NARRA NICKEL MINING AND DEVELOPMENT CORPORATION, TESORO MINING

AND DEVELOPMENT, INC., and McARTHUR MINING, INC., Petitioner, vs.

REDMONT CONSOLIDATED MINES CORPORATION, Respondents. [Dissenting
Opinion J. Leonen]

2014-04-21 | G.R. No. 195580

THIRD DIVISION

DISSENTING OPINION

LEONEN,J.:

Investments into our economy are deterred by interpretations of law that are not based on solid ground
and sound rationale. Predictability m policy is a very strong factor in determining investor confidence.

The so-called "Grandfather Rule" has no statutory basis. It is the Control Test that governs in
determining Filipino equity in corporations. It is this test that is provided in statute and by our most recent
jurisprudence.

Furthermore, the Panel of Arbitrators created by the Philippine Mining Act is not a court of law. It cannot
decide judicial questions with finality. This includes the determination of whether the capital of a
corporation is owned or controlled by Filipino citizens. The Panel of Arbitrators renders arbitral awards.
There is no dispute and, therefore, no competence for arbitration, if one of the parties does not have a
mining claim but simply wishes to ask for a declaration that a corporation is not qualified to hold a mining
agreement. Respondent here did not claim a better right to a mining agreement. By forum shopping
through multiple actions, it sought to disqualify petitioners. The decision of the majority rewards such
actions.

In this case, the majority's holding glosses over statutory provisions 1 and settled jurisprudence.2

Thus, I disagree with the ponencia in relying on the Grandfather Rule. I disagree with the finding that
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petitioners Narra Nickel Mining and Development Corp. (Narra), Tesoro Mining and Development, Inc.
(Tesoro), and McArthur Mining, Inc. (McArthur) are not Filipino corporations. Whether they should be
qualified to hold Mineral Production Sharing Agreements (MPSA) should be the subject of proper
proceedings in accordance with this opinion. I disagree that the Panel of Arbitrators (POA) of the
Department of Environment and Natural Resources (DENR) has jurisdiction to disqualify an applicant for
mining activities on the ground that it does not have the requisite Filipino ownership.

Furthermore, respondent Redmont Consolidated Mines Corp. (Redmont) has engaged in blatant forum
shopping. The Court of Appeals3 is in error for sustaining the POA. Thus, its findings that Narra, Tesoro,
and McArthur are not qualified corporations must be rejected.

To recapitulate, Redmont took interest in undertaking mining activities in the Province of Palawan. Upon
inquiry with the Department of Environment and Natural Resources, it discovered that Narra, Tesoro,
and McArthur had standing MPSA applications for its interested areas.4

Narra, Tesoro, and McArthur are successors-in-interest of other corporations that have earlier pursued
MPSA applications:

1. Narra intended to succeed Alpha Resources and Development Corporation and Patricia Louise
Mining and Development Corporation (PLMDC), which held the application MPSA-IV-1-12
covering an area of 3,277 hectares in Barangay Calategas and Barangay San Isidro, Narra,
Palawan;5

2. Tesoro intended to succeed Sara Marie Mining, Inc. (SMMI), which held the application
MPSA-AMA-IVB-154 covering an area of 3,402 hectares in Barangay Malinao and Barangay
Princess Urduja, Narra, Palawan;6

3. McArthur intended to succeed Madridejos Mining Corporation (MMC), which held the application
MPSA-AMA-IVB-153 covering an area of more than 1,782 hectares in Barangay Sumbiling,
Bataraza, Palawan and EPA-IVB-44 which includes a 3,720-hectare area in Barangay Malatagao,
Bataraza, Palawan from SMMI.7

Contending that Narra, Tesoro, and McArthur are corporations whose foreign equity disqualifies them
from entering into MPSAs, Redmont filed with the DENR Panel of Arbitrators (POA) for Region IV-B

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three (3) separate petitions for the denial of the MPSA applications of Narra, Tesoro, and McArthur. In
these petitions, Redmont asserted that at least sixty percent (60%) of the capital stock of Narra, Tesoro,
and McArthur are owned and controlled by MBMI Resources, Inc. (MBMI), a corporation wholly owned
by Canadians.8

