Florete, Jr. vs. Florete, G.R. No.

174909 & 177275, January 20, 2016

Facts:

A stockholder may suffer from a wrong done to or involving a corporation, but this
does not vest in the aggrieved stockholder a sweeping license to sue in his or her
own capacity. The determination of the stockholder's appropriate remedy�whether
it is an individual suit, a class suit, or a derivative suit�hinges on the object of the
wrong done. When the object of the wrong done is the corporation itself or "the
whole body of its stock and property without any severance or distribution among
individual holders,"1 it is a derivative suit, not an individual suit or
class/representative suit, that a stockholder must resort to.

Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4)
children: Marcelino Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena),
Rogelio Florete, Sr. (Rogelio, Sr.), and Teresita Menchavez (Teresita), now
deceased.5 chanroblesvirtuallawlibrary

People's Broadcasting Service, Inc. (People's Broadcasting) is a private corporation

authorized to operate, own, maintain, install, and construct radio and television
stations in the Philippines.6 In its incorporation on March 8, 1966,7 it had an
authorized capital stock of P250,000.00 divided into 2,500 shares at PI00.00 par
value per share.8

Twenty-five percent (25%) of the corporation's authorized capital stock were then
subscribed to as follows:

On November 17, 1967, Berlin and Sudario resigned from their positions as General
Manager and Station Supervisor, respectively.11 Berlin and Sudario each transferred
20 shares to Raul Muyco and Estrella Mirasol.12 chanroblesvirtuallawlibrary

Salome died on November 22, 1980.13 Marcelino, Sr. suffered a stroke on July 12,
1982, which left him paralyzed and bedridden until his death on October 3,
1990.14 After Marcelino, Sr.'s stroke, their son, Rogelio, Sr. started managing the
affairs of People's Broadcasting.15 chanroblesvirtuallawlibrary

In October 1993, People's Broadcasting sought the services of the accounting and
auditing firm Sycip Gorres Velayo and Co. in order to determine the ownership of
equity in the corporation.16 On November 2, 1994, Sycip Gorres Velayo and Co.
submitted a report detailing the movements of the corporation's shares from
November 23, 1967 to December 8, 1989.

Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to
give a categorical statement on equity ownership as People's Broadcasting's
corporate records were incomplete.

In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the

members of his immediate family, namely: Imelda Florete, Rogelio Florete, Jr., and
Margaret Ruth Florete, as well as to Diamel Corporation, a corporation owned by
Rogelio, Sr.'s family.23 chanroblesvirtuallawlibrary

1
As of April 27, 2002, the stockholders of record of People's Broadcasting were the
following:

On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group)
filed before the Regional Trial Court a Complaint25 for Declaration of Nullity of
Issuances, Transfers and Sale of Shares in People's Broadcasting Service, Inc. and
All Posterior Subscriptions and Increases thereto with Damages 26 against Diamel
Corporation, Rogelio, Sr., Imelda Florete, Margaret Florete, and Rogelio Florete, Jr.
(Rogelio, Sr. Group).

On August 2, 2005, the Regional Trial Court issued a Decision (which it called a
"Placitum") dismissing the Marcelino, Jr. Group's Complaint. It ruled that the
Marcelino, Jr. Group did not have a cause of action against the Rogelio, Sr. Group
and that the former is estopped from questioning the assailed movement of shares
of People's Broadcasting. It also ruled that indispensible parties were not joined in
their Complaint.

The Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of
action against those whom they have impleaded as defendants. It also noted that
the principal obligors in or perpetrators of the assailed transactions were persons
other than those in the Rogelio, Sr. Group who have not been impleaded as parties.
Thus, the Court of Appeals emphasized that the following parties were indispensable
to the case: People's Broadcasting; Marcelino, Sr.; Consolidated Broadcasting
System, Inc.; Salome; Divinagracia; Teresita; and "other stockholders of [People's
Broadcasting] to whom the shares were transferred or the nominees of the
stockholders."

The Court of Appeals further emphasized that the estates of Marcelino, Sr. and
Salome had long been settled, with those in the Marcelino, Jr. Group participating (in
their capacity as heirs). As the Marcelino, Jr. Group failed to act to protect their
supposed interests in shares originally accruing to Marcelino, Sr. and Salome, the
group is estopped from questioning the distribution of Marcelino, Sr.'s and Salome's
assets.40 Furthering the conclusion that the Marcelino, Jr. Group was bound by
estoppel, the Court of Appeals noted that the Marcelino, Jr. Group was well aware of
the matters stated in the report furnished by Sycip Gorres Velayo and Co. but failed
to act on any supposed error in the report. Instead, the Marcelino, Jr. Group waited
ten (10) years before filing their Complaint. In the interim, they even participated in
the affairs of People's Broadcasting, voting their shares and electing members of the
Board of Directors.

Issue:
First, whether it was proper for the Regional Trial Court to dismiss the Complaint
filed by the Marcelino, Jr. Group;

Second, assuming that it was error for the Regional Trial Court to dismiss the
Complaint and that the case may be decided on the merits, whether the transfers of
shares assailed by the Marcelino, Jr. Group should be nullified;

Ruling:

2
A stockholder suing on account of wrongful or fraudulent corporate actions (under-
taken through directors, associates, officers, or other persons) may sue in any of
three (3) capacities: as an individual; as part of a group or specific class of stock-
holders; or as a representative of the corporation.

Villamor v. Umale82 distinguished individual suits from class or representative suits:

Individual suits are filed when the cause of action belongs to the individual stock-
holder personally, and not to the stockholders as a group or to the corporation, e.g.,
denial of right to inspection and denial of dividends to a stockholder. If the cause of
action belongs to a group of stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may be filed to protect the
stockholders in the group.83 chanroblesvirtuallawlibrary

Villamor further explained that a derivative suit "is an action filed by stockholders to
enforce a corporate action."84 A derivative suit, therefore, concerns "a wrong to the
corporation itself."85 The real party in interest is the corporation, not the stockhold-
ers filing the suit. The stockholders are technically nominal parties but are nonethe-
less the active persons who pursue the action for and on behalf of the corporation.

Remedies through derivative suits are not expressly provided for in our
statutes�more specifically, in the Corporation Code and the Securities Regulation
Code�but they are "impliedly recognized when the said laws make corporate di-
rectors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties."86 They are intended to afford reliefs to stock-
holders in instances where those responsible for running the affairs of a corporation
would not otherwise act:

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 occur-
rence of such a situation, the common law gradually recognized the right of a stock-
holder to sue on behalf of a corporation in what eventually became known as a "de -
rivative 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 pro-
tect 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.87
chanrobleslaw

The distinction between individual and class/representative suits on one hand and
derivative suits on the other is crucial. These are not discretionary alternatives. The
fact that stockholders suffer from a wrong done to or involving a corporation does
not vest in them a sweeping license to sue in their own capacity. The recognition of
derivative suits as a vehicle for redress distinct from individual and representative
suits is an acknowledgment that certain wrongs may be addressed only through acts
brought for the corporation:

3
Although in most every case of wrong to the corporation, each stockholder is neces-
sarily 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 corpora-
tion is a person distinct and separate from him, and can and should itself sue the
wrongdoer.88 chanrobleslaw

In Asset Privatization Trust v. Court of Appeals,89 the reasons for disallowing a direct
individual suit were further explained:

The reasons given for not allowing direct individual suit are:

(1) . . . "the universally recognized doctrine that a stockholder in a corporation has

no title legal or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of the stockholders." In other words, to allow share-
holders to sue separately would conflict with the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme
Court held in the case of Evangelista v. Santos, that 'the stockholders may not di-
rectly claim those damages for themselves for that would result in the appropriation
by, and the distribution among them of part of the corporate assets before the dis-
solution of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of Section 16 of the Corporation Law...";

(3) the filing of such suits would conflict with the duty of the management to sue for
the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an in -

dividual on the damages recoverable by the corporation for the same act. 90 chanrobleslaw

The avenues for relief are, thus, mutually exclusive. The determination of the
appropriate remedy hinges on the object of the wrong done. When the object is a
specific stockholder or a definite class of stockholders, an individual suit or
class/representative suit must be resorted to. When the object of the wrong done is
the corporation itself or "the whole body of its stock and property without any
severance or distribution among individual holders," 91 it is a derivative suit that a
stockholder must resort to.

Villamor recalls the requisites for filing derivative suits:

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies
(Interim Rules) provides the five (5) requisites for filing derivative suits: ChanRoblesVirtualawlibrary

SECTION 1. Derivative action.�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

4
 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 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. . . ." This requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al, this court said
that "[a]mong the basic requirements for a derivative suit to prosper is that the mi -
nority shareholder who is suing for and on behalf of the corporation must allege in
his complaint before the proper forum that he is suing on a derivative cause of ac -
tion on behalf of the corporation and all other shareholders similarly situated who
wish to join [him]." ...

Moreover, it is important that the corporation be made a party to the case. 94 (Cita-
tions omitted)

In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and
liabilities arising from the Corporation Code, specifically: Section 23 114 (on corporate
decision-making being vested in the board of directors), Section 25 115 (quorum
requirement for the transaction of corporate business), Sections 39 116 and
102117 (both on stockholders' pre�emptive rights), Section 62118 (stipulating the
consideration for which stocks must be issued), Section 63 119 (stipulating that no
transfer of shares "shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation"), and Section 65 120 (on liabilities of
directors and officers "to the corporation and its creditors" for the issuance of
watered stocks) in relation to provisions in People's Broadcasting's Articles of
Incorporation and By-Laws as regards conditions for issuances of and subscription to
shares. The Marcelino, Jr. Group ultimately prays that People's Broadcasting's entire
capital structure be reconfigured to reflect a status quo ante. 121 chanroblesvirtuallawlibrary

As with Ching and Wellington, the actions being assailed by the Marcelino, Jr. Group
pertain to parties that are not extraneous to People's Broadcasting. They assail and
seek to nullify acts taken by various iterations of People's Broadcasting's Board of
Directors. All these acts and incidents concern the capital structure of People's
Broadcasting. These acts reconfigured, through redistribution and enlargement, the
structure of People's Broadcasting's equity ownership. These acts also admitted into
People's Broadcasting new equity holders such as Consolidated Broadcasting
System, Inc. and Newsounds Broadcasting Network, Inc.

