Chapter IX – Inspection

Basis of right SHs do not directly participate in the management of the business and have little knowledge, if at all, of how the corporate affairs are being run by the directors and officers — As beneficial owners, SHs have the right to know only the financial condition but also how the corporate affairs are being run by their elected directors and the appointed officers — Law grants them the right to inspect the records of the corporation to obtain information they need — Significant for minority SHs — What records covered S74 Books and records legally required to be prepared, maintained, and kept by the corporation: — Books that record all business transactions o “records of all business transactions” broad enough to include those which the Code of Commerce requires all merchants including corporations:  book of inventories and balances  journal  ledger  book for copies of letters and telegrams  financial statements  income tax returns  vouchers and receipts  contracts and all papers pertaining to the contracts  voting trust agreements o records of business transactions  SH need not blindly accept figures in the financial report given by management Records are voluminous and may be difficult to interpret— thus SC held that a SH may make copies, extracts, and memoranda of such records (Veraguth v Isabela Sugar) — Minutes book for meeting of SHs — Minutes book for meetings of the board o Informs the SHs of the policies of the board o SC: until minutes are approved, no SH has the right to make a copy thereof

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Stock and transfer book o Contains the names of all SHs o Code does not require the corporation to furnish a SH with the list of names of other SHs o SEC: SH cannot demand that he be furnished with such a list; he should instead directly examine the books of the corporation Annual financial statements o Most recent financial statements: Granted by Sec 75 o 75: Within 10 days from receipt of written request, corporation must furnish most recent financial statement:  Balance sheet as end of last taxable year  Profit and loss statement showing in detail the assets and liabilities Annual report to the SEC o 141: every corporation domestic or foreign, lawfully doing business in the Philippines Report of election of directors, trustees and officers within 30 days after election by-laws o required by law to be open to inspection, but curiously not the AOI o but since the AOI are filed with the SEC, these are open to inspection by persons with legitimate interests and during reasonable hours on business days

S75 Effect of and limitations on the Right — — — Unbridled exercise of the right to inspect could be harassing to the corporation and would impair its efficient operations Balance must be sought between the interests of the individual SH and the interests of the corporation A corporation may regulate the time and manner of the inspection its books, but it cannot make a by-law which gives the directors absolute discretion to allow or disallow inspection o By-law provisions limiting inspection must be reasonable and not inconsistent with law 74: right to inspect subject to three (3) limitations: (1) must be exercised at reasonable hours on business days (2) person demanding right has not improperly used any information secured through any previous examination of the records (3) demand is made in GF and for a legitimate purpose

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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

To ascertain financial condition of the corporation To ascertain the value of shares 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 o o o

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)

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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

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

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Mandamus (Gokongwei case) o Directed to the corporation o Secretary may be joined as party-defendant If mandamus is inadequate: injunction

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.

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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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

being done or having been done to the corporation, where business judgment is inapplicable and not even an intracorporate 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

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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?


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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

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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

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 partyin-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

See Evangelista v Santos infra GR: Corporation should be made a party-defendant o Exception: Everett case, Angeles v Santos 4. 5. 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 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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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

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