REYES vs. TAN

G.R. No. L-16982             

September 30, 1961 

FACTS:

Several purchases of raw materials were allegedly made in New York for the textile mill and was shipped to the Philippines.  However, the shipment were found out to consist not of raw materials but of finished products, such as, West Point Khaki rayon suiting materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the Central Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which necessarily led to the paralyzation of the operation of the textile mill and its business;

It was said that the Defendant Dalamal, who was the representative in the New York office had interests in the supplier of the aforesaid finished goods and in the Indian Commmercial Company and the Indian Traders responsible for the issuance of the Letters of Credit.

The plaintiff and some members of the board of directors urged defendants to proceed against Dalamal, exposing his offense to the Central Bank, and to initiate suit against Dalamal for his fraud against the corporation;

That defendants refused to proceed against Dalamal and instead continued to deal with the Indian Commercial Company to the damage and prejudice of the corporation. The prayer asks for the appointment of a receiver and a judgment marking defendants jointly and severally liable for the damages.

ISSUE:

W/N the minority stockholders of the corporation are justified in the filing of suit hence making the appointment of a receiver necessary?

RULING:

The importation of textiles instead of raw materials, as well as the failure of the board of directors to take actions against those directly responsible for the misuse of the dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which justified the suit by a minority stockholder of the corporation.

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.

The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been done to remove the erring purchasing managers. In a way the appointment of a receiver may have been thought of by the court below so that the dollar allocation for raw material may be revived and the textile mill placed on an operating basis. It is possible that if a receiver in which the Central Bank may have confidence is appointed, the dollar allocation for raw material may be restored. Claim is made that if a receiver is appointed, the Philippine National Bank to which the corporation owes considerable sums of money might be led to foreclose the mortgage. Precisely the appointment of a receiver in whom the bank may have had confidence might rehabilitate the business and bring a restoration of the dollar allocation much needed for raw material and an improvement in the business and assets the corporation, thus insuring the collection of the bank's loan.

Considering the above circumstances we are led to agree with the judge below that the appointment of a receiver was not only expedient but also necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the textile mills. The first assignment of error is, therefore, overruled.

HOLMES vs. CAMP

DECEMBER 7, 1917

Corporation, Representative Action

FACTS:

The Doe Run Lead Company acquired a large number of shares of the capital stock of the St. Joseph Lead Company, where such stock were held in trust for the use and benefit of the Doe Run Lead Company, which was the real owner thereof.

It was kept in secret knowledge by some of the stockholders that the St. Joseph Lead Company's stock was of much greater value than was commonly known and that the company was about to declare large future dividends.

A conspiracy was made to buy from the Doe Run Lead Company the stock of the St. Joseph Lead Company then held by and for it, thereby committed a fraud upon the Doe Run Lead Company.

The purpose of the action is to compel those who thus defrauded the Doe Run Lead Company as it is alleged, to return to that company the stock which they acquired from it, or if they have parted with the stock to account for its value.

Plaintiffs were, stockholders of the Doe Run Lead Company, but they exchanged this stock for shares of stock of the St. Joseph Lead Company, which they now own.

Robert Holmes individually is a stockholder in the Doe Run Lead Company as well as in the St. Joseph Lead Company, while all the other plaintiffs are stockholders only in the St. Joseph Lead Company. They all sue, however, in the right and on behalf of the Doe Run Lead Company to compel restitution to that company,

ISSUE:

W/N stockholders of a holding company may maintain a representative action for the benefit and in behalf of the subsidiary company, the directors of both companies having refused, after due request, to institute an action in the name of either company?

RULING:

We are unable to see any controlling reason why it should not be permitted.

Representative actions by stockholders are unique in that they are not prosecuted by the stockholder plaintiff for his own direct benefit, or in his own direct right, or because any right of his has been directly violated or because he is entitled individually to the relief sought. Such actions are, as they are commonly designated, purely representative, the plaintiff being permitted to maintain the action, notwithstanding his lack of direct interest, solely to set the machinery of justice in motion, and to prevent what would otherwise be a complete failure of justice.

This form of action is an invention of equity, and stockholders are allowed to resort to it, notwithstanding a lack of direct interest in the relief sought because, as it has been said, "the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue."

The part which a stockholder plays in such an action is merely that of an instigator. The cause of action is that of the corporation, and the recovery must run in its favor. Under these circumstances it is not easy to see why a stockholder in a holding company may not maintain such an action for the benefit of the subsidiary company, and thus indirectly for the advantage of the holding company. His stock interest in the latter company is sufficient to relieve him from the imputation of being a mere officious and impertinent intermeddler.

Clearly no such embarrassment or prejudice can exist in a case like the present when the plaintiffs sue, not in their own right, nor for their own direct benefit, but in the right and for the benefit of a corporation, provided they all sue in the right and for the benefit of the same corporation, and they all have an interest, however indirect, in seeing to it that the corporation receives reparation for the wrongs alleged in the complaint.

What the defendants are called upon to do in this action is to answer to the Doe Run Lead Company, not to these plaintiffs nor to any other stockholder of either company, and it can work no possible prejudice to the defendants who sets the machinery of justice in motion, so long as that person has an ultimate interest in the matter.

CHASE vs. CFI

G.R. No. L-20395 May 13, 1985

Corporation, Derivative Suit

FACTS:

Elton Chase in his capacity a minority stockholder of American Machinery and Parts Manufacturing, Inc. (AMPARTS) and in behalf of the other stockholders of said corporation similarly situated and for the benefit of Amparts filed a derivative suit against Dr. Victor Buencamino, a major stockholders and some other officers, charging them with breach of trust; praying for their removal as directors and, if necessary, for the dissolution and liquidation of said corporation.

The lower court ruled that there was breach of obligation committed by Dr. Buencamino but denied the application for receivership hence ordering the defendant to file a bond amounting to P100,00.00 to answer for the damages that plaintiff may suffer by the non-appointment of a receiver.

The plaintiff contended that the respondent court erred in not ordering the ouster of the defendant from management and in not granting the applied dissolution and receivership.

ISSUE:

W/N removal of defendants who are stockholders/directors shall be granted?

RULING:

In this jurisdiction, it is a "fundamental and settled rule that conclusions and findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence, as well as to observe the demeanor of the witnesses while testifying in the case." 

We have reviewed the evidence on record thoroughly and We are satisfied that the lower court has not overlooked factors of substance and value which if considered, might affect the result of the case. We therefore uphold the findings and conclusions of the lower court.

The record further shows that there were other precautionary measures adopted by lower court for the protection of Chase's rights and interest in Amparts. 

The removal of a stockholder (in this case a majority stockholder) from the management of the corporation and/or the dissolution of a corporation in a suit filed by a minority stockholder is a drastic measure. It should be resorted to only when the necessity is clear which is not the situation in the case at bar.