As Ching and Wellington exemplifies, the action should be a proper derivative suit
even if the assailed acts do not pertain to a corporation's transactions with third
persons. Cua, Jr. established that the pivotal consideration is whether the wrong
done as well as the cause of action arising from it accrues to the corporation itself or
to the whole body of its stockholders. Ching and Wellington states that if "[t]he
causes of action pleaded ... do not accrue to a single shareholder or a class of

5
shareholders but to the corporation itself,"122 the action should be deemed a
derivative suit. Also, in Go, an action "seeking to nullify and invalidate the duly
constituted acts [of a corporation]" entails a cause of action that "rightfully pertains
to [the corporation itself and which stockholders] cannot exercise . . . except
through a derivative suit."123 chanroblesvirtuallawlibrary

These are the same conditions in this case. What the Marcelino, Jr. Group asks is the
complete reversal of a number of corporate acts undertaken by People'
Broadcasting's different boards of directors. These boards supposedly engaged in
outright fraud or, at the very least, acted in such a manner that amounts to wanton
mismanagement of People's Broadcasting's affairs. The ultimate effect of the remedy
they seek is the reconfiguration of People's Broadcasting's capital structure.

The remedies that the Marcelino, Jr. Group seeks are for People's Broadcasting itself
to avail. Ordinarily, these reliefs may be unavailing because objecting stockholders
such as those in the Marcelino, Jr. Group do not hold the controlling interest in
People's Broadcasting. This is precisely the situation that the rule permitting
derivative suits contemplates: minority shareholders having no other recourse
"whenever the directors or officers of the corporation refuse to sue to vindicate the
rights of the corporation or are the ones to be sued and are in control of the
corporation."124chanroblesvirtuallawlibrary

The Marcelino, Jr. Group points to violations of specific provisions of the Corporation
Code that supposedly attest to how their rights as stockholders have been
besmirched. However, this is not enough to sustain a claim that the Marcelino, Jr.
Group initiated a valid individual or class suit. To reiterate, whether stockholders
suffer from a wrong done to or involving a corporation does not readily vest in them
a sweeping license to sue in their own capacity.

The specific provisions adverted to by the Marcelino, Jr. Group signify alleged
wrongdoing committed against the corporation itself and not uniquely to those
stockholders who now comprise the Marcelino, Jr. Group. A violation of Sections 23
and 25 of the Corporation Code�on how decision-making is vested in the board of
directors and on the board's quorum requirement�implies that a decision was
wrongly made for the entire corporation, not just with respect to a handful of
stockholders. Section 65 specifically mentions that a director's or officer's liability for
the issuance of watered stocks in violation of Section 62 is solidary "to the
corporation and its creditors," not to any specific stockholder. Transfers of shares
made in violation of the registration requirement in Section 63 are invalid and, thus,
enable the corporation to impugn the transfer. Notably, those in the Marcelino, Jr.
Group have not shown any specific interest in, or unique entitlement or right to, the
shares supposedly transferred in violation of Section 63.

Also, the damage inflicted upon People's Broadcasting's individual stockholders, if

6
any, was indiscriminate. It was not unique to those in the Marcelino, Jr. Group. It
pertained to "the whole body of [People's Broadcasting's] stock." 125 Accordingly, it
was upon People's Broadcasting itself that the causes of action now claimed by the
Marcelino Jr. Group accrued. While stockholders in the Marcelino, Jr. Group were
permitted to seek relief, they should have done so not in their unique capacity as
individuals or as a group of stockholders but in place of the corporation itself
through a derivative suit. As they, instead, sought relief in their individual capacity,
they did so bereft of a cause of action. Likewise, they did so without even the
slightest averment that the requisites for the filing of a derivative suit, as spelled out
in Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
Controversies, have been satisfied. Since the Complaint lacked a cause of action and
failed to comply with the requirements of the Marcelino, Jr. Group's vehicle for relief,
it was only proper for the Complaint to have been dismissed.

Metropolitan Bank & Trust Co. vs. Salazar Realty Corp., G.R. No. 218738, March 9, 2022

7
Facts:

Petitioner Metrobank and respondent Salazar Realty Corporation (SARC) are both Philippine
corporations. Metrobank is engaged in the banking business,6 while SARC is engaged in the real
estate business.7 Also involved in the events preceding the present litigation is another Philip-
pine corporation, Tacloban RAS Construction Corporation (Tacloban RAS).

On November 5, 2001, SARC filed an action for quieting of title and nullification of contracts
against Metrobank before the RTC of Tacloban City.8 The petition was docketed as Civil Case
No. 2001-11-164.9 SARC alleged that:

1) Based on its latest filings at the time of the filing of the petition, SARC had the following of-
ficers, who also composed its board of directors:10 Raymund A. Salazar, President; Ramon Ve.
Salazar, Vice President; Ralph A. Salazar,11 Secretary; Rosemarie A. Salazar, Treasurer; Con-
suelo A. Salazar,12 Member, Board of Directors.

2) On October 6, 1992, Tacloban RAS obtained a loan from Metrobank in the amount of ten
million pesos (P10,000,000.00).13 On January 9, 1996, the loan amount was increased to twelve
million pesos (P12,000,000.00); and on October 6, 1999 it was further increased to eighteen mil -
lion five hundred thousand pesos (P18,500,000.00).14 This final amount was reflected in a prom-
issory note executed on October 6, 1999 between Tacloban RAS and Metrobank, which was
signed by Consuelo and Ralph as president and corporate secretary, respectively, of Tacloban
RAS.15 To secure the loan, Metrobank and SARC entered into a mortgage contract on January
9, 1996, with Consuelo and Ralph still signing, this time on behalf of SARC.16 The mortgage
covered five parcels of land located in Tacloban City, which were all registered in the name of
SARC.17 The mortgage was likewise amended to cover the final amount of the loan.18

3) Meanwhile, on March 30, 1995, Ramon Ve. Salazar, SARC's Vice President and director,
passed away. Consuelo likewise passed away on October 21, 2001. The vacancies left by their
passing were left unfilled.19

4) The remaining directors of SARC, including Ralph, issued a board resolution approving
the mortgage of the five SARC-owned lots to secure the loan obligation of Tacloban RAS.20

5) Tacloban RAS defaulted on the loan, prompting Metrobank to initiate extrajudicial foreclo-
sure proceedings before the RTC of Tacloban City.21 Metrobank emerged as the winning bidder
in the auction sale.22 Upon issuance of the certificate of sale23 and filing of the affidavit of con-
solidation of ownership,24 SARC's certificates of title were cancelled and new ones were issued
in Metrobank's favor.25

6) Upon hearing about the auction sale, Ramon Ang Salazar, Jr., Robert Ang Salazar, Roger
Ang Salazar and Rosemarie Salazar Fernandez (hereinafter referred to as Ramon et al.) as in -
corporators and stockholders acting in behalf of SARC, immediately checked the status of the
disputed lands with the Register of Deeds. They discovered that SARC's certificates of title had
been cancelled.26 In response, Ramon et al. registered an adverse claim on the new certificates
of title that were issued to Metrobank.27

7) In view of the SARC board's inaction and tacit approval of the unauthorized encumbrance
and subsequent loss of the corporation's real properties, Ramon et al. filed the present suit on
SARC's behalf.

8) The loan agreement is void because Consuelo is not a stockholder or officer of Tacloban
RAS, based on its incorporation papers filed with the SEC.28

8
 9) The mortgage agreement and the foreclosure proceedings are void because Tacloban
RAS has no authority to use SARC's properties as collateral. Rather, the authorization for such
purpose was issued by the SARC board to a single proprietorship named RAS Construction,
which is an entity distinct and separate from Tacloban RAS.29

10) SARC exceeded its corporate powers when it entered into a mortgage contract to secure
the obligation of a separate, distinct, and unrelated corporation. Tacloban RAS is not a subsidiary
of SARC. It likewise holds no shares or any other form of investment in the latter corporation.
Thus, the mortgage contract is void for being ultra vires insofar as SARC is concerned.30

11) SARC's principal corporate assets are limited to six (6) parcels of land. Consequently,
the mortgage of the five parcels in dispute, including the lot on which SARC's principal office is
located, constitutes an encumbrance of substantially all the assets of the corporation which must
be authorized by SARC's stockholders in a meeting for that purpose, pursuant to Section 40 of
the Corporation Code. Absent such authorization, the mortgage contract is null and void.31

12) SARC board and stockholder approvals for the mortgage contract and the amendments
thereto were not annotated on SARC's certificates of title, giving rise to the presumption that nei-
ther the SARC board nor its stockholders approved said contract and the amendments
thereto.32

13) Metrobank failed to exercise due diligence when it extended an eighteen-million-peso

loan to Tacloban RAS, whose authorized capital stock was only three million pesos. Further-
more, the loan was secured by properties owned by SARC, whose authorized capital stock was
only five million pesos. More importantly, Metrobank was guilty of negligence when it failed to
thoroughly investigate Consuelo and Ralph's authority to enter contracts and encumber proper-
ties on behalf of Tacloban RAS and SARC.33

14) Assuming that the loan and mortgage contracts are valid and binding, the foreclosure
proceedings are nevertheless null and void, for the following reasons: a) Metrobank's petition for
foreclosure lacks several material details which render it fatally defective under A.M. No. 99-10-
05-0;34 b) SARC was not given personal notice of the foreclosure sale; c) the publication of the
notice of sale was defective because copies thereof were attached to the record only after the
auction sale had taken place, and notices of publication were not furnished for all instances of
publication, in violation of A.M. No. 99-10-05-0; d) there was only one bidder in the auction sale,
in violation of item 5 of A.M. No. 99-10-05-0; and e) Section 47 of Republic Act No. 8791 which
sets different redemption periods for natural and juridical persons is unconstitutional.35

Accordingly, SARC prayed that the cloud on its title be removed by: 1) nullifying the loan and
mortgage agreements between Metrobank and Tacloban RAS/SARC; 2) nullifying the foreclo-
sure proceedings initiated by Metrobank; and 3) cancelling the certificates of title issued to
Metrobank.

