Narra Nickel Mining vs Redmont - Digest.docx

Narra Nickel Mining vs Redmont Case Digest GR 185590, Apr 21 2014

Facts:

Redmont is a domestic corporation interested in the mining and exploration of some areas in Palawan. Upon learning that those areas were covered by MPSA applications of other three (allegedly Filipino) corporations – Narra, Tesoro, and MacArthur, it filed a petition before the Panel of Arbitrators of DENR seeking to deny their permits on the ground that these corporations are in reality foreignowned. MBMI, a 100% Canadian corporation, owns 40% of the shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro).

Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather Rule must be applied when the 60-40 Filipino-foreign equity ownership is in doubt. Doubt is present in the Filipino equity ownership of Narra, Tesoro, and MacArthur since their common investor, the 100% Canadian-owned corporation – MBMI, funded them.

Under the Grandfather Rule, it is not enough that the corporation does have the required 60% Filipino stockholdings at face value. To determine the percentage of the ultimate Filipino ownership, it must first be traced to the level of the investing corporation and added to the shares directly owned in the investee corporation. Applying this rule, it turns out that the Canadian corporation owns more than 60% of the equity interests of Narra, Tesoro and MacArthur. Hence, the latter are disqualified to participate in the exploration, development and utilization of the Philippine’s natural resources.

Aside from the MPSA, the three corporations also applied for FTAA with the Office of the President. In their answer, they countered that (1) the liberal Control Test must be used in determining the nationality of a corporation as based on Sec 3 of the Foreign Investment Act – which as they claimed admits of corporate layering schemes, and that (2) the nationality question is no longer material because of their subsequent application for FTAA.

1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)

Commercial / Political Law

Narra Nickel Mining vs Redmont

2 SEC Opinion May 13, 1990

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G.R. No. 195580, January 28, 2015 Hide

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Issue 1: W/N the Grandfather Rule must be applied in this case Facts: Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule in cases where corporate layering is present.

First, as a rule in statutory construction, when there is conflict between the Constitution and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. Corporate layering is admittedly allowed by the FIA, but if it is used to circumvent the Constitution and other pertinent laws, then it becomes illegal.

Narra and its co-petitioner corporations – Tesoro and MacArthur, filed a motion before the SC to reconsider its April 21, 2014 Decision which upheld the denial of their MPSA applications. The SC affirmed the CA ruling that there is a doubt to their nationality, and that in applying the Grandfather Rule, the finding is that MBMI, a 100% Canadian-owned corporation, effectively owns 60% of the common stocks of petitioners by owning equity interests of the petitioners’ other majority corporate shareholders. Narra, Tesoro and MacArthur argued that the application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution, the FIA, the Philippine Mining Act, and the

Rules issued by the 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 60% of whose capital is owned by such Filipino citizens may enjoy certain rights and privileges, like the exploration and development of natural resources.

Issue: W/N the application by the SC of the grandfather resulted to the abandonment of the ‘control test’

Held:

No. The ‘control test’ can be 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 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.

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.

In this case, using the ‘control test’, Narra, Tesoro and MacArthur appear to have satisfied the 60-40 equity requirement. But the nationality of these corporations and the foreign-owned common investor that funds them was in doubt, hence, the need to apply the Grandfather Rule.

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Commercial law; Tests to determine the nationality of a corporation. There are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopts the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens. The first part of paragraph 7, DOJ Opinion No. 020, stating “shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality,” pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, “if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality,” pertains to the stricter, more stringent grandfather rule. Application of the Grandfather Rule. Based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. Existence of doubt. The assertion of petitioners that “doubt” only exists when the stockholdings are less than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance where “doubt” as to the ownership of the corporation exists. It would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have “60% Filipino Ownership” at face value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the Constitution. *****************

Pedro Palting vs San Jose Petroleum, Inc.

