Finals Coverage (Derivative Suits onwards) Flashcards
Derivative suit
In cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a stockholder has the right to sue on behalf of the corporation. This is done to protect or vindicate corporate rights whenever officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corporation.
Requisites for derivative suit (based on GPL) (SMC v. Kahn)
- Must have exhausted remedies (Must have demanded the directors to sue. Except when majority of them are guilty of the act complained of).
- You must’ve been a stockhholder at the time of the complained act
- Any benefit recovered must be accounted for the corporation.
- If successful, the plaintiff is entitled to reimbursement for litigation
- Must be filed with SEC (unless there are 3rd persons– iwc, regular courts)
Evangelista v. Santos (1950)
Generally, if the injury complained of is primarily to the corporation, the suit for damages should be claimed only by the corporation.
The stockholders may not directly claim those damages for themselves, as that would result in the appropriation by, and the distribution of part of the corporate assets before dissolution and liquidation. (Old CC says you can’t declare stock from your profits until dissolution)
Liken v. Shaffer (1946)
Where loss has been caused to a corporation by the wrongful acts of those managing it, the right of action belongs to the corporation. There are situations where a-stockholder may bring a direct action in connection with corporate matters.
- officers were in a conspiracy to depreciate the stock value
- minority stockholder was injured bec of the machinations of majority stockholders
- those responsible destroyed the corporate entity of the corp
Keenan v. Eshleman (1938)
Since this is a derivative suit, we treat the complainant as the corporation itself. If we were to limit the recovery to just be distributed to those complaining stockholders, this would encourage fraud. The effect would be to transform a derivative action into one for the benefit of the individual.
Otis v. Pennsylvania Railroad (1944)
The Court allows or disallows Answers by a defendant corporation depending on the nature of the case. For example, in a case where fraud is the complaint, the corporation has an interest to determine the charges and recovering funds it was deprived of. It has no right to make affirmative defenses for the director. When the cause of action endangers corporate interests, an answer setting forth defenses is proper.
Reyes v. Tan (1961)
The failure of the Board of Directors to take action against those directly responsible for the misuse of dollar allocations constitute fraud, or consent on the part of the directors.
Chase v. CFI (1966)
In such case, however, the appointment of a receiver is a matter addressed to the sound discretion of the court, and it has been frequently held that such discretion to appoint a receiver who would take over the administration of the corporate business should be exercised with great caution and only when the necessity therefor is clear.
Holmes v. Camp
In a representative action (i.e. derivative suit), the plaintiff is allowed to maintain the action, notwithstanding his lack of direct interest, solely to set the machinery of justice in motion and to prevent a complete failure of justice. This action is an invention of equity. The stockholder is merely an instigator. The cause of action is that of the corporation, and recovery is in favor of the corporation. A stockholder of a holding company may maintain a derivative suit for the benefit of the subsidiary company because it is indirectly for the advantage of the holding company. His stock interest in the holding company is sufficient for him not to be a “mere officious and impertinent intermeddler”
Villamor Jr. v. Umale (2014)
There are 5 requisites for filing derivative suits (4 are enumerated in Rule 8, Sec. 1 of the Interim Rules of Procedure for Intra Corporate Controversies, while the fifth one is implied in the first paragraph of Rule 8, Sec. 1 of the Interim rules, and already settled in jurisprudence):
1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed;
2) 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;
3) No appraisal rights are available for the act or acts complained of;
4) The suit is not a nuisance or harassment suit; and
5) Action must be brought in the name of the corporation. It is also important that the corporation be made a party to the case.
Ang v. Ang (2013)
Since damage to the corporation was not sufficiently proven by Juanito, the Complaint cannot be considered a bona fide derivative suit. A derivative suit is one that seeks redress for injury to the corporation, and not the stockholder. No such injury was proven in this case.
Florete Sr. v. Florete Jr. (2016)
The test of classification between derivative and individual/class suits is: WON the cause of action accrues to the corporation itself or to the whole body of its stockholders; OR WON the causes of action pleaded accrue to a single shareholder or a class of shareholders OR to the corporation itself
In a DS, one must implead the corporation; for mere failure to do so, this case DISMISSED.
BSP v. Campa Jr (2016)
First, the complaint is not for the benefit of the corporation, but for the benefit of Alino and other third-party mortgagors. Second, the complaint does not meet the requirements of a derivative suit.
