Supreme Court issues rules on derivative suits

MANILA, Philippines - The Supreme Court (SC) has issued rules on the filing of derivative suits in companies whose stockholders are involved in litigation.

The High Court said there are mandatory requirements before courts can give due course to derivative suits, or legal actions that may be taken by a stockholder on behalf of a corporation or association.

“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,” explained the third division of the Court in a decision penned by Associate Justice Minita Chico-Nazario.

The High Court 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.

But the Court stressed that there are mandatory requirements before a derivative suit can be given due course.

Citing Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, the SC said derivative actions may be filed based on four conditions.

Frist, the Court said that the suing party should be a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;

The petitioner should have exerted all reasonable efforts, and alleged 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;

The SC said there should also be no appraisal rights available for the act or acts complained of, and, lastly, the suit should not be a nuisance or harassment.

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.

The SC issued the ruling through a case that stemmed from the petition of Anthony Yu against his younger half-brother Joseph Yukayguan and other who were all shareholders of Winchester Industrial Supply, Inc., a company engaged in hardware and industrial equipment business. Named respondents were members of the Yukayguan family, including patriarch Joseph, matriarch Nancy, and the couple’s children Jerald Nerwin and Jill Neslie.

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

The SC ruled in favor of the petitioner.

Concurring in the decision were Associate Justices Consuelo-Ynares Santiago, Presbiterio Velasco Jr., and Antonio Eduardo Nachura.