FILIPINAS PORT SERVICES INC v. GO, ET AL.

FACTS:

            The case involves a petition for review on certiorari.

            We have here Eliodoro C. Cruz suing on behalf of the stockholders of Filipinas Port Services alleging that there has been numerous cases of mismanagement by the board of directors:

1. creation of an executive committee not provided for in the by-laws of the corporation
2. disproportionate increase in the salary of officials
3. re-creation of already existing positions
4. creation of additional positions with holders not doing any work to deserve any monthly remuneration.

He prayed for the return of the salary received by all the unnecessarily appointed members.

The Trial Court sided with the respondent and ruled that the creation of the executive committee and the additional position was legitimate given that it was provided by the corporation’s by-law. However, the prayer for the return of salaries received was granted, even if the positions and the committee were valid, for the court ruled that Filipinas Port Services is not a big corporation requiring multiple executive positions.

The respondents appealed the decision and they received a favourable decision as the Court of Appeals granted the respondents’ appeal, reversed and set aside the appealed decision of the trial court and accordingly dismissed the so-called derivative suit filed by Cruz, et al.,

Cruz did not take the decision sitting down, hence the petition.

To counter the appeal filed by Cruz, respondents also claim that what Cruz filed is not a derivative suit.

      The petition was denied and the challenged decision of the CA was affirmed. Only, the Supreme Court clarified the issue involving the legitimacy of the derivative suit.                   

ISSUE: 

Was the case filed by Cruz, on behalf of Filipinas Port Services Inc., a derivative suit?

HELD:

YES.

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder or an individual trustee may be permitted to institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal part.

          Here, the action below is principally for damages resulting from alleged mismanagement of the affairs of Filport by its directors/officers, it being alleged that the acts of mismanagement are detrimental to the interests of Filport.  Thus, the injury complained of primarily pertains to the corporation so that the suit for relief should be by the corporation.  However, since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly institute a “derivative suit” to vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real party-in-interest.

 Besides, the requisites before a derivative suit can be filed by a stockholder or individual trustee are present in this case, to wit:

a)         the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material;

b)         he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea;  and

c)         the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit.

                         

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to have its board of directors remedy what he perceived as wrong when he wrote a letter requesting the board to do the necessary action in his complaint; and (3) the alleged wrong was in truth a wrong against the stockholders of the corporation generally, and not against Cruz or Minterbro, in particular. And while it is true that the complaining stockholder must show to the satisfaction of the court that he has exhausted all the means within his reach to attain within the corporation itself the redress for his grievances, or actions in conformity to his wishes, nonetheless, where the corporation is under the complete control of the principal defendants or other trustees, as here, there is no necessity of making a demand upon the directors. The reason is obvious: a demand upon the board to institute an action and prosecute the same effectively would have been useless and an exercise in futility.

Bottom line, when it comes to cases involving two or more trustees, an individual trustee can file a derivative suit duly following the requisites without the need to exhaust internal remedies  where the trusteeship is under the complete control of the other trustees for it will be a waste of time.