by: J. Sixto C. Marella, Jr.
Derivative suits are actions filed in
court by a stockholder or group of stockholders irrespective of
number of shares held in cases where “directors are guilty of
breach of trust, not of mere error of judgment or abuse of
discretion and intra-corporate remedy is futile or useless, done for
the benefit of the corporation, to bring about redress of the wrong
inflicted directly upon the corporation and indirectly upon the
stockholders.” There is no express provision in the
Corporation Code on derivative suits but the right of a stockholder
to initiate it has long been recognized by courts of common law,
founded on equity. There are various theories to explain the grant
of this right.
One theory is, the suit is an
exceptional method of procedure to give a remedy for a corporate
wrong affecting the shareholders indirectly which would otherwise
escape redress, perhaps by the fraud of the wrongdoers themselves.
Another theory is that “the right
of the stockholder to sue exists because of special injury to him for
which he is otherwise without redress.” This idea that the
plaintiff sues because of the special indirect damage to himself as a
shareholder by the wrong to the corporation and its assets is not an
adequate explanation of the basis of the shareholders' suit.
It has been held in
Pascual vs. Del Saz Orozco, that it became gradually apparent
that frequently the corporation was helpless to institute the suit.
It was found that where the guilty parties themselves control the
board of directors and also a majority of the stocks that the
corporation was in their power, was unable to institute suit, and
that the minority of the stockholders were being defrauded of their
rights and were without remedy. The time came when the minority of
the stockholders of the defrauded corporation – the corporation
itself being controlled by guilty parties were given a standing in
court for the purpose of taking up the cause of the corporation, and
in its name and stead, of bringing the guilty parties to account.
For the action to prosper, it is
necessary to show that the aggrieved party is the corporation and the
cause is the willful act of the director or officer, resulting in
damage or prejudice. Further, the following must be shown—
- the stockholder or member bringing the
suit must have exhausted his remedies within the corporation; i.e.,
he has made a demand on the directors or trustees and the latter
failed or refused to do so. This demand however is not necessary
where it would be futile to make it, as where the majority of the
directors or trustees are guilty of the wrong complained of.
- the stockholder or member must have
been one at the time the transaction or act complained of took place,
unless such transaction or act continues and is injurious to the
stockholder. In one case, the Supreme Court has allowed a derivative
suit brought by the heirs of the stockholder during whose lifetime
the transaction took place.
- any benefit recovered by the
stockholder or member as a result of the derivative suit, whether by
final judgment, by judicial compromise or by extra-judicial
settlement, must be accounted for to the corporation, who is the real
party in interest.
- if the suit is successful, the
stockholder prosecuting the suit is entitled to reimbursement from
the corporation for the reasonable expenses of litigation, including
Derivative suit is to be distinguished
from personal suit of a stockholder, available when, for example, the
right to inspect corporate records is denied, and brings an action in
his name. A class suit, is also different because it refers to suits
involving a class of shareholders whose rights as such are violated,
such as where holders of preferred shares are not given the
preferential treatment they are entitled to.
The shareholder must, however, sue in
good faith for the corporation and not as the representative or
puppet of a rival company.
In one case derivative suit was held
improper where plaintiffs who were minority stockholders sued the
principal officer of the corporation for damages due to mismanagement
and misuse of corporate assets and the relief prayed is for
plaintiffs to be paid the value of their respective participation in
the said assets.
On the matter of
bringing in the corporation as a party plaintiff or defendant, the
prevailing rule is, it should be made a party. It will bar future
actions based on the same act because of res judicata.
In the prosecution of the derivative
suit, the corporation is not allowed to be an active party. It
should not have control over the suit against the real defendants.
It is required to adopt a neutral or passive role with only a limited
power to defend itself, while its volunteer representative conduct
for its benefit the litigation which its management has failed or
refused to bring. It need not answer or take any steps in the
proceedings nor can it assume the status of co-plaintiff. The
plaintiff has the right of control. It is improper to use corporate
funds to give financial aid or to assist the defense of directors,
officers or other defendants. The plaintiff shareholder is entitled
to a fair opportunity to prosecute the lawsuit without having the
resources of the corporation turned against him.
Worthy of note is Reyes
vs. Tan where the appointment of a receiver in a
derivative suit was allowed.
An interesting issue in derivative suits
is whether it is proper in an action against a third person, where
the board of directors, in the exercise of its judgment, decides not
to sue. In the United States, this issue was disposed of in the
manner as follows–
“A corporation's right to sue is
correlative to its right not to sue. Unless an equitable basis for
intervention be shown, an individual stockholder has no more right to
challenge by a derivative suit a decision of the board not to sue a
third person than to so challenge any other decision of the board.
However, where the complaint alleges and it is proved that the
directors acted in bad faith, dishonestly or in breach of trust, or
were under the control of the wrongdoers, then a derivative suit
against a third person may be given due course.”
If the suit is successful, any monetary
award for the injury caused to the corporation shall inure to the
corporation, not to the stockholder who brought the action. He is,
however, entitled to recover costs of litigation including attorney’s