DOJ Opinion No. 093, s. 1989

DOJ OPINION NO. 093 , s. 1989 May 3, 1989 Mr. Ramon T. Garcia Chief Executive Trustee Asset Privatization Trust 10th Floor, BA-Lepanto Bldg. Makati, Metro Manila Sir : This refers to your request for opinion on whether or not the following corporate structure is legally permissible under existing laws, particularly R.A. No. 1828, the Nickel Law, as amended, in conjunction with the Omnibus Investments Code: "1. The mining titles or mineral leases and the mining activities associated with the operation shall be held by a company to be formed in which 60% shall be owned by Filipinos and 40% owned by a foreign group; 2. The refinery activities themselves and the associated fixed assets will be wholly owned by the same foreign group". It appears that the foregoing issue has arisen in connection with your on-going negotiations on the disposition of Nonoc Mining and Industrial Corporation (NMIC), a subsidiary jointly owned by the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB) which was transferred, together with its physical assets (the Nickel Refinery Plant), by the said Banks to the Asset Privatization Trust (APT) for disposition pursuant to Proclamation No. 50. The predecessor-in-interest of NMIC was Marinduque Mining and Industrial Corporation ("Marinduque") which has a subsisting operating contract with the government for the operation of Parcel II of the Surigao Mineral Reservation, executed pursuant to Republic Act No. 1828, as amended, otherwise known as the Nickel Law. prcd Basically, your question is whether or not the ownership of mining rights and the ownership and operation of the nickel refinery can be segregated for purposes of the contemplated disposal of the NMIC and its nickel refinery. The APT is at present negotiating with Dallhold Management Pty. Ltd., White Rock Mining and with another group identified with Mr. Jesus S. Cabarrus. The pertinent provisions of Republic Act No. 1828, as amended, otherwise known as the "Nickel Law" and E.O. No. 226, otherwise known as the "Omnibus Investments Code of 1987" read as follows: R . A . No . 1828 (The Nickel Law), as amended "Section 1. Recognizing the importance to the national economy of the development, exploitation and utilization of the mineral deposits in the Surigao Mineral Reservation and the processing and disposition of the minerals that may be produced therefrom, it is hereby declared to be the policy of the Government to undertake such development, exploitation, utilization, processing and disposition either by itself, or jointly with private enterprise, or by engaging and utilizing the services of persons or corporations, as independent contractor or contractors, sixty per centum (60%) of the capital stock of which is owned and controlled by persons qualified under the Constitution to exploit, develop and utilize the natural resources of the Philippines, . . ." (Emphasis supplied) "Sec. 2. . . . "Should the President of the Philippines decide to have the operation undertaken through an independent contractor or contractors, as hereinabove provided, the Board may engage and utilize the services of persons or corporations, as independent contractor or contractors, with the approval of the President by calling for bids to undertake or perform for the Government any phase or phases of all the operations authorized in this Act covering any particular area or areas within the Surigao Mineral Reservation and the processing of the minerals produced therefrom, negotiating and entering for such purpose into a contract or contracts of service with any party or parties, domestic or foreign, fully qualified as to organization , finances, resources, experience and technical competence, for the operation of the whole or part of the Surigao Mineral Reservation under the provisions of this Act: Provided further, That any provision of existing law to the contrary notwithstanding, the successful bidder, contractor or operator, may be a corporation formed by one or more corporation organized for the purpose of engaging in mining at least sixty per cent of the capital stock of each of said corporation is owned by Filipino citizens, except where the effect of such interlocking stock ownership is to divest Filipino citizens of the ultimate and actual control of the corporation , in which case the corporation shall be disqualified to be a bidder, contractor, or operator under the provisions of this Act and shall be subject to the penalty prescribed in Section 190 1/7 of the Corporation Law". (Emphasis supplied) E . O . No . 226 (The Omnibus Investments Code) "ART. 17. 'Pioneer enterprise' shall mean a registered enterprise (1) engaged in the manufacture, processing or production , and not merely in the assembly or packaging of goods, products, commodities or raw materials that have not been or are not being produced in the Philippines on a commercial scale or (2) which uses a design, for formula, scheme, method, process or system of production or transformation of any element, substance or raw materials into another raw material or finished goods which is new and untried in the Philippines or (3) engaged in the pursuit of agricultural, forestry and mining activities and/or services including the industrial aspects of food processing whenever appropriate, pre-determined by the Board, in consultation with the appropriate Department, to be feasible and highly essential to the attainment of the national goal in relation to a declared specific national food and agricultural program for self-sufficiency and other benefits of the project or (4) which produces non-conventional fuels or manufacturers equipment which utilizes non-conventional fuels or sources of energy in its production, manufacturing or processing operations: Provided; That the final product in any of the foregoing instances involves or will involve substantial use and processing of domestic raw materials, whenever available; taking into account the risks and magnitude of investment: Provided, further, That the foregoing definitions shall not in any way