Corporation Law: The Revised Corporation Code of the Philippines - Sec 71

THE REVISED CORPORATION CODE  OF THE PHILIPPINES 

Republic Act No. 11232 

TITLE VII - STOCKS AND STOCKHOLDERS

Section 71. Rights of Unpaid Shares, Nondelinquent.

Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.

1. Accrual of Rights of Shareholders.

• A pre-incorporation subscriber becomes a shareholder from the moment the Certificate of Incorporation is issued. 
• He is a shareholder from the inception of the corporation. 
• Unless certain terms and conditions are required, a post-incorporation subscriber becomes a shareholder from the perfection of the subscription contract. 
• He is a shareholder the moment he holds the shares by virtue of a subscription contract.
• Whether the subscription is pre-incorporation or post-incorporation subscription, the subscriber is entitled to all the rights of a shareholder from the time he becomes such shareholder.
• It is not necessary that the subscription price has been fully paid. 
• It is also not necessary that a certificate of stock is issued.
• One right which is not available if the shares are not fully paid, is the right to secure a stock certificate or to have any subsequent transfer registered in the books of the corporation. In one case, it was even said that there is no cause of action for mandamus to compel the corporation to register the transfer if the corporation has an unpaid claim on the share and no certificate has been issued. 204 The transfer is effective only between the parties.

2. Basic Rights.

• It was noted earlier that a shareholder has interest over the management, income and assets of the corporation.
• The shareholder has certain rights, which include proprietary rights, as well as the right to participate directly or indirectly in the management of the corporation through the election of directors and by directly approving specific corporate acts as well as the exercise of certain remedial rights. 
• The shareholder has the following rights even if he has not yet fully paid his shares: 

1. Voting rights (Section 6);
2. Right to remove directors (Section 27);
3. Right to dividends (Section 42); 
4. Appraisal right (Section 80); 
5. Right to issuance of stock certificate for fully paid shares (Section 63); 
6. Proportionate participation in the distribution of assets in liquidation (Section 139);
7. Right to transfer stocks in corporate books (Section 62)
8. Pre-emptive right (Section 38);
9. Right to inspect books and records (Section 73);
10. Right to be furnished of the most recent financial statement/financial report (Section 74);
11. Right to recover stocks unlawfully sold for delinquent payment of subscription (Section 68); and 
12. Right to file individual suit, representative suit, and derivative suits. 

3. Obligations. 

• Being a shareholder has concomitant obligations to the corporation, to the other subscribers as well as to third persons in proper cases. 
• The obligations of a stockholder include the following:

1. Liability to the corporation for unpaid subscription (Sections 66-69); 
2. Liability to the corporation for interest on unpaid subscription if so required in the subscription contract (Section 65);
3. Liability to the creditors of the corporation for unpaid subscription under the Limited Liability Rule;
4. Liability for watered stock (Section 64); and
5. Liability for dividends unlawfully paid (Section 42). 

4. Right to File an Action. 

• A shareholder has the right to file three types of actions:

1. Derivative Actions;
2. Individual Actions; and 
3. Representative Actions. 

• These actions are meant not only to directly protect the stockholder's interest but also the interest of the corporation. 
• The cause of action need not even pertain to the stockholder, as in the case of a derivative action.

5. Derivative Actions. 

• These are suits brought by one or more stockholders/members in the name and on behalf of the corporation to redress wrongs committed against it, or to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or have control of the corporation. 
• Derivative actions are not expressly provided for in the Corporation Code/RCCP although the right to file such actions is implicit from the other rights of shareholders.
• The general rule is that where a corporation is an injured party, its power to sue is lodged with its Board of Directors or Trustees. 
• Nonetheless, by way of exception, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the 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 a nominal party, with the corporation as the real party in interest. 
• A derivative action is a suit by a shareholder to enforce a corporate cause of action. 
• The corporation is a necessary party to the suit.
• And the relief that is granted is a judgment against a third person in favor of the corporation. 
• Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.

5.01. Requisites under the Rules.

• Derivative actions are recognized under the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799 that was promulgated by the Supreme Court on March 13, 2001.
• Section 1 of Rule 8 of the Interim Rules provides for the requisites for the filing of derivative action. 
• A stockholder or member may bring an action in the name of a corporation provided the following are present:

1. He was a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed;
2. He exerted all reasonable efforts, and alleges the same with particularity in the 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 acts or acts complained of; 
4. The suit is not a nuisance or harassment suit; and
5. The action is filed in the name of the corporation.

