Published — June 6, 2022
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
After reading “What is a Derivative Suit and its Requisites?”, read also “What is the Binding Effect of Bylaws of a Corporation?”
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A derivative suit is an action filed by stockholders to enforce a corporate action.
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A stockholder may bring an action in the name of a corporation or association as the case may be.
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In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party.
The rule says:
Rule 8 of the Interim Rules of Procedure for Intra-Corporate Disputes provides for the requisites of a derivative action. It states that:
“Section 1. Derivative Action. – A stockholder may bring an action in the name of a corporation or association as the case may be, provided that:
- 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;
- 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;
- No appraisal rights are available for the act or acts complained of; and
- The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
Section 2. Discontinuance. – A derivative action shall not be discontinued, compromised, or settled without the approval of the court. During the pendency of the action, any sale of shares of the complaining stockholder shall be approved by the court. If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interests it determines will be so affected.”
Jurisprudence says:
“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.” (Villamor, Jr. v. Umali, G.R. No. 172843, September 24, 2014)
In the case of Cua, et.al. v. Tan, et.al. (G.R. No. 181455-56, December 04, 2009), the Supreme Court has extensively explained the difference between a derivative suit and a class suit. It provides that:
“Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be classified into individual suits, class suits, and derivative 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. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a stockholder or member may find that he has no redress because the former are vested by law with the right to decide whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a “derivative suit.” It has been proven to be an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in interest.”
“Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members may bring an action in the name of the corporation or association provided that he (the minority stockholder) exerted all reasonable efforts and allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies available under the articles of incorporation, by-laws or rules governing the corporation or partnership to obtain the reliefs he desires.” (Ching v. Subic Bay Golf and Country Club, Inc., G.R. No. 174353, September 10, 2014)
Who is a real party in interest in a derivative suit?
“In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party.
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.” (Villamor, Jr. v. Umali, G.R. No. 172843, September 24, 2014)
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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