DERIVATIVE SUITS

 Pascual vs. Orozco, 19 Phil 82

 Evangelista vs. Santos, 86 Phil 837
 Liken vs. Shaffer, et.al., 64 F. supp. 432
 Keenan vs. Eshleman, et.al., 2 A 2d 904
 Republic bank vs cuaderno, 19 SCRA 671
 Reyes vs. Tan, 3 SCRA 198
 Chase vs. Court of first instance of Manila, 18 SCRA 602
 Holmes vs. Camp, et.al., 180 A 2d 409
 Gamboa vs. Victoriano, 90 SCRA 40
 San Miguel vs. Kahn, 176 SCRA 447
 Villamor, Jr. vs. Umale, 736 SCRA 325
 Ang vs. ang, 699 SCRA 272
 Cua, jr. vs Tan, 607 SCRA 648
 CANDIDO PASCUAL
vs.
EUGENIO DEL SAZ OROZCO, ET AL.
G.R. No. L-5174. March 17, 1911

FACTS:

This action was brought by the plaintiff Pascual, in his own right as a
stockholder of the bank, for the benefit of the bank, and all the other stockholders
thereof. The Banco Español-Filipino is a banking corporation, constituted as such by
royal decree of the Crown of Spain in the year 1854, the original grant having been
subsequently extended and modified by royal decree of July 14, 1897, and by Act No.
1790 of the Philippine Commission.
It is alleged in the amended complaint that the only compensation
contemplated or provided for the managing officers of the bank was a certain per cent
of the net profits resulting from the bank's operations, as set forth in article 30 of its
reformed charter or statutes.
The gist of the first and second causes of action is as follows: The defendants
constitute a majority of the present board of directors of the bank, who alone can
authorize an action against them in the name of the corporation. It appears that
during the years 1903, 1904, 1905, and 1907 the defendants and appellees, without
the knowledge, consent, or acquiescence of the stockholders, deducted their respective
compensation from the gross income instead of from the net profits of the bank,
thereby defrauding the bank and its stockholders of approximately P20,000 per
annum.
The second cause of action sets forth that defendants' and appellees' immediate
predecessors in office in the bank during the years 1899, 1900, 1901, and 1902,
committed the same illegality as to their compensation as is charged against the
defendants themselves. In the four years immediately following the year 1902, the
defendants and appellees were the only officials or representatives of the bank who
could and should investigate and take action in regard to the sums of money thus
fraudulently appropriated by their predecessors. They were the only persons interested
in the bank who knew of the fraudulent appropriation by their predecessors.
The court below sustained the demurrer as to the first and second causes of action on
the ground that in actions of this character the plaintiff must aver in his complaint
that he was the owner of stock in the corporation at the time of the occurrences
complained of, or else that the stock has since devolved upon him by operation of law.

ISSUE:

Whether or not the petitioner has a cause of action to file a derivative suit.

RULING:

YES.

As to the first cause of action: In suits of this character the corporation itself and
not the plaintiff stockholder is the real party in interest. The rights of the individual
stockholder are merged into that of the corporation. It is a universally recognized
doctrine that a stockholder in a corporation has no title legal or equitable to the
corporate property; that both of these are in the corporation itself for the benefit of all
the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a
stockholder in the bank (corporation) has a right to maintain a suit for and on behalf
of the bank, but the extent of such a right must depend upon when, how, and for what
purpose he acquired the shares which he now owns.
As to the Second cause of action: It affirmatively appears from the complaint
that the plaintiff was not a stockholder during any of the time in question in this
second cause of action. Upon the question whether or not a stockholder can maintain
a suit of this character upon a cause of action pertaining to the corporation when it
appears that he was not a stockholder at the time of the occurrence of the acts
complained of and upon which the action is based, the authorities do not agree.
 JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS

defendant-appelle (86 Phil. 387; May 19, 1950) – Juan D. Evangelista, et. al. are
minority stockholders of the Vitali Lumber Company, Inc., while Rafael Santos holds
more than 50% of the stocks of said corporation and also is and always has been the
president, manager, and treasurer thereof. Santos, in such triple capacity, through
fault, neglect, and abandonment allowed its lumber concession to lapse and its
properties and assets, among them machineries, buildings, warehouses, trucks, etc.,
to disappear, thus causing the complete ruin of the corporation and total depreciation
of its stocks.

Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to render an
account of his administration of the corporate affairs and assets: (2) to pay plaintiffs
the value of their respective participation in said assets on the basis of the value of the
stocks held by each of them; and (3) to pay the costs of suit. Evangelista, et. al. also
ask for such other remedy as may be and equitable. The trial court dismissed the
action on the ground of improper venue and lack of cause of action.

ISSUE:

WON plaintiffs have a right to bring the action for their benefit?

HELD:

No. The complaint shows that the action is for damages resulting from
mismanagement of the affairs and assets of the corporation by its principal officer, it
being alleged that defendant's maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The injury complained of is
thus primarily to that of the corporation, so that the suit for the damages claimed
should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia
of Corporation pp. 977-980). The stockholders may not directly claim those damages
for themselves for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of the corporation
and the liquidation of its debts and liabilities, something which cannot be legally done
in view of section 16 of the Corporation Law.

But while it is to the corporation that the action should pertain in cases of this nature,
however, if the officers of the corporation, who are the ones called upon to protect their
rights, refuse to sue, or where a demand upon them to file the necessary suit would be
futile because they are the very ones to be sued or because they hold the controlling
interest in the corporation, then in that case any one of the stockholders is allowed to
bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is
the corporation itself and not the plaintiff stockholder that is the real property in
interest, so that such damages as may be recovered shall pertain to the corporation
(Pascual vs . Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit
brought by a stockholder as the nominal party plaintiff for the benefit of the
corporation, which is the real property in interest (13 Fletcher, Cyclopedia of
Corporations, p. 295).

In the present case, the plaintiff stockholders have brought the action not for the
benefit of the corporation but for their own benefit, since they ask that the defendant
make good the losses occasioned by his mismanagement and pay to them the value of
their respective participation in the corporate assets on the basis of their respective
holdings. Clearly, this cannot be done until all corporate debts, if there be any, are
paid and the existence of the corporation terminated by the limitation of its charter or
by lawful dissolution in view of the provisions of section 16 of the Corporation Law.

It results that plaintiff's complaint shows no cause of action in their favor so that the
lower court did not err in dismissing the complaint on that ground.

While plaintiffs ask for remedy to which they are not entitled unless the requirement of
section 16 of the Corporation Law be first complied with, we note that the action
stated in their complaint is susceptible of being converted into a derivative suit for the
benefit of the corporation by a mere change in the prayer. Such amendment, however,
is not possible now, since the complaint has been filed in the wrong court, so that the
same last to be dismissed.

The order appealed from is therefore affirmed, but without prejudice to the filing of the
proper action in which the venue shall be laid in the proper province. Appellant's shall
pay costs. So ordered
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-
appellant, vs. MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, THE
BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD
OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees ( GR No. L -
22399; 19 SCRA 671; March 30, 1967)

FACTS:

Damaso Perez, a stockholder of Republic Bank, instituted a derivative suit against

defendant Pablo Roman, then President of the Bank, for granting certain loans to
fictitious and non-existing persons and to their close friends, relatives and/or
employees, who were in reality their dummies on the basis of fictitious or inflated
appraised value of real estate properties, in connivance with other officials.

The complaint alleged that Miguel Cuaderno, then Central Bank Governor, acting
upon the complaint, and the Monetary Board ordered an investigation and found
violations of the General Banking Act, but no information was filed until his
retirement; that to neutralize the impending action against him, Pablo Roman engaged
Miguel Cuaderno as technical consultant and selected Bienvenido Dizon as Chairman
of the Board of the Bank; that such appointment was done in bad faith and without
intention to protect the interest of the Bank but were only prompted to protect Pablo
Roman.

The complaint, therefore, prayed for a writ of preliminary injunction against eh

Monetary Board in confirming such appointments, but was dismissed by the lower
court.

ISSUE:

WON the court below erred in dismissing the complaint?

HELD:

Yes. The defendants mainly controvert the right of plaintiff to question the
appointment and selection of defendants Cuaderno and Dizon, which they contend to
be the result of corporate acts with which plaintiff, as stockholder, cannot interfere.
Normally, this is correct, but Philippine jurisprudence is settled that an individual
stockholder is permitted to institute a derivative or representative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever (1) the officials of the corporation refuse to sue, or (2) are the ones to be
sued or (3) 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
(Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil.
518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-
appellant's action here is precisely in conformity, with these principles. He is neither
alleging nor vindicating his own individual interest or prejudice, but the interest of the
Republic Bank and the damage caused to it. The action he has brought is a derivative
one, expressly manifested to be for and in behalf of the Republic Bank, because it was
futile to demand action by the corporation, since its Directors were nominees and
creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff
are frauds against the Bank that redounded to its prejudice. The complaint expressly
pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido
Dizon to head the Board of Directors of the Republic Bank, were made only to shield
Pablo Roman from criminal prosecution and not to further the interests of the Bank,
and avers that both men are Roman's alter egos . There is no denying that the facts
thus pleaded in the complaint constitute a cause of action for the bank: if the
questioned appointments were made solely to protect Roman from criminal
prosecution, by a Board composed by Roman's creatures and nominees, then the
moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or
diversion of corporate funds, since the Republic Bank would have no interest in
shielding Roman, and the directors in approving the appointments would be
committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid
out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos,
supra .).

