Chapter IX – Inspection — Stock and transfer book

o Contains the names of all SHs

Basis of right o Code does not require the corporation to furnish a SH with the list
of names of other SHs
— SHs do not directly participate in the management of the business and o SEC: SH cannot demand that he be furnished with such a list; he
have little knowledge, if at all, of how the corporate affairs are being run should instead directly examine the books of the corporation
by the directors and officers — Annual financial statements
— As beneficial owners, SHs have the right to know only the financial o Most recent financial statements: Granted by Sec 75
condition but also how the corporate affairs are being run by their o 75: Within 10 days from receipt of written request, corporation
elected directors and the appointed officers must furnish most recent financial statement:
— Law grants them the right to inspect the records of the corporation to  Balance sheet as end of last taxable year
obtain information they need  Profit and loss statement showing in detail the assets and
— Significant for minority SHs liabilities
— Annual report to the SEC
What records covered o 141: every corporation domestic or foreign, lawfully doing
business in the Philippines
S74 — Report of election of directors, trustees and officers within 30 days
after election
Books and records legally required to be prepared, maintained, and kept by — by-laws
the corporation: o required by law to be open to inspection, but curiously not the
— Books that record all business transactions AOI
o “records of all business transactions” broad enough to include o but since the AOI are filed with the SEC, these are open to
those which the Code of Commerce requires all merchants including inspection by persons with legitimate interests and during
corporations: reasonable hours on business days
 book of inventories and balances
 journal S75
 ledger
 book for copies of letters and telegrams Effect of and limitations on the Right
 financial statements
— Unbridled exercise of the right to inspect could be harassing to the
 income tax returns
corporation and would impair its efficient operations
 vouchers and receipts
— Balance must be sought between the interests of the individual SH
 contracts and all papers pertaining to the contracts and the interests of the corporation
 voting trust agreements — A corporation may regulate the time and manner of the inspection its
o records of business transactions books, but it cannot make a by-law which gives the directors absolute
 SH need not blindly accept figures in the financial report discretion to allow or disallow inspection
given by management o By-law provisions limiting inspection must be reasonable and not
Records are voluminous and may be difficult to interpret— inconsistent with law
thus SC held that a SH may make copies, extracts, and
memoranda of such records (Veraguth v Isabela Sugar) — 74: right to inspect subject to three (3) limitations:
— Minutes book for meeting of SHs (1) must be exercised at reasonable hours on business days
— Minutes book for meetings of the board (2) person demanding right has not improperly used any information
o Informs the SHs of the policies of the board secured through any previous examination of the records
o SC: until minutes are approved, no SH has the right to make a copy (3) demand is made in GF and for a legitimate purpose
thereof

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1. Limitations as to time and place
— Time of inspection
o Only at reasonable hours on business days, throughout the
year
o By-laws cannot limit inspection to merely a few days during
the year chosen by the directors
o By-laws cannot provide for inspection only upon authority of
the president
o Business hours are reasonable hours; but inspection should
not impede efficient operations of the business
— Place of inspection
o 74: enjoins the corporation to keep all its records and stock
and transfer books at its principal office, and inspection
should be at such office
o Veraguth case: SH cannot demand that he be allowed to
take the corporate books out of the principal office for the
purpose of inspecting them, but may make copies thereof
2. Purpose
— Is purpose material?
o 74 implies that the purpose of the SH in exercising his right to
inspect is material; must not act in BF and must be for a legitimate
purpose
o purpose is presumed to be a proper one and the corporation cannot
refuse to grant him the right on a mere belief that the motive is
improper
o burden of proof that the motive is improper is on the corporation and
its officers
— what is a legitimate purpose?
o One which is germane to the interests of the SHs as such and
not contrary to the interests of the corporation (Gokongwei v
SEC)
 Access to stock and transfer book (contains names of all
SHs) may be upheld provided the purpose in inspecting it is
reasonably related to a SHs interest as such

