Case Summary (G.R. No. 195580)
Mootness and the Court’s Justification for Deciding the Controversy
Petitioners argued the case was moot because their MPSA applications had been converted to FTAA applications and they had been granted an FTAA, and because MBMI had allegedly sold its shares to a Filipino corporation (DMCI). The Court rejected mootness: the FTAA previously issued had been cancelled and revoked by the Office of the President (a fact petitioners omitted), and alleged post-litigation changes in shareholding (MBMI’s purported divestment) could not erase constitutional violations that occurred earlier. The Court invoked established exceptions to the moot-and-academic doctrine: grave constitutional violation, exceptional character and paramount public interest, need to formulate controlling principles, and capability of repetition yet evading review. The Court found all four exceptions present and thus justified deciding the merits despite any claimed mootness.
The Constitutional Concern and Public Interest
The Court emphasized that allowing issuance of MPSAs to entities effectively owned and controlled by foreign nationals through intricate corporate layering would breach Article XII, Section 2 of the 1987 Constitution. The structure in this case was characterized as an exceptional, public-interest matter because it was designed to circumvent the constitutional Filipino-ownership requirement for exploitation of natural resources. The Court stressed the need to formulate clear principles to prevent circumvention by using nominee Filipino corporations or multiple corporate tiers.
Grandfather Rule and Control Test: Relationship and Justification
The Court affirmed the Control Test as the primary method for determining corporate nationality (i.e., whether at least 60% of capital stock outstanding and entitled to vote is owned and held by Filipino citizens). However, where doubt exists about beneficial ownership and control notwithstanding apparent compliance with the 60–40 ratio, the Court held that the Grandfather Rule may be applied as a supplement to the Control Test. The Grandfather Rule attributes the nationality of corporate shareholders by tracing shareholdings through corporate tiers to natural persons to reveal ultimate beneficial ownership. The Court found this approach consistent with constitutional intent, SEC practice, DOJ opinions, BIR application of stock attribution, and past Supreme Court decisions (as cited in the Decision), and necessary where indicia suggest foreigners may be the beneficial owners despite nominal compliance.
Authorities, Administrative Practice, and Doctrinal Support
The Court cited: SEC en banc rulings (including SEC en banc application in Redmont Consolidated Mines Corp. v. McArthur Mining, Inc., et al.), SEC Opinion No. 10-31, various DOJ opinions (including Op. No. 144 s. 1977 and Op. No. 165 s. 1984), BIR rulings applying stock attribution, the Court’s own precedents (including Gamboa v. Teves and Express Investments/Bayantel), and SEC Memo No. 8 (2013) clarifying that the required Filipino percentage should be applied to both shares entitled to vote and total outstanding shares. These authorities support the proposition that beneficial ownership and situs of control must be examined, and that the Grandfather Rule is an established administrative and judicial tool to prevent circumvention.
How the Grandfather Rule Is Applied in Tandem with the Control Test
The Court explained the correct analytical sequence: first, apply the Control Test—if the 60% Filipino equity of shares entitled to vote is not met, the entity is foreign and no further inquiry is required. If the Control Test appears satisfied, the Grandfather Rule may be invoked only where doubt exists about beneficial ownership or control (e.g., foreign provision of funds, technology, management, or other indicia of dummy arrangements). The Court adopted limits on tracing corporate layers consistent with SEC practice (two tiers for publicly-held corporations, three tiers for closely held corporations) to avoid infinite attribution.
Factual Application to Petitioners — Structure, Payments, and Indicia of Control
The Court examined shareholdings and paid-up capital across corporate tiers for each petitioner, focusing on common shares (10,000 common shares each) and the disproportionate payment of capital by MBMI in several interposed Filipino corporations:
Tesoro: Tesoro’s 10,000 common shares — Sara Marie Mining, Inc. (Filipino) held 59.97% and MBMI 39.98%; Sara Marie in turn was 66.63% held by Olympic Mines & Development Corp. (Filipino) and 33.31% by MBMI. Olympic paid nothing for its subscription while MBMI paid nearly all the paid-up capital. Using the Grandfather Rule, the Court computed Filipinos’ beneficial participation in Tesoro at 40.01% and foreigners at 59.99%, concluding Tesoro failed the 60% Filipino ownership requirement.
McArthur: McArthur’s 10,000 common shares — Madridejos Mining Corp. (Filipino) held 59.97% and MBMI 39.98%; Madridejos was 66.63% owned by Olympic and 33.31% by MBMI. Olympic did not pay for subscribed shares while MBMI contributed nearly all paid-up capital. The Court calculated Filipino participation at 40.01% and foreign at 59.99%, concluding McArthur likewise failed the Filipino ownership threshold.
