Grandfather rule still useful in nationality

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IT IS UNDENIABLE that a developing country like ours needs the aid of
foreign investments to boost our economy. More often than not, we have an
abundance of labor and natural resources to supply the demand for goods
and services, but lack the capital to spearhead action.
In an attempt to strike a balance between allowing foreign participation in economic activities
and protecting the rights of Filipinos to use our own resources, provisions in the Constitution and
in other laws abound to ensure that some identified areas of activities are reserved to Philippine
nationals.
For juridical entities, this means that a certain percentage of ownership shall be reserved to
Filipinos.
Through the years, however, we have seen the Securities and Exchange Commission (SEC)
apply two different tests -- the more liberal control test, and the stricter grandfather rule.
Under the control test, a corporation will be deemed a Philippine national as long as at least 60%
of its capital stock outstanding and entitled to vote is held by Philippine citizens.
If the percentage of Filipino ownership is less than 60%, only the number of shares
corresponding to such percentage shall be considered held by
Philippine nationals.
This means that there is no need to trace the ownership of the Filipino stockholdings since a
corporation is automatically considered Filipino as long as it is at least 60% Filipino-owned.
The control test, indisputably, is easier to apply than the grandfather rule, which determines the
nationality of a corporation by tracing both the direct and indirect foreign equity of a corporation.
In applying the grandfather rule, it is not enough to look into the nationality of the parent -- the
grandfathers nationality must also be looked at. But which of the two shall apply in our
jurisdiction? Did the control test, used by the SEC in several of its opinions, kick out the
grandfather from its throne?
In Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines Corp., a ninemonth-old decision of the Supreme Court, the Court answered and clarified when the two tests
shall be used in determining the nationality of a corporation.
Redmont, a domestic corporation organized and existing under Philippine laws, took interest in

mining and exploring certain areas of the province of Palawan. However, the areas it sought to
explore were already covered by the Mineral Production Sharing Agreement (MPSA)
applications of Narra, Tesoro and McArthur companies.
Redmont opposed their applications on the ground that at least 60% of the capital stock of
McArthur, Tesoro and Narra are owned and controlled by a common shareholder, MBMI
Resources Inc., a 100% Canadian corporation.
Since MBMI was alleged to be the ultimate driving force behind Narra, Tesoro and McArthur,
Redmont argued that they should not be qualified to engage in mining activities, which is a partly
nationalized activity.
Narra, Tesoro and McArthur argued that, applying the control test, they should be considered
Philippine corporations since on paper, it clearly appears that at least 60% of their capital is
owned by Filipinos.
But Redmont argued that given the circumstances, it is the grandfather rule which should be
applied.
In finally applying the grandfather rule and declaring that the corporations are indeed not
qualified to engage in mining activities in the Philippines, the Supreme Court found that the
corporation crafted a web of corporate layering, whereby at face value, it appears that the
corporations satisfy the Filipino equity requirement, but in truth the ultimate controlling
shareholders are foreigners.
Though the Supreme Court recognized that corporate layering is allowed by law, it drew the line
in cases when it is used to skirt around the Constitution and pertinent laws.
Thus, the Supreme Court did away with the control test and applied the grandfather rule because
it found the nationalities of the corporations to be in doubt, as shown by the following indicia:
The corporations have a common major investor, MBMI, a 100% foreign corporation;
Their corporate structures and nominal shareholders are the same;
During the pendency of the cases, the corporations moved to convert their MPSA applications
to financial or technical assistance agreements instead;
The corporate documents of MBMI show that its operations are only through its local
counterparts;
In the course of the proceedings, MBMI suddenly divested its interest to another company and
subsequently claimed that the cases are now moot. The Supreme Court agreed with the ruling of
the Court of Appeals who found these actions highly suspicious.
These clearly show the pitfall of the control test -- it is as easy and more convenient to

circumvent as it is easy and more convenient to use and apply in determining the nationality of a
corporation.
Though the Supreme Court has made clear that the grandfather rule is definitely not yet out of
the game, its ruling in Narra still gives rise to one important question -- when will the nationality
of a corporation be considered in doubt? On the converse, when will the 60% Filipino
ownership at face value be sufficient?
There is obviously no hard and fast rule that can be applied to all corporations, and every
situation must be assessed based on all the surrounding circumstances.
Evidently, the Supreme Court itself is still uncovering which test is more applicable as real-life
situations present themselves. As for us, we just have to wait and see how the grandfather will
continue to rule the corporate world.
Candice Christine O. Tongco is an associate of the Corporate and Special Projects Department of
the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
cotongco@accralaw.com