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Case digest · Business judgment rule; derivative suit
Filipinas Port Services, Inc. vs. Go
A former president, now a stockholder, sued the directors over paid positions that went mostly to board members. He had the right to sue, but not the proof.
Facts
1968–1991
Eliodoro C. Cruz was president of Filipinas Port Services, Inc. (Filport), a stevedoring company in Davao City, from 1968 until he lost his bid for reelection in 1991.
September 4, 1992
Cruz wrote the board questioning its creation of four assistant vice-president posts and two special-assistant posts, each paying P13,050.00 a month. Five of the six went to board members. He asked the board to recover the salaries.
June 14, 1993
Cruz filed with the Securities and Exchange Commission a suit he described as a derivative suit. He also questioned an executive committee and salary increases for certain officers. The case remained unresolved for years until R.A. No. 8799, the Securities Regulation Code, moved it to the regular courts; on the directors’ motion, it was later transferred to the Regional Trial Court of Davao City.
December 10, 2001
The trial court upheld the board’s power to create positions and found the salary increases reasonable, but held that three of the positions had been created just for accommodation, and ordered the salaries refunded.
January 19, 2004
The Court of Appeals reversed and dismissed the suit.
Issue
Could Cruz sue the directors by derivative suit, and are the directors liable to return the salaries of the positions they created?
Ruling
Cruz could sue, but the directors are not liable. The Court denied the petition and affirmed the Court of Appeals in all respects.
The suit was a valid derivative suit: the alleged wrong was against the corporation, and since the corporation was under the complete control of the defendants, a demand on the board would have been futile. On the merits, the board may create offices and fix officers’ pay, and the need for additional positions is a management prerogative that courts will not review without proof of bad faith or malice. Cruz’s evidence was his own testimony, which the Court found to be mere insinuations of wrongdoing. Payment of the questioned salaries was not even proven. And, as Cruz himself testified and admitted, he was the one who moved to create some of the same positions while he was president. Even assuming mismanagement and losses, there was no showing of bad faith.
“If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable.”
Doctrine
A stockholder may file a derivative suit for the corporation when its officials refuse to sue, or when a demand on them would be futile because they are the ones to be sued or they control the corporation. “In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party.” In this case, the Court applied three requisites: the plaintiff was a stockholder when the act complained of took place; he tried to exhaust intra-corporate remedies by demanding relief from the board; and the cause of action belongs to the corporation, the harm being done to it and not to the suing stockholder.
Compare: proof of bad faith
In Carag vs. NLRC, G.R. No. 147590, April 2, 2007, the Court en banc refused to hold a board chairman personally liable for the corporation’s liability to its workers, because bad faith and gross negligence were neither alleged nor proved: “the bad faith or wrongdoing of the director must be established clearly and convincingly. Bad faith is never presumed.”
Bar tip
Separate standing from the merits. A stockholder may sue by derivative suit for a wrong done to the corporation, but winning still requires proof of bad faith; a charge of mismanagement is not enough. Also know the requirements of a derivative suit under Rule 8, Sec. 1 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.
Hear it explained
Business Judgment Rule, Podcast Ep. 6, at 9:32
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This digest is general legal information for education, not legal advice, and it is not a substitute for reading the decision. Quoted passages are taken word for word from the full text.