On February 13, 2002, Metrobank filed a Comment with Motion to Dismiss. It argued that
Ralph had authority to enter into the loan and mortgage agreements, and that the mortgaged
properties were personally owned by Ralph and Consuelo.37 Metrobank further alleged that
Consuelo personally bound herself as surety;38 and that the final amount of the loan was agreed
upon pursuant to a restructuring upon Ralph's request, with the approval of the boards of direc -
tors of both Tacloban RAS and SARC.39

Metrobank also argued that SARC and its stockholders have no standing to seek the cancel-
lation of the loan and mortgage agreements since SARC is not a party thereto.40 It also argued
that the petition filed by SARC through Ramon et al. is in the nature of a derivative suit which
must be directed against SARC's officers, directors, or stockholders. Likewise, since the petition
is in the nature of a derivative suit, it is an intra-corporate controversy over which regular courts
like Branch 9 of the Tacloban City RTC have no jurisdiction.41 Metrobank thus prayed that the

9
petition be dismissed for lack of standing on the part of both Ramon et al. and SARC, and for
lack of jurisdiction.

In its Reply, SARC reiterated Ralph's lack of authority to bind Tacloban RAS and SARC. It
also disputed Metrobank's argument on standing, maintaining that the case was properly filed
against Metrobank, who was responsible for clouding its titles by initiating the foreclosure pro-
ceedings.42 In the same vein, SARC also rejected Metrobank's characterization of the petition as
an intra-corporate controversy, arguing that the loan and mortgage contracts, as well as the fore-
closure proceedings, are clouds on SARC's title which may only be removed by the RTC, thus:

Issue:

3). THE FINDING OF THE COURT OF APPEALS THAT THE CASE A QUO IS NOT A DERIVA-
TIVE SUIT BECAUSE THE STOCKHOLDERS WHO BROUGHT THE SUIT FOR OR ON BE -
HALF OF RESPONDENT CORPORATION ARE NOT STOCKHOLDERS OF PETITIONER, AS-
SUMING EX ARGUMENTI, IS CORRECT WILL CAUSE THE DISMISSAL OF THE CASE A
QUO ON THE GROUND OF LACK OF CAUSE OF ACTION OR PERSONALITY TO SUE.

Ruling:

A derivative suit is one of three kinds of suits that may be filed by a stockholder or member of
a corporation or association, viz.:

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of direc -

tors 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 be-
cause 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 belong -
ing to the same group. But where the acts complained of constitute a wrong to the corporation it -
self, then 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 necessar-
ily affected because the value of his interest therein would he 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 wrongdoers. 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.

However, in cases of mismanagement where the wrongful acts committed by the directors
or trustees themselves, a stockholder or member may find that he has no redress be -
cause 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 the corpo-
ration in what eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against 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 corpora -
tion. In such actions, the suing stockholder is regarded as the nominal party, with the corporation
as the party in interest.

10
 Jurisprudence has developed three requisites for a derivative suit, which are first enumer-
ated together in the 1989 case of San Miguel Corporation v. Kahn:74

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction com-
plained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of di-
rectors for the appropriate relief but the latter has failed or refused to heed his plea;

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been,
or being caused to the corporation and not to the particular stockholder bringing the suit.75

This is the three-part test insisted upon by Metrobank; however, this test has been super-
seded by Rule 8, Section 1 of the 2001 IRPIC, which obliquely defines a derivative suit, or a de-
rivative action, as an action brought by a stockholder or member in the name of a corporation or
association.76 That same provision states that such actions may be brought, provided that the
following requisites, which must be specifically alleged in the complaint,77 are met:

(1) The party suing on the corporation or association's behalf 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) Such party exerted all reasonable efforts, and alleges the same with particularity in the com-
plaint, 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.

(5) The suit must be brought in the name of the corporation.

Applying the foregoing disquisitions to the case at bar, we find that while SARC's suit is in-
deed a derivative suit which is transferable to the relevant special commercial court in accor-
dance with the Gonzales guidelines, it nevertheless suffers from fatal defects which merit its dis-
missal.

SARC's petition expressly alleges that it is being filed as a derivative suit:

6. This is a stockholder's derivative suit instituted by PETITIONERS RAMON A. SALAZAR, JR.,

ROGER A. SALAZR, ROBERT A. SALAZAR and ROSEMARIE S. FERNANDEZ for and in be-
half of SALAZAR ANG REALTY CORPORATION (Plaintiff-corporation), as its incorporators and
stockholders x x x. Said Petitioners were stockholders of the corporation at the time that: 1) a
loan in the amount of EIGHTEEN MILLION FIVE HUNDRED THOUSAND PESOS was obtained
from the Respondent Bank evidenced by a promissory note (Annex "B") allegedly signed by the
late Consuelo Ang Salazar and Ralph Ang Salazar as representatives of Tacloban RAS Con-
struction Corporation x x x; 2) the mortgage contract (Annex "C") in favor of the Respondent
bank was allegedly executed by the corporation through the late Consuelo A. Salazar who was
described as the corporation's President and its Secretary Ralph A. Salazar x x x;

11
xxxx

7. This suit is brought by the above[-]mentioned incorporators and stockholders for the following
reasons:

xxxx

7.2. Ramon Ve. Salazar, director and Vice President of the Corporation died on March 30, 1995,
before the mortgage contract which is sought to be declared null and void was executed. No doc-
ument was filed with the SEC which shows that an election was held by the board of directors in
order to fill the vacancy. Consuelo A. Salazar passed away last October 21, 2001. The remaining
directors of the corporation have not taken any steps to vindicate the corporation's rights. De-
mand upon the board of directors to file suit in behalf of the corporation would be useless in that
the mortgage contract, the validity of which is being questioned in this suit appeared to have
been approved by said board through a supposed board resolution certified by the corporate
secretary Ralph A. Salazar and the Secretary's Certificate of said resolution was annotated on
the titles issued in the name of Salazar Ang Realty Corporation. This however, cannot be deter-
mined with certainty by the Petitioners stockholders as Ralph A. Salazar acting as the corporate
secretary of Plaintiff Corporation has custody of the stock and transfer book as well as the reso-
lutions and other documents and papers of the corporation.

7.3. Time is of the essence considering that corporate assets have now been registered in the
name of the Respondent Bank and the exhaustion of remedies within the corporation which
would delay the filing of a suit would only cause irreparable damage to the corporation.101

Apart from the express statement in paragraph 6, the rest of the petition's allegations clearly
reveal that the crux of the dispute is the illegal and ultra vires approval of the mortgage by the
SARC board without the consent of the suing shareholders, and despite the vacancies in the
board created by the deaths of Ramon Sr. and Consuelo. These allegations unmistakably show
the existence of a "controversy arising out of intra-corporate relations," with the suing sharehold-
ers assailing the decisions of Ralph and the SARC board. The non-joinder of Ralph and the other
officers or shareholders of SARC, or even of Tacloban RAS, is of no moment, because non-join-
der of parties is not a ground for dismissal, and the court can order their inclusion at any
time.102 While the reliefs sought are directed at Metrobank and the officers who conducted the
auction sale, the suing shareholders' cause of action is ultimately rooted in the illegal and im -
proper ratification and authorization of the mortgage contract by Ralph and the SARC board.

Having established that the petition is a derivative suit, we determine its compliance with the
requisites therefor under the 2001 IRPIC. ℒαwρhi ৷

There is no question that the suit was brought in SARC's name by Ramon et al., who were
stockholders at the time the assailed mortgage contract was entered into. The petition also con -
tains allegations justifying the non-exhaustion of intra-corporate remedies.103 However, it does
not comply with Rule 1, Section 1(3) of the 2001 IRPIC, regarding the availment of appraisal
rights.

Among the grounds raised by SARC for the nullification of the mortgage contract is that it
constitutes an encumbrance of substantially all the assets of the corporation which must be au-
thorized by its stockholders in a meeting for that purpose, pursuant to Section 40 of the Corpora-
tion Code.104 Under that provision, a mortgage of all or substantially all of the corporation's as-
sets is subject to the exercise of the appraisal right. It was therefore incumbent upon herein re-
spondents to make particular allegations regarding their availment of their appraisal rights or the
impossibility or futility thereof.105 Under the 2001 IRPIC, a derivative suit must particularly allege
that there are no appraisal rights available against the assailed corporate action.106 Conversely,
if appraisal rights are available, such fact must be alleged and the non-availment thereof must be
properly explained, moreso since a derivative suit must particularly allege that the stockholder

12
exerted all reasonable efforts to exhaust all remedies available under the laws and regulations
governing the corporation.107

Furthermore, SARC's petition lacks a categorical statement that it is not a nuisance or ha -

rassment suit. In order to provide legal justification for what is essentially an unauthorized suit
filed on behalf of the corporation, stockholders who resort to the equitable remedy of a derivative
suit must categorically declare under oath that the remedy is being sought for just and legitimate
purposes and not as a form of nuisance or harassment.108 This principle is now enshrined in
Rule 8, Section 1 of the 2001 IRPIC, which explicitly states that nuisance or harassment suits
shall be dismissed.109

To conclude, we reiterate that a derivative suit is an equitable exception to the rule that the
corporate power of suit is exercisable only through the board of directors. A proper resort to this
equitable procedural device must satisfy the requisites laid down by law and procedure for its in-
stitution; thus, courts must deny resort when such requisites are not met.

