
On the other hand, a mining dispute is a dispute involving (a) rights to mining areas, (b) mineral agreements, FTAAs, or permits, and (c) surface owners, occupants and claimholders/concessionaires. Under Republic Act No. 7942 (otherwise known as the Philippine Mining Act of 1995), the Panel of Arbitrators has exclusive and original jurisdiction to hear and decide these mining disputes. The Court of Appeals, in its questioned decision, correctly stated that the Panel’s jurisdiction is limited only to those mining disputes which raise questions of fact or matters requiring the application of technological knowledge and experience. 8 (Emphasis supplied, citation omitted)
We see nothing in [S]ections 61 and 73 of the Mining Law that indicates a legislative intent to confer real judicial power upon the Director of Mines. The very terms of [S]ection 73 of the Mining Law, as amended by Republic Act No. 4388, in requiring that the adverse claim must “state in full detail the nature, boundaries and extent of the adverse claim” show that the conflicts to be decided by reason of such adverse claim refer primarily to questions of fact. This is made even clearer by the explanatory note to House Bill No. 2522, later to become Republic Act 4388, that “[S]ections 61 and 73 that refer to the overlapping of claims are amended to expedite resolutions of mining conflicts * * *.” The controversies to be submitted and resolved by the Director of Mines under the sections refer ther[e]fore only to the overlapping of claims and administrative matters incidental thereto.10 (Emphasis supplied)
This is a definition that is consistent with the first part of paragraph 7 of the 1967 SEC Rules, which [originally articulated] the Control Test: “[s]hares belonging to corporations or partnerships at least 60 per cent of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.”15
It is a matter of transitivity16 that if Filipino stockholders control a corporation which, in turn, controls another corporation, then the Filipino stockholders control the latter corporation, albeit indirectly or through the former corporation.
An illustration is apt.
Suppose that a corporation, “C”, is engaged in a nationalized activity requiring that 60% of its capital be owned by Filipinos and that this 60% is owned by another corporation, “B”, while the remaining 40% is owned by stockholders, collectively referred to as “Y”. Y is composed entirely of foreign nationals. As for B, 60% of its capital is owned by stockholders collectively referred to as “A”, while the remaining 40% is owned by stockholders collectively referred to as “X”. The collective A, is composed entirely of Philippine nationals, while the collective X is composed entirely of foreign nationals. (N.b., in this illustration, capital is understood to mean “shares of stock entitled to vote in the election of directors,” per the definition in Gamboa17). Thus:chanRoblesvirtualLawlibraryA: 60% X: 40%
B: 60% Y: 40%
C
By owning 60% of B’s capital, A controls B. Likewise, by owning 60% of C’s capital, B controls C. From this, it follows, as a matter of transitivity, that A controls C; albeit indirectly, that is, through B.
This “control” holds true regardless of the aggregate foreign capital in B and C. As explained in Gamboa, control by stockholders is a matter resting on the ability to vote in the election of directors:chanRoblesvirtualLawlibraryIndisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation.18B will not be outvoted by Y in matters relating to C, while A will not be outvoted by X in matters relating to B. Since all actions taken by B must necessarily be in conformity with the will of A, anything that B does in relation to C is, in effect, in conformity with the will of A. No amount of aggregating the foreign capital in B and C will enable X to outvote A, nor Y to outvote B.
In effect, A controls C, through B. Stated otherwise, the collective Filipinos in A, effectively control C, through their control of B.19
Voting power, as discussed previously, ultimately rests on the controlling stockholders of the controlling investor corporation. To go back to the previous illustration, voting power ultimately rests on A, it having the voting power in B which, in turn, has the voting power in C.21
As to investment returns or power, it is ultimately A which enjoys investment power. It controls B’s investment decisions – including the disposition of securities held by B – and (again, through B) controls C’s investment decisions.
Similarly, it is ultimately A which benefits from investment returns generated through C. Any income generated by C redounds to B’s benefit, that is, through income obtained from C, B gains funds or assets which it can use either to finance itself in respect of capital and/or operations. This is a direct benefit to B, itself a Philippine national. This is also an indirect benefit to A, a collectivity of Philippine nationals, as then, its business – B – not only becomes more viable as a going concern but also becomes equipped to funnel income to A.