Narra, Tesoro, and McArthur countered that the POA did not have jurisdiction to rule on Redmont’s
petitions per Section 77 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of 1995
(Mining Act). They also argued that Redmont did not have personality to sue as it had no pending
application of its own over the areas in which they had pending applications. They contended that
whether they were Filipino corporations has become immaterial as they were already pursuing
applications for Financial or Technical Assistance Agreements (FTAA), which, unlike MPSAs, may be
entered into by foreign corporations. They added that, in any case, they were qualified to enter into
MPSAs as 60% of their capital is owned by Filipinos.9

In a December 14, 2007 resolution,10 the POA held that Narra, Tesoro, and McArthur are foreign
corporations disqualified from entering into MPSAs. The dispositive portion of this resolution reads:

WHEREFORE, the Panel of Arbitrators finds the Respondents McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing
Agreement (MPSA) are hereby as [sic], they are DECLARED NULL AND VOID.

Accordingly, the Exploration Permit Applications of Petitioner Redmont Consolidated Mines

Corporation shall be GIVEN DUE COURSE, subject to compliance with the provisions of the
Mining Law and its implementing rules and regulations.11

Narra, Tesoro, and McArthur then filed appeals before the Mines Adjudication Board (MAB). In a
September 10, 2008 order,12 the MAB pointed out that “no MPSA has so far been issued in favor of any
of the parties”;13 thus, it faulted the POA for still ruling that “[t]heir Mineral Production Sharing
Agreement (MPSA) are hereby as [sic], they are DECLARED NULL AND VOID.”14

The MAB sustained the contention of Narra, Tesoro, and McArthur that “the Panel does not have
jurisdiction over the instant case, and that it should have dismissed the Petition fortwith [sic].”15 It
emphasized that:

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 [W]hether or not an applicant for an MPSA meets the qualifications imposed by law, more
particularly the nationality requirement, is a matter that is addressed to the sound discretion of the
competent body or agency, in this case the [Securities and Exchange Commission]. In the interest
of orderly procedure and administrative efficiency, it is imperative that the DENR, including the
Panel, accord full faith and confidence to the contents of Appellants’ Articles of Incorporation,
which have undergone thorough evaluation and scrutiny by the SEC. Unless the SEC or the courts
promulgate a ruling to the effect that the Appellant corporations are not Filipino corporations, the
Board cannot conclude otherwise. This proposition is borne out by the legal presumptions that
official duty has been regularly performed, and that the law has been obeyed in the preparation
and approval of said documents.16

Redmont then filed with the Court of Appeals a petition for review under Rule 43 of the 1997 Rules on
Civil Procedure. This petition was docketed as CA-G.R. SP No. 109703.

In a decision dated October 1, 2010,17 the Court of Appeals, through its Seventh Division, reversed the
MAB and sustained the findings of the POA.18

The Court of Appeals noted that the “pivotal issue before the Court is whether or not respondents
McArthur, Tesoro and Narra are Philippine nationals under Philippine laws, rules and regulations.”19
Noting that doubt existed as to their foreign equity ownerships, the Court of Appeals, Seventh Division,
asserted that such equity ownerships must be reckoned via the Grandfather Rule.20 Ultimately, it ruled
that Narra, Tesoro, and McArthur “are not Philippine nationals, hence, their MPSA applications should be
recommended for rejection by the Secretary of the DENR.”21

On the matter of the Panel of Arbitrators’ jurisdiction, the Court of Appeals, Seventh Division, referred to
this court’s declarations in Celestial Nickel Mining Exploration Corp. v. Macroasia Corp.22 and
considered these pronouncements as “clearly support[ing the conclusion] that the POA has jurisdiction to
resolve the Petitions filed by x x x Redmont.”23

The motion for reconsideration of Narra, Tesoro, and McArthur was denied by the Court of Appeals
through a resolution dated February 15, 2011.24

Hence, this present petition was filed and docketed as G.R. No. 195580.

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Apart from these proceedings before the POA, the MAB and the Court of Appeals, Redmont also filed
three (3) separate actions before the Securities and Exchange Commission, the Regional Trial Court of
Quezon City, and the Office of the President:

First action: On August 14, 2008, Redmont filed a complaint for revocation of the certificates of
registration of Narra, Tesoro, and McArthur with the Securities and Exchange Commission
(SEC).25 This complaint became the subject of another case (G.R. No. 205513), which was
consolidated but later de-consolidated with the present petition, G.R. No. 195580.