13
Paul Lee Tan, et. al. vs. Paul Sycip, et. al., August 17, 2006

Facts:

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based
on the number of outstanding voting stocks. For nonstock corporations, only those who are ac-
tual, living members with voting rights shall be counted in determining the existence of a quorum
during members’ meetings. Dead members shall not be counted.

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation
with fifteen (15) regular members, who also constitute the board of trustees. [4] During the annual
members’ meeting held on April 6, 1998, there were only eleven (11) [5] living member-trustees,
as four (4) had already died. Out of the eleven, seven (7) 6 attended the meeting through their re-
spective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the ob-
jection of Atty. Antonio C. Pacis, who argued that there was no quorum. 7 In the meeting, Peti-
tioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four
deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners
maintained that the deceased member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all their rights (including the right
to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of
quorum. She held that the basis for determining the quorum in a meeting of members should be
their number as specified in the articles of incorporation, not simply the number of living mem-
bers. 8 She explained that the qualifying phrase "entitled to vote" in Section 24 9 of the Corpora-
tion Code, which provided the basis for determining a quorum for the election of directors or
trustees, should be read together with Section 89. 10

The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it pre-
scribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction
with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal of petitioners
and affirmed the Decision of the hearing officer in toto. 13 It found to be untenable their contention
that the word "members," as used in Section 52 14 of the Corporation Code, referred only to the
living members of a nonstock corporation. 15

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certifi-
cation of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special
Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition.

Issue:

whether or not in NON-STOCK corporations, dead members should still be counted in determi-
nation of quorum for purposed of conducting the Annual Members’ Meeting.

14
"Petitioners have maintained before the courts below that the DEAD members should no longer
be counted in computing quorum primarily on the ground that members’ rights are ‘personal and
non-transferable’ as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

Ruling:

Section 52 of the Corporation Code states:

"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws,
a quorum shall consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock corporations."

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the
outstanding capital stock, as defined by the Code thus:

"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as used
in this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares." (Un-
derscoring supplied)

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual
number of members of the corporation, the next question to resolve is what happens in the event
of the death of one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal ti-
tle to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the
stocks of the decedent are held by the administrator or executor. 44

On the other hand, membership in and all rights arising from a nonstock corporation are personal
and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not "dead members" are entitled to
exercise their voting rights (through their executor or administrator), depends on those articles of
incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated
by the death of the member. 46 Section 91 of the Corporation Code further provides that termina-
tion extinguishes all the rights of a member of the corporation, unless otherwise provided in the
articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the
membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not
to be counted in determining the requisite vote in corporate matters or the requisite quorum for
the annual members’ meeting. With 11 remaining members, the quorum in the present case

15
should be 6. Therefore, there being a quorum, the annual members’ meeting, conducted with
six 47 members present, was valid.

Vacancy in the

Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code
provides:

"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or by expi-
ration of term, may be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockhold-
ers in a regular or special meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only for the unexpired term of his predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still consti-
tute a quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies in the
board by the remaining directors or trustees constituting a quorum is merely permissive, not
mandatory. 48 Corporations, therefore, may choose how vacancies in their respective boards may
be filled up -- either by the remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of
directors; that is, by a majority vote of the remaining members of the board. 50

While a majority of the remaining corporate members were present, however, the "election" of
the four trustees cannot be legally upheld for the obvious reason that it was held in an annual
meeting of the members, not of the board of trustees. We are not unmindful of the fact that the
members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS by-
law provision, which specifically prescribes that vacancies in the board must be filled up by the
remaining trustees. In other words, these remaining member-trustees must sit as a board in or-
der to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the board and
that by the constituent members of the corporation. The board of trustees must act, not individu-
ally or separately, but as a body in a lawful meeting. On the other hand, in their annual meeting,
the members may be represented by their respective proxies, as in the contested annual mem-
bers’ meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions

16
Philip Turner, et. al. vs. Lorenzo Shipping Corp., G.R. No. 157479, Nov.24, 2010

Facts:

The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation en-
gaged primarily in cargo shipping activities. In June 1999, the respondent decided to amend its
articles of incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of
stock. Feeling that the corporate move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment of their shares at the rate of
₱2.276/share based on the book value of the shares, or a total of ₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its shares
were listed in the Philippine Stock Exchange, and that the payment could be made only if the re-
spondent had unrestricted retained earnings in its books to cover the value of the shares, which
was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal com-
mittee pursuant to Section 82 of the Corporation Code, each of them nominating a representa-
tive, who together then nominated the third member who would be chairman of the appraisal
committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the petition-
ers’ nominee; Atty. Antonio Acyatan, the respondent’s nominee; and Leo Anoche of the Asian
Appraisal Company, Inc., the third member/chairman.

On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an ag-
gregate value of ₱2,565,400.00 for the petitioners.2

Subsequently, the petitioners demanded payment based on the valuation of the appraisal com-
mittee, plus 2%/month penalty from the date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to the appraisers. 3

In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’ de-
mand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising
their appraisal rights could be paid only when the corporation had unrestricted retained earnings
to cover the fair value of the shares, but that it had no retained earnings at the time of the peti-
tioners’ demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit
of ₱72,973,114.00 as of December 31, 1999.

Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and
damages in the RTC in Makati City on January 22, 2001.

The respondent opposed the motion for partial summary judgment, stating that the determination
of the unrestricted retained earnings should be made at the end of the fiscal year of the respon-
dent, and that the petitioners did not have a cause of action against the respondent.

17
Ruling:

Stockholder’s Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to demand payment of
the fair value of his or her shares. This right, known as the right of appraisal, is expressly recog-
nized in Section 81 of the Corporation Code, to wit:

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the char-
ter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not
vest unless objectionable corporate action is taken.13 It serves the purpose of enabling the dis-
senting stockholder to have his interests purchased and to retire from the corporation. 14 1avvphil

Under the common law, there were originally conflicting views on whether a corporation had the
power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to
purchase its issued stocks because such purchase was an indirect method of reducing capital
(which was statutorily restricted), aside from being inconsistent with the privilege of limited liabil-
ity to creditors.15 Only a few American jurisdictions adopted by decision or statute the strict Eng-
lish rule forbidding a corporation from purchasing its own shares. In some American states where
the English rule used to be adopted, statutes granting authority to purchase out of surplus funds
were enacted, while in others, shares might be purchased even out of capital provided the rights
of creditors were not prejudiced.16 The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a corporation of its
assets and against the impairment of its capital needed for the protection of creditors. 17

Now, however, a corporation can purchase its own shares, provided payment is made out of sur-
plus profits and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this new
rule is embodied in Section 41 of the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited
to the following cases: Provided, That the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

18
 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares un-
der the provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well as the implications
of the right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted against the proposed cor-
porate action by making a written demand on the corporation within 30 days after the date on
which the vote was taken for the payment of the fair value of his shares. The failure to make the
demand within the period is deemed a waiver of the appraisal right.19

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares
within a period of 60 days from the date the stockholders approved the corporate action, the fair
value shall be determined and appraised by three disinterested persons, one of whom shall be
named by the stockholder, another by the corporation, and the third by the two thus chosen. The
findings and award of the majority of the appraisers shall be final, and the corporation shall pay
their award within 30 days after the award is made. Upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the corpora-
tion.20

3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend
rights, shall be suspended from the time of demand for the payment of the fair value of the
shares until either the abandonment of the corporate action involved or the purchase of the
shares by the corporation, except the right of such stockholder to receive payment of the fair
value of the shares.21

4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon
that such shares are dissenting shares. A failure to do so shall, at the option of the corporation,
terminate his rights under this Title X of the Corporation Code. If shares represented by the cer-
tificates bearing such notation are transferred, and the certificates are consequently canceled,
the rights of the transferor as a dissenting stockholder under this Title shall cease and the trans-
feree shall have all the rights of a regular stockholder; and all dividend distributions that would
have accrued on such shares shall be paid to the transferee.22

5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the Corpo-
ration Code provides that if the dissenting stockholder is not paid the value of his shares within
30 days after the award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution of corporate assets. 24 The creditors of
a corporation have the right to assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has outstanding debts and li-

19
abilities.25 There can be no distribution of assets among the stockholders without first paying cor-
porate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is
null and void.

The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:

However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal con-
dition that no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment. Thus, the Supreme Court held
that:

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are re-
garded as equity in trust for the payment of corporate creditors. The reason is that creditors of a
corporation are preferred over the stockholders in the distribution of corporate assets. There can
be no distribution of assets among the stockholders without first paying corporate creditors.
Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Creditors
of a corporation have the right to assume that so long as there are outstanding debts and liabili-
ties, the board of directors will not use the assets of the corporation to purchase its own stock.