Metrobank v. Salazar (2022)
As per the 2001 IRPIC, derivative suits, wc is defined as an action brought by a stockholder or member in the name of a corporation or association, are under the jurisdiction of SCCs. However, as per the Gonzales guidelines, when filed with the RTC in its general jurisdiction, the case can be shuffled to the SCC. Thus, a dismissal is not proper on that ground. Nonetheless, the petition of the SARC should still be dismissed on the ground that it does not comply with the requisites for a derivative suit under Rule 8, Sec. 1 of the 2001 IRPIC.
If appraisal rights are available, such fact must be alleged and the non-availment thereof must be properly explained, more so since a derivative suit must particularly allege that the stockholder exerted all reasonable efforts to exhaust all remedies available. This, they failed to do.
Stockholders who resort to the equitable remedy of a derivative suit must categorically declare under oath that the remedy is being sought for just and legitimate purposes and not as a form of nuisance or harassment.
Ago Realty v. Ago (2019)
In cases of derivative suits, the rule is different from the general rule that the board may authorize a representative of the corporation to perform all necessary physical acts, such as the signing of documents through a board resolution, since the board is guilty of breaching the trust reposed in it by the stockholders, it is but logical to dispense with the requirement of obtaining from it authority to institute the case and to sign the certification against forum shopping.
Pascual v. Orozco (1911)
A stockholder in a corporation who was not such at the time when alleged objectionable transactions took place, or whose shares of stock have not since devolved upon him by operation of law, can not 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.
Sources of Financing
(a) the contributions of its stockholders (i.e. equity of stockholders or equity investment),
(b) loans or advances by creditors, and
(c) the profits which the corporation may earn.
Capital structure
Aggregate of the securities issued– may be shares of stock or debt securities
Capital structure
Aggregate of the securities issued– may be shares of stock or debt securities
Authorized capital stock
Amount fixed (usually by charter) to be subscribed and paid in or secured to be paid in by the shareholders of a corp. either in money, property, labor or services, at the organization of the corporation or afterwards, and upon which it is to conduct its operations
Outstanding/Subscribed capital stock
Amount subscribed which may be less than the authorized capital stock
Stated capital
Aggregate par/issued value of the subscribed capital stock which sets the minimum limit of corporate assets that should be retained by the corporation as protection to creditors.
This may not be withdrawn or distributed to shareholders.
Matters that nonvoting shareholders may still. vote on (Sec. 6)
- Amendment of AoI
- Adoption and amendment of bylaws
- Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all corporate property
- Incurring, creating/increasing bonded indebtedness
- Increase/decrease ACS
- Merger/consolidation
- Investment of corporate funds in another corp. or business
- Dissolution
Common stock
Entitles the owner to an equal pro rata division of profits (if there are any).
Preferred stock
Entitled to some preference either in dividends or in the distribution of assets upon liquidation
- Must be issued with a stated par value
- Preferences must be in the AoI and in stock certificate.
Participating preferred stock
After getting their fixed dividend preference, they share with the common stock the rest of the dividends.
- Must be expressly provided
Cumulative preferred stock
If in any given year/s there are no dividends to be declared, the arrears for such year/s have to be made up in subsequent years before any dividend can be paid to common stock
- Is general rule
Par shares
- Fixed in AOI as the min. issued price
- Must be stated in the stock cert which cannot be issued unless paid in full by subscriber
- Cannot be issued at less than par. Result would be a “watered stock”. Consequence is the stockholder will still pay the difference
- May be issued or sold at higher than par
- May be as low as one centavo
- May only be changed by amending AOI
- Must pay its full consideration
No-par shares
- Not stated in stock cert but is fixed in the AOI or in a resolution by the board (as long as authorized) or by by-laws or by shareholders
- Not considered issued.
- No stock cert is issued until fully paid
- Must not have an issued price less than P5
- Advantage is it can be changed time to time
- Must pay its full consideration
Waiver of the preemptive right
- Prior waivers/denials should appear in the AOI (unless it was through unanimous agreement by the existing stockholders through a private agreement)
- If through amendment of AoI, needs 2/3 vote of the outstanding capital stock
- Must be given reasonable time to exercise their preemptive right
Remedy for violation of preemptive right
- Injunction against an issue
- Mandamus
- SEC may order cancellation of the shars
Voting reqs
- Increase/decrease capital stock (majority of Board and 2/3 of outstanding capital stock at a stockholders’ meeting duly called for that purpose with written notice of the details sent at their place of residence and served personally or through electronic means
- Issuance of stock dividend (2/3 approval of outstanding capital stock at a regular/special meeting duly called for the purpose) (Sec. 42)
- Amendment of AoI (Majority of board and vote or assent of 2/3 outstanding capital stock)
- Extend/shorten corporate term (Majority of board, ratified at a meeting by at least 2/3 outstanding capital stock)
- Voluntary dissolution (Majority of board and resolution with affirmative vote of majority of OCS/members of a meeting held upon call of directors).