limit the rights and incentives granted to less-developed-area enterprises provided under Title V, Book I hereof" (Emphasis supplied) "ART. 32. Qualifications of a Registered Enterprise . To be entitled to registration under the Investment Priorities Plan, an applicant must satisfy the Board that: (1) He is a citizen of the Philippines, in case the applicant is a natural person, or in case a partnership or any other association, it is organized under Philippine laws and that at least sixty percent (60%) of its capital is owned and controlled by citizens of the Philippines; or in case of a corporation or a cooperative, it is organized under Philippine laws and that at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by Philippine nationals as defined under Article 15 of this code, and at least sixty percent (60%) of the members of the Board of Directors are citizens of the Philippines . If it does not possess the required degree of ownership as mentioned above by Philippine nationals, the following circumstances must be satisfactorily established : prcd (a) That it proposes to engage in a pioneer project as defined in Article 17 of this Code , which considering the nature and extent of capital requirements, processes, technical skills and relative business risks involved, is in the opinion of the Board of such a nature that the available measured capacity thereof cannot be readily and adequately filled by Philippine nationals; or, if the applicant is exporting at least seventy percent (70%) of its total production, the export requirement herein provided may be reduced in meritorious cases under such conditions and/or limited incentives as the Board may determine; (b) That it obligates itself to attain the status of a Philippine national, as defined in Article 15, within thirty (30) years from the date of registration or within such longer period as the Board may require taking into account the export potential of the project: Provided, That a registered enterprise which exports one hundred percent (100%) of its total production need not comply with this requirement; (c) That the pioneer area it will engage in is one that is not within the activities reserved by the Constitution or other laws of the Philippines to Philippine citizens or corporations owned and controlled by Philippine citizens ; . . . (Emphasis supplied) Anent the corporate ownership contemplated in your first query wherein the mining titles or mineral leases and the mining activities associated with the operation shall be held by a company with a 60-40 Filipino-foreign equity ownership, it is our view that the same satisfies constitutional and statutory requirements. This Department has had occasion to rule in several opinions that it is implicit in the constitutional provisions reserving the exploitation, development and utilization of natural resources to citizens of the Philippines or to corporations or associations at least 60% of the capital of which is owned by citizens of the Philippines, that the nationality requirement, in case of a corporation, is not satisfied unless it meets the criterion of beneficial ownership, i.e., that Filipinos are the principal beneficiaries in the exploration of natural resources (Op. No. 14, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial consideration is situs of control, whether in a stock or non-stock corporation" (Op. No. 178, s. 1974). As stated to Register of Deeds vs. Ung Siu Si Temple (97 Phil. 58), the purpose of the sixty per centum requirement is obviously to ensure that corporations and associations allowed to acquire agricultural land or to exploit natural resources "shall be controlled by Filipinos" (Op. No. 130, s. 1985). It is pertinent to note that under Section 2 of the Nickel Law, a bidder, contractor or operator "may be corporation formed by one or more corporations organized for the purpose of engaging in mining at least sixty per cent of the capital stock of each of said corporation is owned by Filipino citizens, except where the effect of such interlocking stock ownership is to divest Filipino citizens of the ultimate and actual control of the corporation, in which case the corporation shall be disqualified to be a bidder contractor or operator under the provisions of [said] Act ". Anent the corporate ownership mentioned in your second query wherein "the refinery activities themselves and the associated fixed assets will be wholly owned by the same foreign group" holding the 40% equity in the corporation contemplated in the first query, it is our view that it is not legally permissible. The Nickel Refinery must also be held, and its operation managed, by a 60-40 corporation in the light of the provisions of R.A. No. 1828, as amended, which do not distinguish between mining and processing/refinery and activities but in fact consider both activities as part and parcel of mining operations which can be undertaken only by a qualified contractor or operator (referring to a Filipino citizen or a 60-40 Philippine corporation). prcd It is true that "processing" of minerals may be considered a pioneer activity under the Omnibus Investments Code (Art. 17, E.O. No. 226) which even a 100% foreign-owned company can engaged in (Art, 32[a], id .) provided that it is not within the activities reserved by the Constitution or other laws of the Philippines to Philippine citizens or to corporations owned and controlled by Philippine citizens (Sec. 32[d], id .). However, in view of the express provision of R.A. No. 1828, as amended (The Nickel Law) mentioning "processing" as one of the activities to be held by companies with 60-40 Filipino-foreign equity (Sec. 2, R.A. No. 1828, as amended), the proposed corporate structure mentioned in the second query is legally untenable. To own the refinery activities and the associated fixed assets, the foreign group's equity must be restructured to comply with the 60-Filipino and 40-foreign equity requirement prescribed in R.A. No. 1828, as amended. Please be guided accordingly. Very truly yours, (SGD.) SEDFREY A. ORDOEZ Secretary of Justice