By: Ellaine Anne Bernardino on April 29, 2021

Stockholders of a corporation may file legal suits based on the unlawful or fraudulent acts of the board of directors, corporate officers or even third persons. Depending on the situation, there are three classes of suits available to a stockholder as a remedy, namely, individual suits, representative or class suits, and derivative suits.

An individual suit is an action brought by the stockholder in his name when a wrong is done to him personally and not to other stockholders or the corporation. An illustration would be when the stockholder is denied his right to inspect the corporate records or his right to dividends.

A representative or class suit is an action brought by the stockholder on behalf of himself and all other stockholders who are similarly situated such as when a wrong is committed against a group of stockholders. An example of this would be when the rights of the preferred stockholders are violated, a representative suit may be filed for the protection of all stockholders belonging to the same group.

In the case of Castillo vs Balinghasay (GR 150976, Oct. 18, 2004), the petitioners were stockholders of the corporation holding Class “B” shares who were deprived of their voting rights. The Supreme Court ruled that since the Corporation Code expressly prohibits the deprivation of voting rights, except as to “preferred” and “redeemable” shares, therefore, the Articles of Incorporation of the corporation cannot be construed in a manner asto grant exclusive voting rights to Class “A” stockholders, to the prejudice of Class “B” stockholders.

A derivative suit is one which is instituted by a stockholder on behalf of the corporation for its protection from acts committed by directors, corporate officers, and third persons. The whole purpose of the law authorizing derivative suits is to allow the stockholders of the corporation to enforce rights that are derivative or secondary in nature (Agdao Landless Residents Association Inc. [ALRAI] vs Maramion, GR 188642 and 189425, Oct. 17, 2016).

In Western Institute of Technology Inc. vs Salas (GR 113032, Aug. 21, 1997), the court explained that a derivative suit is an action brought by minority stockholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. Such suits have been the principal remedy of the minority stockholders against abuses by the majority. Hence, in the case of Villamor vs Umale (GR 172843, Sept. 24, 2014), the court recognized that the right of a stockholder to institute a derivative suit is not based on any express provision of the Corporation Code or the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific performance of an obligation, owed by the corporation to its stockholders, to assist its rights of action when the corporation has been put in default by the unjust refusal of the members of the board of directors or management to adopt appropriate measures for its protection.

For a derivative suit to prosper, the following requisites must concur: the party was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; all intra-corporate remedies have been exhausted; the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit; no appraisal rights are available for the act or acts complained of; and the suit is not a nuisance or harassment suit (Ching and Wellington vs Subic Bay Golf and Country Club Inc., GR 174353, Sept. 10, 2014).

In the case of ALRAI vs Maramion, the respondents filed an individual suit against the petitioners to nullify the illegal distribution of the donated lands owned by the corporation among the officers of ALRAI and the alleged mismanagement of the corporate assets. The court held that the cause of action and the reliefs sought by the respondents strictly call for the filing of a derivative suit, and not an individual suit which they filed. However, the court noted that since there was substantial compliance with the requirements of a derivative suit, the case was treated as a derivative suit in the interest of justice. Moreover, the court ruled that the reliefs sought do not entail the premature distribution of corporate assets but seek to preserve them for corporate interest. Hence, any benefit that may be recovered is accounted for, not in favor of respondents, but for the corporation, who is the real party-in-interest. In derivative suits, the real party-in-interest is the corporation, and the suing stockholder is a mere nominal party.

It is important though that damage to the corporation be proven in derivative suits since derivative suits seek redress for injury to the corporation and not just to the individual stockholder. If the damage to the corporation was not sufficiently proven, the complaint cannot be considered a bona fide derivative suit (Ang vs Spouses Roberto, GR 201675, June 19, 2013).

As stated in the case Florete Jr. vs Florete (GR 174909, Jan. 20, 2016), it is noteworthy that a stockholder may suffer from a wrong done to or involving a corporation, but this does not mean that the aggrieved stockholder is entitled to sue in his or her own capacity.

The avenues for relief are mutually exclusive. The determination of the appropriate remedy, whether it is an individual suit, a representative suit, or a derivative suit, is dependent on the object of the wrong done. When the object of the wrong done is the corporation itself or “the whole body of its stock and property without any severance or distribution among individual holders,” it is a derivative suit that must be resorted to by the stockholder, and not an individual suit or representative suit.

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Ellaine Anne L. Bernardino is a junior associate of Mata-Perez, Tamayo and Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.

https://www.manilatimes.net/2021/04/29/business/columnists-business/stockholder-suits/868460/