DERIVATIVE SUITS, INDIVIDUAL AND REPRESENTATIVE OR CLASS SUITS

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder or member is denied the right of inspection, his suit would be individual because the wrong is done to him personally and not to the other stockholders or the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders’ rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual stockholder.

          However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a stockholder or member may find that he has no redress because the former are vested by law with the right to decide whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be an effective remedy of the minority against the abuses of management. Thus, 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 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 the nominal party, with the corporation as the party in interest. (Jose Campos, Jr. and Maria Clara L. Campos, The Corporation Code: Comments, Notes and Selected Cases (1990 ed.), Vol. I, pp. 819-820).

The afore-quoted exposition is relevant in the case of Santiago Cua, Jr. et. al. vs. Miguel Ocampo Tan, et. al. considering that the claim therein of respondents Miguel, et al., that its Complaint in Civil Case No. 07-610 is not just a derivative suit, but also an intracorporate action arising from devices or schemes employed by the PRCI Board of Directors amounting to fraud or misrepresentation.

The Supreme Court declared that a thorough study of the said Complaint, however, reveals that the distinction is deceptive. The supposed devices and schemes employed by the PRCI Board of Directors amounting to fraud or misrepresentation are the very same bases for the derivative suit. They are the very same acts of the PRCI Board of Directors that have supposedly caused injury to the corporation. From the very beginning of their Complaint, respondents have alleged that they are filing the same "as shareholders, for and in behalf of the Corporation, in order to redress the wrongs committed against the Corporation and to protect or vindicate corporate rights, and to prevent wastage and dissipation of corporate funds and assets and the further commission of illegal acts by the Board of Directors." Although respondents Miguel, et al., also aver that they are seeking "redress for the injuries of the minority stockholders against the wrongdoings of the majority," the rest of the Complaint does not bear this out, and is utterly lacking any allegation of injury personal to them or a certain class of stockholders to which they belong.

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and individual and class suits, on the other, are mutually exclusive, viz:

As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. Thus, ‘the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’ [Citations.]" (Jones, supra, 1 Cal.3d 93, 106, 81 Cal.Rptr. 592, 460 P.2d 464.) In contrast, "a direct action [is one] filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to his or her interest as a shareholder. ... [¶] ... [T]he two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) *651 or the corporation (derivative action)." (Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:598, p. 6-127.)

Thus, in Nelson v. Anderson (1999) 72 Cal.App.4th 111, 84 Cal.Rptr.2d 753, the **289 minority shareholder alleged that the other shareholder of the corporation negligently managed the business, resulting in its total failure. (Id. at p. 125, 84 Cal.Rptr.2d 753) The appellate court concluded that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is injury to the whole body of its stockholders, it was for the corporation to institute and maintain a remedial action. [Citation.] A derivative action would have been appropriate if its responsible officials had refused or failed to act." (Id. at pp. 125-126, 84 Cal.Rptr.2d 753) The court went on to note that the damages shown at trial were the loss of corporate profits. (Id. at p. 126, 84 Cal.Rptr.2d 753) Since "[s]hareholders own neither the property nor the earnings of the corporation," any damages that the plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury to the corporation."

Based on allegations in the Complaint of Miguel, et al., in Civil Case No. 07-610, the Court determines that there is only a derivative suit, based on the devices and schemes employed by the PRCI Board of Directors that amounts to mismanagement, misrepresentation, fraud, and bad faith. (SANTIAGO CUA, JR., et. al. vs. MIGUEL OCAMPO TAN et. al., G.R. No. 181455-56, December 4, 2009, CHICO-NAZARIO, J.).