Moreover, beneficial ownership need not be direct. A controlling shareholder is deemed the indirect beneficial owner of securities (e.g., shares) held by a corporation of which he or she is a controlling shareholder. Thus, in the previous illustration, A, the controlling shareholder of B, is the indirect beneficial owner of the shares in C to the extent that they are held by B.22
Bare ownership of 60% of a corporation’s shares would not suffice. What is necessary is such ownership as will ensure control of a corporation.
In Gamboa, “[f]ull beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required.”23With this in mind, the Grandfather Rule may be used as a supplement to the Control Test, that is, as a further check to ensure that control and beneficial ownership of a corporation is in fact lodged in Filipinos.
For instance, Department of Justice Opinion No. 165, series of 1984, identified the following “significant indicators” or badges of “dummy status”:chanRoblesvirtualLawlibraryIn instances where methods are employed to disable Filipinos from exercising control and reaping the economic benefits of an enterprise, the ostensible control vested by ownership of 60% of a corporation’s capital may be pierced. Then, the Grandfather Rule allows for a further, more exacting examination of who actually controls and benefits from holding such capital.25
- That the foreign investor provides practically all the funds for the joint investment undertaken by Filipino businessmen and their foreign partner[;]
- That the foreign investors undertake to provide practically all the technological support for the joint venture[; and]
- That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.24
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result to 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. As a corollary rule, even if the 60-40 Filipino to foreign equity 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.”27
Proceeding from the findings of the Court of Appeals in its October 1, 2010 decision in CA-G.R. SP No. 109703, it appears that at least 60% of equities in Narra, Tesoro, and McArthur is owned by Philippine nationals. Per this initial analysis, Narra, Tesoro, and McArthur ostensibly satisfy the requirements of the Control Test in order that they may be deemed Filipino corporations.
Attention must be drawn to how these findings fail to indicate which (fractional) portion of these equities consist of “shares of stock entitled to vote in the election of directors” or, if there is even any such portion of shares which are not entitled to vote. These findings fail to indicate any distinction between common shares and preferred shares (not entitled to vote). Absent a basis for reckoning non-voting shares, there is, thus, no basis for diminishing the 60% Filipino equity holding in Narra, Tesoro, and McArthur and undermining their having ostensibly satisfied the requirements of the Control Test in order to be deemed Filipino corporations qualified to enter into MPSAs.31
Having made these observations, it should not be discounted that a more thorough consideration – as has been intimated in the earlier disquisition regarding how 60% Filipino equity ownership is but a minimum and how the Grandfather Rule may be applied to further examine actual Filipino ownership – could yield an entirely different conclusion. In fact, Redmont has asserted that such a situation avails.
However, the contingencies of this case must restrain the court’s consideration of Redmont’s claims. Redmont sought relief from a body without jurisdiction – the Panel of Arbitrators – and has engaged in blatant forum shopping. It has taken liberties with and ran amok of rules that define fair play. It is, therefore, bound by its lapses and indiscretions and must bear the consequences of its imprudence.33
Redmont has taken at least four (4) distinct routes all seeking substantially the same remedy. Stripped of their verbosity and legalese, Redmont’s petitions before the DENR Panel of Arbitrators, complaint before the Regional Trial Court, complaint before the Securities and Exchange Commission, and petition before the Office of the President all seek to prevent Narra, Tesoro, and McArthur as well as their co-respondents and/or co-defendants from engaging in mining operations. Moreover, these are all grounded on the same cause (i.e., that they are disqualified from doing so because they fail to satisfy the requisite Filipino equity ownership) and premised on the same facts or circumstances.
Redmont has created a situation where multiple tribunals must rule on the extent to which the parties adverse to Redmont have met the requisite Filipino equity ownership. It is certainly possible that conflicting decisions will be issued by the various tribunals over which Redmont’s various applications for relief have been lodged. It is, thus, glaring that the very evil sought to be prevented by the rule against forum shopping is being foisted by Redmont.
. . . .