18 SCRA 924 – Business Organization – Corporation Law – Parity Rights – Nationality – Nationalized Areas of Activity

In 1956, San Jose Petroleum, Inc. (SJP), a mining corporation organized under the laws of Panama, was allowed by the Securities and Exchange Commission (SEC) to sell its shares of stocks in the Philippines. Apparently, the proceeds of such sale shall be invested in San Jose Oil Company, Inc. (SJO), a domestic mining corporation. Pedro Palting opposed the authorization granted to SJP because said tie up between SJP and SJO is violative of the constitution; that SJO is 90% owned by SJP; that the other 10% is owned by another foreign corporation; that a mining corporation cannot be interested in another mining corporation. SJP on the other hand invoked that under the parity rights agreement (Laurel-Langley Agreement), SJP, a foreign corporation, is allowed to invest in a domestic corporation.

ISSUE: Whether or not SJP is correct.

HELD: No. The parity rights agreement is not applicable to SJP. The parity rights are only granted to American business enterprises or enterprises directly or indirectly controlled by US citizens. SJP is a Panamanian corporate citizen. The other owners of SJO are Venezuelan corporations, not Americans. SJP was not able to show contrary evidence. Further, the Supreme Court emphasized that the stocks of these corporations are being traded in stocks exchanges abroad which renders their foreign ownership subject to change from time to time. This fact renders a practical impossibility to meet the requirements under the parity rights. Hence, the tie up between SJP and SJO is illegal, SJP not being a domestic corporation or an American business enterprise contemplated under the LaurelLangley Agreement.

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Commission a sworn registration statement, for the registration and licensing for sale in the Philippines Voting Trust Certificates.

It was alleged that the entire proceeds of the sale of said securities will be devoted or used exclusively to finance the operations of San Jose Oil Company, Inc. which is a domestic mining corporation. Pedro R. Palting and others, allegedly prospective investors in the shares of SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission an opposition to registration and licensing of the securities on the grounds that the tie-up between SAN JOSE PETROLEUM, and SAN JOSE OIL, violates the Constitution of the Philippines, the Corporation Law and the Petroleum Act of 1949.

Issue: Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, and SAN JOSE OIL COMPANY, INC., is violative of the Constitution, the Laurel-Langley Agreement, the Petroleum Act of 1949

Held: Yes. In the 1946 Ordinance Appended to the Constitution, this right was extended to citizens of the United States; states that to all forms of business enterprises owned or controlled, directly or indirectly, by citizens of the United States in the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or corporations or associations owned or controlled by citizens of the Philippines, would have the privilege of disposition, exploitation, development, and utilization of all Philippine natural resources. However, respondent is owned, controlled, directly and indirectly by Panamanian Corporation.

G.R. No. L-14441 Case Digest G.R. No. L-14441, December 17, 1966 Pedro R. Palting vs Sanjose Petroleum Inc.

The Laurel-Langley Agreement also states that with respect to natural resources in the public domain in the Philippines, only through the medium of a corporation organized under the laws of the Philippines and at least 60% of the capital stock of which is owned or controlled by citizens of the United States.

Ponente: Barrera

Facts: San Jose Petroleum a corporation organized and existing in the Republic of Panama, PETROLEUM filed with the Philippine Securities and Exchange

Although it was claimed that the corporation has stockholders residing in United States, there was no indication if they are all citizens of America, how much percentage do they occupy as stockholders, and if they have the same rules that apply to the conditions mentioned. In the circumstances, the court ruled that the respondent SAN JOSE PETROLEUM, as presently constituted, is not a business enterprise that is authorized to exercise the parity privileges under the Parity

Ordinance, the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.

In Redmont, the SEC found that out of the authorized capital stock of the corporations in question, the domestic corporations paid nothing for the stocks they subscribed to in each of the corporations, and the foreign corporation “provided practically all the funds.” The SEC concluded that doubt exists in this particular case, thus calling for the application of the grandfather rule.

The parity rights agreement is not applicable to SJP. The parity rights are only granted to American business enterprises or enterprises directly or indirectly controlled by US citizens. SJP is a Panamanian corporate citizen. The other owners of SJO are Venezuelan corporations, not Americans. SJP was not able to show contrary evidence. Further, the Supreme Court emphasized that the stocks of these corporations are being traded in stocks exchanges abroad which renders their foreign ownership subject to change from time to time. This fact renders a practical impossibility to meet the requirements under the parity rights. Hence, the tie up between SJP and SJO is illegal, SJP not being a domestic corporation or an American business enterprise contemplated under the Laurel-Langley Agreement.

