Everett vs.

Asia Banking
G.R. No. L-25241; November 3, 1926

FACTS:
Teal & Company is indebted to HW Peabody & Co. for P300K for tractors,
plows, and parts delivered, of which it has paid P150K. Asia Banking Corp held
drafts accepted by Teal under the HW Peabody’s guarantee. Tractors were returned
to HW Peabody due to its being unsellable due to financial and agricultural
depression in the RP. Teal ordered another lot of tractors from Smith Kirkpatrick, but
shipment was delayed until the rescission of the credit of Teal with Asia Bank. Yet
Smith still delivered the order, and Teal at the request and advice of the Bank
accepted the drafts and stored the same. Asia Banking persuaded Teal, Peabody,
and Smith Kirkpatrick to enter into a “creditor’s agreement” wherein it was mutually
agreed that neither of the parties should take action to collect its debts from Teal for
2 years. Teal soon became indebted to Asia Bank for P750,000, secured by
mortgage. The Bank then suggested that, for the mutual protection of Teal and
itself, it was advisable that the Bank should temporarily obtain control of the
management and affairs of the company.
To this end, it was necessary for the stockholders to place their shares in a
voting trust to be held by the Bank, and then the Bank would finance Teal under its
own supervision. The Teal stockholders were thus induced to enter into the Voting
Trust Agreement, with the purpose that the agreement will be intended for the
protection of all parties from outside creditors. Shortly after the execution and
delivery of the voting trust and the MOA, Mullen as GM of the Bank, caused the
displacement and removal stockholder representatives in the Board and the
substitution in their place of the Bank’s employees or representatives. The new
Board, who have not purchased any share of stock of Teal, proceeded to remove the
Corporate Secretary, discharge all the old managers and displace them with
creatures of their own choosing whose interest consisted wholly in pleasing
themselves and the Bank, and who were wholly foreign to the stockholders.

ISSUE:
WON the action should have been brought by Teal and Co., and not the
majority stockholders thereof.

HELD:

NO. Teal and Co., including its Board, was already under the control of Asia
Banking. Thus, it would have been useless to ask the Board to institute the present
suit, and the law does not require litigants to perform useless acts. The court held
that the stockholders could bring the said action (in the nature of a derivative suit)
on behalf of Teal and Co.
When the Board of Directors in a Corporation is under the complete control of
the principal defendants in the case and it is obvious that a demand upon the board
of directors to institute an action and prosecute the same effectively would be
useless, the action may be brought by one or more of the stockholders without such
demand. The Court however, did not rule on the propriety or impropriety of the
Voting Trust Agreement between the Bank and the Company.

NOTE: However, it may be inferred that the stockholders may bring suit against the
trustees if the voting trust agreement is being used by the said Trustees to
perpetuate fraud against the corporation, as is present in this case. The
stockholders would still have legal standing to institute the suit in behalf of the
corporation for acts done by the trustees to defraud the corporation, when the said
trustees already have control of the Board of the said corporation. A derivative suit
is still proper.