Gonzales v PNB (supra): Where a person acquired one
share of a corporation just so he can exercise his right to
inspect a transaction entered into before he became a SH,
his purpose is not germane to his interest as such and is
thus not legitimate. Right is denied.
— Proper purposes:
o To ascertain whether the corporation is being mismanaged
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o To ascertain financial condition of the corporation
o To ascertain the value of shares
o To obtain a mailing list of SHs to solicit proxies or influence
voting, in anticipation of SH meetings
— Improper purposes:
o To obtain information as to business secrets or to reveal business
secrets
o To secure business prospects or investment of advertising lists
o To find technical defects in corporate transactions to bring
nuisance or “strike suits” for blackmail
o To obtain information to be published to embarrass the
corporation, depress the value of its assets, and cause loss to
SHs, or to demoralize and cause dissension among SHs
Who may exercise the right
— Directors, trustees, SHs, or members
o Either personally or through an agent
o Limitations on a SH operate equally to directors and trustees
— Voting trust agreement: both voting trustee and the transferor have
the right of inspection
o Transferor is STILL the beneficial owner of the shares and should
have as much right to seek information to protect his investment
as any SH
— Parent-subsidiary
o If legally separate and independent entities: no right of inspection
to subsidiary
o If not, i.e. both are one and the same and under the control of the
parent: right to inspect available to subsidiary and the parent
(Gokongwei)
Who may be held liable
— Corporate officer who has custody of the books and papers sought to
be inspected who refuses to allow inspection
— Directors or trustees who voted for refusal if stated in a board
resolution
Defenses available to persons held liable
— Person demanding has improperly used any information secured
through any prior examination
— One requesting was not in GF or does not have a legitimate purpose
Remedies available if inspection refused

— Mandamus (Gokongwei case)
o Directed to the corporation
o Secretary may be joined as party-defendant
— If mandamus is inadequate: injunction
— Action for damages against the officer or agent who refused inspection
o Corporation itself may not be necessarily liable
o 74: damages shall be imposed instead on the erring officers and
directors if refusal is pursuant to a board resolution
— Criminal suit
o Against the offending officers
o Wrongful denial of the right to inspect a criminal offense punishable
under Sec 144 of the Corpo Code.
Pardo v Hercules Lumber. F: Corporate secretary of Hercules Lumber
refused to permit Pardo, a SH, or his agent to inspect the records and
business transactions of the company at the times desired by Pardo. Basis of
the refusal was the provision in the company’s by-laws which stipulated that
every SH may examine the books of the company and other documents
upon the days which the board annually fixes.
H: The resolution of the board limiting the rights of SHs to inspect its records
to a period of 10 days prior to the annual SH meeting is an unreasonable
restriction in accordance with the Corpo Code, which provides that the right
to inspect can be exercised at reasonable hours. The right of inspection was
interpreted to mean that the right may be exercised at reasonable hours on
business days throughout the year, and not merely during an arbitrary
period of a few days chosen by the directors.
Gonzales v PNB. H: The Code has prescribed limitations to the right of
inspection, requiring as a condition for examination that the person
requesting must not have been guilty of using improperly any information
secured through a prior examination, and that the person asking for such
must be acting in GF and for a legitimate purpose. It is the SH seeking to
exercise the right of inspection to set forth the reasons and purposes for
which he desires such inspection. SC held that the purpose of Gonzales,
which was to arm himself with evidence which he can use against the bank
for acts done by the latter when he was still a total stranger (i.e. not a SH),
were not deemed proper motives and his request was denied.
Veraguth v Isabela Sugar Co. F: Directors have the unqualified right to
inspect the books and records of a corporation at all reasonable times.
Pretexts may not be put forward by the officers to keep a director or SH from
inspecting the books and minutes of the corporation, and the right to inspect
cannot be denied on the grounds that the director or SHs are on unfriendly
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terms with the officers. A director or SH has no absolute right to secure
certified copies of the minutes until these minutes have been written up
and approved by the directors.
Gokongwei v. SEC. F: Gokongwei, a major SH of San Miguel Corporation,
sought to exercise his right to inspect the books and records of SMC Int’l,
a foreign subsidiary wholly-owned and controlled by SMC. Since he was
not a SH of the subsidiary, SMC denied his request to inspect its books.
H: Where the right to inspect is granted by statute to the SH, it is given to
him as such and must be exercised by him with respect to his interest as
a SH and for some purpose germane thereto or in the interest of the
corporation. The inspection has to be germane to the petitioner’s interest
as a SH and has to be proper and lawful in character and not inimical to
the interest of the corporation.
The SH’s right to inspect is based on his ownership of the assets and
property of the corporation. It is therefore an incident of ownership of the
corporate property, whether this ownership or interest be termed an
equitable ownership, beneficial ownership, or quasi-ownership, and is
predicated upon the necessity of self-protection.
On application for mandamus to enforce the right, it is proper for the
court to inquire into and consider the SH’s GF and his purpose and
motives in seeking inspection. But the impropriety of purpose such as will
defeat enforcement must be set up by the corporation defensively if the
Court is to take cognizance of it as a qualification. In other words, the
specific provisions take from the SH the burden of showing the propriety
of purpose and place upon the corporation the burden of showing
impropriety of purpose or motive.
The foreign subsidiary is wholly-owned by SMC and therefore under its
control, and would be more in accord with equity, GF, and fair dealing to
construe the statutory right of Gokongwei as SH to inspect the books of
the parent as extending to the books of the subsidiary in its control.

