On Derivative Suits
On March 1, 2004, Pasig Printing Corporation (PPC) obtained an option to lease portions of Mid-Pasig Development Corporation’s (MID-PASIG) property, including a prime property (ROCKLAND) occupied by MC Home Depot (MCHD).
On November 11, 2004, PPC’s board of directors issued a resolution waiving all its rights, interests, and participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr. (VILLAMOR). PPC received no consideration for this waiver in favor of Villamor’s law firm.
On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA) with MCHD. Under the MOA, MCHD would continue to occupy the area as PPC’s sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of ₱4,500,000.00 plus goodwill of ₱18,000,000.00
In compliance with the terms of the MOA, MCHD issued 20 post-dated checks representing rental payments for one year and the goodwill money. The checks were given to Villamor who did not turn these or the equivalent amount over to PPC, upon encashment.
Hernando Balmores (RESPONDENT) , a stockholder and director of PPC, wrote a letter addressed to PPC’s directors (PETITIONERS) , informing them that Villamor should be made to deliver to PPC and account for MCHD’s checks or their equivalent value.
Due to the alleged inaction of PETITIONERS, RESPONDENT filed with the Regional Trial Court an intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-Corporate Controversies (Interim Rules) against PETITIONERS for their alleged devices or schemes amounting to fraud or misrepresentation “detrimental to the interest of the corporation and its stockholders.”
RESPONDENT alleged in his complaint that because of petitioners’ actions, PPC’s assets were “. . . not only in imminent danger, but have actually been dissipated,lost, wasted and destroyed.” He also prayed that a receiver be appointed from his list of nominees. He also prayed for PETITIONERS’ prohibition from “selling, encumbering, transferring or disposing in any manner any of PPC’s properties, including the MCHD checks and/or their proceeds.” He further prayed for the accounting and remittance to PPC of the MCHD checks or their proceeds and for the annulment of the board’s resolution waiving PPC’s rights in favor of VILLAMOR’s law firm.
Ruling of the RTC
In a resolution dated 15 June 2005, the RTC denied RESPONDENT’s prayer for the appointment of a receiver or the creation of a management committee.
According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by PPC’s board of directors, waiving its rights to the option to lease contract in favor of Villamor’s law firm, must be accorded prima facie validity.
The trial court also found that there was “no clear and positive showing of dissipation, loss, wastage, or destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders, partieslitigants or the general public.” The board’s failure to recover the disputed amounts was not an indication of mismanagement resulting in the dissipation of assets.
The trial court noted that PPC was earning substantial rental income from its other sub-lessees.
The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as an indispensable party, without which, there would be no final determination of the action.
Ruling of the CA
The Court of Appeals (CA) reversed the trial court’s decision, and issued a new order placing PPC under receivership and creating an interim management committee.
The Court of Appeals also ruled that the case filed by respondent Balmores with the trial court “[was] a derivative suit because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors].
Whether the CA correctly characterized RESPONDENT’s action as a derivative suit.
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.
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.”
In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere nominal party.
RESPONDENT’s action in the trial court failed to satisfy all the requisites of a derivative suit.
RESPONDENT failed to exhaust all available remedies to obtain the reliefs he prayed for. Though he tried to communicate with PPC’s directors about the checks in Villamor’s possession before he filed an action with the trial court, RESPONDENT was not able to show that this comprised all the remedies available under the articles of incorporation, by-laws, laws, or rules governing PPC.
Granting that (a) RESPONDENT’s attempt to communicate with the other PPC directors already comprised all the available remedies that he could have exhausted and (b) the corporation was under full control of PETITIONERS that exhaustion of remedies became impossible or futile, RESPONDENT failed to allege that appraisal rights were not available for the acts complained of here.
Neither did RESPONDENT implead PPC as party in the case nor did he allege that he was filing on behalf of the corporation.
The non-derivative character of RESPONDENT’s action may also be gleaned from his allegations in the trial court complaint. In the complaint, he described the nature of his action as an action under Rule 1, Section 1(a)(1) of the Interim Rules, and not an action under Rule 1, Section 1(a)(4) of the Interim Rules, which refers to derivative suits.
RESPONDENT’s intent to file an individual suit removes it from the coverage of derivative suits.