An Introduction To Remedial Rights of Stockholders

This article talks about the remedial rights of stockholders. Times may arise when a stockholder or a member (hereinafter collectively referred to as “stockholder”) of a corporation has become aggrieved on account of a wrongful or fraudulent corporate act or omission.

Other stockholders, directors and/or officers may have caused such unlawful act or omission and injured the stockholder, a group of stockholders to which he belongs, or the corporation itself. To rectify such wrongdoings, a stockholder must properly exercise his right as a stockholder to bring an action to court. This right is also known as “remedial rights.”

Remedial rights of stockholders | Actions 

A stockholder may sue in any of the three (3) capacities: as an individual; as part of a group or specific class of stockholders; or as a representative of the corporation.((Florente vs. Florente, G.R. No. 174909, January 20, 2016))

As such, a stockholder can file any of the following suits:

1. An individual suit;
2. A representative suit; or
3. A derivative suit.

Individual Suit

An individual suit is an action brought by the shareholder in his own name when a wrong is personally inflicted against him.((Cua, Jr. vs. Tan, G.R. No. 181455-56, December 4, 2009)) For example, should a stockholder be denied his right of inspection, the proper remedy would be an individual suit because the wrong is done to him personally, and not to the other stockholders or the corporation.((Id.)) The stockholder may file the said suit without the authority of the board of directors since the wrong committed against him is personal.

In the case of Lim et. al vs. Lim-Yu,((G.R. No. 138343, February 19, 2001)) the Supreme Court (SC) held that the suit filed by respondent is actually an individual suit instead of a derivative suit (which will be discussed later) because she was complaining only of the violation of her preemptive right under Section 39 of the Corporation Code.((Id.))

She was merely praying that she be allowed to subscribe to the additional issuances of stocks in proportion to her shareholdings to enable her to preserve her percentage of ownership in the corporation.((Id.)) She was therefore not acting for the benefit of the corporation.((Id.)) As such, her suit is an individual suit because she was acting in representation of her personal interest and not that of the corporation.((Id.))

Hence, when a shareholder’s cause of action against the corporation is solely personal, he must file an individual suit against such corporation.

Representative Suit

A representative suit is one filed by a stockholder for himself and on behalf of a group shareholders to which he belongs to rectify a wrong caused to such group.((Supra., Note 2)) In other words, to avail such suit, the wrong must be committed against the group of stockholders to which the suing stockholder belongs. This means that the group must share the same interest which they seek to protect against the corporation.((Id.))

Derivative suit

A derivative suit is an action brought in the name and on behalf of the corporation to redress wrongs committed against it, or to protect corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or have control of the corporation.((Timoteo Aquino & Jose Sundiang, Reviewer on Commercial Law [2017, ed]))

This suit is proper when the wrong committed is against the corporation itself. As the shareholder is suing on behalf of the corporation, it is necessary that the corporation is impleaded (or named as a party) in the case.((See Republic Bank vs. Cuaderno, G.R. No. L-22399, March 30, 1967))  In this kind of action, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party.((Hi-Yield Realty vs. Court of Appeals, G.R. No. 168863, June 23, 2009))

The stockholder’s right to file a derivative suit is neither provided for under the provisions of the Corporation Code or even in the Securities Regulation Code, but such right is impliedly recognized when said laws imposed liabilities on corporate directors or officers who would violate their fiduciary rights and/or cause damages to the corporation and its stockholders.((See Yu, et. al. vs. Yukayguan, et. al., G.R. No. 177549, January 18, 2009))

Thus, in cases where the directors or trustees themselves have mismanaged the corporation and naturally would not bring a suit for their own mismanagement, a concerned shareholder may file a derivative suit on behalf of the corporation.((Supra., Note 2))

This remedy serves as a principal defense of minority shareholders against abuses by the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation’s rights.((Commart (Phils.) Inc., et. al. vs. Securities and Exchange Commission and Magtulac, G.R. No. 85318, June 3, 1991))

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (hereinafter the “Interim Rules”)((A.M. NO. 01-2-04-SC, March 13, 2001)) enumerates the five (5) requisites for filing a derivative suit:

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:((Id.))

(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;((Id.))

(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;((Id.))

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

(4) The suit is not a nuisance or harassment suit.((Id.))

To be qualified to file a derivative suit, the suing stockholder must be an existing stockholder at the time the cause of action accrued. If the cause of action is continuing, then the stockholder must be a stockholder at the time of the cause of action accrued. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own right, or the redress of a wrong committed against him, individually, but on behalf and for the benefit of the corporation.((San Miguel Corporation vs. Khan, G.R. No. 85339, August 11, 1989)) As long as the stockholder owns one (1) share of stock, then he has the right to bring a derivative suit on behalf of the corporation.

In Chua vs. Wellington,((See Ching vs. Subic Bay Golf and Country Club, G.R. No. 174353, September 10, 2014)) the SC ruled that although the petitioners own only two (2) out of the 409 alleged outstanding shares or 0.24%, such ownership is enough to give them the right to file the derivative suit.

It is equally important that the suing stockholder must first exhaust all efforts and remedies available under the articles of incorporation, by-laws, and other laws and rules governing the corporation or partnership.((Id.))

The purpose for this rule is “to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.”((Supra., Yu vs. Yukayguan, G.R. No. 177549, June 18, 2009))  The court will dismiss the case if it finds that the stockholder has failed to exhaust all remedies available to him.

