GRANDFATHER RULE: WHEN THE 60-40 FILIPINO – FOREIGN EQUITY IS IN

DOUBT
The Law is found on the first paragraph of Section 2, Article XII of the 1987 Philippine
Constitution, to wit:

“Section 2.  All lands of the public domain, waters, minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture, or
production-sharing agreements with Filipino citizens, or corporations or associations at
least sixty per centum of whose capital is owned by such citizens. Such agreements may
be for a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law. In cases of water rights for
irrigation, water supply, fisheries, or industrial uses other than the development of water power,
beneficial use may be the measure and limit of the grant.” (emphasis supplied)
Now, how do we determine the nationality of a corporation? Laws and jurisprudence would
provide the following tests:

1. Incorporation Test – It is determined by the place of incorporation regardless of the

nationality of its stockholders.
2. Domiciliary Test – It is determined by the principal place of business of the corporation.
3. Control Test – It is determined by the nationality of the controlling stockholders or
members. This test is applied in times of war.
4. Grandfather Rule – Nationality is attributed to the percentage of equity in the
corporation used in nationalized or partly nationalized area. 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.”
1. Said 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
2. diminish the effective control of Filipinos.
The first three tests are self-explanatory. Let’s talk about the fourth.

The Rule was thoroughly discussed in the case of “Narra Nickel Mining and Development
Corporation vs. Redmont Consolidated Mines Corporation (G.R. No. 195580, January 28,
2015)”
The aforementioned case stemmed from a dispute over the mining and exploration of certain
areas in Palawan. The respondent Redmont Consolidated Mines, Inc. (Redmont
henceforth) questioned the nationality of the three petitioner corporations (Narra Nickel, Tesoro,
and McArthur) which are prior applicants for Mineral Production and Sharing
Agreements (MPSA) on the same area. Redmont alleged that these three corporations are not
qualified as they do not meet the “at least 60% owned by Filipinos” requirement under the cited
provision of the Constitution. It further argued that at least 60% of the capital stock of Narra
Nickel, Tesoro and MacArthur are owned and controlled by MBMI Resources, Inc. (MBMI
henceforth), which is a 100% Canadian corporation. 
The Supreme Court ruled on the dispute by giving an answer to the question, “When should
the Grandfather Rule be applied?” It then provided that it should be applied only when:
 the corporation’s Filipino equity falls below the constitutional threshold of 60 percent or;
 there exists a “doubt” as to the Filipino to Foreign equity.
How would we know that a corporation’s Filipino equity falls bellow the threshold of 60 percent
or that there exists a “doubt” as to the Filipino to Foreign equity? We must first apply the third
test which is the Control Test. As mentioned, Control Test is determined by the nationality of the
controlling stockholders. When after applying the Control Test and there exists a “doubt” as to
the Filipino – Foreign equity, meaning, even when the equity does not fall below the threshold
but reasonable grounds to doubt the true ownership exists, Grandfather Rule butts in. 
Grandfather Rule determines the actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the corporation. In essence, Grandfather
Rule supplements the Control Test.

The “doubt” demanding the application of the Grandfather Rule is not confined or refer to the
fact that the apparent Filipino ownership of the corporation’s equity falls below the 60%
constitutional 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 which actually gave rise to the legislation on the Anti-Dummy Law.
In the present case, the doubt exists as to the extent of control and beneficial ownership of
MBMI over the petitioners and their investing corporate stockholders. In applying the
Grandfather Rule, the Supreme Court looked into the actual ownership of MBMI in each of the
three corporations. It further checked the structure of the other shareholder corporations of each
company.   Through the application of the Grandfather Rule, the Supreme Court held that
petitioners Narra Nickel, Tesoro and MacArthur Mining are not considered Philippine
nationals since MBMI, a 100 percent Canadian corporation, owns 60 percent or more of their
equity shares interests. Hence, as non-Philippine nationals, they are disqualified to participate in
the exploitation, utilization and development of the Philippines’ natural resources
KEY NOTES ON REVISED CORPORATION CODE

1. On number of Incorporators. The requirement as to the minimum number of

incorporators to organize a corporation has been removed. However, it should still not
be more than fifteen (15) incorporators (Section 10).