20
Chua v. People, G.R. No. 216146, August 24, 2016

Facts:

[Joselyn] was a stockholder of Chua Tee Corporation of Manila. x x x [Alfredo] was the president
and chairman of the board, while [Tomas] was the corporate secretary and also a member of the
board of the same corporation. x x x [Mercedes] was the accountant/bookkeeper tasked with the
physical custody of the corporate records.

On or about August 24, 2000, Joselyn invoked her right as a stockholder pursuant to Section 74
of the Corporation Code to inspect the records of the books of the business transactions of the
corporation, the minutes of the meetings of the board of directors and stockholders, as well as
the financial statement[ s] of the corporation. She hired a lawyer to send demand letters to each
of the petitioners for her right to inspect to be heeded. However, she was denied of such right to
inspect.

Joselyn likewise hired the services of Mr. Abednego Velayo (Mr. Velayo) from the accounting
firm of Guzman Bocaling and Company to assist her in examining the books of the corporation.
Armed with a letter request[,] together with the list of schedules of audit materials, Mr. Velayo
and his group visited the corporation's premises for the supposed examination of the accounts.
However, the books of accounts were not formally presented to them and there was no list of
schedules[,] which would allow them to pursue their inspection. Mr. Velayo testified that they
failed to complete their objective of inspecting the books of accounts and examine the recorded
documents. (Citations omitted)
9

In the Complaint-Affidavit filed before the Quezon City Prosecutors' Office, Joselyn alleged that
despite written demands, the petitioners conspired in refusing without valid cause the exercise of
her right to inspect Chua Tee Corporation of Manila's (CTCM) business transactions records, fi-
nancial statements and minutes of the meetings of both the board of directors and stockhold-
ers.10

In their Counter Affidavits, the petitioners denied liability. They argued that the custody of the
11

records sought to be inspected by Joselyn did not pertain to them. Besides, the physical records
were merely kept inside the cabinets in the corporate office. Further, they did not prevent Joselyn
from inspecting the records. What happened was that Mercedes was severely occupied with
winding up the affairs of CTCM after it ceased operations. Joselyn and her lawyers then failed to
set up an appointment with Mercedes. Joselyn, through counsel, then sent demand letters to in-
spect the records. Not long after, Joselyn filed two cases, one of which was civil and the other,
criminal, against the petitioners.

Issue:

propriety of their conviction for alleged violation of Section 74, in relation to Section 144, of the
Corporation Code.

21
Ruling:

Despite the expiration of CTCM's

corporate term in 1999, duties as
corporate officers still pertained to
the petitioners when Joselyn 's
complaint was filed in 2000.

Yu, et al. v. Yukayguan, et al. 48

instructs that:

[T]he corporation continues to be a body corporate for three (3) years after its dissolution for pur-
poses of prosecuting and defending suits by and against it and for enabling it to settle and close
its affairs, culminating in the disposition and distribution of its ,remaining assets. x x x The termi-
nation of the life of a juridical entity does not by itself cause the extinction or diminution of the
rights and liabilities of such entity x x x nor those of its owners and creditors. x x x.
49

Further, as correctly pointed out by the OSG, Sections 122 and 145 of the Corporation Code ex-
plicitly provide for the continuation of the body corporate for three years after dissolution. The
rights and remedies against, or liabilities of, the officers shall not be removed or impaired by rea-
son of the dissolution of the corporation. Corollarily then, a stockholder's right to inspect corpo-
rate records subsists during the period of liquidation. Hence, Joselyn, as a stockholder, had the
right to demand for the inspection of records. Lodged upon the corporation is the corresponding
duty to allow the said inspection.

22
Ma. Belen Flordeliza Ang-Abaya vs. Eduardo G. Ang, G.R. No. 178511, Dec. 4, 2008

Facts:

Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) (collectively re-
ferred to as "the corporations") are family-owned corporations, where petitioners Ma. Belen
Flordeliza C. Ang-Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato (Vin-
cent), Hanna Zorayda A. Ang (Hanna) and private respondent Eduardo G. Ang (Eduardo) are
shareholders, officers and members of the board of directors.

Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing Corporation (Oriana)
filed Civil Case No. 4257-MC, which is a case for damages with prayer for issuance of a tempo-
rary restraining order (TRO) and/or writ of preliminary injunction against herein respondent Ed-
uardo, together with Michael Edward Chi Ang (Michael), and some other persons for allegedly
conniving to fraudulently wrest control/management of the corporations.5 Eduardo allegedly bor-
rowed substantial amounts of money from the said corporations without any intention to repay;
that he repeatedly demanded for increases in his monthly allowance and for more cash ad-
vances contrary to existing corporate policies; that he harassed petitioner Flordeliza to transfer
and/or sell certain corporate and personal properties in order to pay off his personal obligations;
that he attempted to forcibly evict petitioner Jason from his office and claim it as his own; that he
interfered with and disrupted the daily business operations of the corporations; that Michael was
placed on preventive suspension due to prolonged absence without leave and commission of
acts of disloyalty such as carrying out orders of Eduardo which were detrimental to their busi-
ness, using privileged information and confidential documents/data obtained in his capacity as
Vice President of the corporations, and admitting to have sabotaged their distribution system and
operations.

During the pendency of Civil Case No. 4257-MC, particularly in July, 2004, Eduardo sought per-
mission to inspect the corporate books of VMC and Genato on account of petitioners’ alleged fail-
ure and/or refusal to update him on the financial and business activities of these family corpora-
tions.6 Petitioners denied the request claiming that Eduardo would use the information obtained
from said inspection for purposes inimical to the corporations’ interests, considering that: "a) he
is harassing and/or bullying the Corporation[s] into writing off P165,071,586.55 worth of personal
advances which he had unlawfully obtained in the past; b) he is unjustly demanding that he be
given the office currently occupied by Mr. Francis Jason Ang, the Vice-President for Finance and
Corporate Secretary; c) he is usurping the rights belonging exclusively to the Corporation; and d)
he is coercing and/or trying to inveigle the Directors and/or Officers of the Corporation to give in
to his baseless demands involving specific corporate assets."7

Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and
Genato, Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging
them with violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code
of the Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent, and Hanna were subsequently
impleaded for likewise denying respondent’s request to inspect the corporate books.

Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of fac-
tual and legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still
pending resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the

23
allegations contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s
lavish lifestyle, which is funded by personal loans and cash advances from the family corpora-
tions. They alleged that Eduardo consistently pressured petitioner Flordeliza, his daughter, to im-
properly transfer ownership of the corporations’ V.A.G. Building to him; 11 to disregard the com-
pany policy prohibiting advances by shareholders; to unduly increase his corporate monthly al-
lowance; and to sell her Wack-Wack Golf proprietary share and use the proceeds thereof to pay
his personal financial obligations. When the proposed transfer of the V.A.G. Building did not ma-
terialize, petitioners claim that Eduardo instituted an action to compel the donation of said prop-
erty to him.12 Furthermore, they claim that Eduardo attempted to forcibly evict petitioner Jason
from his office at VMC so he can occupy the same; that Eduardo and his cohorts constantly cre-
ated trouble by intervening in the daily operations of the corporations without the knowledge or
consent of the board of directors.

Issue:

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE

OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING
THE RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING PROBABLE CAUSE
AGAINST PETITIONERS AFTER PRELIMINARY INVESTIGATION FOR VIOLATION OF SEC-
TION 74 OF THE CORPORATION CODE OF THE PHILIPPINES.

Ruling:

In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a
case of violation of a stockholder or member’s right to inspect the corporate books/records as
provided for under Section 74 of the Corporation Code, the following elements must be present:

First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation’s records or minutes;

Second. Any officer or agent of the concerned corporation shall refuse to allow the said director,
trustee, stockholder or member of the corporation to examine and copy said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be imposed upon the directors or
trustees who voted for such refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense that the person de-
manding to examine and copy excerpts from the corporation’s records and minutes has improp-
erly used any information secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand, the contrary must be shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of
improper use or motive is in the nature of a justifying circumstance that would exonerate those
who raise and are able to prove the same. Accordingly, where the corporation denies inspection
on the ground of improper motive or purpose, the burden of proof is taken from the shareholder
and placed on the corporation.33 This being the case, it would be improper for the prosecutor,
during preliminary investigation, to refuse or fail to address the defense of improper use or mo-
tive, given its express statutory recognition. In the past we have declared that if justifying circum-
stances are claimed as a defense, they should have at least been raised during preliminary in-

24
vestigation;34 which settles the view that the consideration and determination of justifying circum-
stances as a defense is a relevant subject of preliminary investigation.

In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the rationale
behind a stockholder's right to inspect corporate books, to wit:

The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an in-
cident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right
is predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has
to be proper and lawful in character and not inimical to the interest of the corpora-
tion.30

In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or examine the
records of a corporation under Section 74 of the Corporation Code is circumscribed by the ex-
press limitation contained in the succeeding proviso, which states that:

[I]t shall be a defense to any action under this section that the person demanding to ex-
amine and copy excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the records or minutes
of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand. (Emphasis supplied)

Thus, contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate books is not
without limitations. While the right of inspection was enlarged under the Corporation Code as op-
posed to the old Corporation Law (Act No. 1459, as amended),

It is now expressly required as a condition for such examination that the one request-
ing it must not have been guilty of using improperly any information secured through a
prior examination, or that the person asking for such examination must be acting in good
faith and for a legitimate purpose in making his demand.32 (Emphasis supplied)

Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on
the latter’s attempt in bad faith at having his more than P165 million advances from the corpora-
tions written off; that Eduardo is unjustly demanding that he be given the office of Jason, or the
Vice Presidency for Finance and Corporate Secretary; that Eduardo is usurping rights belonging
exclusively to the corporations; and Eduardo’s attempts at coercing the corporations, their direc-
tors and officers into giving in to his baseless demands involving specific corporate assets.
Specifically, petitioners accuse Eduardo of the following:

25
 1. He is a spendthrift, using the family corporations’ resources to sustain his extravagant
lifestyle. During his incumbency as officer of VMC and Genato (from 1984 to 2000), he
was able to obtain massive amounts by way of cash advances from these corporations,
amounting to more than P165 million;

2. He is exercising undue pressure upon petitioners in order to acquire ownership,

through the forced execution of a deed of donation, over the VAG Building in San Juan,
which building belongs to Genato;

3. He is putting pressure on the corporations, through their directors and officers, for the
latter to disregard their respective policies which prohibit the grant of cash advances to
stockholders.

