Happy to Be A Minority? A Look at Philippine Mining Laws from the Perspective of a Foreign Investor

One may think that being in the minority is not a situation a person would want to be in. The opposite appears true in the Philippines – based on foreign investments in the Philippine mining sector, many foreign mining companies have chosen to be in the minority.

The Philippines experienced increased interest from foreign mining companies after a 2004 Philippine Supreme Court decision upholding the constitutionality of the Philippine Mining Act and the financial or technical assistance agreements ("FTAAs") executed pursuant thereto. Under the Mining Act, non-Philippine nationals ("Non-Filipinos") can own all of the shares of a company that holds a FTAA ("FTAA Company").

While the Supreme Court’s ruling paved the way for full foreign ownership of a FTAA Company, many foreign mining companies have remained a minority shareholder in a Philippine mining company ("MPSA Company") that holds a mineral production sharing agreement ("MPSA"), notwithstanding the obstacles that a minority shareholding may bring.

Under the FTAA scenario, the non-Filipino does not face limitations in its involvement in the management and operation of the FTAA Company. On the other hand, a MPSA Company is considered engaged in a partly-nationalized activity. This means that: (1) non-Filipinos must not own more than 40% of the capital of the mining company; (2) the election of non-Filipinos as board members is limited to the proportionate share of non-Filipinos in the capital of the company; (3) non-Filipinos cannot hold positions in the MPSA Company other than technical positions; and (4) non-Filipinos cannot intervene in the management, operation, administration or control of the MPSA Company, whether as an officer, employee or laborer therein.

Notwithstanding what may appear to be obstacles to non-Filipinos under an MPSA scenario, many foreign mining companies (including some of the world’s biggest mining companies) have made investments in MPSA Companies. In fact, many of the investments made by foreign mining companies in the Philippine mining sector were made through acquisition of shares in MPSA Companies. In advising foreign mining companies, local practitioners need to consider structures and solutions that will alleviate concerns that arise from the fact that non-Filipinos hold a minority shareholding in, and do not have control over, the MPSA Company. In our firm’s experience, this requires a delicate balancing act of addressing the client’s concerns on being a minority stockholder and ensuring that the proposed structure and solution comply with applicable law. While this can be challenging, there are legal and commercially acceptable solutions to holding a minority stake in a MPSA Company.

By Hector M. de Leon Jr.

SyCip Salazar Hernandez & Gatmaitan
Hector de Leon Jr, Partner
105 Paseo de Roxas, Makati City, Philippines
(Phone) +632 817 98 11
(Mail) hmdeleon@syciplaw.com
(Web) www.syciplaw.com