In view of this complaint, Redmont filed on September 1, 2008 a manifestation and motion to
suspend proceeding[s] before the MAB.26

In a letter-resolution dated September 3, 2009, the SEC’s Compliance and Enforcement

Department (CED) ruled in favor of Narra, Tesoro, and McArthur. It applied the Control Test per
Section 3 of Republic Act No. 7042, as amended by Republic Act No. 8179, the Foreign
Investments Act (FIA), and held that Narra, Tesoro, and McArthur as well as their co-respondents
in that case satisfied the requisite Filipino equity ownership.27 Redmont then filed an appeal with
the SEC En Banc.

In a decision dated March 25, 2010,28 the SEC En Banc set aside the SEC-CED’s
letter-resolution with respect to Narra, Tesoro, and McArthur as the appeal from the MAB’s
September 10, 2008 order was then pending with the Court of Appeals, Seventh Division.29 The
SEC En Banc considered the assertion that Redmont has been engaging in forum shopping:

It is evident from the foregoing that aside from identity of the parties x xx, the issue(s) raised
in the CA Case and the factual foundations thereof x x x are substantially the same as those
obtaining the case at bar. Yet, Redmont did not include this CA Case in the Certification
Against Forum Shopping attached to the instant Appeal.30

However, with respect to the other respondent-appellees in that case (Sara Marie Mining, Inc.,
Patricia Louise Mining and Development Corp., Madridejos Mining Corp., Bethlehem Nickel Corp.,
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San Juanico Nickel Corp., and MBMI Resources Inc.), the complaint was remanded to the
SEC-CED for further proceedings with the reminder for it to “consider every piece already on
record and, if necessary, to conduct further investigation in order to ascertain, consistent with the
Grandfather Rule, the true, actual Filipino and foreign participation in each of these five (5)
corporations.”31

Asserting that the SEC En Banc had already made a definite finding that Redmont has been
engaging in forum shopping, Sara Marie Mining, Inc., Patricia Louise Mining and Development
Corp., and Madridejos Mining Corp. filed with the Court of Appeals a petition for review under Rule
43 of the 1997 Rules of Civil Procedure. This petition was docketed as CA-G.R. SP No. 113523.

In a decision dated May 23, 2012, the Court of Appeals, Former Tenth Division, found that “there
was a deliberate attempt not to disclose the pendency of CA-GR SP No. 109703.”32 It concluded
that “the partial dismissal of the case before the SEC is unwarranted. It should have been
dismissed in its entirety and with prejudice to the complainant.”33 The dispositive portion of the
decision reads:

WHEREFORE, the Petition is GRANTED. The Decision dated March 25, 2010 of the
Securities and Exchange Commission En Banc is REVERSED and SET ASIDE. Accordingly,
the complaint for revocation filed by Redmont Consolidated Mines is DISMISSED with
prejudice.34 (Emphasis supplied)

On January 22, 2013, the Court of Appeals, Former Tenth Division, issued a resolution35 denying
Redmont’s motion for reconsideration.

Aggrieved, Redmont filed the petition for review on certiorari which became the subject of G.R. No.
205513, initially lodged with this court’s First Division. Through a November 27, 2013 resolution,
G.R. No. 205513 was consolidated with G.R. No. 195580. Subsequently however, this court’s
Third Division de-consolidated the two (2) cases.

Second Action: On September 8, 2008, Redmont filed a complaint for injunction (of the MAB
proceedings pending the resolution of the complaint before the SEC) with application for issuance
of a temporary restraining order (TRO) and/or writ of preliminary injunction with the Regional Trial
Court, Branch 92, Quezon City.36 The Regional Trial Court issued a TRO on September 16, 2008.