Chapter X – Derivative Suits
— Def’n: one instituted by a SH or a member for and in behalf of the
corporation for its protection from acts committed by directors, trustees,
corporate officers, and even third persons
— Common law recognized the right of a SH to sue in behalf of the
corporation through the “derivative suit”
— SH files a derivative suit in behalf of the corporation in order to protect
or vindicate corporate rights, whenever corporate officers refuse to sue
or are the ones to be sued or hold control of the corporation
Nature and basis of derivative suit: distinguished from individual
and representative suit
— Suits by SHs or members of a corporation based on wrongful or
fraudulent acts of directors or officers may be classified into:
o Individual suits—ex. Where right of inspection is denied because
wrong is done to SH who avails of the right
o Class/representative suits—where the wrong is doe to a group of
SHs ex. PS holders’ rights are violated
— Derivative suits—where the acts constitute a wrong to the corporation
itself, cause of action belongs to the corporation and not to the
individual SH
o Each SH is necessarily affected by such a wrong to the corporation
because the value of his interest would be impaired
o Decision to sue or not to sue based on a wrong committed against
the corporation primarily rests within the discretion and exercise of
sound business judgment by the board of directors
 Primary duty of the directors is to increase net asset value of
the corporation by deriving profits…
… but remedies such as derivative suits against wrongful,

