G.R. No. 174353, 10 September 2014

FACTS:

Nestor Ching and Andrew Wellington filed a Complaint with the RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board of Directors and officers. The complaint alleged that SBGCCI sold shares to plaintiffs at US$22,000.00 per share, presenting to them the Articles of Incorporation. However, an amendment to the Articles of Incorporation was approved by the Securities and Exchange Commission (SEC).

Petitioners claimed that SBGCCI did not disclose to them the above amendment which allegedly makes the shares non-proprietary as it takes away the right of the shareholders to participate in the pro-rata distribution of the assets of the corporation in case of dissolution. This is fraud against the stockholders who only discovered the amendment when they filed a case for injunction to restrain SBGCCI from suspending their rights to use all the facilities of the club.

Furthermore, petitioners alleged that the Board of Directors and officers of the corporation did not call any stockholders’ meeting from the time of the incorporation. Neither the financial statements of the corporation nor the financial report of the operation of SBGCCI was also furnished by the directors and officers. Petitioners also claim that SBGCCI presented to the SEC an amendment to its By-Laws suspending the voting rights of the shareholders except for the five founders’ shares. Said amendment was allegedly passed without any stockholders’ meeting or notice. Several instances of fraud in the management allegedly committed by its Board of Directors and officers were also enumerated.

The RTC issued an order dismissing the complaint for being a derivative suit without complying with the second and fourth requirements stated in the Interim Rules in order for its institution to be proper. This was affirmed by the CA. Contrary to the ruling, the petitioners assert that the present case was not a derivative suit.

ISSUE:

Whether the complaint is a derivative suit.

RULING:

No. The nature of an action, as well as which court or body has jurisdiction over it, is determined based on the allegations contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein. While there were allegations in the complaint of fraud in their subscription agreements, petitioners do not pray for the rescission of their subscription or seek to avail of their appraisal rights.

Instead, they ask that defendants be enjoined from managing the corporation and to pay damages for their mismanagement. Petitioners’ only possible cause of action as minority stockholders against the actions of the Board of Directors is the common law right to file a derivative suit. The legal standing of minority stockholders to bring derivative suits is not a statutory right, there being no provision in the Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity. However, a derivative suit cannot prosper without first complying with the legal requisites for its institution.

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra Corporate Controversies imposes the following requirements for derivative suits:

(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;
(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;
(3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit.

In the case at bar, it is found that petitioners failed to comply with the second requirement. The complaint contained no allegation of any effort to avail of intra-corporate remedies. Even if petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the Complaint is not a useless formality which may be disregarded at will.

The RTC, however, is not correct in ruling that the fourth requirement is also not complied with. Although the shareholdings of petitioners are indeed only 2 out of the 409 alleged outstanding shares or 0.24%, such shareholdings are enough in order for a member or a minority stockholder to file a derivative suit for and in behalf of a corporation.

*Case Digest by Rezeile S. Morandarte, Refresher, Andres Bonifacio College, SY 2019 – 2020