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 By then, however, the MAB had already ruled in favor of Narra, Tesoro, and McArthur.37

Third Action: On May 7, 2010, Redmont filed with the Office of the President a petition seeking the
cancellation of the financial or technical assistance agreement (FTAA) applications of Narra,
Tesoro, and McArthur. In a decision dated April 6, 2011,38 the Office of the President ruled in
favor of Redmont. In a resolution dated July 6, 2011,39 the Office of the President denied the
motion for reconsideration of Narra, Tesoro, and McArthur. As noted by the ponencia, Narra,
Tesoro, and McArthur then filed an appeal with the Court of Appeals. As this appeal has been
denied, they filed another appeal with this court, which appeal is pending in another division.40

The petition for review on certiorari subject of G.R. No. 195580 is an appeal from the Court of Appeals’
October 1, 2010 decision in CA-G.R. SP No. 109703 reversing the MAB and sustaining the POA’s
findings that Narra, Tesoro, and McArthur are foreign corporations disqualified from entering into MPSAs.
The petition also questions the February 15, 2011 resolution of the Court of Appeals denying the motion
for reconsideration of Narra, Tesoro, and McArthur.

To reiterate, G.R. No. 195580 was consolidated with another petition – G.R. No. 205513 – through a
resolution of this court dated November 27, 2013. G.R. No. 205513 is an appeal from the Court of
Appeals, Former Tenth Division’s May 23, 2012 decision and January 22, 2013 resolution in CA-G.R. SP
No. 113523. Subsequently however, G.R. No. 195580 and G.R. No. 205513 were de-consolidated.

Apart from G.R. Nos. 195580 and 205513, a third petition has been filed with this court. This third
petition is an offshoot of the petitions filed by Redmont with the Office of the President seeking the
cancellation of the FTAA applications of Narra, Tesoro, and McArthur.

The main issue in this case relates to the ownership of capital in Narra, Tesoro, and McArthur, i.e.,
whether they have satisfied the required Filipino equity ownership so as to be qualified to enter into
MPSAs.

In addition to this, Narra, Tesoro, and McArthur raise procedural issues: (1) the POA’s jurisdiction over
the subject matter of Redmont’s petitions; (2) the supposed mootness of Redmont’s petitions before the
POA considering that Narra, Tesoro, and McArthur have pursued applications for FTAAs; and (3)
Redmont’s supposed engagement in forum shopping.41

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Governing laws

Mining is an environmentally sensitive activity that entails the exploration, development, and utilization of
inalienable natural resources. It falls within the broad ambit of Article XII, Section 2 as well as other
sections of the 1987 Constitution which refers to ancestral domains42 and the environment.43

More specifically, Republic Act No. 7942 or the Philippine Mining Act, its implementing rules and
regulations, other administrative issuances as well as jurisprudence govern the application for mining
rights among others. Small-scale mining44 is governed by Republic Act No. 7076, the People’s
Small-scale Mining Act of 1991. Apart from these, other statutes such as Republic Act No. 8371, the
Indigenous Peoples Rights Act of 1997 (IPRA), and Republic Act No. 7160, the Local Government Code
(LGC) contain provisions which delimit the conduct of mining activities.

Republic Act No. 7042, as amended by Republic Act No. 8179, the Foreign Investments Act (FIA) is
significant with respect to the participation of foreign investors in nationalized economic activities such as
mining. In the 2012 resolution ruling on the motion for reconsideration in Gamboa v. Teves,45 this court
stated that “The FIA is the basic law governing foreign investments in the Philippines, irrespective of the
nature of business and area of investment.”46

Commonwealth Act No. 108, as amended, otherwise known as the Anti-Dummy Law, penalizes those
who “allow [their] name or citizenship to be used for the purpose of evading”47 “constitutional or legal
provisions requir[ing] Philippine or any other specific citizenship as a requisite for the exercise or
enjoyment of a right, franchise or privilege”.48

Batas Pambansa Blg. 68, the Corporation Code, is the general law that “provide[s] for the formation,
organization, [and] regulation of private corporations.”49 The conduct of activities relating to securities,
such as shares of stock, is regulated by Republic Act No. 8799, the Securities Regulation Code (SRC).

DENR’s Panel of Arbitrators

has no competence over the
petitions filed by Redmont

The DENR Panel of Arbitrators does not have the competence to rule on the issue of whether the
ownership of the capital of the corporations Narra, Tesoro, and McArthur meet the constitutional and
statutory requirements. This alone is ample basis for granting the petition.

