Derivative suits

Published July 22, 2021, 7:00 AM

by Atty. Jun De Zuñiga

Corporations can sue only by and through the authority of its board of directors. The stockholders, who are the owners, by law and necessity, are deemed to have turned over the complete management of the enterprise to their representatives who are called directors. If these directors, by default, unwillingness or breach of loyalty, do not take any action to protect the corporation from ultra vires or injurious acts, a stockholder, as an exception, can initiate legal action under the principle of derivative suits.

A derivative suit is defined as one brought by one or more stockholders in the name and on behalf of the corporation to redress wrongs committed against it whenever its officials refuse to sue, or are the ones to be sued, or hold control of the corporation (De Leon, The Corporation Code, p. 577). In cases of mismanagement where the wrongful acts are committed by the directors themselves, a stockholder 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 then be helpless to seek remedy. Common law thus recognized the right of a stockholder to sue through what is now known as a derivative suit (Herbosa&Recalde, The Revised Corporation Code, p. 263).

 There is no explicit provision in the Revised Corporation Code on derivative suits. Such recourse can however be implied from definitions on the liability of directors. Under Section 30 of said Code, directors who approve patently illegal acts, or who are guilty of gross negligence, or who acquire any pecuniary interest in conflict with their duty, shall be liable for damages. Under Section 33 of the same Code, where a director acquires a business opportunity which should belong to the corporation, thereby profiting therefrom, said director must account for and refund to the corporation all such profits. And under Section 64 of the same Code, a director who consents to the issuance of watered stocks (where the consideration is less than their par value) shall be liable solidarily with the stockholder concerned for the difference in values.

There are prerequisites for the filing of a derivative suit, but due to space constraints, I will just highlight three of them. First, the suit should be brought in the name and on behalf of the corporation for a wrong done on the corporation and not one done to the stockholder. It is a suit by a stockholder  to enforce a corporate cause of action (De Leon, ibid., p. 578). Second, there must be demand upon the board to redress the wrong. The purpose is to make the derivative suit the final recourse of the stockholder, after all other remedies had failed (Herbosa&Recalde, ibid., p. 164, citing Yu, et al. vs.Yukayguan, G. R. No. 177549, June 18, 2009).

Third, the stockholder cannot exercise his appraisal right. The rules take out cases when the petitioning stockholder may exercise or should have exercised his appraisal right (a remedy to exit from the corporation upon payment to him of the fair value of his shares). Its exercise is regarded to be an effective remedy than filing a derivative action (Herbosa&Recalde, ibid., p. 265). This leads now to my discussion of the appraisal right in a subsequent article.

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The above comments are the personal views of the writer. His email address is [email protected]