2013 (Mercantile Law) Bar Exam Questions: Essay Question 8

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VIII.

In the November 2010 stockholders meeting of Greenville Corporation, eight (8) directors were elected to the board. The directors assumed their posts in January 2011. Since no stockholders’ meeting was held in November 2011, the eight directors served in a holdover capacity and thus continued discharging their powers.

In June 2012, two (2) of Greenville Corporation’s directors — Director A and Director B — resigned from the board. Relying on Section 29 of the Corporation Code, the remaining six (6) directors elected two (2) new directors to fill in the vacancy caused by the resignation of Directors A and B.

Stockholder X questioned the election of the new directors, initially, through a letter-complaint addressed to the board, and later (when his letter-complaint went unheeded), through a derivative suit filed with the court. He claimed that the vacancy in the board should be filled up by the vote of the stockholders of Greenville Corporation. Greenville Corporation’s directors defended the legality of their action, claiming as well that Stockholder X’s derivative suit was improper.

Rule on the issues raised. (8%)

9 comments

  1. my answer is based on Sotckholder X’s claim that only Greenville’s stockholders can fill up vacancies in the Board through stockholders’ meeting and election called for that purpose.

    1. Yup for me ganun din, i treated it as expiration of term since holdover capacity na lng naman ung remaining directors hence stockholders will be the one to elect. As to the 2nd issue i forgot my answer but my premise begun by enumerating the requisites of derivative suit.

      1. Ang naisagot ko pala dito is improper nga yung derivative suit sinc the issue pertains to directorship and not to the corporation itself.

    1. Derivative suit was improper.
      The requisites for a derivative suit as laid down in the case of Legaspi Towers, et al. v Muer, et al. are as follows:
      a) the party bringing suit should be a shareholder as of the time of the act or transaction complained 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 directors for the appropriate relief but the latter has failed or refused to heed his plea; and

      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.

      In Cua, Jr., v Tan, the Supreme Court held that, “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 occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a “derivative 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 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 corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party-in- interest.”

      Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit. Further, the stockholder’s right to file a derivative suit is not based on any express provision of The Corporation Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties, which is not the issue in this case.

  2. Derivative suit was improper.
    The requisites for a derivative suit as laid down in the case of Legaspi Towers, et al. v Muer, et al. are as follows:
    a) the party bringing suit should be a shareholder as of the time of the act or transaction complained 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 directors for the appropriate relief but the latter has failed or refused to heed his plea; and

    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.

    In Cua, Jr., v Tan, the Supreme Court held that, “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 occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a “derivative 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 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 corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party-in- interest.”

    Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative suit. Further, the stockholder’s right to file a derivative suit is not based on any express provision of The Corporation Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties, which is not the issue in this case.

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