• The rules likewise provide that the court shall dismiss the case if it is a nuisance or harassment suit.
• Section 2 of Rule 8 provides that "a derivative action shall not be discontinued, compromised or settled without approval of the court. During the pendency of the action, the court shall approve any sale of shares of the complaining stockholders. If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interest it determines will be so affected."
• The stockholder is only a nominal party in a derivative action. 
• The real party in interest is the corporation.
• Consequently, the corporation is an indispensable party who must be impleaded in the derivative action.
• The Supreme Court explained that it is the corporation that is the indispensable party, while the suing stockholder is just a nominal party. 
• With the corporation as the real party-in-interest and the indispensable party, the filing of two separate derivative actions is not allowed. 
• Any ruling in one of the derivative suits should already bind the corporation as res judicata in the other. 
• Nobody should be allowed to file the same derivative suit twice, resulting in the violation of the rules against multiplicity of suits and even forum-shopping. 
• It is also in disregard of the separate-corporate-entity principle, because it is to look beyond the corporation and to give recognition to the different identities of the stockholders instituting the derivative suits.
• There is no requirement regarding the number of shares that is being held by the stockholders who will file the case. 
• For example, two minority shareholders who own one share each can file the derivative action.
• A stockholder can initiate a derivative action only if he is a stockholder at the time of the transaction in question and at the time of the filing of the action.
• A transferee who was not yet a stockholder at the time of the transaction cannot initiate the action on the theory that a transferee ought to take things as he found them when he acquired his shares. 
• If the party himself who is the victim of fraud chooses to waive his remedy, the remedy does not belong to the subsequent purchaser.
• The exception to the rule that the person who will file the case must be a shareholder at the time the transaction was entered into, is a situation where the transactions continue and are injurious to the stockholder or affect him especially and specifically in some other way.
• Although the fifth requisite is not included in the Interim Rules, it is a settled jurisprudence that the action brought by the stockholders must be in the name of the corporation.
• It is a condition sine qua non that the corporation is impleaded or made a party to case.
• A stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress.
• In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. 
• The basis of a stockholder's suit is always one in equity.
• A derivative action is proper if the action is principally for damages resulting from alleged mismanagement of the affairs of the corporation by its directors/officers, if it is alleged that the acts of mismanagement are detrimental to the interests of the corporation. 
• Thus, the injury complained of primarily pertains to the corporation so that the suit for relief should be by the corporation. 
• A derivative action is also proper when the action is based on the devices and schemes employed by the Board of Directors that amount to mismanagement, misrepresentation, fraud, and bad faith
• A derivative suit is improper if the complainants, who were former members of the Board of Directors of a corporation, filed the case to question the election of the new set of directors and to protect and enforce their individual right to vote. 
• The case was filed against the new directors who allegedly pushed through with the election even if the complainants had adjourned the meeting allegedly due to lack of quorum. 
• The Supreme Court ruled that the derivative action was improper because the case involved injury to the rights of the complainants. 

5.02. Reason Why Individual Suits Are Improper. 

• An individual action is improper in cases where derivative suits can be filed considering that the cause of action pertains to the corporation. 
• In addition, the Supreme Court adopted the following reasons for not allowing direct individual suit: 

1. the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable right to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders." In other words, to allow shareholders to sue separately would conflict with the separate corporate entity principle;
2. xx x that the prior right of the creditors may be prejudiced. Thus, the Supreme Court held in the case of Evangelista v. Santos, that 'the stockholders may not directly 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 dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done' x x x; 
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 a ascertaining the effect of partial recovery by an individual on the damages recoverable by the corporation for the same act.

5.03. Distinguished from Liquidation. 

• A derivative suit is fundamentally distinct and independent from liquidation proceedings. 
• They are neither part of each other nor the necessary consequence of the other. 
• There is totally no justification for a court to convert a derivative suit instituted by stockholders in behalf of a corporation to a proceeding for the liquidation of the same corporation.

5.04. Rationale. 

• The Supreme Court explained the basis of the right of a shareholder to file a derivative action in Nora A. Bitong v. Court of Appeals, et al., as follows: 
• "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 intra-corporate 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 stockholder's right to institute 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. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. The most important of these is the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation."