4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary
Share;

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to de-
mand an increase in his P140,000.00 monthly allowance from the corporation to
P250,000.00; demand a cash advance of US$10,000; and to demand that the corpora-
tions shoulder the medical and educational expenses of his family as well as those of the
other stockholders;

6. In November 2003, he demanded that he be given an office within the corporations’

premises. In December 2003, he stormed the corporations’ common office, ordered the
employees to vacate the premises, summoned the directors to a meeting, and there he
berated them for not acting on his requests. In January 2004, he returned to the office,
demanding the transfer of the Accounting Department and for Jason to vacate his office
by the end of the month. He likewise left a letter which contained his demands. At the
end of January 2004, he returned, ordered the employees to leave the premises and de-
manded that Jason surrender his office and vacate his desk. He did this no less than four
(4) times. As a result, the respective boards of directors of the corporations resolved to
ban him from the corporate premises;

7. He has been interfering in the everyday operations of VMC and Genato, usurping the
duties, rights and authority of the directors and officers thereof. He attempted to lease out
a warehouse within the VMC premises without the knowledge and consent of its directors
and officers; during the wake of the former President of VMC and Genato, he issued in-
structions for the employees to close down operations for the whole duration of the wake,
against the corporate officers’ instructions to attend the wake by batch, so as not to ham-
per business operations; he has caused chaos and confusion in VMC and Genato as a
result;41

8. He is out to sabotage the family corporations.42

These serious allegations are supported by official and other documents, such as board resolu-
tions, treasurer’s affidavits and written communication from the respondent Eduardo himself, who
appears to have withheld his objections to these charges. His silence virtually amounts to an ac-
quiescence.43 Taken together, all these serve to justify petitioners’ allegation that Eduardo was
not acting in good faith and for a legitimate purpose in making his demand for inspection of the
corporate books. Otherwise stated, there is lack of probable cause to support the allegation that
petitioners violated Section 74 of the Corporation Code in refusing respondent’s request for ex-
amination of the corporation books.

26
Aderito Z. Yujuico, et. al. vs. Cezar Quiambao et. al., G.R. No. 180416, June 2, 2014

Facts:

The complaint accuses respondents and Casanova of violating Section 74 in relation to Section
144 of Batas Pambansa Blg. 68 or the Corporation Code. The petitioners premise such accusa-
tion on the following factual allegations:
8

1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly elected president
and chairman of STRADEC-demanded Quiambao for the turnover of the corporate
records of the company, particularly the accounting files, ledgers, journals and other
records of the corporation's business. Quiambao refused.

2. As it turns out, the corporate records of STRADEC were in the possession of

Casanova-the accountant of STRADEC. Casanova was keeping custody of the said
records on behalf of Quiambao, who allegedly needed the same as part of his defense in
a pending case in court.

3. After the 1 March 2004 stockholders' meeting, Quiambao and Casanova caused the
removal of the corporate records of STRADEC from the company's offices in Pasig City.

4. Upon his appointment as corporate secretary on 21 June 2004, Blando likewise de-
manded Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil re-
fused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and transfer
book deposited in a safety deposit box with Equitable PCI Bank, Kamias Road, Quezon
City. Blando acceded to the proposal and the stock and transfer book was deposited in a
safety deposit box with the bank identified. It was agreed that the safety deposit box may
only be opened in the presence of both Quiambao and Blando.

6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock and transfer
book from the safety deposit box and brought it to the offices of the Stradcom Corpora-
tion (STRADCOM) in Quezon City. Quiambao thereafter asked Blando to proceed to the
STRADCOM offices. Upon arriving thereat, Quiambao pressured Blando to make certain
entries in the stock and transfer books. After making such entries, Blando again de-
manded that he be given possession of the stock and transfer book. Quiambao refused.

7. On 1 July 2004, Blando received an order dated 30 June 2004 issued by the RTC,
Branch 71, of Pasig City in Civil Case No. 70027, which directed him to cancel the entries
he made in the stock and transfer book. Hence, on even date, Blando wrote letters to
Quiambao and Pilapil once again demanding for the turnover of the stock and transfer
book. Pilapil replied thru a letter dated 2 July 2004 where he appeared to agree to
Blando's demand.

8. However, upon meeting with Pilapil and Quiambao, the latter still refused to turnover
the stock and transfer book to Blando. Instead, Blando was once again constrained to

27
 agree to a proposal by Pilapil to have the stock and transfer book deposited with the
RTC, Branch 155, of Pasig City. The said court, however, refused to accept such deposit
on the ground that it had no place for safekeeping.

9. Since Quiambao and Pilapil still refused to turnover the stock and transfer book,
Blando again acceded to have the book deposited in a safety deposit box, this time, with
the Export and Industry Bank in San Miguel A venue, Pasig City.

Petitioners theorize that the refusal by the respondents and Casanova to turnover STRADEC's
corporate records and stock and transfer book violates their right, as stockholders, directors and
officers of the corporation, to inspect such records and book under Section 7 4 of the Corporation
Code. For such violation, petitioners conclude, respondents may be held criminally liable pur-
suant to Section 144 of the Corporation Code.

Issue:

argue that the R TC made a legal blunder when it held that the refusal to allow inspection of the
stock and transfer book of a corporation is not a punishable offense under the Corporation Code.
Petitioners contend that such a refusal still amounts to a violation of Section 74 of the Corpora-
tion Code, for which Section 144 of the same code prescribes a penalty.

Ruling:

The act of ref using to allow inspection of the

stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.

We first address the inaccurate pronouncement of the RTC.

Section 74 is the provision of the Corporation Code that deals with the books a corporation is re-
quired to keep. It reads:

Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or
member, the time when any director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any
motion or proposition, and a record thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee, stockholder or member of the corporation at rea-
sonable hours on business days and he may demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.

28
Any officer or agent of the corporation who shall refuse to allow any director, trustees, stock-
holder or member of the corporation to examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder
or member for damages, and in addition, shall be guilty of an offense which shall be punishable
under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it
shall be a defense to any action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has improperly used any information
secured through any prior examination of the records or minutes of such corporation or of any
other corporation, or was not acting in good faith or for a legitimate purpose in making his de-
mand.

Stock corporations must also keep a book to be known as the "stock and transfer book'', in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the corporation or in the office
of its stock transfer agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he se-
cures a license from the Securities and Exchange Commission and pays a fee as may be fixed
by the Commission, which shall be renewable annually: Provided, That a stock corporation is not
precluded from performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee herein pro-
vided, shall be applicable. (5 la and 32a; P.B. No. 268.) (Emphasis supplied)

Section 144 of the Corporation Code, on the other hand, is the general penal provision of the
Corporation Code. It reads:

Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not less
than one thousand (₱1,000.00) pesos but not more than ten thousand (₱10,000.00) pesos or by
imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the
discretion of the court. If the violation is committed by a corporation, the same may, after notice
and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Com-
mission: Provided, That such dissolution shall not preclude the institution of appropriate action
against the director, trustee or officer of the corporation responsible for said violation: Provided,
further, That nothing in this section shall be construed to repeal the other causes for dissolution
of a corporation provided in this Code. (190 112 a) (Emphasis supplied)

In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow inspection
of the stock and transfer book, even though it may be a violation of Section 74(4), is not punish-
able as an offense under the Corporation Code. In justifying this conclusion, the RTC seemingly
29

relied on the fact that, under Section 7 4 of the Corporation Code, the application of Section 144
is expressly mentioned only in relation to the act of "refus[ing] to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from [the corporation's]
records or minutes" that excludes its stock and transfer book.

We do not agree.

While Section 74 of the Corporation Code expressly mentions the application of Section 144 only
in relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the

29
corporation to examine and copy excerpts from [the corporation's] records or minutes," the same
does not mean that the latter section no longer applies to any other possible violations of the for-
mer section.

It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any provi-
sion" of the Corporation Code "not otherwise specifically penalized therein." Hence, we find in-
consequential the fact that that Section 74 expressly mentions the application of Section 144 only
to a specific act, but not with respect to the other possible violations of the former section.

Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be made to
apply to violations of the right of a stockholder to inspect the stock and transfer book of a corpo-
ration under Section 74(4) given the already unequivocal intent of the legislature to penalize vio-
lations of a parallel right, i.e., the right of a stockholder or member to examine the other records
and minutes of a corporation under Section 74(2). Certainly, all the rights guaranteed to corpora-
tors under Section 7 4 of the Corporation Code are mandatory for the corporation to respect. All
such rights are just the same underpinned by the same policy consideration of keeping public
confidence in the corporate vehicle thru an assurance of transparency in the corporation's opera-
tions.

Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to allow inspec-
tion of the stock and transfer book is not a punishable offense under the Corporation Code. Such
refusal, when done in violation of Section 74(4) of the Corporation Code, properly falls within the
purview of Section 144 of the same code and thus may be penalized as an offense.

A criminal action based on the violation of a

stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.

