Law and Jurisprudence

On Derivative Suits and The Requisites

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation.  In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party. (FILIPINAS PORT SERVICES v. GO; G.R. No. 161886; 16 March 2007)

According to the Supreme Court in Villamor v. Umale (G.R.No. 172843; 24 September 2014), a “derivative suit is an action filed by stockholders to enforce a corporate action.  It is an exception to the general rule that the corporation’s power to sue is exercised only by the board of directors or trustees”.

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies provides the requisites  for filing derivative suits as follows:

A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that:

(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.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The Supreme Court elucidated further:

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member must be “in the name of [the] corporation or association. . . .”