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Section 77 of the Mining Act provides for the matters falling under the exclusive original jurisdiction of the
DENR Panel of Arbitrators, as follows:

Section 77. Panel of Arbitrators – x x x Within thirty (30) working days, after the submission of the
case by the parties for decision, the panel shall have exclusive and original jurisdiction to hear and
decide on the following:

(a) Disputes involving rights to mining areas;

(b) Disputes involving mineral agreements or permit;

(c) Disputes involving surface owners, occupants and claimholders / concessionaires; and

(d) Disputes pending before the Bureau and the Department at the date of the effectivity of this Act.

In 2007, this court’s decision in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.50
construed the phrase “disputes involving rights to mining areas” as referring “to any adverse claim,
protest, or opposition to an application for mineral agreement.”51

Proceeding from this court’s statements in Celestial, the ponencia states:

Accordingly, as We enunciated in Celestial, the POA unquestionably has jurisdiction to resolve

disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does
not include either the approval or rejection of the MPSA applications which is vested only upon the
Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of the
petitioners’ MPSA applications being that they are foreign corporation [sic], is valid.52

An earlier decision of this court, Gonzales v. Climax Mining Ltd.,53 ruled on the jurisdiction of the Panel
of Arbitrators as follows:
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 We now come to the meat of the case which revolves mainly around the question of jurisdiction by
the Panel of Arbitrators: Does the Panel of Arbitrators have jurisdiction over the complaint for
declaration of nullity and/or termination of the subject contracts on the ground of fraud, oppression
and violation of the Constitution? This issue may be distilled into the more basic question of
whether the Complaint raises a mining dispute or a judicial question.

A judicial question is a question that is proper for determination by the courts, as opposed
to a moot question or one properly decided by the executive or legislative branch. A judicial
question is raised when the determination of the question involves the exercise of a judicial
function; that is, the question involves the determination of what the law is and what the legal
rights of the parties are with respect to the matter in controversy.

On the other hand, a mining dispute is a dispute involving (a) rights to mining areas, (b) mineral
agreements, FTAAs, or permits, and (c) surface owners, occupants and
claimholders/concessionaires. Under Republic Act No. 7942 (otherwise known as the Philippine
Mining Act of 1995), the Panel of Arbitrators has exclusive and original jurisdiction to hear and
decide these mining disputes. The Court of Appeals, in its questioned decision, correctly stated
that the Panel’s jurisdiction is limited only to those mining disputes which raise questions of fact or
matters requiring the application of technological knowledge and experience. 54 (Emphasis
supplied)

Moreover, this court’s decision in Philex Mining Corp. v. Zaldivia,55 which was also referred to in
Gonzales, explained what “questions of fact” are appropriate for resolution in a mining dispute:

We see nothing in sections 61 and 73 of the Mining Law that indicates a legislative intent to confer
real judicial power upon the Director of Mines. The very terms of section 73 of the Mining Law, as
amended by Republic Act No. 4388, in requiring that the adverse claim must "state in full detail the
nature, boundaries and extent of the adverse claim" show that the conflicts to be decided by
reason of such adverse claim refer primarily to questions of fact. This is made even clearer by the
explanatory note to House Bill No. 2522, later to become Republic Act 4388, that "sections 61 and
73 that refer to the overlapping of claims are amended to expedite resolutions of mining conflicts *
* *." The controversies to be submitted and resolved by the Director of Mines under the sections
refer therfore [sic] only to the overlapping of claims and administrative matters incidental
thereto.56 (Emphasis supplied)

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The pronouncements in Celestial cited by the ponencia were made to address the assertions of Celestial
Nickel and Mining Corporation (Celestial Nickel) and Blue Ridge Mineral Corporation (Blue Ridge) that
the Panel of Arbitrators had the power to cancel existing mineral agreements pursuant to Section 77 of
the Mining Act.57 Thus:

Clearly, POA’s jurisdiction over “disputes involving rights to mining areas” has nothing to do with
the cancellation of existing mineral agreements.58

These pronouncements did not undo or abandon the distinction, clarified in Gonzales, between judicial
questions and mining disputes. The former are cognizable by regular courts of justice, while the latter are
cognizable by the DENR Panel of Arbitrators.

As has been repeatedly acknowledged by the ponencia,59 the Court of Appeals,60 and the Mines
Adjudication Board,61 the present case, and the petitions filed by Redmont before the DENR Panel of
Arbitrators boil down to the “pivotal issue x x x [of] whether or not [Narra, Tesoro, and McArthur] are
Philippine nationals.”