The foregoing notwithstanding, and independently of the reasons provided therefor by the RTC,
we sustain the dismissal of Criminal Case No. 89724.

Criminal Case No. 89724 accuses respondents of denying petitioners' right to examine or inspect
the corporate records and the stock and transfer book of STRADEC. It is thus a criminal action
that is based on the violation of the second and fourth paragraphs of Section 7 4 of the Corpora-
tion Code.

A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the
same section, reveal that they are provisions that obligates a corporation: they prescribe what
books or records a corporation is required to keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or members in relation to
such books and records. Hence, by parity of reasoning, the second and fourth paragraphs of
1âwphi1

Section 74, including the first paragraph of the same section, can only be violated by a corpora-
tion.

It is clear then that a criminal action based on the violation of the second or fourth paragraphs of
Section 74 can only be maintained against corporate officers or such other persons that are act-
ing on behalf of the corporation. Violations of the second and fourth paragraphs of Section 74
contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies
the right of any of its stockholders to inspect the records, minutes and the stock and transfer
book of such corporation.

30
The problem with the petitioners' complaint and the evidence that they submitted during prelimi-
nary investigation is that they do not establish that respondents were acting on behalf of
STRADEC. Quite the contrary, the scenario painted by the complaint is that the respondents are
merely outgoing officers of STRADEC who, for some reason, withheld and refused to turn-over
the company records of STRADEC; that it is the petitioners who are actually acting on behalf of
STRADEC; and that STRADEC is actually merely trying to recover custody of the withheld
records.

In other words, petitioners are not actually invoking their right to inspect the records and the
stock and transfer book of STRADEC under the second and fourth paragraphs of Section 74.
What they seek to enforce is the proprietary right of STRADEC to be in possession of such
records and book. Such right, though certainly legally enforceable by other means, cannot be en-
forced by a criminal prosecution based on a violation of the second and fourth paragraphs of
Section 74. That is simply not the situation contemplated by the second and fourth paragraphs of
Section 74 of the Corporation Code.

For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of probable cause

31
Terelay Investment and Dev. Corp. vs. Cecilia Teresita Yulo, G.R. No. 160924, Aug. 05, 2015

Facts:

Asserting her right as a stockholder, Cecilia Teresita Yulo wrote a letter, dated Sep-
tember 14, 1999, addressed to Terelay Investment and Development Corporation
(TERELAY) requesting that she be allowed to examine its books and records on Sep-
tember 17, 1999 at 1:30 o'clock in the afternoon at the latter's office on the 25th
floor, Citibank Tower, Makati City. In its reply-letter, dated September 15, 1999,
TERELAY denied the request for inspection and instead demanded that she show
proof that she was a bona fide stockholder.

On September 16, 1999, Cecilia Yulo again sent another letter clarifying that her re-
quest for examination of the corporate records was for the purpose of inquiring into
the financial condition of TERELAY and the conduct of its affairs by the principal offi-
cers. The following day, Cecilia Yulo received a faxed letter from TERELAY's counsel
advising her not to continue with the inspection in order to avoid trouble.

On October 11, 1999, Cecilia Yulo filed with the Securities and Exchange Commis-
sion (SEC), a Petition for Issuance of a Writ of Mandamus with prayer for Damages
against TERELAY, docketed as SEC Case No. 10-99-6433. In her petition, she prayed
that judgment be rendered ordering TERELAY to allow her to inspect its corporate
records, books of account and other financial records; to pay her actual damages
representing attorney's fees and litigation expenses of not less than One Hundred
Thousand Pesos (P100,000.00); to pay her exemplary damages; and to pay the
costs of the suit On May 16, 2000, in the preliminary conference held before the SEC
Hearing Officer, the parties agreed on the following:

Issue:

In this appeal, the petitioner insists that the CA committed serious error: (a) in hold-
ing that the respondent was a stockholder entitled to inspect its books and records,
and allowing her to inspect its corporate records despite her shareholding being a
measly .001% interest

Ruling:

Secondly, the petitioner's submission that the respondent's "insignificant holding" of

only .001% of the petitioner's stockholding did not justify the granting of her appli-
cation for inspection of the corporate books and records is unwarranted.

32
The Corporation Code has granted to all stockholders the right to inspect the corpo-
rate books and records, and in so doing has not required any specific amount of in-
terest for the exercise of the right to inspect.15 Ubi lex non distinguit nee nos dis-
tinguere debemos. When the law has made no distinction, we ought not to recognize
any distinction.

Neither could the petitioner arbitrarily deny the respondent's right to inspect the cor-
porate books and records on the basis that her inspection would be used for a
doubtful or dubious reason. Under Section 74, third paragraph, of the Corporation
Code, the only time when the demand to examine and copy the corporation's
records and minutes could be refused is when the corporation puts up as a defense
to any action that "the person demanding" had "improperly used any information
secured through any prior examination of the records or minutes of such corporation
or of any other corporation, or was not acting in good faith or for a legitimate pur-
pose in making his demand."

The right of the shareholder to inspect the books and records of the petitioner
should not be made subject to the condition of a showing of any particular dispute or
of proving any mismanagement or other occasion rendering an examination proper,
but if the right is to be denied, the burden of proof is upon the corporation to show
that the purpose of the shareholder is improper, by way of defense.

33
Phil. Associated Smelting and Refining Corp. vs. Pablito Lim, G.R. No. 172948, Oct. 05, 2016

Facts:

Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corpora-

tion duly organized and existing under the laws of the Philippines and is engaged in copper
smelting and refining.

On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred
to as petitioners) were former senior officers and presently shareholders of PASAR holding
500 shares each.

An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction
and/or Temporary Restraining Order, dated February 4, 2004 was filed by PASAR seeking to
restrain petitioners from demanding inspection of its confidential and inexistent records.

On February 23, 2004, petitioners moved for the dismissal of the petition on the following
grounds: 1) the petition states no cause of action; 2) the petition should be dismissed on
account of litis pendentia; 3) the petition is a nuisance or harassment suit; and 4) the pe-
tition should be dismissed on account of improper venue.

On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of prelimi-
nary injunction. The RTC held that the right to inspect book should not be denied to the
stockholders, however, the same may be restricted. The right to inspect should be limited
to the ordinary records as identified and classified by PASAR. Thus, pending the determina-
tion of which records are confidential or inexistent, the petitioners should be enjoined from
inspecting the books. The dispositive portion of said Order states:

"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito

Lim, Manuel A. Agcaoili and Consuelo N. Padilla or their representatives from gaining ac-
cess to records of Philippine Associated Smelting and Refining Corporation which are
presently classified as either confidential or inexistent, until further orders from this Court.

Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND PE -

SOS (P500,000.00) in favor of herein respondents to answer for all damages which the lat -
ter may sustain by reason of the injunction should this Court, finally decide that petitioner
is not entitled thereto.

SO ORDERED."

On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary Injunc-
tion on the ground that the petition is insufficient. Petitioners claim that the enforcement
of the right to inspect book should be on the stockholders and not on PASAR. Petitioners
further claim that no irreparable injury is caused to PASAR which justifies the issuance of
the writ of preliminary injunction.

34
Petitioner argues that the right of a stockholder to inspect corporate books and records is
[20]
limited in that any demand must be made in good faith or for a legitimate purpose. Re-
spondents, however, have no legitimate purpose in this case.[21] If respondents gain ac-
cess to petitioner's confidential records, petitioner's trade secrets and other confidential
information will be used by its former officers to give undue commercial advantage to third
[22]
parties. Petitioner insists that to hold that objections to the right of inspection can only
be raised in an action for mandamus brought by the stockholder, would leave a corporation
[23]
helpless and without an adequate legal remedy. To leave the corporation helpless
[24]
negates the doctrine that where there is a right, there is a remedy for its violation.

Petitioner argues that it has the right to protect itself against all forms of embarrassment
or harassment against its officers, including the filing of criminal cases against them.
[25]
Moreover, respondents' request for inspection of confidential corporate records and
documents violates and breaches petitioner's right to peaceful and continuous possession
[26]
of its confidential records and documents.

Petitioner further argues that respondents' Motion for Dissolution before the Court of Ap-
peals did not comply with Rule 58, Section 6 of the Rules of Court. Therefore, the Motion
[27]
should not have been granted. Likewise, respondents' Motion to Dismiss is a prohibited
pleading under Rule 1, Section 8 of the Interim Rules of Procedure Governing Intra-Corpo-
[28] [29]
rate Controversies and should not have been granted. In any case, the Court of Ap-
peals should have remanded the case to the trial court for further disposition. [

Ruling:

The Corporation Code provides that a stockholder has the right to inspect the records of all
business transactions of the corporation and the minutes of any meeting at reasonable
hours on business days. The stockholder may demand in writing for a copy of excerpts
from these records or minutes, at his or her expense:

Title VIII
Corporate Books and Records

SECTION 74. Books to be Kept; Stock Transfer Agent. — Every corporation shall, at its
principal office, keep and carefully preserve a record of all business transactions, and min-
utes of all meetings of stockholders or members, or of the board of directors or trustees, in
which shall be set forth in detail the time and place of holding the meeting, how autho-
rized, the notice given, whether the meeting was regular or special, if special its object,
those present and absent, and every act done or ordered done at the meeting. Upon the de -
mand of any director, trustee, stockholder or member, the time when any director, trustee,
stockholder or member entered or left the meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any director, trustee, stockholder or member
on any action or proposed action must be recorded in full on his demand.