Defendants urge that the action is improper because the plaintiff was not authorized
by the corporation to bring suit in its behalf. Any such authority could not be expected
as the suit is aimed to nullify the action taken by the manager and the board of
directors of the Republic Bank; and any demand for intra-corporate remedy would be
futile, as expressly pleaded in the complaint. These circumstances permit a
stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no
other stockholder has chosen to make common cause with plaintiff Perez is irrelevant,
since the smallness of plaintiff's holdings is no ground for denying him relief
(Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings
for the absence of other stockholders to be of any significance, no issues having even
been joined.

ISSUE2:

WON the Corporation should be a plaintiff or defendant?

HELD2:

The English practice is to make the corporation a party plaintiff, while in the United
States, the usage leans in favor of its being joined as party defendant (see Editorial
Note, 51 LRA [NS] 123). Objections can be raised against either method. (1) Absence of
corporate authority would seem to militate against making the corporation a party
plaintiff, while (2) joining it as defendant places the entity in the awkward position of
resisting an action instituted for its benefit. What is important is that the corporation'
should be made a party, in order to make the Court's judgment binding upon it, and
thus bar future relitigation of the issues. On what side the corporation appears loses
importance when it is considered that it lay within the power of the trial court to direct
the making of such amendments of the pleadings, by adding or dropping parties, as
may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of
parties is not a ground to dismiss an action. ( Ibid .)

ISSUE3:

WON the action of the plaintiff amounts to a quo warranto proceeding?

HELD:

No. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic
Bank's board of directors. The suit is aimed at preventing the waste or diversion of
corporate funds in paying officers appointed solely to protect Pablo Roman from
criminal prosecution, and not to carry on the corporation's bank business. Whether
the complaint's allegations to such effect are true or not must be determined after due
hearing.

CATALINA R. REYES
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila,
Branch XIII and FRANCISCA R. JUSTINIANI
G.R. No. L-16982. September 30, 1961

FACTS:

The corporation, Roxas-Kalaw Textile Mills, Inc., was organized on June 5, 1954
by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas, Jose Ma.
Barcelona and Morris Wilson, for and on behalf of the following primary principals
with the following shareholdings: Adelia K. Roxas, 1200 Class A shares; I. Sherman,
900 Class A shares; Robert W. Born, 450 Class A shares and Morris Wilson, 450 Class
A shares; that the respondent holds both Class A and Class B shares and number and
value thereof are is follows: Class A — 50 shares, Class B — 1,250 shares.
On May 8, 1957, the Board of Directors approved a resolution designating one
Dayaram as co-manager and Morris Wilson was likewise designated as co-manager
with responsibilities for the management of the factory only’. An office in New York
was opened for the purpose of supervising purchases, which purchases must have the
unanimous agreement of Cesar K. Roxas, New York resident member of the board of
directors, Robert Born and Wadhumal Dalamal or their respective representatives.
Several purchases aggregating $289,678.86 were made in New York for raw materials
and shipped to the Philippines, which shipment were found out to consist not of raw
materials but already finished products, for which reasons the Central Bank of the
Philippines stopped all dollar allocations for raw materials for the corporation which
necessarily led to the paralyzation of the operation of the textile mill and its business.

ISSUES:

Whether or not a derivative suit will prosper.

RULING:

NO.

