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STUDY ON DERIVATIVE SUIT IN A CORPORATE SETTING
DERIVATIVE SUIT; CONCEPT & REQUISITES
It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trust, not of mere error of judgment or abuse of
discretion, and intracorporate remedy is futile or useless, a stockholder may
institute a suit in behalf of himself and other stockholders and for the benefit of
the corporation, to bring about a redress of the wrong inflicted directly upon
the corporation and indirectly upon the stockholders.
The stockholder's right to institute a derivative suit is not based on any
express provision of The Corporation Code but is impliedly recognized when the
law makes 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. In effect, the suit is an action for specific performance of an obligation
owed by the corporation to the stockholders to assist its rights of action when
the corporation has been put in default by the wrongful refusal of the directors
or management to make suitable measures for its protection. (Bitong vs. CA1)
Definition & Concept; Corporation as the Real Party in Interest
As defined in the case of Lim vs. Lim-Yu2, a derivative suit is an action
brought by minority shareholders in the name of the corporation to redress
wrongs committed against it, for which the directors refuse to sue. It is a
remedy designed by equity and has been the principal defense of the minority
shareholders against abuses by the majority.
Also, a derivative action is a suit by a shareholder to enforce a corporate
cause of action. The corporation is a necessary party to the suit. And the relief
which is granted is a judgment against a third person in favor of the
corporation. Similarly, if a corporation has a defense to an action against it and
is not asserting it, a stockholder may intervene and defend on behalf of the
corporation.
However, it should be noted that not every suit filed in behalf of the
corporation is a derivative suit. For a derivative suit to prosper, it is required
that the minority stockholder suing for and on behalf of the corporation must
allege in his complaint that he is suing on a derivative cause of action on behalf
of the corporation and all other stockholders similarly situated who may wish to
join him in the suit.

1
2

G.R. No. 123553 July 13, 1998

G.R. No. 138343 February 19, 2001

It is a condition sine qua non that the corporation be impleaded as a

party because not only is the corporation an indispensable party, but it is also
the present rule that it must be served with process. The judgment must be
made binding upon the corporation in order that the corporation may get the
benefit of the suit and may not bring subsequent suit against the same
defendants for the same cause of action. In other words, the corporation must
be joined as party because it is its cause of action that is being litigated and
because judgment must be a res adjudicata against it. (Chua vs. CA3)
Common-law basis of the right of a stockholder to bring a derivative
suit on behalf of the corporation
The board of directors of a corporation is a creation of the stockholders
and controls and directs the affairs of the corporation by allegation of the
stockholders. But the board of directors, or the majority thereof, in drawing to
themselves the power of the corporation, occupies a position of trusteeship in
relation to the minority of the stock in the sense that the board should exercise
good faith, care and diligence in the administration of the affairs of the
corporation and should protect not only the interest of the majority but also
those of the minority of the stock. Where a majority of the board of directors
wastes or dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the exercise of its equity
jurisdiction, and upon showing that intracorporate remedy is unavailing, will
entertain a suit filed by the minority members of the board of directors, for and
in behalf of the corporation, to prevent waste and dissipation and the
commission of illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in such a case
is said to be brought derivatively in behalf of the corporation to protect the
rights of the minority stockholders thereof. (Angeles vs. Santos4)

3
4

G.R. No. 150793. November 19, 2004

G.R. No. L-43413 August 31, 1937

Under Section 36 of the Corporation Code 5, read in relation to Section

23 , where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. 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. In such actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest. (First Philippine
International Bank vs. CA7)
The basis of a stockholder's suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its institution. The
most important of these is the bona fide ownership by a stockholder of a stock
in his own right at the time of the transaction complained of which invests him
with standing to institute a derivative action for the benefit of the corporation.
(Bitong vs. CA8)
6

Derivative suits as an exception to the business judgment rule

Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or
foreign, shall give donations in aid of any political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose
or purposes as stated in the articles of incorporation.
6
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the corporation. Any
director who ceases to be the owner of at least one (1) share of the capital stock of the corporation
of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
7
G.R. No. 115849. January 24, 1996
8
G.R. No. 123553 July 13, 1998

It must be clearly understood that the right of the stockholders or

members to bring a derivative suit on behalf of the corporation, is an exception
to the business judgment rule provided under Sec. 23 of the Corporation Code.
Thus, unless the circumstances show that the BOD/BOT are not in a position to
exercise their business judgment (such as when it is the Board itself that
committed an act that caused damage to the corporation or it is a conflict-ofinterest situation, where it cannot be expected that it would used in business
discretion, of whether to file a suit or not, for the best of the corporation),
stockholders or members have no reason under equity considerations to
exercise the business judgment of bringing a suit in behalf of the corporation. 9
Requisites for the proper filing of a derivative suit
A. Jurisprudential requisites:
(a) the party bringing the suit should be a shareholder as of the time of the
act or transaction complained of, and at the time of the filing of the suit,
the number of his shares not being material
(b) the party has tried to exhaust intra-corporate remedies i.e., has made a
demand on the BOD for appropriate relief, but the latter has failed to
refused to heed is 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 particular stockholder bringing the suit. (Filipinas Port
Services, Inc. vs. Go10)

B. Requisites under Section 1, Rule 8 of the Interim Rules of

Procedure for Intra-Corporate Controversies:

