Derivative Suits in Philippine Corporate Law: A Legal Overview

 

Derivative Suits in Philippine Corporate Law: A Legal Overview

In Philippine corporate jurisprudence, derivative suits serve as a crucial mechanism for minority shareholders to enforce corporate rights when the corporation's management fails to act. Rooted in equity, these suits allow shareholders to initiate legal action on behalf of the corporation, particularly when those in control are unwilling or unable to address corporate wrongs.​

Legal Basis and Jurisprudential Recognition

While the Revised Corporation Code (RCC) does not explicitly provide for derivative suits, Philippine courts have long recognized them through jurisprudence. The Supreme Court, in Villamor, Jr. v. Umale (G.R. No. 172843, September 24, 2014), affirmed that a derivative suit is an exception to the general rule that the power to sue resides with the board of directors. This exception applies when the board refuses to redress corporate injuries, especially when the alleged wrongdoers are in control of the corporation.​Inquirer.net+1Manila Bulletin+1Inquirer.net+2C3 Firm+2Alburo Law Offices+2Manila Bulletin

Requisites for Filing a Derivative Suit

To validly initiate a derivative suit in the Philippines, the following requisites must be satisfied:

1. Stockholder Status: The plaintiff must be a stockholder at the time of the act or transaction complained of and must maintain such status throughout the litigation.​C3 Firm+3Inquirer.net+3RESPICIO & CO.+3

2. Exhaustion of Intra-Corporate Remedies: The plaintiff must demonstrate that all reasonable efforts to obtain the desired relief from the board of directors have been exhausted. This includes making a formal demand on the board to address the issue, unless such demand would be futile, as recognized in San Miguel Corporation v. Kahn (G.R. No. 165266, August 24, 2011).​C3 Firm

3. No Appraisal Rights Available: The act or acts complained of must not be subject to appraisal rights under the RCC.​C3 Firm+2Inquirer.net+2Alburo Law Offices+2

4. Good Faith: The suit must be filed in good faith and not as a nuisance or harassment suit.​Inquirer.net

5. Filing in the Name of the Corporation: The action must be brought in the name of the corporation, which is the real party-in-interest.​Inquirer.net+2C3 Firm+2RESPICIO & CO.+2

These requisites are outlined in Rule 8 of the Interim Rules of Procedure for Intra-Corporate Controversies.​Inquirer.net+3C3 Firm+3RESPICIO & CO.+3

Procedural Considerations

Derivative suits are classified as intra-corporate controversies and fall under the jurisdiction of Regional Trial Courts designated as Special Commercial Courts. The procedural rules require that the complaint explicitly state the efforts undertaken to obtain the desired relief from the board and the reasons for the board's inaction.​RESPICIO & CO.The D&O Diary+2Boston University Law Scholarly Commons+2Alburo Law Offices+2

Case Illustration: Metrobank v. Salazar

In Metrobank v. Salazar (G.R. No. 218738, March 9, 2022), minority shareholders filed a derivative suit challenging the mortgage of corporate properties without stockholders' approval. The Supreme Court dismissed the suit, citing the plaintiffs' failure to allege with particularity the exhaustion of intra-corporate remedies and to state that the suit was not a nuisance or harassment action. This case underscores the importance of strict compliance with procedural requirements in derivative suits.​Inquirer.net

Conclusion

Derivative suits are vital tools for minority shareholders to protect corporate interests when management fails to act against wrongdoing. However, initiating such suits requires meticulous adherence to legal and procedural requisites. Properly executed, derivative suits uphold corporate governance and ensure accountability within Philippine corporations.​eLibrary+3Inquirer.net+3C3 Firm+3

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The Residual Power of the President of the Philippines

 

As declared by the Supreme Court, the residual power it is the power borne by the President’s duty to preserve and defend the Constitution.  It may also be viewed as a power implicit in the President’s duty to take care that the laws are faithfully executed.  (Marcos v. Manglapus, 177 SCRA 668) 

Suarez (2015) cited Hyman where the latter advanced the view that an allowance of discretionary power is unavoidable and is best lodged in the President. 