This is a matter that entails a consideration of the law. It is a question that relates to the status of Narra,
Tesoro, and McArthur and the legal rights (or inhibitions) accruing to them on account of their status.
This does not entail a consideration of the specifications of mining arrangements and operations. Thus,
the petitions filed by Redmont before the DENR Panel of Arbitrators relate to judicial questions and not
to mining disputes. They relate to matters which are beyond the jurisdiction of the Panel of Arbitrators.

Furthermore nowhere in Section 77 of the Republic Act No. 7942 is there a grant of jurisdiction to the
Panel of Arbitrators over the determination of the qualification of applicants. The Philippine Mining Act
clearly requires the existence of a “dispute” over a mining area,62 a mining agreement,63 with a surface
owner,64 or those pending with the Bureau or the Department65 upon the law’s promulgation. The
existence of a “dispute” presupposes that the party bringing the suit has a colorable or putative claim
more superior than that of the respondent in the arbitration proceedings. After all, the Panel of Arbitrators
is supposed to provide binding arbitration which should result in a binding award either in favor of the
petitioner or the respondent. Thus, the Panel of Arbitrators is a qualified quasi-judicial agency. It does
not perform all judicial functions in lieu of courts of law.

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The petition brought by respondent before the Panel of Arbitrators a quo could not have resulted in any
kind of award in its favor. It was asking for a judicial declaration at first instance of the qualification of the
petitioners to hold mining agreements in accordance with the law. This clearly was beyond the
jurisdiction of the Panel of Arbitrators and eventually also of the Mines Adjudication Board (MAB).

The remedy of Redmont should have been either to cause the cancellation of the registration of any of
the petitioners with the Securities and Exchange Commission or to request for a determination of their
qualifications with the Secretary of the Department of Environment and Natural Resources. Should either
the Securities and Exchange Commission (SEC) or the Secretary of Environment and Natural
Resources rule against its request, Redmont could have gone by certiorari to a Regional Trial Court.

Having brought their petitions to an entity without jurisdiction, the petition in this case should be granted.

Mining as a nationalized
economic activity

The determination of who may engage in mining activities is grounded in the 1987 Constitution and the
Mining Act.

Article XII, Section 2 of the 1987 Constitution reads:

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 60 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 twentyfive 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 waterpower, beneficial use may be the measure and limit of the grant.

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 The State shall protect the nation’s marine wealth in its archipelagic waters, territorial sea,
and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino
citizens. The Congress may, by law, allow small-scale utilization of natural resources by
Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen
and fish workers in rivers, lakes, bays, and lagoons.

The President may enter into agreements with foreignowned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of
the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this
provision, within thirty days from its execution. (Emphasis supplied)

The requirement for nationalization should always be read in relation to Article II, Section 19 of the
Constitution which reads:

Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos. (Emphasis supplied)

Congress takes part in giving substantive meaning to the phrases “Filipino x x x corporations or
associations at least 60 per centum of whose capital is owned by such citizens”66 as well as the phrase
“effectively controlled by Filipinos”.67 Like all constitutional text, the meanings of these phrases become
more salient in context.

Thus, Section 3 (aq) of the Mining Act defines a “qualified person” as follows:

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 Section 3. Definition of Terms. - As used in and for purposes of this Act, the following terms,
whether in singular or plural, shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per centum (60%) of the
capital of which is owned by citizens of the Philippines: Provided, That a legally organized
foreign-owned corporation shall be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance agreement or
mineral processing permit. (Emphasis supplied)

In addition, Section 3 (t) defines a “foreign-owned corporation” as follows:

(t) "Foreign-owned corporation" means any corporation, partnerships, association, or cooperative

duly registered in accordance with law in which less than fifty per centum (50%) of the capital is
owned by Filipino citizens.

Under the Mining Act, nationality requirements are relevant for the following categories of mining
contracts and permits: first, exploration permits (EP); second, mineral agreements (MA); third, financial
or technical assistance agreements (FTAA); and fourth, mineral processing permits (MPP).