5.05. Exhaustion of Intra-Corporate Remedies.

• In order that a stockholder may sue on behalf of the corporation, he must allege with some particularity in his complaint that he has exhausted his remedies within the corporation by making a sufficient demand upon the directors or other officers for appropriate relief with the expressed intent to sue if relief is denied.
• A general allegation in the complaint that intra-corporate remedies were exhausted is not sufficient.
• The intent behind the rule is to make the derivative suit the final recourse of the stockholders, after all other remedies to obtain the relief sought have failed.
• For example, a derivative action will be deemed prematurely filed if the action of the Board of Directors (for the transfer of substantially all of its assets) sought to be annulled has not yet been submitted to the stockholders for their rejection or approval
• At any rate, equity does not require a useless act.
• While it is true that the complaining stockholder must show to the satisfaction of the court that he has exhausted all the means within his reach to attain within the corporation itself the redress for his grievances, or actions in conformity to his wishes, nonetheless, where the corporation is under the complete control of the directors who are the alleged wrongdoers, there is no necessity of making a demand upon the directors. 
• The reason is obvious: a demand upon the Board to institute an action and prosecute the same effectively would have been useless and an exercise in futility. 
• Exhaustion of intra-corporate remedy is typically deemed futile when a majority of the directors have participated or approved the alleged wrongdoing or are otherwise financially interested in the challenged transaction. 
• There is an opinion to the 'effect that futility of exhausting intra-corporate remedy does not mean that there is no likelihood whatsoever that the Board will agree to the demand of the shareholder who filed the derivative action. 
• Rather, demand is futile where a reasonable doubt exists that the Board has the ability to exercise its managerial power, in relation to the decision to prosecute, within the strictures of its fiduciary duty. 
• If the Board's disability in a particular transaction is attributable to self-interest or lack of independence, then pre-suit demand is not required.

6. Individual Actions.

• These are actions brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him personally and to determine his individual right.
• The cause of action pertains to the shareholder and the action is meant directly to protect his interest.
• A stockholder may file an individual action or suit against another stockholder or even against the corporation itself if he has sufficient cause of action.
• For instance, a denial of the right to inspection and denial of dividends to a stockholder are appropriate causes of action for individual actions.
• In Cua, Jr. v. Ocampo Tan, the Supreme Court cited the rule in American jurisprudence to the effect that a derivative suit, on on hand, and individual and class suits, on the other, are mutually exclusive, viz.: 
• "As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. Thus, 'the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.' [Citations]" (Jones, supra, 1 Cal.3d 9 3, 106, 81 Cal. Rptr. 592, 460 P.2d 46 4.) In contrast, "a direct action [is one] filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs ) for injury to his or her interest as a shareholder . ... [T]he two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) ... or the corporation (derivative action)." (Friedman, Cal. Practice Guide: Corporations, supra, 6:598, p. 6 -127.) 
• Thus, in Nelson v. Anderson ( 1999) 72 Cal.App.4th 1 11, 84 Cal. Rptr.2d 753, the ... minority shareholder alleged that the other shareholder of the corporation negligently managed the business, resulting in its total failure. (Id. at p. 125, 84 Cal.Rptr.2d 753 ) The appellate court concluded that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is injury to the whole body of its stockholders, it was for the corporation to institute and maintain a remedial action. [Citation.] A derivative action would have been appropriate if its responsible officials had refused or failed to act." (Id. at pp. 125-126, 84 Cal.Rptr.2d 753) The court went on to note that the damages shown at trial were the loss of corporate profits. (Id. at p. 126, 84 Cal.Rptr.2d 753 ) Since "[s]hareholders own neither the property nor the earnings of the corporation," any damages that the plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury to the corporation."

7. Representative Actions. 

• These are actions brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders. 
• The Supreme Court adopted the following explanation from learned legal writers in Cua, Jr. v. Ocampo Tan:
• "Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors 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 because 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 belonging to the same group. But where the acts complained of constitute a wrong to the corporation itself, 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 necessarily 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 corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. 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 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."

8. Code of Corporate Governance.

• Stockholders' rights and protection of the minority shareholders are given attention under the 2009 Code of Corporate Governance. 
• Thus, the said 2009 Code of Corporate Governance provides that the Board shall respect the rights of the stockholders as provided for in the Corporation Code (now the RCCP).
• Protection of the minority shareholders is also provided for in the 2016 Code of Corporate Governance for Publicly Listed Companies. 

PROBLEMS:

Q: Mercy subscribed to 1,000 shares of stock of Rosario Corporation. She paid 25% of said subscription. During the stockholders' meeting, can Mercy vote all her subscribed shares? Explain your answer. 