This power has been further enunciated by the Supreme Court where it stated that “The Presidents power to conduct investigations to aid him in ensuring the faithful execution of laws in this case, fundamental laws on public accountability and transparency is inherent in the President’s powers as the Chief Executive.”    Thus, the Executive Department is given much leeway in ensuring that our laws are faithfully executed.  (Biraogo et al. vs. The Philippine Truth Commission of 2010, G.R. Nos. 192935 and 193036, December 7, 2010). 

As Nolledo (1993) explains:  “The President is enjoined to do justice to every man.  The President must consecrate himself to the service of the Nation.  He holds the highest position within the gift of his people, the latter trusting that he is offering himself to the service of the whole nation, not to the service of himself or those close to him.    In no case must the President violate the sacred duties of being the Head of State and Government.  His service belongs to the people.   He holds the highest and exalted position of the land as a trust.  If he becomes unworthy of that trust, he must resign because he becomes a disgrace to the presidency.”

In the exercise of the power to enforce and administer laws, the President of the Philippines assumes a plenitude of authority.   This corresponding awesome responsibility makes him the most influential person in the land.  In the hands of a Magsaysay or Quezon, it can be an instrument to uplift a common man; in the hands of a Marcos, it can deprave and pervert it into a bludgeon of oppression.    Indeed, the impact of the Presidency upon the nation is tremendous.  (Cruz, 1991).

Can the residual powers of the President of the Republic of the Philippines be the subject of abuse? 

A study was conducted on how the President’s "implied" and "residual" powers can be constitutionally questioned. First, the President can issue executive orders without prior legislative sanction;  Second,  the President can unilaterally reorganize government agencies without regard for the functional objectives and constitutional independence of other institutions; Third, the President can control appointments to key public offices originally intended to counterbalance executive authority; Fourth, the President can largely sought to insulate himself/herself from accountability for impasses that resulted from institutional deadlocks which himself/herself has created;  Fifth, the President can withhold funds already appropriated when “revenues are scarce”;  Sixth, the President can control the national budget and delay the release of the local government units’ just share in the national taxes (Internal Revenue Allotment or IRA) to use the same as a political leverage to attract potential allies and pressure local opponents.

The residual power of the President of the Philippines can result to a strong President but a weaker legislature and judiciary. The system may suffer from limited or ineffective constitutional checks on the Executive branch.   The President may often aggrandize his/her power by referring to the separation of powers to justify assertions of authority and to avoid oversight from other branches or governmental bodies.  

In the case of Romulo L. Neri vs. Senate Committee on Accountability of Public Officers and Investigations et al. (En Banc), G.R. No. 180643, September 4, 2008, Romulo Neri, the Secretary of the National Economic Development Authority (NEDA), testified before the Senate that he was offered a bribe to endorse a particular procurement contract. When Senators asked about the President's involvement in approving the contract, Neri invoked the executive privilege afforded to him by E.O. No. 464.    After the Senate ordered his arrest for refusing to answer its questions, Neri filed a petition with the Supreme Court. The Court upheld the claim of executive privilege. 

In this case, the Supreme Court relied on a conception of broad residual executive power to justify the expansion of the privilege, even against constitutional rights to public information.

References:

Rose-Acherman S., Desierto D. & Volosin N. (2010), “Hyper-Presidentialism:  Separation of Powers without Checks and Balances in Argentina and the Philippines”  Berkeley Journal of International Law, Vol. 29 Issue 1, University of California School of Law.

 

Cruz, I. (1991).  Philippine Political Law.   Central Law Book Publishing, Inc.

 

Nolledo, J. (1993).  The 1987 Constitution with Explanations.  1993 Revised Edition. National Bookstore, Inc.

Suarez, R. (2015).  Statutory Construction.  Rex Bookstore, Rex Printing and Publishing Inc.