- Voluntary dissolution with creditors (diff: 2/3 of OCS/members)
- Sale or other disposition of assets (At least 2/3 of OCS/members in a meeting duly called for the purpose)
Underwriting
Act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation
Kinds of underwriting
- Strict; where you agree for a fee to sell the securities to the public and take up whatever portion of the issue not sold within a specified period. Often protected by with agreements with sub-underwriters
- Firm commitment; Assures the issuer of a specified amount of money at a certain time and the risk is shifted to investment houses. The issuer sells the entire issue outright to a group of securities firms who sell it at a price differential to a larger selling group of dealers –> to the public
- Best efforts; Distribute securities through firms which merely undertake to use their best efforts to sell
Hay v. Hay (1951)
the object to be achieved in the issuance of preferred stock is ordinarily twofold. First, the investor is to be assured of a continued or periodical return, or dividend or dividends from the profits of the corporation without the uncertainty attendant upon the ownership of common stock; and second, the investor is to be assured, as an additional inducement to invest, that in the event of dissolution and distribution of the assets of the corporation between the two classes of stockholders, if the anticipated profits have proved insufficient to produce such a dividend or return upon its capital stock, then he shall receive it upon such distribution of the capital assets in preference to any distribution to the holders of the common stock.
Garcia v. Lim Chu Sing (1934)
The shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the stockholder is not a creditor of the bank for such shares. The indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares, there being no relation of creditor and debtor with respect to such shares
Utah Hotel v. Madsen (2009)
As a general rule…whoever subscribes to an unconditional agreement to take a given number of shares becomes thereby a shareholder in the corporation in respect to that number, subject to any valid conditions named in the subscription paper and to those imposed by the general law. The act of subscribing for a stated number of shares fixes the liability of the subscriber to creditors of the corporation as a shareholder, although he has not paid into the treasury of the corporation any part of his subscription, or done any act whatever in his character as a shareholder.”
Wallace v. Eclipse Company (1919)
As a general rule, promoters of a corporation not yet organized, especially when their contracts are made for and on behalf of the corporation, are regarded as the agents of the corporation, and such contracts become binding upon them as well as upon the corporation after organization and acceptance thereof by it.
Datu Benito v. SEC
The general rule is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. This is on the
theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. An original subscn’ber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest.
Stokes v. Continental (1906)
While the corporation could not compel stokes to take new shares at any price, since they were issued for money and not for property, it could not lawfully dispose of those shares without giving him a chance to get his proportion at the same price that outsiders got theirs.
He had an inchoate right to one share of the new stock for each share owned by him of the old stock, provided he was ready to pay the price fixed by the stockholders.
If so situated that he could not take it himself, he was entitled to sell the right to one who could.
Thom v. Baltimore Trust (1930)
in transactions involving the acquisition of property by corporations in exchange for shares of their stock, the determining consideration to the owners of the property may be the advantage of sharing as stockholders in the profits of the corporation with which they are contracting. Thus, the preemptive right may not be exercised where the stocks are issued not for cash but for property owned by another corporation in a merger agreement.
Fuller v. Krogh (1962)
GR: The pre-emptive right should not be denied. EXN: On the grounds of practical necessity, the pre-emptive right can be denied or limited, such as when the corporation has great need for a particular property and the issuance of the stock is the only practical and feasible method by which the corporation can acquire it for the best interest of all the stockholders.
In the cases of stock issued in payment of a pre-existing debt, we do not see any reason why pre-emptive rights should be denied. A debt calls for payment in money which the recognition and exercise of the preemptive rights would furnish.
Dunlay v. V Avenue (1963)
The general rule is: directors may not authorize the issue of unissued stock to themselves for the primary purpose of converting them from minority to majority stockholders. Such conduct, as indicated, is inequitable in the highest degree because it involves a breach of the duty of the directors as fiduciaries representing all the stockholders, irrespective of any doctrine of pre-emptive right.
The exception is: if the issue of the unissued original shares, whenever authorized, is reasonably necessary to raise money to be used in the business of the corporation, the original shareholders have no right to count on obtaining and keeping their proportionate part of the original stock
