SC clarifies rules on corporate disputes

11/01/2009

The Supreme Court (SC) has clarified rules covering the filing of corporate disputes.

In a decision by Associate Justice Minita Chico-Nazario of the SC’s Third Division, the tribunal said there are mandatory requirements before courts can give due course to derivative suits – or legal actions that may be taken by a stockholder(s) on behalf of a corporation or association.

Concurring with Nazario’s decision were Associate Justices Consuelo-Ynares Santiago, Presbiterio Velasco Jr. and Antonio Eduardo Nachura.

The case stemmed from the petition of Anthony Yu et al against his younger half-brother Joseph Yukayguan et al, who were all shareholders of Winchester Industrial Supply Inc., a company engaged in hardware and industrial equipment business.

Accusing his older brother’s family of misappropriating funds and assets of the company, Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial Court dismissed the case, saying Yukayguan failed to follow and observe the essentials for filing of a derivative suit or action. The ruling was upheld but later reversed by the Court of Appeals, prompting Yu to elevate the matter to the SC.

Ruling in favor of Yu, the high court said: “The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation.”

The SC said 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. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress.

It stressed, however, that there are mandatory requirements before a derivative suit can be given due course by the Court. Citing Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the SC said derivative actions may be filed provided that the suing party 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; and 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.

As additional requirements, the SC said there must be no appraisal rights — which would allow a stockholder to sell his holdings back to the company – available and the suit is not a nuisance or harassment suit.

The high court also stressed that a stockholder’s right to institute a derivative suit is not based on any provision of law but based merely on equity. Accordingly, it can only be allowed after first strictly complying with the legal requirements for its institution. Benjamin B. Pulta

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