Part 3 Continuation General principles in Commercial Law

A derivative suit is an action filed by stockholders to enforce a corporate action. It is an exception to the general rule that the corporation’s power to sue is exercised only by the board of directors or trustees. Hi-Yield Realty, Incorporated v. Court of Appeals, 608 Phil. 350, 358 (2009) [Per J. Quisumbing, Second Division], citing R.N. Symaco Trading Corporation v. Santos, 504 Phil. 573, 589 (2005) [Per J. Callejo, Sr., Second Division].

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be sued and

are in control of the corporation. It is allowed when the “directors [or officers] are guilty of breach of . . . trust, [and] not of mere error of judgment. Hi-Yield Realty, Incorporated v. Court of Appeals, 608 Phil. 350, 358 (2009) [Per J. Quisumbing, Second Division]. See also Asset Privatization Trust v. Court of Appeals, 360 Phil. 768, 805 (1998)

[Per J. Kapunan, Third Division] and Republic Bank v. Cuaderno, 125 Phil. 1076, 1082 (1967) [Per J. J.B.L. Reyes, En Banc] Bitong v. Court of Appeals, 354 Phil. 516, 545 (1998) [Per J. Bellosillo, First Division].

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party. Hi-Yield Realty, Incorporated v. Court of Appeals.

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even 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 the stockholders, to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to adopt suitable measures for its protection. Cua, Jr. v. Tan, G.R. Nos. 181455–56 and 182008, December 4, 2009, 607 SCRA 645, 696 [Per J. Chico-Nazario, Third Division].

Rule 8, Section 1 of the Interim Rules of Procedure for Intra- Corporate Controversies (Interim Rules) provides the five (5) requisites for filing derivative suits:

SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided,  that:

(1) He 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;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available

under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit. In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be “in the name of [the] corporation or association. . . .” This requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that “[a]mong the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join [him].” This principle on derivative suits has been repeated in, among other cases, Tam Wing Tak v. Hon. Makasiar and De Guia66 and in Chua v. Court of Appeals, which was cited in Hi-Yield Realty, Incorporated v. Court of Appeals.

Moreover, it is important that the corporation be made a party to the case. This court explained in Asset Privatization Trust v. Court of Appeals why it is a condition sine qua non that the corporation be impleaded as party in derivative suits. Thus: Not only is the corporation an indispensible party, but it is also the present rule that it must be served with process. The reason given is that the judgment must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same defendants for the same cause of action. In other words the corporation must be joined as party because it is its cause of action that is being litigated and because judgment must be a res judicata against it.

In the same case, this court enumerated the reasons for disallowing a direct individual suit. The reasons given for not allowing direct individual suit are:

(1) . . . “the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders.” In other words, to allow shareholders to sue separately would conflict with the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of Section 16 of the Corporation Law. . .”;

(3) the filing of such suits would conflict with the duty of the management to sue for the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the damages recoverable by the corporation for the same act.

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Individual suits are filed when the cause of action belongs to the individual stockholder personally, and not to the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of dividends

to a stockholder. If the cause of action belongs to a group of stockholders, such as when the rights violated belong to preferred stockholders, a class or representative suit may be filed to protect the stockholders in the group. Cua, Jr. v. Tan, G.R. Nos. 181455–56 and 182008, December 4, 2009, 607 SCRA 645, 690 [Per J.

Chico-Nazario, Third Division].

Corporations have a personality that is separate and distinct from their stockholders and directors. A wrong to the corporation does not necessarily create an individual cause of action. “A cause of action is the act or omission by which a party violates the right of another.” A cause of action must pertain to complainant if he or she is to be entitled to the reliefs sought.