The claim that respondent Justinian did not take steps to remedy the illegal
importation for a period of two years is without merit. During that period of time
respondent had the right to assume and expect that the directors would remedy the
anomalous situation of the corporation brought about by their own wrong doing. Only
after such period of time had elapsed could respondent conclude that the directors
were remiss in their duty to protect the corporation property and business. The fraud
consisted in importing finished textile instead of raw cotton for the textile mill; the
fraud, therefore, was committed by the manager of the business and was consented to
by the directors, evidently beyond reach of respondent as treasurer for that period.
The directors permitted the fraudulent transaction to go unpunished and
nothing appears to have been done to remove the erring purchasing managers. In a
way the appointment of a receiver may have been thought of by the court below so
that the dollar allocation for raw material may be revived and the textile mill placed on
an operating basis.
ELTON W. CHASE, as minority Stockholder and on behalf of other Stockholders
similarly situated and for the benefit of AMERICAN MACHINERY AND PARTS
MANUFACTURING, INC., plaintiff-appellant, vs. DR. VICTOR BUENCAMINO, SR.,
VICTOR BUENCAMINO, JR., JULIO B. FRANCIA and DOLORES A. BUENCAMINO,
respondents. ( GR No. L - 20 395; 136 SCRA 365; May 13, 1985)

FACTS:

Herein plaintiff-appellant Elton Chase, entered into an agreement with Dr.

Buencamino and William Cranker (already business partners) for the establishment of
a factory in Manila called American Machinery Engineering Parts, Inc. (Amparts),
where chase was to transfer his tractor plant, ship his machineries from his former
plant in America to Manila, install said machineries at Amparts plant and he is to be
the production manager of Amparts.

For some time the three maintained harmonious relations until Chase tendered his
resignation which was accepted by Buencamino and Cranker. Chase initially filed a
case in California against Cranker for the recovery of the purchase price of his plant,
but this died a natural death. Eventually, he filed a case before the CFI alleging
various acts of frauds allegedly committed by the other two.

ISSUE:

WON Chase has capacity to institute a derivative suit?

HELD:

Yes. The evidence of defendants proves very clearly that right from the start, Chase
was by them recognized as a stockholder and initial incorporator with 600 paid up
shares representing a 1/3 interest in Amparts, and that would be enough for Chase to
have the correct personality to institute this derivative suit; the second place, it also
appears apparently undenied that Chase did not win in California so that he did not
recover the $150,000.00 that he had prayed for there against Overseas, which if he
had would really in the mind of the Court have put him in estoppel to intervene in any
manner as incorporator or stockholder of Amparts; and in the third place and most
important it should not be forgotten that Chase has filed the present case not for his
personal benefit, but for the benefit of Amparts, so that to the Court the argument of
estoppel as against him would appear to be out of place; the estoppel to be valid as a
defense must be an estoppel against Amparts itself; the long and short of it is that the
Court is impelled and constrained to discard all the other defenses set up by Dr.
Buencamino on the principal complaint; the result of all these would be to sustain so
far, the position of Chase that Dr. Buencamino must account for the P570,000.00
used to pay the second series of payment on the subscription, the P330,000.00 used
in paying the lsst series on the subscription, plus another sum of P245,000.00 entered
as loan on his favor and against Amparts, for the sum of P434,000.00 earned in the
blackmarketing of the excess of $140,000.00 dollars on the forwarding costs and
promotional expenses, for the sum of P391,200.00 earned in the blackmarketing of the
excess of $117,000.00 in the transaction with Bertoni and Cotti, and all these would
reach a total of P1,970,200.00; and as the appropriation of the profits for himself was
a quasi-delict, the liability therefore assuming that it had been done with the
cooperation of Cranker would have to be solidary, 2194 New Civil Code.

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE

LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-BORROMEO
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of
Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR.,
LEONITO LOPUE, and LUISA U. DACLES
G.R. No. L-40620. May 5, 1979

FACTS:

The herein petitioners were sued by herein defendants to nullify the issuance of
823 shares of stock of the Inocentes de la Rama, Inc. in favor of the petitioners.
On April 4, 1972, the respondents, are the owners of 1,328 shares of stock of
the Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital
stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which were
subscribed and issued, thus leaving 823 shares unissued. Then President and Vice-
President of the corporation, respectively, the defendants Mercedes R. Borromeo,
Honorio de la Rama, and Ricardo Gamboa, remaining members of the board of
directors of the corporation, in order to forestall the takeover by the plaintiffs of the
afore-named corporation, surreptitiously met and elected Ricardo L. Gamboa and
Honorio de la Rama as president and vice-president of the corporation, respectively,
and passed a resolution authorizing the sale of the 823 unissued shares of the
corporation to the defendants, at par value, after which the petitioners were elected to
the board of directors of the corporation.
The respondents claimed that the sale of the unissued 823 shares of stock of
the corporation was in violation of the plaintiffs' and pre-emptive rights and made
without the approval of the board of directors representing 2/3 of the outstanding
capital stock, and is in disregard of the strictest relation of trust existing between the
defendants, as stockholders. The respondents prayed that a writ of preliminary
injunction be issued restraining the defendants from committing, or continuing the
performance of an act tending to prejudice, diminish or otherwise injure the plaintiffs'
rights in the corporate properties and funds of the corporation, and from disposing,
transferring, selling, or otherwise impairing the value of the 823 shares of stock
illegally issued. The respondent court granted the prayer.

