GR 161886; (March, 2007) (Digest)
G.R. No. 161886 , March 16, 2007
FILIPINAS PORT SERVICES, INC., ET AL., Petitioners, vs. VICTORIANO S. GO, ET AL., Respondents.
FACTS
Petitioner Eliodoro C. Cruz, former president of Filipinas Port Services, Inc. (Filport), filed a derivative suit with the Securities and Exchange Commission (SEC) on behalf of the corporation and its stockholders, including co-petitioner Mindanao Terminal and Brokerage Services, Inc. The suit was against the incumbent members of Filport’s Board of Directors (respondents). Cruz alleged acts of mismanagement, including the creation of an executive committee and various assistant vice-president and special assistant positions, all with substantial monthly remuneration, and the granting of increased emoluments to other corporate officers. He contended these acts were detrimental to the corporation, as the positions were unnecessary or duplicative, and the compensation was disproportionate.
The case was transferred to the Regional Trial Court (RTC) of Davao City pursuant to Republic Act No. 8799 . The RTC ruled in favor of petitioners. On appeal, the Court of Appeals (CA) reversed the RTC and dismissed the derivative suit. The CA held that Cruz failed to prove the alleged mismanagement and, crucially, failed to establish that he made a prior demand on the Board of Directors to sue, which is a condition precedent for a derivative suit. Petitioners elevated the case to the Supreme Court.
ISSUE
Whether the Court of Appeals erred in dismissing the derivative suit on the grounds of failure to prove mismanagement and, primarily, for non-compliance with the requirement of a prior demand on the board.
RULING
The Supreme Court denied the petition and affirmed the CA decision. On the procedural requirement, the Court held that a stockholder filing a derivative suit must allege in the complaint that he has exhausted intra-corporate remedies, or at least show valid reasons for not doing so, such as the futility of making a demand. The law requires this demand to give the corporation the opportunity to address the grievance itself. In this case, Cruz’s letter of September 4, 1992, merely questioned the creation of the positions and requested recovery of salaries. This letter did not constitute a demand upon the board to institute an action against the responsible directors, which is the demand required in a derivative suit.
The Court further ruled that the exception to the demand requirement—where the board is under the control of the alleged wrongdoers—did not apply. Cruz failed to substantiate his claim that the board was under the complete control of the respondents. The mere fact that the respondents constituted the board majority was insufficient to prove control in the context of excusing a demand. Consequently, Cruz lacked the legal standing to institute the derivative suit for failure to comply with this condition precedent. Given this dispositive procedural flaw, the Supreme Court found it unnecessary to delve into the substantive merits of the alleged mismanagement.