In Section 20 of the Mining Act, “[a]n exploration permit grants the right to conduct exploration for all
minerals in specified areas.” Section 3 (q) defines exploration as the “searching or prospecting for
mineral resources by geological, geochemical or geophysical surveys, remote sensing, test pitting,
trenching, drilling, shaft sinking, tunneling or any other means for the purpose of determining the
existence, extent, quantity and quality thereof and the feasibility of mining them for profit.” DENR
Administrative Order No. 2005-15 characterizes an exploration permit as the “initial mode of entry in
mineral exploration.”68

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In Section 26 of the Mining Act, “[a] mineral agreement shall grant to the contractor the exclusive right to
conduct mining operations and to extract all mineral resources found in the contract area.”

There are three (3) forms of mineral agreements:

1. Mineral production sharing agreement (MPSA) “where the Government grants to the contractor
the exclusive right to conduct mining operations within a contract area and shares in the gross
output [with the] contractor x x x provid[ing] the financing, technology, management and personnel
necessary for the
implementation of [the MPSA]”;69

2. Co-production agreement (CA) “wherein the Government shall provide inputs to the mining
operations other than the mineral resource”;70 and

3. Joint-venture agreement (JVA) “where a joint-venture company is organized by the Government

and the contractor with both parties having equity shares. Aside from earnings in equity, the
Government shall be entitled to a share in the gross output”.71

The second paragraph of Section 26 of the Mining Act allows a contractor “to convert his agreement into
any of the modes of mineral agreements or financial or technical assistance agreement x x x.”

Section 33 of the Mining Act allows “[a]ny qualified person with technical and financial capability to
undertake large-scale exploration, development, and utilization of mineral resources in the Philippines”
through a financial or technical assistance agreement.

In addition to Exploration Permits, Mineral Agreements, and FTAAs, the Mining Act allows for the grant
of mineral processing permits (MPP) in order to “engage in the processing of minerals.”72 Section 3 (y)
of the Mining Act defines mineral processing as “milling, beneficiation or upgrading of ores or minerals
and rocks or by similar means to convert the same into marketable products.”

Applying the definition of a “qualified person” in Section 3 (aq) of the Mining Act, a corporation which
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intends to enter into a Mining Agreement must have (1) “technical and financial capability to undertake
mineral resources development” and (2) “duly registered in accordance with law at least sixty per centum
(60%) of the capital of which is owned by citizens of the Philippines”.73 Clearly, the Department of
Environment and Natural Resources, as an administrative body, determines technical and financial
capability. The DENR, not the Panel of Arbitrators, is also mandated to determine whether the
corporation is (a) duly registered in accordance with law and (b) at least “sixty percent of the capital” is
“owned by citizens of the Philippines.”

Limitations on foreign participation in certain economic activities are not new. Similar, though not
identical, limitations are contained in the 1935 and 1973 Constitutions with respect to the exploration,
development, and utilization of natural resources.

Article XII, Section 1 of the 1935 Constitution provides:

Section 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals,
coal, petroleum, and other mineral oils, all forces or potential energy, and other natural
resources of the Philippines belong to the State, and their disposition, exploitation,
development, or utilization shall be limited to citizens of the Philippines, or to corporations or
associations at least sixty per centum of the capital of which is owned by such citizens,
subject to any existing right, grant, lease, or concession at the time of the inauguration of the
Government established under this Constitution. Natural resources, with the exception of
public agricultural land, shall not be alienated, and no license, concession, or lease for the
exploitation, development, or utilization of any of the natural resources shall be granted for a
period exceeding twenty-five years, except as to water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power, in which cases
beneficial use may be the measure and the limit of the grant. (Emphasis supplied)

Likewise, Article XIV, Section 9 of the 1973 Constitution states:

Section 9. The disposition, exploration, development, of exploitation, or utilization of any of

the natural resources of the Philippines shall be limited to citizens of the Philippines, or to
corporations or association at least sixty per centum of the capital of which is owned by such
citizens. The Batasang Pambansa, in the national interest, may allow such citizens,
corporations, or associations to enter into service contracts for financial, technical,

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 management, or other forms of assistance with any foreign person or entity for the
exploitation, development, exploitation, or utilization of any of the natural resources. Existing
valid and binding service contracts for financial, the technical, management, or other forms
of assistance are hereby recognized as such. (Emphasis supplied)