To further qualify for the filing of a derivative suit, the stockholder must allege in the suit that there were no appraisal rights available for the acts complained of.((See Forest Hills Golf and Country Club, Inc. vs. Fil- Estate Properties, Inc., G.R. No. 206649, July 20, 2016)) Appraisal right refers to the right of the stockholder to get out of the corporation by dissenting and demanding the payment of the fair market value of his shares.((Supra., Note 2)) The appraisal right may only be exercised in the following instances:

1. In case an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;((Section 80, RA 11232, Revised Corporation Code))
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Revised Corporation Code;((Id.))
3. In case of merger or consolidation; and((Id.))
4. In case of investment of corporate funds for any purpose other than the primary purpose of the corporation.((Id.))

As mentioned above, the filing of a derivative suit is a last resort for a stockholder to exercise after all the remedies have been exhausted.((Supra., Note 20)) An appraisal right is a remedy for the stockholder who does not agree with the business decisions of the directors and trustees of the corporation. When such right is available to the shareholder to exercise, he cannot file a derivative suit.

Furthermore, the suit must not be a nuisance or harassment suit. Otherwise, the court shall dismiss the same.((Supra., Note 12))

A fifth requisite for a derivative suit is implied in the first paragraph of the Interim Rules and is settled in jurisprudence,((See Rocille Aquino-Tambasacan, 2020, Primer on the Revised Corporation Code [Republic Act No. 11232])) which provides that a stockholder must file the suit in the name of the corporation or association.

In Western Institute of Technology, Inc., et al. vs. Salas, et al.,((G.R. No. 113032, August 21, 1997)) the petitioners assert that the present case is a derivative suit on behalf of the corporation to annul Resolution No. 48 for granting to respondents retroactive monthly compensation in their capacities as corporate officers.((Id.))

The Court disagreed with the contention of petitioners because among 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 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.((Id.))

This was not complied with by the petitioners either in their complaint before the trial court nor in the petition to the SC which, in part, merely states that “this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098.”((Id.))

To reiterate, the stockholder must allege in his suit that he is filing based on derivative suit on behalf of the corporation and all other stockholders who are in the same situation as him.((Id.)) This is a required condition to bind the corporation with regard to the judgment of the court.((See Asset Private Privatization Trust vs. Court of Appeals, G.R. No. 121171 December 29, 1998)) Consequently, it is important that the corporation be impleaded as party in derivative suit since the cause of action belongs to the corporation and not the minority shareholder, and because judgment must be a res judicata against it.((Supra., Note 15))

In sum, all the requirements for derivative suit must be met so that the court may take cognizance of the cause of action by the minority stockholder.

When to file a suit

As a general rule, management decisions are left to the discretion of officers and directors of a corporation, and courts are barred from interfering in the business judgments of a corporation so long as its acts are made in good faith.((Montelibano v. Bacolod-Murica Milling Co., G.R. No. L-15092, May 18, 1962)) Courts may not reverse contracts entered into by the board of directors by mere petition of the stockholders, especially when the cause of the losses is merely an error in business judgment, not amounting to bad faith or negligence,((See Filipinas Port Services vs. Go, G.R. No. 161886, March 16, 2007)) and such acts are done within the scope of the duties of the board.

However, this rule is not absolute. Courts may inquire unto contracts that are –

1. Unconscionable and oppressive as to amount to wanton destruction to the rights of the minority;((Ong vs. Tiu, G.R. No. 144476, April 8, 2003)) or
2. When there is bad faith or gross negligence by the directors.((Republic Communications Inc vs. Court of Appeals, G.R. No. 135074, January 29, 1999))

Thus, where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion — and intra-corporate remedy is futile or useless, a stockholder may institute a suit on behalf of himself and other stockholders and for the benefit of the corporation.((Supra., Note 2))

Where to file such remedial suits of a stockholder

The Interim Rules of Procedure for Intra-Corporate Controversies((Interim Rules of Procedure for Intra-Corporate Controversies, Rule 1, Section 5)) provides that civil cases under its jurisdiction shall be commenced and tried in the Regional Trial Court (RTC) that has jurisdiction over the principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or association is in Metro Manila as registered in the Securities and Exchange Commission, the action must be filed in the city or municipality where the head office is located.((Ibid.))

The cases covered under the jurisdiction of the RTC are the following:

1. Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of any corporation, partnership, or association;((Id.))
2. Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members, or associates; and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively;((Id.))
3. Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations;((Id.))
4. Derivative suits; and((Id.))
5. Inspection of corporate books.((Id.))

Numbers 1 to 3 and 5 may pertain to an individual suit or a representative suit, depending on whether the injury inflicted is against an individual stockholder or a group of stockholders. As for number 4, it clearly pertains to a derivative suit that a stockholder may file on behalf of the corporation and all the shareholders who wish to join him.

Final Thoughts

The stockholder, regardless of the number of his shares, and the corporation itself are not remedially powerless when directors, officers, or other stockholders have wronged them. As discussed above, there are legal remedies available for rectifying a wrongful or fraudulent corporate action that has injured the stockholder or the corporation. Therefore, directors, trustees, and majority stockholders have no absolute power. They are not immune from suits, and they cannot make an excuse out of their majority control of the corporation to further their own interests at the expense of the corporation and its minority stockholders.