A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:
(a) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed;
(b) 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;
(c) The reliefs sought pertain to the corporation
(d) No appraisal rights are available for the acts or acts complained of;
and
(e) The suit is not a nuisance or harassment suit.
Furthermore, Section 2 of the said Interim Rules provides that a
derivative action shall not be discontinued, compromised or settled without
approval of the court. If the court determines that the interest of the
stockholders or members will be substantially affected by the discontinuance,
compromise or settlement, the court may direct that notice, by publication or
otherwise, be given to the stockholders or members whose interest it
determines will be so affected.
PROPER PARTY TO BRING DERIVATIVE SUIT
9

Villanueva, Cesar. Philippine Corporate Law, Manila: Rex Printing Company, 2010
G.R. No. 161886 March 16, 2007

10

A derivative suit will not prosper if it is filed by a person who is not a

stockholder or member of the corporation.
The bona fide ownership by a stockholder of stock in his own right
suffices to invest him with standing to bring a derivative action for the benefit
of the corporation. The number of his shares is immaterial since he is not suing
in his own behalf, or for the protection or vindication of his own particular right,
or the redress of a wrong committed against him, individually, but in behalf and
for the benefit of the corporation. (San Miguel Corporation vs.Kahn11)
The party bringing the suit should be a shareholder as of the time the
cause of action took place and at the time of the suit. The Supreme Court in
the case of Pascual vs. Orozco12, relying mainly on American jurisprudence,
ruled that a stockholder who was not such at the time when alleged
objectionable transaction took place, or whose shares of stocks have not since
devolved upon him by operation of law, cannot maintain suits of this character,
unless such transactions continue and are injurious to such stockholder or
affect him especially or specifically in some other way. Therefore, a person who
was not a stockholder at the time the cause of action accrued may bring a
derivative suit when the covered transactions continue and are injurious to
such shareholder or affect him especially or specifically in some other way.
However, as cited in the book of Cesar Villanueva13, such stockholder may not
institute the derivative suit in the following cases, to wit: (a) If the transferor,
when he had the chance or right to constitute the derivative suit when he was
still the shareholder, did not do so, then his transferee cannot institute the
derivative suit himself. If the transferor is estopped, then the transferee must
also be estopped; or (b) It is possible that the transferor himself, was part of
the fraud against the corporation, therefore, you cannot expect him to bring an
action for and in behalf of the corporation, then the transferee cannot also
institute the derivative suit.
EXHAUSTION OF INTRA-CORPORATE REMEDIES
The general rule is that a derivative suit can only be filed when there
has been a showing of exhaustion of intracorporate remedies. Exhaustion of
intra-corporate remedy is not only a procedural rule but also a substantive rule.
In order for the petition to be complete and proper, this must be alleged
specifically.
Exception: when exhaustion would be futile and useless because the BOD
would not bring the suit for the reason that they are also guilty or part of the
fraud committed against the corporation.
Laches by inaction of directors
Where the corporation is virtually immobilized from commencing suit
against its directors such as when the BOD, under the by-laws of the
corporation, had the control of the affairs of the corporation, laches does
11
12
13

G.R. No. 85339 August 11, 1989

G.R. No. L-5174 March 17, 1911
Villanueva, Cesar. Philippine Corporate Law, Manila: Rex Printing Company, 2010

not begin to attach against the corporation until directors cease to be

such.
Grounds for derivative suit
a. Express allegation that suit filed is derivative in nature
- For a derivative suit to prosper is that the minority shareholder who
is suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative
cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join.
- Once a derivative suit is properly filed, it does not require for its
decision that the entire membership of the association ate not
indispensable parties in a derivative suit - It is enough that a
member or a minority of such members file a derivative suit for and
in behalf of the corporation. After all, the members/stockholders who
filed a derivative suit are merely nominal parties, the real party-ininterest being the corporation itself for and in whose behalf the suit
is filed
b. Nature of the relief prayed for
- Since it is the corporation which is the real party in interest, then the
reliefs prayed for must be for the benefit or interest of the
corporation, when the reliefs prayed for do not pertain to the
corporation, then it is an improper derivative suit.
- Unfortunately in Yu vs. Yukayguan (2009), the court held that a
stockholder may commence a derivative suit for mismanagement,
waste or dissipation of corporate assets because of a special injury
to him for which he is otherwise without redress. In effect, the suit is
an action for specific performance of an obligation owed by the
corporation to the stockholders to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the
directors or management to make suitable measures for its
protection.
c. Enforcement of pre-emptive right
- A suit to enforce preemptive rights in a corporation is not a
derivative suit, and therefore a temporary restraining order enjoining
a person representing the corporation will not bar such action, bec.
It is instituted on behalf and for the benefit of the shareholder, not
the corporation.
Appointment of receiver
Chase vs. CFI held that in addition to the right to file a derivative suit, a
shareholder, in order to ensure that during the pendency of the
derivative suit, the corporation is ran properly, he can also ask for the
appointment of a receiver to take management away from the board
and instead place it in the hands of a receiver.
Proper forum for derivative suit: RTC
Nuisance suits
One of the conditions for filing a derivative suit is that the suit is not a
nuisance or harassment suit; otherwise the court is authorized to
forthwith dismiss the case.

Failure to allege categorically that the suit was not a nuisance or a

harassment suit was fatal to the merit of the filing of the derivative suit.
Availability of appraisal rights
Under Rule 1 of the said Interim Rules, the availability of appraisal right
for the act/s complained of is an important factor in intra-corporate suits
for the courts to determine whether the suit is a nuisance suit or one
brought for harassment.
Corporations retained counsel cannot defend the board in a
derivative suit brought
To do so would be tantamount to representing conflicting interests which
is prohibited by the Code of Professional Responsibility.