Maria Cecilia M.

Pelagio
JD 2-2

CONTROL TEST AND GRANDFATHER TEST

Under the Philippine jurisdiction the incorporation test serves as the primary test since
we adhere to the doctrine that a corporation is a creature of the State whose laws it has been
created. However, other tests such as the control test and the grandfather rule must also be
applied in determining compliance with the provisions of the Constitution and of other laws on
nationality requirements. In the case of Narra Nickel Mining and Development Corporation vs.
Redmont Consolidated Mines Corporation, the court explained the difference between the
control test and the grandfather test. Under the control test or the liberal rule, 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. On the other hand, under the stricter, more
stringent grandfather rule, 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 Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less
than 60%, or say, 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 shall be recorded as belonging to aliens.
In SEC-OGC Opinion No. 12-02 dated February 2, 2012, it was stated that under the
liberal control test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipinoowned is considered as Filipino. While under the stricter grandfather rule, the combined totals in
the Investing Corporation and the Investee Corporation must be traced (i.e. grandfathered) to
determine the total percentage of Filipino ownership. In other words the grandfather rule applies
only where the joint venture corporation with Filipino and foreign stockholders with less than
60% Filipino stockholdings (0r 59%) invests in other joint venture corporation which is either 6040 Filipino-alien or 59% less Filipino. Stated differently, where the 60-40 Filipino-foreign equity
ownership is not in doubt, the grandfather rue will not apply.
When in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule." But where there exists doubt as to the proper representation of the
Filipino-foreign equity participation, the grandfather rule will be used in lieu of the control test to
determine compliance with the nationality requirement.
In the Narra v Redmont case, the court found serious doubt as to the true nationality of
the corporations involved due to the following: 1) the presence of MBMI, a common major
investor, which is a one hundred percent Canadian corporation, in three mining corporations; 2)
the similarities of the corporate structures of the corporations; 3) the presence of the same
nominal shareholders in the corporations; and 4) the paid-in capital of the corporate owners
being paid only by the foreign investor, among many other indicators showing the desire to
circumvent the nationality requirement in mining activities.

After a scrutiny of the evidence extant on record, the Court finds that this case calls for
the application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt
is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro,
since their common investor, the 100% Canadian corporationMBMI, funded them. Obviously,
the instant case presents a situation which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Courts mind. To determine, therefore, the
actual participation, direct or indirect, of MBMI, the grandfather rule must be used.
In ending, as the court held in the Narra v Redmont case, the "control test" is still the
prevailing mode of determining whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines.