G.R. No. 174353, September 10, 2014
NESTOR CHING AND ANDREW WELLINGTON, Petitioners, v. SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN ALIAS SUSAN HU, HU TSUNG CHIEH ALIAS JACK HU, HU TSUNG HUI, HU TSUNG TZU AND REYNALD R. SUAREZ, Respondents.
D E C I S I O N
LEONARDO-DE CASTRO, J.:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the Club at the time of its dissolution or liquidation.4
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be declared in their favor. In accordance with the Lease and Development Agreement by and between Subic Bay Metropolitan Authority and The Universal International Group of Taiwan, where the golf course and clubhouse component thereof was assigned to the Club, the shareholders shall not have proprietary rights or interests over the properties of the Club.5 x x x. (Emphasis supplied.)
- The Board of Directors and the officers of the corporation did not indicate in its financial report for the year 1999 the amount of P235,584,000.00 collected from the subscription of 409 shareholders who paid U.S.$22,000.00 for one (1) share of stock at the then prevailing rate of P26.18 to a dollar. The stockholders were not informed how these funds were spent or its whereabouts.
- The Corporation has been collecting green fees from the patrons of the golf course at an average sum of P1,600.00 per eighteen (18) holes but the income is not reported in their yearly report. The yearly report for the year 1999 contains the report of the Independent Public Accountant who stated that the company was incorporated on April 1, 1996 but has not yet started its regular business operation. The golf course has been in operation since 1997 and as such has collected green fees from non-members and foreigners who played golf in the club. There is no financial report as to the income derived from these sources.
- There is reliable information that the Defendant Corporation has not paid its rentals to the Subic Bay Metropolitan Authority which up to the present is estimated to be not less than one (1) million U.S. Dollars. Furthermore, the electric billings of the corporation [have] not been paid which amounts also to several millions of pesos.
- That the Supreme Court sustained the pre-termination of its contract with the SBMA and presently the club is operating without any valid contract with SBMA. The defendant was ordered by the Supreme Court to yield the possession, the operation and the management of the golf course to SBMA. Up to now the defendants [have] defied this Order.
- That the value of the shares of stock of the corporation has drastically declined from its issued value of U.S.$22,000.00 to only Two Hundred Thousand Pesos, (P200,000.00) Philippine Currency. The shareholders [have] lost in terms of investment the sum estimated to be more than two hundred thousand pesos. This loss is due to the fact that the Club is mismanaged and the golf course is poorly maintained. Other amenities of the Club has (sic) not yet been constructed and are not existing despite the lapse of more than five (5) years from the time the stocks were offered for sale to the public. The cause of the decrease in value of the shares of stocks is the fraudulent mismanagement of the club.6
WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining order be issued enjoining the defendants from acting as Officers and Board of Directors of the Corporation. After hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as Board of Directors and Officers of the Corporation. In the meantime a Receiver be appointed by the Court to act as such until a duly constituted Board of Directors and Officers of the Corporation be elected and qualified.
That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand Pesos each representing the decrease in value of their shares of stocks plus the sum of P100,000.00 as legal expense and attorney’s fees, as well as appearance fee of P4,000.00 per hearing.7
(a) The subscriptions of the 409 shareholders were paid to Universal International Group Development Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs and other shareholders bought their shares;8
(b) Contrary to the allegations in the Complaint, said subscriptions were reflected in SBGCCI’s balance sheets for the fiscal years 1998 and 1999;9
(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their shares were purchased after the amendment of the Articles of Incorporation and such amendment was publicly known to all members prior and subsequent to the said amendment;10
(d) Shareholders’ meetings had been held and the corporate acts complained of were approved at shareholders’ meetings;11
(e) Financial statements of SBGCCI had always been presented to shareholders justifiably requesting copies;12
(f) Green fees collected were reported in SBGCCI’s audited financial statements;13
(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to operate under a valid contract with the SBMA;14 and
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of members’ shares have increased.15
The Court finds that this case is intended not only for the benefit of the two petitioners. This is apparent from the caption of the case which reads Nestor Ching, Andrew Wellington and the Subic Bay Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners.
This is also shown in the allegations of the petition[.] x x x.
On the bases of these allegations of the petition, the Court finds that the case is a derivative suit. Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members may bring an action in the name of the corporation or association provided that he (the minority stockholder) exerted all reasonable efforts and allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies available under the articles of incorporation, by-laws or rules governing the corporation or partnership to obtain the reliefs he desires. An examination of the petition does not show any allegation that the petitioners applied for redress to the Board of Directors of respondent corporation there being no demand, oral or written on the respondents to address their complaints. Neither did the petitioners appl[y] for redress to the stockholders of the respondent corporation and ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should have asked the Board of Directors of the respondent corporation and/or its stockholders to hold a meeting for the taking up of the petitioners’ rights in this petition.17
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission.
A derivative suit must be differentiated from individual and representative or class suits, thus:“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.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.:
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.”
x x x x“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.’ x x x. 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. x x x. [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).” x x x.
Thus, in Nelson v. Anderson (1999), x x x, the **289 minority shareholder alleged that the other shareholder of the corporation negligently managed the business, resulting in its total failure. x x x. 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. x x x. A derivative action would have been appropriate if its responsible officials had refused or failed to act.” x x x. The court went on to note that the damages shown at trial were the loss of corporate profits. x x x. 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.” (Citations omitted.)
(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; and
(4) The suit is not a nuisance or harassment suit.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts 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; and to allege such fact with particularity in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had failed.
* Per Special Order No. 1772 dated August 28, 2014.
** Per Special Order No. 1771 dated August 28, 2014.
1Rollo, pp. 31-44; penned by Associate Justice Bienvenido L. Reyes (now a member of this Court) with Associate Justices Godardo A. Jacinto and Arturo D. Brion (now a member of this Court), concurring.
2 Id. at 58-61.
3 Id. at 62-70.
4 Id. at 94.
5 Id. at 103.
6 Id. at 66-67.
7 Id. at 68.
8 Id. at 137.
10 Id. at 138.
13 Id. at 139.
15 Id. at 139-140.
16 Id. at 140-148.
17 Id. at 58-59.
18 (b) Prohibition against nuisance and harassment suits. – Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the following:(1) The extent of the shareholding or interest of the initiating stockholder or member;In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss the case.
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief sought.
19 125 Phil. 1076, 1082 (1967).
20Go v. Distinction Properties Development and Construction, Inc., G.R. No. 194024, April 25, 2012, 671 SCRA 461, 471-472.
21 Reyes v. Hon. Regional Trial Court of Makati, Branch 142, 583 Phil. 591, 612 (2008).
22 G.R. Nos. 181455-56, December 4, 2009, 607 SCRA 645, 690-693.
23Yu v. Yukayguan, 607 Phil. 581, 610 (2009).
25Majority Stockholders of Ruby Industrial Corporation v. Lim, G.R. No. 165887, June 6, 2011, 650 SCRA 461, 497.
26 Supra note 23 at 612.