35
The records of all business transactions of the corporation and the minutes of any meet -
ings shall be open to the inspection of any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its records
or minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
pursuant to a resolution or order of the Board of Directors or Trustees, the liability under
this section for such action shall be imposed upon the directors or trustees who voted for
such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured through any prior exami-
nation of the records or minutes of such corporation or of any other corporation, or was
not acting in good faith or for a legitimate purpose in making his demand. (Emphasis sup-
plied)

The right to inspect under Section 74 of the Corporation Code is subject to certain limita-
tions. However, these limitations are expressly provided as defenses in actions filed under
Section 74. Thus, this Court has held that a corporation's objections to the right to in-
spect must be raised as a defense:

2) the person demanding to examine and copy excerpts from the corporation's records and
minutes has not improperly used any information secured through any previous examina-
tion of the records of such corporation; and 3) the demand is made in good faith or for a le -
gitimate purpose. The latter two limitations, however, must be set up as a defense by the
corporation if it is to merit judicial cognizance. As such, and in the absence of evidence,
the PCGG cannot unilaterally deny a stockholder from exercising his statutory right of in-
spection based on an unsupported and naked assertion that private respondent's motive is
improper or merely for curiosity or on the ground that the stockholder is not in friendly
terms with the corporation's officers.[55]

[56]
Gokongwei, Jr. v. Securities and Exchange Commission stresses that "impropriety of
purpose . . . must be set up the [sic] corporation defensively":

The stockholder's right of inspection of the corporation's books and records is based upon
their 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 equi -
table ownership, a beneficial ownership, or a quasi-ownership. This right is predicated
upon the necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as a stockholder and for some pur-
pose germane thereto or in the interest of the corporation. In other words, the inspection
has to be germane to the petitioner's interest as a stockholder, and has to be proper and
lawful in character and not inimical to the interest of the corporation. In Grey v. Insular
Lumber, this Court held that "the right to examine the books of the corporation must be ex-
ercised in good faith, for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes." The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to inquire into and
consider the stockholder's good faith and his purpose and motives hi seeking inspection.

36
Thus, it was held that "the right given by statute is not absolute and may be refused when
the information is not sought in good faith or is used to the detriment of the corporation."
But the "impropriety of purpose such as will defeat enforcement must be set up the corpo-
ration defensively if the Court is to take cognizance of it as a qualification. In other words,
the specific provisions take from the stockholder the burden of showing propriety of pur-
pose and place upon the corporation the burden of showing impropriety of purpose or mo-
tive." It appears to be the "general rule that stockholders are entitled to full information as
to the management of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that the company is be-
ing mismanaged or that it is being managed for the personal benefit of officers or directors
or certain of the stockholders to the exclusion of others." [57] (Emphasis supplied, citations
omitted)

[58]
Terelay Investment and Development Corp. v. Yulo has held that although the corpora-
tion may deny a stockholder's request to inspect corporate records, the corporation must
show that the purpose of the shareholder is improper by way of defense:

The right of the shareholder to inspect the books and records of the petitioner should not
be made subject to the condition of a showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination proper, but if the right is to
be denied, the burden of proof is upon the corporation to show that the purpose of the
shareholder is improper, by way of defense.
Among the purposes held to justify a demand for inspection are the following: (1) To ascer-
tain the financial condition of the company or the propriety of dividends; (2) the value of
the shares of stock for sale or investment; (3) whether there has been mismanagement; (4)
in anticipation of shareholders' meetings to obtain a mailing list of shareholders to solicit
proxies or influence voting; (5) to obtain information in aid of litigation with the corporation
or its officers as to corporate transactions. Among the improper purposes which may jus-
tify denial of the right of inspection are: (1) Obtaining of information as to business secrets
or to aid a competitor; (2) to secure business "prospects" or investment or advertising
lists; (3) to find technical defects in corporate transactions in order to bring "strike suits"
for purposes of blackmail or extortion.

In general, however, officers and directors have no legal authority to close the office doors
against shareholders for whom they are only agents, and withhold from them the right to
inspect the books which furnishes the most effective method of gaining information which
the law has provided, on mere doubt or suspicion as to the motives of the shareholder.
While there is some conflict of authority, when an inspection by a shareholder is con -
tested, the burden is usually held to be upon the corporation to establish a probability that
the applicant is attempting to gain inspection for a purpose not connected with his inter-
ests as a shareholder, or that his purpose is otherwise improper. The burden is not upon
the petitioner to show the propriety of his examination or that the refusal by the officers or
directors was wrongful, except under statutory provisions.[59] (Citations omitted)

Among the actions that may be filed is an action for specific performance, damages, peti-
tion for mandamus, or for violation of Section 74, in relation to Section 144 of the Corpora-
tion Code, which provides:

SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or
its amendments not otherwise specifically penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00)
pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court. If the violation is committed by a corporation, the

37
same may, after notice and hearing, be dissolved in appropriate proceedings before the Se -
curities and Exchange Commission: Provided, That such dissolution shall not preclude
the institution of appropriate action against the director, trustee or officer of the corpora-
tion responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.

In this case, petitioner invokes its right to raise the limitations provided under Section 74
of the Corporation Code. However, petitioner provides scant legal basis to claim this right
because it does not raise the limitations as a matter of defense. As properly appreciated
by the Court of Appeals:

We agree. The act of PASAR in filing a petition for injunction with prayer for writ of prelimi -
nary injunction is uncalled for. The petition is a pre-emptive action unjustly intended to im-
pede and restrain the stockholders' rights. If a stockholder demands the inspection of cor-
porate books, the corporation could refuse to heed to such demand. When the corporation,
through its officers, denies the stockholders of such right, the latter could then go to court
and enforce their rights. It is then that the corporation could set up its defenses and the
reasons for the denial of such right. Thus, the proper remedy available for the enforcement
of the right of inspection is undoubtedly the writ of mandamus to be filed by the stockhold -
ers and not a petition for injunction filed by the corporation. [60]

Petitioner insists that the Court of Appeals erred in relying on Section 74 of the Corpora-
tion Code. It claims that jurisprudence allows the corporation to prevent a stockholder
[61]
from inspecting records containing confidential information. Petitioner cites W.G
[62]
Philpotts v. Philippine Manufacturing Company:

In order that the rule above stated may not be taken in too sweeping a sense, we deem it
advisable to say that there are some things which a corporation may undoubtedly keep se-
cret, notwithstanding the right of inspection given by law to the stockholder; as, for in-
stance, where a corporation engaged in the business of manufacture, has acquired a for-
mula or process, not generally known, which has proved of utility to it in the manufacture
of its products. It is not our intention to declare that the authorities of the corporation, and
more particularly the Board of Directors, might not adopt measures for the protection of
such process from publicity.[63]

However, W.G Philpotts cannot support petitioner's contention since it involved a petition
for mandamus where the stockholder prayed to be allowed to exercise its right to inspect,
and the respondent's objections were raised as a defense. Nothing in W.G.
Philpotts grants a corporation a cause of action to enjoin the exercise of the right of in-
spection by a stockholder.

The clear provision in Section 74 of the Corporation Code is sufficient authority to con-
clude that an action for injunction and, consequently, a writ of preliminary injunction filed
by a corporation is generally unavailable to prevent stockholders from exercising their
right to inspection. Specifically, stockholders cannot be prevented from gaining access to
the (a) records of all business transactions of the corporation; and (b) minutes of any meet-
ing of stockholders or the board of directors, including their various committees and sub-
committees.

The grant of legal personality to a corporation is conditioned on its compliance with cer-
tain obligations. Among these are its fiduciary responsibilities to its stockholders. Provid-

38
ing stockholders with access to information is a fundamental basis for their intelligent par-
ticipation in the governance of the corporation as a business organization that they par-
tially own. The law is agnostic with respect to the amount of shares required. Generally,
each individual stockholder should be given reasonable access so that he or she can as-
sess or share his or her assessment of the management of the corporation with other
stockholders. The separate legal personality of a corporation is not so absolutely separate
that it divorces itself from its responsibility to its constituent owners.

The law takes into consideration the potential disparity in the financial legal resources be-
tween the corporation and an ordinary stockholder. The phraseology of the text of the law
provides that access to the information mentioned in Section 74 of the Corporation Code is
mandatory. The presumption is that the corporation should provide access. If it has basis
for denial, then the corporation shoulders the risks of being sued and of successfully rais-
ing the proper defenses. The corporation cannot immediately deploy its resources—part of
which is owned by the requesting stockholder—to put the owner on the defensive.

Specifically, corporations may raise their objections to the right of inspection through affir-
mative defense in an ordinary civil action for specific performance or damages, or through
[64]
a comment (if one is required) in a petition for mandamus. The corporation or defendant
or respondent still carries the burden of proving (a) that the stockholder has improperly
[65]
used information before; (b) lack of good faith; or (c) lack of legitimate purpose.

Good faith and a legitimate purpose are presumed. It is the duty of the corporation to al-
lege and prove with sufficient evidence the facts that give rise to a claim of bad faith as to
the existence of an illegitimate purpose.

The confidentiality of business transactions is not a magical incantation that will defeat
the request of a stockholder to inspect the records. Although it is true that the business is
entitled to the protection of its trade secrets and other intellectual property rights, facts
must be pleaded to convince the court that a specific stockholder's request for inspection,
under certain conditions, would violate the corporation's own legal right.

Furthermore, the discomfort caused to the management of a corporation when a request

for inspection is claimed is part of the regular matters that a business wanting to ensure
good governance must endure. The range between discomfort and vexation is a broad one,
which may tend to be located in the personalities of those involved.

Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the
part of the requesting stockholder. Courts must be convinced that the scope or manner of
the request and the conditions under which it was made are so frivolous that the huge cost
to the business will, in equity, be unfair to the other stockholders. There is no iota of evi-
dence that this happened here.

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