Narra: Narra’s 10,000 common shares — Patricia Louise Mining & Development Corp. (Filipino) held 59.97% and MBMI 39.98%; Patricia Louise was 65.96% owned by Palawan Alpha South Resource Development Corp. (Filipino) and 33.96% by MBMI. PASRDC paid nothing while MBMI paid almost all paid-up capital. The Court computed Filipino participation at 39.64% and foreign participation at 60.36%, concluding Narra failed the constitutional Filipino ownership requirement.
The Court emphasized that these computations were based on common shares (voting shares), not preferred or redeemable shares, and that Section 6 of the Corporation Code presumes voting rights unless otherwise indicated.
Indicators of Dummy Status and Grounds for Further Inquiry
Relying on DOJ and SEC precedent, the Court identified significant indicia that justified applying the Grandfather Rule: the foreign investor (MBMI) provided practically all funds for subscriptions; foreign investors managed operations or supplied the technical resources; and foreign investors prepared economic studies. These indicia created reasonable doubt about the locus of beneficial ownership and control and warranted attribution of corporate shareholder interests to MBMI for purposes of determining nationality.
POA Jurisdiction to Make Preliminary Findings on Nationality in Mining Disputes
The Court confirmed the DENR Panel of Arbitrators has exclusive and original jurisdiction to hear disputes involving rights to mining areas and mineral agreements under Section 77 of RA 7942. The Court explained that in disputes involving applications for mineral agreements, the POA may make preliminary findings on the nationality of corporate applicants because resolution of nationality is essential and incident to adjudicating competing claims to mining areas. The Court compared this to municipal courts’ preliminary inquiries into ownership for possession cases; the POA’s jurisdiction to resolve adverse claims, protests, or oppositions to mineral agreement applications necessarily includes ruling on whether an applicant meets nationality requirements for such agreements.
Final Disposition by the Court
The Supreme Court denied the petitioners’ motion for reconsideration with finality, reaffirmed its April 21, 2014 Decision upholding the Court of Appeals’ conclusion that petitioners are foreign corporations not entitled to MPSAs, and ordered entry of judgment. No further pleadings were to be entertained.
Dissent (Justice Leonen) — Scope and Principal Argumen
Case Syllabus (G.R. No. 195580)
Citation and Panel
- Reported at 752 Phil. 255, Special Third Division; G.R. No. 195580; Decision rendered January 28, 2015; Notice of Judgment received February 20, 2015.
- Resolution authored by Justice Velasco, Jr., J.; Peralta, Mendoza, and Jardeleza, JJ., concur.
- Justice Leonen files a dissenting opinion (invoking separate, detailed objections).
- Final disposition in this Resolution: Motion for Reconsideration denied with finality.
Parties and Posture
- Petitioners: Narra Nickel Mining and Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining, Inc. (McArthur).
- Respondent: Redmont Consolidated Mines Corp. (Redmont).
- Subject matter: Motion for Reconsideration of the Court’s April 21, 2014 Decision which denied Petitioners’ Petition for Review on Certiorari under Rule 45 and affirmed the Court of Appeals’ October 1, 2010 Decision and February 15, 2011 Resolution in CA-G.R. SP No. 109703.
- Core controversy: Whether petitioners, given their ownership and corporate-layering structures involving MBMI Resources, Inc. (MBMI), qualify as Filipino corporations entitled to Mineral Production Sharing Agreements (MPSAs) under Section 2, Article XII of the 1987 Constitution and pertinent statutes.
Procedural History and Filings
- The Court’s April 21, 2014 Decision denied petitioners’ Rule 45 Petition for Review and sustained the appellate court’s holding that petitioners are foreign corporations not entitled to MPSAs.
- Petitioners filed a Motion for Reconsideration dated June 5, 2014, arguing the Decision was contrary to law and logic and alleging mootness based on conversion of MPSA applications to FTAA applications and an alleged divestment by MBMI to a Filipino corporation (DMCI).
- Respondent Redmont filed a Comment dated September 2, 2014, opposing the Motion as a pro-forma rehash; petitioners filed a Reply dated September 30, 2014.
- The Court considered parties’ submissions and resolved to deny the Motion for Reconsideration with finality; no further pleadings entertained.
Core Issues Presented
- Whether the case had become moot and academic by reason of (a) conversion of petitioners’ MPSA applications into FTAA applications and (b) MBMI’s alleged sale of its shareholdings to DMCI.
- Whether the Grandfather Rule was properly applied, and how it relates to the Control Test, in determining the nationality (Filipino or foreign) of the petitioners for purposes of qualifying for MPSAs.
- Whether the Panel of Arbitrators (POA) of the DENR had jurisdiction to pass upon the nationality of applicants for MPSAs as part of resolving mining-area disputes.
- Whether, on the facts and stock-structure evidence before the Court, petitioners were effectively controlled or beneficially owned by a foreign corporation (MBMI) so as to render them foreign and ineligible for MPSAs.