2. Perpetual Existence. A corporation shall have perpetual existence unless its articles of
incorporation provides otherwise (Section 11).

3. No Minimum Capital Stock Required. Stock corporations shall not be required to have

minimum capital stock, except as otherwise specifically provided by special law (Section
12).

4. Arbitration Agreement. In Section 13 of the Revised Corporation Code, a corporation

may include in its Articles of Incorporation a clause providing for arbitration agreement
pursuant to Section 181 of the same Code. It may also be included in its by-laws.
Disputes between the corporations, its stockholders or members, or from intra-corporate
relations except when it involves interests of third parties shall be referred for arbitration.

5. Non-Use of Corporate Charter. Under Section 21, a corporation is given an ample time

to organize and commence its business within five (5) years compared to the Old Code
wherein it only provided for two (2) years. Further, a corporation who commenced its
business, but becomes inoperative for five (5) years shall be considered as delinquent
corporation unlike in the old Code that it will be a ground for revocation of license. It is
given two (2) years to resume operations and comply with all the requirements the SEC
prescribed.

6. Corporations vested with Public Interest defined. Section 22 provides for an

enumeration of what are the corporations vested with Public Interest to wit:

(a) Corporations listed with an exchange or with assets of at least Fifty Million Pesos
(50,000,000) and having two hundred (200) or more holders of shares, each holding at least
one hundred (100) shares of a class of its equity shares;

(b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money service
business, pre-need, trust and insurance companies, and other financial intermediaries; and

(c) Other corporations engaged in businesses vested with public interest similar to the above,
as may be determined by the Commission, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of an independent director, such
as the extent of minority ownership, type of financial products or securities issued or offered to
investors, public interest involved in the nature of business operations, and other analogous
factors.

The above enumerated corporations shall have independent directors constituting at least
twenty percent (20%) of said corporation’s board of directors.  Further, Section 24 provides that
for corporations vested with public interest, they shall elect a compliance officer.
 7. Use of technology or electronic means. The Revised Code allows written notices of
stockholders meeting to be sent through electronic mail or such other manner as the
Commission shall allow under its guidelines (Section 49). Voting may also be done
through remote communication like videoconferencing or teleconferencing or the like if
allowed by the by-laws. Further, the SEC shall develop and implement an electronic
filing and monitoring system (Section 180).

8. Treasurer must be a Resident. It is specifically stated that the Treasurer must be a

Resident thereby clearing the qualification needed for such position unlike in the old
Code wherein it was not mentioned (Section 24).

9. Disqualifications. Section 26 provides for an enumeration of grounds for disqualification

from being a director, trustee or officer of any corporation if, within five (5) years prior to
the election or appointment as such, the person was:

(a) Convicted by final judgment:

(i)Of an offense punishable by imprisonment for a period exceeding six (6) years;
(ii) For violating this Code; and
(iii) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation Code”;

(b) Found administratively liable for any offense involving fraudulent acts; an

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct
similar to those enumerated in paragraphs (a) and (b) above.

The old Code only provides for par. (a) both (i) and (ii) as stated above.

10. Reasonable Donations. The ban on corporations giving donations to political parties has
been lifted by the passage of this Revised Corporation Code as Section 35 provides that
one of the powers of a corporation is “to make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, that no foreign corporation shall give donations in aid of any political
party or candidate or for purposes of partisan political activity”. Only foreign corporations
are banned.

11. Shares of stocks in another corporation. It is expressly provided in Section

61 as consideration for the issuance of stock.

12. Inspection of Corporate Books. Section 73 provides for penalties to be imposed upon a

stockholder in case there is Abuse of Rights as to Inspection of Corporate Books. He
shall be penalized under Section 158 of this Code without prejudice to the provisions
of Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the
Philippines”, as amended, and Republic Act No. 10173, otherwise known as the “Data
Privacy Act of 2012”.

13. One Person Corporation. Title XIII, Chapter III, Sections 115-132 laid down all the
provisions pertinent to One Person Corporation or a corporation with only a single
 stockholder, who shall only be a natural person, trust, or an estate.  With this, a viable
option is given for those who may want to put up business solely.

14. Withdrawal from Dissolution. Corporations who requested for Dissolution may request
for its withdrawal provided all the necessary requirements pertinent thereto are
provided (Section 137).