BusinessWorld | Grandfather rule still useful in nationality test

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June 15, 2016 | MANILA, PHILIPPINES

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Bworldonline.com

Opinion
Posted on February 10, 2015 10:36:00 PM

Grandfather rule still useful in nationality

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Amicus
Curiae
Candice
Christine O.
Tongco

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.

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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.

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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.

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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?

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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.

http://www.bworldonline.com/content.php?section=Opinion&title=grandfather-rule-still-useful-in-nationality-test&id=102501

Page 1 of 2

BusinessWorld | Grandfather rule still useful in nationality test

15/06/2016, 11:52 AM

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

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