Name: SARACHO, Nicole R.
Topic: Derivatives of Suits
Law or Provision Cited: Rule 8, Section 1 of Interim Rules of Procedure
for Intra Corporate Controvercies. Section 23 Corporation Code
Title: Santiago Cuam Jr, et al. v Miguel Ocampo, et al
Source, Date: G.R. No, 18145-56, 4 December 2009
Facts:
Philippine Racing Club, Inc. (PRCI) is a corporation organized and
established to conduct horse racing and promote the better breeding
of horses in the Philippines. Under its franchise, PRCI may operate only
one racetrack. Under it Article of Incorporation, it included a secondary
purpose of developing and selling real properties into realty projects.
PRCI owns two real properties, the Makati and Cavite Property. PRCI
wished to convert Makati Property, its Sta. Ana racetrack into urban
residential and commercial use.
So that PRCI could continue to focus its effort on pursuing its core
business competence of horse racing, instead of organizing and
establishing a new corporation for the realty project, PRCI management
opted to acquire another domestic corporation, JTH Davies Holdings
(JTH).
PRCI Board of DIretors held a meeting wherein they affirmatively
pass and approve the acquisition of the stocks of JTH but however was
dissented by one of the directors, Atty. Brigido Dulay.
It was then determined that the Makati property, could be
transferred to JTH in exchange for the unissued portion of the latters
recently increase authorized capital stock. The differenc between the
total zonal value of the Makati property and the aggregate par value of
the JTH shares to be issued in exchange for the same, would be
reflected as additional paid-in capital of PRCI in JTH. The said exchange
was approved by the PRCI Board of Directors but was opposed again by
Dulay.
The property for shares exchange between PRCI and JTH was
supposed to be presented for approval to stockholders under their
special agenda in the scheduled Annual Stockholders Meeting.
However, respondents Miguel et al as minority stockholders of PRCI
filed before RTC a Complaint, denominated as a Derivative Suit with a
prayer for Issuance of TRO/Preliminary Injunction, against the directors
of PRCI and/or JTH based on their alleged fraudulent devices or
schemes in the transactions.
RTC granted the complaint. Respondents appealed to the CA
contended that the complaint be dismissed for it contained mere
allegations. CA ruled that there was no reason to dismiss the complaint
providing that it complied with the requisites under Rule 8, Section 1 of
Interim Rules of Procedure for Intra Corporate Controvercies, a
stockholder or member may bring an action in the name of corporation
through a Derivative Action.
Hence, this petition.
Issue: Whether or not respondents complaint constituted a valid
derivative suit
Held: NO.
Ruling:
The board of directors of a corporation is a creation of the
stockholders. The board of directors, or the majority thereof, controls
and directs the affairs of the corporation; but in drawing to itself the
power of the corporation, it occupies a position of trusteeship in
relation to the minority of the stock. Where the majority of the board of
directors fraudulently disposes of its properties, or performs ultra vires
acts, the court, upon showing that intracorporate remedy is unavailing,
will entertain a suit filed by the minority members of the board of
directors, for and in behalf of the corporation, to prevent the
commission of illegal acts and otherwise redress the injuries of the
minority stockholders against the wrongdoing of the majority. The
action in such a case is said to be brought derivatively in behalf of the
corporation to protect the rights of the minority stockholders thereof
A derivative suit must be differentiated from individual and
representative or class suits. Where a stockholder or member is denied
the right of inspection, his suit would be individual because the wrong
is done to him personally and not to the other stockholders or the
corporation. Where the wrong is done to a group of stockholders, as
where preferred stockholders rights are violated, a class or
representative suit will be proper for the protection of all stockholders
belonging to the same group.
According to the SC, a shareholder's derivative suit seeks to
recover for the benefit of the corporation and its whole body of
shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failure of the corporation to act.
Thus, the actionis derivative, i.e., in the corporate right, if the
gravamen of the complaint is injury to the corporation, or to the whole
body of its stock and property without any severance or distribution
among individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets. In contrast, "a
direct action is one filed by the shareholder individually (or on behalf of
a class of shareholders to which he or she belongs) for injury to his or
her interest as a shareholder. The two actions are mutually exclusive:
i.e.,the right of action and recovery belongs to either the Shareholders
(direct action) or the corporation (derivative action).
Derivative suit regarding the acquisition of JTH, the SC
ruled that it is dismissible for being moot and academic. PRCI
Resolution of Board of Directors authorized the acquisition by PRCI of
JTH. Respondents Miguel, et al. instituted the derivative suit against
herein petitioners in their capacity as directors of PRCI and/or JTH.
Clearly, the acquisition by PRCI of JTH and the constitution of the JTH
Board of Directors are no longer just the acts of the majority of the
PRCI Board of Directors, but also of the majority of the PRCI
stockholders. By ratification, even an unauthorized act of an agent
becomes the authorized act of the principal. To declare the Resolution
dated 26 September 2006 of the PRCI Board of Directors null and void
will serve no practical use or value, or affect any of the rights of the
parties, because the Resolution of the PRCI stockholders -- approving
and ratifying said acquisition and the manner in which PRCI shall
constitute the JTH Board of Directors -- will still remain valid and
binding. In fact, if the derivative suit, insofar as it concerns the
Resolution dated 26 September 2006 of the PRCI Board of Directors, is
not dismissible for mootness, it is still vulnerable to dismissal for failure
to implead indispensable parties, namely, the majority of the PRCI
stockholders.
Derivative suit regarding the property for shares
exchange between PRCI and JTH, the SC proposed corporate
action; and that at the time respondents Miguel, et al., instituted the
derivative suit, PRCI stockholders had yet to vote on the intended
property-for-shares exchange between PRCI and JTH. Respondents
Miguel, et al., themselves caused the unavailability of appraisal rights
by filing the Complaint, in which they prayed that the 11 May 2007
Resolution of the Board of Directors approving the property-for-shares
exchange between PRCI and JTH be declared null and void, even before
the said Resolution could be presented to the PRCI stockholders for
approval or rejection. More than anything, the argument of
respondents Miguel, et al., raises questions of whether their derivative
suit was prematurely filed for they had failed to exert all reasonable
efforts to exhaust all other remedies available under the articles of
incorporation, by-laws, laws, or rules governing the corporation or
partnership, as required by Rule 8, Section 1(2) of the IRPICC. The
obvious intent behind the rule is to make the derivative suit the final
recourse of the stockholder after all other remedies to obtain the relief
sought have failed.