Yes. Section 72 of the Corporation Code (now Section 71 of the RCCP) provides that full payment of subscription is not required to make one a stockholder and holders of non-delinquent shares shall have all the rights of a stockholder. There is no showing in this case that Mercy holds delinquent shares. Mercy is, thus, entitled to all the rights of a stockholder upon the perfection of the subscription agreement, which rights include the right to vote during the stockholders' meeting. (1990 Bar) Q: 

Q: A small stockholder of a Bank filed a suit praying for injunction to prevent the approval of the appointments of two persons whom he claimed were being appointed to their positions only for the purpose of shielding from criminal prosecution the controlling stockholder, alleged to be committing fraud in the bank affairs. Defendants were the Board of Directors of the Bank, the two persons, whose appointments were being questioned, and the controlling stockholder of the bank. These defendants moved to dismiss the suit on the ground that a mere stockholder is not allowed to question the appointments because they were corporate acts. Should the case be dismissed? 

No. A stockholder has the right to file a derivative suit to question the appointments. The directors cannot be expected to nullify the appointments; hence, a stockholder can bring a derivative suit on behalf of the corporation. It-would be futile for the stockholder to ask the Board to bring the suit because said Board was the one responsible for the questioned appointments. (1975 Bar)

Q: A group of stockholders of Sesame Corporation filed a court suit against the members of the Board of Directors to make good to the shareholders, in proportion to their shareholdings, the losses incurred by the corporation because of the defendant Board of Directors' management. Will the action prosper? Reasons. 

No. The action will not prosper. The shareholders have no right to the corporate assets until liquidation. Hence, they cannot ask for shares in whatever is due to the corporation. Moreover, even if there is a cause of action against the directors, the proper party to file the case is the corporation. The shareholders may file a derivative suit but the reliefs should be in favor of the corporation. (1988 Bar) 

Q: "N' became stockholder of Prime Real Estate Corporation (PREC) on July 10, 1991, when he was given one share by another stockholder to qualify him as director. "A" was not reelected director in July 1, 1992 annual meeting but he continued to be a registered shareholder of PREC. When he was still a director, "A" discovered that on January 5, 1991, PREC issued free of charge 10,000 shares to "X," a lawyer who assisted in a court case involving PREC. 

a. Can "A" now bring an action in the name of the corporation to question the issuance of the shares to "X" without receiving any payment? 

No. It is required for the filing of a derivative suit that the person who initiates the suit was a stockholder at the time of the transaction in question. The transaction in question was entered into before Mr. A became a shareholder. However, if the act complained of is a continuing one, A may file the derivative suit. It does not appear that the act is a continuing one in this case

b. Can "X" question the right of "A" to sue him in behalf of the corporation on the ground that "A" has only one share in his name? 

No. The right to file a derivative suit pertains to all shareholders. Even a shareholder owning one share is entitled to such right. 

c. Can the shares issued to "X" be considered as watered stock? 

No. Watered shares are those sold by the corporation for less than the par or book value. In the instant case, there must be proof that the value of the services rendered by "X" is less than the total par value of the shares issued in his name in order for such shares to be considered as watered stocks. (1993 Bar)

Q: The Board of Directors of P Corporation approved a resolution authorizing the acquisition of up to 100% of the common stocks of J Corporation. The Board specifically appointed one of its Directors, Mr. S, to act as attorney-in-fact and proxy who could vote all the shares of P Corporation in J Corporation. Mr. S, by virtue of such power, was able to constitute the Board of J Corporation. The Board of P Corporation likewise approved that the payment of the shares of J Corporation shall be made by transferring the real property of P Corporation to J Corporation.

The property to be transferred constitute substantially all of the assets of P Corporation. The decision of the Board was later ratified by the stockholders representing 74% of the outstanding capital. However, before the stockholders' meeting where such ratification was made, the minority stockholders filed a derivative suit asking the Court to declare null and void the resolution of the Board. Will the action prosper? 

No, the action will not prosper. The action of the minority shareholders should be dismissed for being moot and academic. Where the issues have become moot and academic, there is no justiciable controversy, thereby rendering the resolution of the same of no practical use or value. Since the resolution of the Board was ratified by the stockholders, the acquisition by P Corporation of J Corporation is no longer just the act of the Board but also of the stockholders. By ratification, even an unauthorized act of an agent becomes the authorized act of the principal. To declare the resolution null and void will serve no practical use or value or affect any of the rights of the parties because the approval of the stockholders will still remain valid and binding. (Cua, Jr. v. Ocampo, G.R. Nos. 181455 and 182008, December 4, 2009)