ISSUES:

Whether or not the proper action is a derivative suit.

RULING:

YES.

An individual stockholder is permitted to institute a derivative suit on behalf of

the corporation wherein he holds stock 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. 12 In
the case at bar, however, the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation. At any rate, it is yet
too early in the proceedings since the issues have not been joined. Besides, misjoinder
of parties is not a ground to dismiss an action.
 SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH
KAHN and RAMON DEL ROSARIO, JR.
G.R. No. 85339. August 11, 1989

FACTS:

33,133,266 shares of the outstanding capital stock of SMC were acquired 14

other corporations, and were placed under a Voting Trust Agreement in favor of the
late Andres Soriano, Jr. However, 33,133,266 SMC shares were sequestered by the
PCGG, on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a
close associate and dummy of former President Marcos. SMC promptly suspended
payment of the other installments of the price to the 14 seller corporations.
On December, 1986, the SMC Board, by Resolution No. 86-122, "decided to
assume the loans incurred by Neptunia for the down payment ((P500M)) on the
33,133,266 shares." The Board opined that there was "nothing illegal in this
assumption (of liability for the loans)," since Neptunia was "an indirectly wholly owned
subsidiary of SMC," there "was no additional expense or exposure for the SMC Group,
and there were tax and other benefits which would redound to the SMC group of
companies. However, at the meeting of the SMC Board, Eduardo de los Angeles, one of
the PCGG representatives in the SMC board, impugned said Resolution No. 86-122.

ISSUE:

Whether or not de los Angeles can file a derivative suit in behalf of the
corporation.

RULING:

YES.

The Court ruled that it is claimed that since de los Angeles 20 shares represent
only .00001644% of the total number of outstanding shares (1 21,645,860), he cannot
be deemed to fairly and adequately represent the interests of the minority
stockholders. The implicit argument — that a stockholder, to be considered as
qualified to bring a derivative suit, must hold a substantial or significant block of
stock — finds no support whatever in the law. The requisites for a derivative suit are
as follows: (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.
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.
 JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), INC.
vs.
SPOUSES ROBERTO and RACHEL ANG
G.R. No. 201675. June 19, 2013

FACTS:

Sps. Roberto and Rachel Ang took over the active management of [SMBI].
Through the employment of sugar coated words, they were able to successfully
manipulate the stocks sharings between themselves at 50-50 under the condition that
the procedures mandated by the Corporation Code on increase of capital stock be
strictly observed (valid Board Meeting). No such meeting of the Board to increase capital
stock materialized. It was more of an accommodation to buy peace.
Juanito claimed that payments to Nancy and Theodore ceased sometime after
2006. On 24 November 2008, Nancy and Theodore, through their counsel here in the
Philippines, sent a demand letter to "Spouses Juanito L. Ang/Anecita L. Ang and
Spouses Roberto L. Ang/Rachel L. Ang" for payment of the principal amounting to
$1,000,000.00 plus interest at ten percent (10%) per annum, for a total of
$2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then
sent a letter to Nancy and Theodore’s counsel on 5 January 2009, saying that they are
not complying with the demand letter because they have not personally contracted a
loan from Nancy and Theodore.

ISSUE:

Whether or not the Honorable Court of Appeals erred in ordering the dismissal of
the Complaint on the ground that the case is not a derivative suit.

RULING:

NO.

The Complaint is not a derivative suit. A derivative suit is an action brought by a

stockholder on behalf of the corporation to enforce corporate rights against the
corporation’s directors, officers or other insiders. Under Sections 23 and 36 of the
Corporation Code, the directors or officers, as provided under the by-laws, have the right
to decide whether or not a corporation should sue. Since these directors or officers will
never be willing to sue themselves, or impugn their wrongful or fraudulent decisions,
stockholders are permitted by law to bring an action in the name of the corporation to
hold these directors and officers accountable. In derivative suits, the real party
ininterest is the corporation, while the stockholder is a mere nominal party.