This is confirmed by new SEC Chairperson Teresita Herbosa in a letter to Action for Economic Reforms dated 27 June 2011. She stated:

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The Control Test for Corporate Nationality (Part 2) Categories: Yellow Pad Malaluan is a lawyer, co-founder and trustee of AER; Lumba is a lawyer, teaches at the UP College of law and is a fellow of AER. This piece was published in the August 1, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

Control Test Remains in Force But a closer look at Redmont reveals that the decision does not represent an abandonment of the control test. The application of the control test is further elaborated in DOJ Opinion No. 020, s. 2005 dated 5 May 2005: In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipinoforeign equity ownership is in doubt (i.e. in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholders [or 59%] invests in other joint venture corporation which is either 6040% Filipino-alien or 59% less Filipino). Stated differently, where the 60-40 Filipino-foreign equity ownership is not in doubt, the Grandfather Rule will not apply.”

“We advise that the decision in the Redmont case amply elucidates the Commission’s position on how to determine the qualification of a corporation to engage in nationalized economic activities. To reiterate and clarify, the Commission is not abandoning the control test as the general rule. However, in cases where compliance with the citizenship restrictions is doubtful, as in the Redmont case, the Commission will apply the grandfather rule considering that applying the control test would result in circumvention of the Constitutional and statutory restrictions on foreign capital.” (emphasis supplied) More important, there was a change in position on the part of the SEC Office of the General Counsel in a later opinion dated 19 April 2011 (SEC-OGC Opinion No. 11-26). While not ruling on a query on the legality of certain investments subject of the request for opinion, it discussed “for purposes of information” the rules applicable to foreign participation in investments. In its discussion, it reiterated the control test as a standing rule. The clarification made by the SEC Chairperson in the letter dated 27 June 2011, and the SEC OGC opinion dated 19 April 2011, put to rest any doubt on the applicability of the control test occasioned by Redmont and Medusa. In sum, the control test remains in force. SEC Cannot Unilaterally Abandon the Control Test Indeed, the SEC, and much less the SEC OGC, cannot unilaterally abandon the control test in favor of the grandfather rule. First, there are obvious practical difficulties in abandoning the control test that has been consistently applied by the SEC and relied upon by investors for more than two decades. Second, apart from these considerations, it is doubtful whether the SEC can, at this time and by mere administrative fiat, legally do away with the control test since it has been embodied in a law – the Foreign Investments Act (FIA). To quote: [T]he term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines;or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is

owned and held by citizens of the Philippines; x x x (Sec 3 (a), Republic Act No. 7042 as amended by Republic Act No. 8179) (emphasis supplied) As confirmed in several SEC opinions, (see SEC Opinion dated 23 November 1993 and SEC-OGC Opinion No. 17-07 dated 27 September 2007) the cited provision is the statutory embodiment of the control test. What used to be a mere administrative practice has now been elevated to the level of a statutory imperative rendering it beyond the SEC’s authority to abandon. The FIA itself states: Section 12. Consistent Government Action. – No agency, instrumentality or political subdivision of the Government shall take any action in conflict with or which will nullify the provisions of this Act, or any certificate or authority granted hereunder. Moreover, it is the NEDA and not the SEC that is authorized to adopt the appropriate metric because it is the sole entity vested with the power to issue rules implementing the FIA. It has already issued said rules, wherein, in Rule I, Section 1 (b), it adopted the control test. The government has the discretion to select from a range of options what would be in the best interest of the country, as long as it is consistent with the relevant constitutional restriction to reserve control to Filipinos. Assuming that the 60%

Filipino equity in a corporation investing in another corporation is not held by dummies, they can outvote the foreign equity and control its entire equity in the corporation it invests in. This is what the control test essentially means: control of a corporation results in control over its equity in another corporation.

Consistency and Stability of Rules In deciding an investment destination, investors look at how the investment climate in the Philippines has improved over time, and also how it stands vis-à-vis other countries. The perception remains that rules here are more predisposed to changes. The inconsistency and instability evoked by rulings or issuances such as Redmontand Medusa give the Philippines this bad international reputation. We need to send a credible signal that rules and administrative interpretations will be applied consistently. Such institutionalization and stability of rules is a challenge not just for SEC, but the Philippine government as a whole.