It strains credulity to accept that Redmont’s actions have not been willful. By filing petitions with the DENR Panel of Arbitrators, Redmont started the entire series of events that have culminated in: first, the present petition; second, the de-consolidated G.R. No. 205513; and third, at least one (1) more petition filed with this court.34chanroblesvirtuallawlibrary
Following the adverse decision of the Panel of Arbitrators, Narra, Tesoro, and McArthur pursued appeals before the Mines Adjudication Board. This is all but a logical consequence of the POA’s adverse decision. While the appeal before the MAB was pending, Redmont filed a complaint with the SEC and then filed a complaint with the Regional Trial Court to enjoin the MAB from proceeding. Redmont seems to have conveniently forgotten that it was its own actions that gave rise to the proceedings before the MAB in the first place. Moreover, even as all these were pending and in various stages of appeal and/or review, Redmont still filed a petition before the Office of the President.
Consistent with Rule 7, Section 5 of the 1997 Rules of Civil Procedure, the actions subject of these consolidated petitions must be dismissed with prejudice.35
1. The DENR Panel of Arbitrators;
2. The Securities and Exchange Commission;
3. The Regional Trial Court, Quezon City; and
4. The Office of the President.
Endnotes:
1Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 12 [Per J. Velasco, Jr., Special Third Division Resolution].
2 J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, [Per J. Velasco, Jr., Third Division].
3 565 Phil. 466 (2007) [Per J. Velasco, Jr., Second Division].
4 Id. at 499.
5 492 Phil. 682 (2005) [Per J. Tinga, Second Division].
6 150 Phil. 547 (1972) [Per J. J.B.L. Reyes, En Banc].
7 492 Phil. 682 (2005) [Per J. Tinga, Second Division].
8 Id. at 692-693, as cited in J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 10–11 [Per J. Velasco, Jr., Third Division].
9 150 Phil. 547 (1972) [Per J. Reyes, J.B.L, En Banc].
10 Id. at 553-554, as cited in J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 11 [Per J. Velasco, Jr., Third Division].
11 J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 11 [Per J. Velasco, Jr., Third Division].
12 Id. at 34.
13 To reiterate what I stated in my dissent in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 36 [Per J. Velasco, Jr., Third Division]:chanRoblesvirtualLawlibrary
In the final analysis, the records of the Constitutional Commission do not bind this court. As Charles P. Curtis, Jr. said on the role of history in constitutional exegesis:chanRoblesvirtualLawlibrary
The intention of the framers of the Constitution, even assuming we could discover what it was, when it is not adequately expressed in the Constitution, that is to say, what they meant when they did not say it, surely that has no binding force upon us. If we look behind or beyond what they set down in the document, prying into what else they wrote and what they said, anything we may find is only advisory. They may sit in at our councils. There is no reason why we should eavesdrop on theirs.
14Gamboa v. Teves, G.R. No. 176579, October 9, 2012, 682 SCRA 397, 435 [Per J. Carpio, En Banc].
15 J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 37 [Per J. Velasco, Jr., Third Division].
16 I.e., “([o]f a relation) such that, if it applies between successive members of a sequence, it must also apply between any two members taken in order. For instance, if A is larger than B, and B is larger than C, then A is larger than C”.
17Gamboa v. Teves, G.R. No. 176579, June 28, 2011, 652 SCRA 690, 723 and 726 [Per J. Carpio, En Banc] as cited in J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, [Per J. Velasco, Jr., Third Division].
18 Id. at 725.
19 J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 39 [Per J. Velasco, Jr., Third Division].
20 Id. at 43–44.
21 Id. at 44.
22 Id.
23Gamboa v. Teves, G.R. No. 176579, June 28, 2011, 652 SCRA 690, 730 [Per J. Carpio, En Banc], as cited in J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 46 [Per J. Velasco, Jr., Third Division].
24 Sec. of Justice Op No. 165, s. 1984, as cited in J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 47 [Per J. Velasco, Jr., Third Division].
25 J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 46–47 [Per J. Velasco, Jr., Third Division].
26 Id.
27Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 12 [Per J. Velasco, Jr., Special Third Division Resolution]. Emphasis and underscoring from the original, citation omitted.
28 Id.
29 The majority’s Resolution fails to specify if these are all common shares.
30 The majority’s Resolution also fails to specify if these are all common shares.
31 J. Leonen, dissenting opinion in Narra Nickel v. Redmont, G.R. No. 195580, April 21, 2014, 47–48 [Per J. Velasco, Jr., Third Division].
32 Id. at 52.
33 Id.
34 Arising from Redmont’s Petition with the Office of the President.
35 Id. at 53-55.cralawred