The rationale for nationalizing the exploration, development, and utilization of natural resources
was explained by this court in Register of Deeds of Rizal v. Ung Siu Si Temple74 as follows:

The purpose of the sixty per centum requirement is obviously to ensure that corporations or
associations allowed to acquire agricultural land or to exploit natural resources shall be
controlled by Filipinos; and the spirit of the Constitution demands that in the absence of
capital stock, the controlling membership should be composed of Filipino citizens.75
(Emphasis supplied)

On point are Dean Vicente Sinco’s words, cited with approval by this court in Republic v.
Quasha:76

It should be emphatically stated that the provisions of our Constitution which limit to Filipinos
the rights to develop the natural resources and to operate the public utilities of the
Philippines is one of the bulwarks of our national integrity. The Filipino people decided to
include it in our Constitution in order that it may have the stability and permanency that its
importance requires. It is written in our Constitution so that it may neither be the subject of
barter nor be impaired in the give and take of politics. With our natural resources, our
sources of power and energy, our public lands, and our public utilities, the material basis of
the nation's existence, in the hands of aliens over whom the Philippine Government does
not have complete control, the Filipinos may soon find themselves deprived of their
patrimony and living as it were, in a house that no longer belongs to them.77 (Emphasis
supplied)

Article XII, Section 2 of the 1987 Constitution ensures the effectivity of the broad economic policy,
spelled out in Article II, Section 19 of the 1987 Constitution, of “a self-reliant and independent national
economy effectively controlled by Filipinos” and the collective aspiration articulated in the 1987

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Constitution’s Preamble of “conserv[ing] and develop[ing] our patrimony.”

In this case, Narra, Tesoro, and McArthur are corporations of which a portion of their equity is owned by
corporations and individuals acknowledged to be foreign nationals. Moreover, they have each sought to
enter into a Mineral Production Sharing Agreement (MPSA). This arrangement requires that foreigners
own, at most, only 40% of the capital.

Notwithstanding that they have moved to obtain FTAAs — which are permitted for wholly owned foreign
corporations —Redmont still asserts that Narra, Tesoro, and McArthur are in violation of the nationality
requirements of the 1987 Constitution and of the Mining Act.78

Narra, Tesoro, and McArthur argue that the Grandfather Rule should not be applied as there is no legal
basis for it. They assert that Section 3 (a) of the Foreign Investments Act (FIA) provides exclusively for
the Control Test as the means for reckoning foreign equity in a corporation and, ultimately, the nationality
of a corporation engaged in or seeking to engage in an activity with nationality restrictions. They fault the
Court of Appeals for relying on DOJ Opinion No. 20, series of 2005, a mere administrative issuance, as
opposed to the Foreign Investments Act, a statute, for applying the Grandfather Rule.79

Standards for reckoning

foreign equity participation in
nationalized economic
activities

The broad and long-standing nationalization of certain sectors and industries notwithstanding, an
apparent confusion has persisted as to how foreign equity holdings in a corporation engaged in a
nationalized economic activity shall be reckoned. As have been proffered by the myriad cast of parties
and adjudicative bodies involved in this case, there have been two means: the Control Test and the
Grandfather Rule.

Paragraph 7 of the 1967 Rules of the Securities and Exchange Commission, dated February 28, 1967,
states:

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 Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock
or capital respectively, of which belong to a Filipino citizens, all of the said shares shall be
recorded as owned by Filipinos. But if less than 60%, or, say, only 50% of the capital stock or
capital of the corporation or partnership, respectively belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as
belonging to aliens.80

Department of Justice (DOJ) Opinion No. 20, series of 2005, explains that the 1967 SEC Rules provide
for the Control Test and the Grandfather Rule as the means for reckoning foreign and Filipino equity
ownership in an “investee” corporation:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others of determining compliance with nationality requirements
(the “Investee Corporation”). Such manner of computation is necessary since the shares of the
Investee Corporation may be owned both by individual stockholders (“Investing Individuals”) and
by corporations and partnerships (“Investing Corporation”). The determination of nationality
depending on the ownership of the Investee Corporation and in certain instances, the Investing
Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test
in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules
which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the
liberal Control Test, there is no need to further trace the ownership of the 60% %

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