Summary of Key Facts Relied Upon by the Court
- Petitioners’ MPSA applications and related proceedings led to litigation in multiple fora, including the DENR POA, Mines Adjudication Board, SEC, Regional Trial Court actions, and petitions to the Office of the President.
- Central factual finding upheld: MBMI, a 100% Canadian-owned firm, effectively owns significant equity interests in petitioners by virtue of its equity interests in petitioners’ majority corporate shareholders.
- Petitioners converted their MPSA applications to FTAA applications and were at one time granted FTAAs; the Office of the President subsequently cancelled and revoked the FTAA issued to petitioners (a fact omitted in petitioners’ Motion for Reconsideration).
- Petitioners allege MBMI divested and sold all its shareholdings to DMCI Mining Corporation (DMCI); the Court treats the alleged sale as a factual matter outside the scope of verification in a Rule 45 proceeding and notes that any later divestment does not negate constitutional violations that had already occurred.
- Record exhibits and submissions show multilayered corporate ownership structures where ostensibly Filipino majority corporate shareholders (e.g., Olympic Mines & Development Corp., PASRDC) subscribed to major share blocks but did not pay for their subscriptions while MBMI paid nearly all respective paid-up capital.
Court’s Ruling on Mootness and Justiciability
- The Court held the case had not been rendered moot and academic for purposes of refusing to decide the controversy.
- Even assuming the FTAA issuance and the alleged sale by MBMI had mooted certain aspects, the Court reaffirmed its longstanding exceptions to the moot-and-academic principle and found that the case met all four exceptions permitting adjudication:
- Grave violation of the Constitution: permitting MPSAs to entities effectively owned and controlled by a 100% foreign corporation via corporate layering would contravene Section 2, Article XII.
- Exceptional character and paramount public interest: the layering scheme is exceptional and undermines public policy reserving natural-resource exploitation predominantly to Filipinos.
- Need to formulate controlling principles: the dispute required formulation of principles to ensure effective enforcement of the 60% Filipino-ownership constitutional mandate.
- Capable of repetition yet evading review: petitioners’ corporate layering typifies repeatable schemes using dummy Filipino corporations to evade constitutional restrictions.
- The Court emphasized that the revocation of the FTAA by the Office of the President is material and that petitioners omitted this critical fact in their Motion for Reconsideration.
Legal Doctrines and Tests Discussed
- Control Test:
- Described as the prevailing mode to determine whether a corporation qualifies as Filipino under Section 2, Article XII: whether at least 60% of capital stock outstanding and entitled to vote is owned and held by Philippine citizens.
- The Court reaffirmed the Control Test’s primacy but allowed supplementation under specified conditions.
- Grandfather Rule:
- Employed as a supplement, not a substitute, to the Control Test where factual doubt exists as to the locus of beneficial ownership and control.
- Concept: attribute the nationality of second-tier (and, within stated limits, subsequent-tier) corporate shareholders to determine ultimate Filipino equity and beneficial ownership.
- Supported by historical SEC practice, administrative rulings, DOJ opinions, BIR rulings, and SEC opinions (including SEC-OGC Opinion No. 10-31 and the SEC en banc ruling in Redmont v. McArthur) as implementing the constitutional intent of Filipinization.
- Beneficial Ownership and Situs of Control:
- The Court reiterated that mere legal title is insufficient; full beneficial ownership coupled with appropriate voting rights is essential.
- Concept of situs of control used by DOJ and SEC and recognized in the Court’s prior cases to assess whether Filipinos are the principal beneficiaries and controllers of the enterprise.
- Limits on Grandfather Rule Application:
- SEC internal guidance suggested a limit on the number of corporate layers to be traced: two levels for publicly-held corporations and three levels for closely held corporations, consistent with Palting v. San Jose Petroleum, Inc.
Authorities, Opinions and Administrative Guidance Cited
- Constitutional and statutory provisions cited:
- Section 2, Article XII, 1987 Constitution (Filipino ownership of natural resources).
- Republic Act No. 7942, Philippine Mining Act of 1995 (Sec. 3(aq), Sec. 77 re: POA jurisdiction).
- Foreign Investments Act (FIA) and implementing rules (referenced for beneficial ownership requirements).
- Administrative and doctrinal references:
- SEC-OGC Opinion No. 10-31 (Dec. 9, 2010): strict application of Grandfather Rule through layers.
- SEC en banc decision in Redmont Consolidated Mines Corp. v. McArthur Mining, Inc., et al. (En Banc Case No. 09-09-177, March 25, 2010): application of Grandfather Rule where foreign funds and control indicators create doubt.
- DOJ Opinions (e.g., Opinion No. 144, S. 1977; Nos. 178, 130, 165, 84): articulation of beneficial ownership, situs of control, and indicators of d