negligent, or illegal acts which causes losses or injury to the
corporation may even be more costly in terms of future
profits
 when the board exercises its business judgment in GF that it
will not pursue remedies in behalf of the corporation, then
the use of the derivative suit will not prosper
 when the cause of action is against third parties, or against
some members of the board, and there remains enough
disinterested members to validly act as a body, the
determination whether to take corporate action still lies
within the business judgment of the board
o It is only when the board itself has been the author of the wrong
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being done or having been done to the corporation, where
business judgment is inapplicable and not even an intra-
corporate remedy would be successful
 In cases of mismanagement where wrongful acts are
done by directors/trustees, the directors would never be
willing to sue themselves
 The suing SH is regarded as the nominal party, with the
corporation as the party-in-interest
— Basis: Angeles v Santos
o Board is a creation of the SHs and controls the corporate affairs
by delegation of the SHs
o Board occupies a position of trusteeship:
 Must exercise GF, care and diligence in their
administration of the corporate affairs
 Must protect the interests of the majority and also of the
minority
o Where the board or directors wastes the corporate funds,
fraudulently disposes of its assets or performs ultra vires acts, the
courts, upon showing that an intra-corporate remedy is
unavailable, will entertain a suit of the minority members of the
board (or any SH), for an in behalf of the corporation, to prevent
waste, stop the commission of illegal acts, and redress the
injuries of the minority against the majority
Requirements relating to derivative suit
— Corpo Code contains no provision at all relating to derivative suits,
but ff rules apply: (SMC v Kahn)
— Proper forum for derivative suit:
o SRC: all intra-corporate disputes under Sec 5 of PD 902-A are
transferred to the RTC
1.
Exhaustion of intra-corporate remedies:
— GR: Suing SH must have exhausted his remedies within the
corporation
o Made a demand on directors to sue
o Directors refuse or fail to sue
— Exception: demand not necessary where it would be futile to make
it, as where the majority of the board are the very ones guilty of the
wrong complained of (Everett v Asia Banking Corp.)
— Not only a procedural rule but also a substantive one
— Do the remedies within the corporation include removal of the errant
directors, or ratification of the transaction?
— A SH can also ask for the appointment of a receiver to take management
away from the board and place in the hands of a receiver
2.
Standing to institute a derivative suit as a SH in behalf of
the corporation.
— GR: SH must have been a SH at the time of the transaction or act
complained of took place, or the shares devolved upon him
o SMC v Kahn: bona fide ownership by a SH in his own right suffices
to invest him with standing to bring a derivative action for the
benefit of the corporation
o Rep. v. Cuaderno: Number of shares is immaterial since the SH is
not suing in his own behalf
— Exception: Even if the SH was not a SH at the time the questioned
transactions took place, but the covered transactions continue and are
injurious to the SH or affect him in some other way, he may bring a
derivative suit (Pascual v Orozco)
— Exceptions to the exception:
o If a SH transferred his shares after he had a chance to institute the
derivative suit but failed to do so before the transfer, the transferee
cannot institute the derivative suit himself
o If a transferor is estopped, the transferee is also estopped from
suing
o If the transferor is himself party to the fraud or wrongful act against
the corporation
3. The action must be brought for the benefit and in behalf of the
corporation
— See Evangelista v Santos infra
— GR: Corporation should be made a party-defendant
o Exception: Everett case, Angeles v Santos
4. Any benefit recovered by the SH as a result of the derivative suit
must be accounted for to the corporation as the real party-in-interest
5. Plaintiff SH is entitled to reimbursement from the corporation for the
reasonable expenses of litigation
Evangelista et al v Santos. F: Plaintiffs are minority SHs who brought a
derivative suit against the principal officer for damages resulting from the
mismanagement of corporate affairs and misuse of corporate assets. The
complaint prayed for judgment requiring defendant, among others, to pay
plaintiffs the value of their respective participation in said assets on the
basis of the value of the shares held by them.
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H: Suit would not prosper. SHs brought the action not for the benefit of
the corporation but for their own benefit since they asked that the
defendant make good the losses occasioned by his mismanagement and
pay them the value of their respective participation in the corporate
assets on the basis of their respective holdings. The relief sought could
not be done until all the corporate debts, if there are any, are paid and
the existence of the corporation terminated by the limitation of its charter
or by lawful dissolution. Since it is the corporation which is the real party-
in-interest, then the reliefs prayed for must be for the benefit or interest
of the corporation. When the reliefs prayed for do not pertain to the
corporation, then it is an improper derivative suit.
Republic Bank v Cuaderno. F: A derivative suit was brought against the
officers and the board. Complaint alleged that the directors approved a
resolution granting excessive compensation to the corporate officers. Suit
was filed in order to prevent dissipation of the corporate funds for the
payment of salaries of the said officers. Board claims the action cannot
prosper for failure to compel the board to file the suit for and in behalf of
the corporation.
H: Such a suit need not be authorized by the corporation where its
objective is to nullify the action taken by its manager and the board, in
which case any demand for intra-corporate remedy would be futile, and
thus necessitating the court to intervene by granting the petition for a
derivative suit.
A SH in a banking corporation has a right to maintain a suit for an in
behalf of the corporation, but the extent of such right depends upon
when and for what purpose he acquired the shares of stock of which he is
the owner.
On the issue that the relators controverted the right to question the
appointment and selection of Cuaderno and Dizon, which they contend to
be the resilt of corporate acts with which the plaintiff as SH, cannot
intervere, the SC held that an individual SH is permitted to institute a
derivative suit in behalf of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever the official of the
corporation refuses to sue, or are to ones to be sued.
San Miguel Corporation v Kahn. H: Requisites for a proper derivative
suit:
(a) party bringing suit should be a SH as of the time of the act or
transaction complained of and at the time of filing of the suit.
Number of shareholdings immaterial. A bona fide ownership by a
 SH in his own right suffices to invest him with standing to bring a
derivative action in behalf of the corporation
(b) party has tried to exhausted intra-corporate remedies (made
demand on the board to sue in behalf of the corporation, but the
latter failed or refused)
(c) cause of action actually devolves on the corporation, the wrongdoing
or harm having been or being caused to the corporation itself and
not to the suing SH