Shields the corporators
from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation.
Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions
Tramat Mercantil, Inc. vs. CA, (1994), reiterated in Atrium Management Corp. v. CA, (2001):
Liability of Director, Trustee or Officer (Asked in 96 and 97)
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
He agrees to hold himself personally and solidarily liable with the corporation; or
He is made, by a specific provision of law, to personally answer for his corporate action
D. Duties of Controlling Stockholders
A majority stockholder is subject to the duty of good faith when he acts by voting at a stockholders’ meeting with respect to a matter in which he has a personal interest
Controlling stockholders may dispose of their shares at any time and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are known as intending to raid the corporate treasury or otherwise improperly benefit themselves.
It is fraudulent for a stockholder to buy from another stockholder without disclosing his identity
Principal stockholders are likewise prohibited from using inside information in the purchase and sale of equity security
E. Remedies in Case of Mismanagement
1. Receivership2. Injunction if the act has not been done 3. Dissolution if the abuse amounts to a ground
for quo warranto but the Solicitor General refuses to act
4. Derivative suit filed with the RTC
F. Right of Inspection
1. Basis of Right
As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs.
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A stockholder’s right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-ownership.
Such right is predicated upon the necessity of self-protection. Gokongwei Jr. vs. SEC (1979)
2. Records/Books to be Kept (Sec. 74) a. Books that record all business
transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc;
b. Minute book for meetings of the stockholders/members;
c. Minute book for meetings of the board/trustees;
d. Stock and transfer book.
Stock transfer agent - One engaged principally in the business of registering transfers of stocks in behalf of a stock corporation (licensed by the SEC). The corporate secretary is the one duly authorized to make entries in the stock and transfer book.
Torres et al vs. CA (1997)
It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.
3. Financial Statements (Sec. 75)
Within 10 days from written request, the corporation shall furnish its most recent financial statement (balance sheet and profit or loss statement as of last taxable year) At a regular meeting, the Board shall present a financial report of the operations of the corporation for the preceding year, which shall include financial statements duly signed and certified by an independent CPA.
4. Requirements for the exercise of the right of inspection (Sec. 74)
a. It must be exercised at reasonable hours on business days and in the place where the corporation keeps all its records (i.e., principal office).
b. The stockholder has not improperly used any information he secured through any previous examination.
c. Demand is made in good faith or for a legitimate purpose. If the corporation or
its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same.
Gokongwei vs. SEC (1979):
TEST to determine whether the purpose is legitimate – A legitimate purpose is one which is germane to the interests of the stockholder as such and not contrary to the interests of the corporation.
5. Remedies when inspection is refused a. Mandamus
b. Injunction
c. Action for damages
d. File an action under Sec. 144 to impose a penal offense by fine and/or imprisonment
G. Derivative Suits
(Asked in 93)“A suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit, and the relief which is granted is a judgment against a third person in favour of the corporation” Chua v. CA (2004)
Suits of stockholders based on wrongful or fraudulent acts of directors or other persons.
1. Requisites of Derivative Actions
a. That the stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed;
b. That the stockholder exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the AOI, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires.
c. That there is no appraisal right available for the act(s) complained of; and
d. That the suit is not a nuisance or harassment suit. (Rule 8, Interim Rules of Procedure for Intra-Corporate Controversies)
Requisites based on jurisprudence a. The cause of action actually devolves
on the corporation, the wrong or harm having been, or being caused to it and not the shareholder filing the suit.
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Evangelista vs. Santos (1950), SMC vs.
Kahn (1989).
b. The reliefs sought pertain to the corporation. Symaco Trading Corp. vs.
Santos (2005).
Recent rulings on the matter
a. Status of heirs as co-owners of shares before partition of estate does not make them shareholders until there is compliance with Sec. 63 on the manner of transferring shares, thus the heirs are not automatically registered shareholders of the corporation. Reyes vs. RTC of Makati (2008).
b. Stockholder may commence a derivative suit “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 right of action when the corporation is put on default by the wrongful refusal of the directors or management to make suitable measures for its protection.” Yu vs.
Yukayguan (June 18, 2009)
Bitong vs. CA (1998):
The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the BOD that exercises its corporate powers and not in the president or officer thereof. But 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 SH may institute a derivative 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.
2. Jurisdiction over derivative suits lies with the RTC (Sec. 5.2, Securities Regulation Code)
3. Other suits by stockholders/members a. Individual Actions – those brought by
the shareholder in his own name against the corporation when a wrong is directly inflicted against him.
b. Representative or Class Actions – those brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders.
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