09 Dec Revival of the Grandfather Rule?

In a surprising opinion, the General Counsel of the Securities and Exchange Commission held that the grandfather rule should be used in determining the nationality of a corporation engaged in a partly nationalized activity instead of the traditionally used control test.

As stated in SEC-OGC Opinion No. 10-31 (December 9, 2010), Medusa Mining Ltd (MML) is an investor in a joint venture that is the holder of a mineral production sharing agreement. It is in partnership with PHILSAGA Mining Corp. (PHILSAGA), apparently a Filipino corporation. MML, a 100% foreign corporation, owns 40 % of the joint venture, while PHILSAGA owns the remaining 60% equity. Answering the question of MML on whether it has violated the Constitution and other pertinent laws regarding foreign participation in mining activities, the OGC said that:

We opine that we must look into the citizenship of the individual stockholders, i.e. natural persons, of that investor-corporation in order to determine if the Constitutional and statutory restrictions are complied with. If the shares of stock of the immediate investor corporation is in turn held and controlled by another corporation, then we must look into the citizenship of the individual stockholders of the latter corporation. In other words, if there are layers of intervening corporations investing in a mining joint venture, we must delve into the citizenship of the individual stockholders of each corporation. This is the strict application of the grandfather rule, which the Commission has been consistently applying prior to the 1990s.

This opinion, as admitted by then General Counsel Vernette G. Umali-Pacio, is in contravention of the SEC’s prevailing policy of applying the “control test”. Under this latter test, a legal fiction is created where if 60% of the shares of an investing corporation are owned by Philippine citizens then all of the shares of the 100% of that corporation’s share are considered Filipino owned for purposes of determining the extent of foreign equity in an investee corporation engaging in an activity restricted to Philippine citizens. The opinion defended its stand in this way:

Control test must not be applied in determining if a corporation satisfies the Constitution’s citizenship requirements in certain areas of activities…Philippine citizenship is being unduly attributed to foreign individuals who own the rest of the shares in a 60% Filipino equity corporation investing in another corporation. Thus, applying the control test effectively circumvents the Constitutional mandate that corporations engaging in certain activities must be 60% owned by Filipino citizens. The words of the Constitution clearly provide that we must look at the citizenship of the individual/natural person who ultimately owns and controls the shares of stocks of the corporation engaging in the nationalized/partly-nationalized activity. In fact, the Mining Act strictly adheres to the text of the Constitution and does not provide for the application of the control test.