G.R. No. 174353 , September 10, 2014.
NESTOR CHING and ANDREW WELLINGTON, Petitioners, vs. SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents.

FACTS

Petitioners Nestor Ching and Andrew Wellington, on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI), filed a Complaint with the Regional Trial Court (RTC) of Olongapo City against SBGCCI and its Board of Directors and officers. The complaint alleged several acts of fraud and mismanagement. Specifically, petitioners claimed that SBGCCI amended its Articles of Incorporation on June 27, 1996, to state that shareholders “shall not have proprietary rights or interests over the properties of the Club,” a change not disclosed to shareholders who purchased shares at US$22,000 each based on the original articles promising a pro-rata share of assets upon dissolution. Petitioners further alleged that the Board did not call stockholders’ meetings, furnish financial statements, or properly report finances, including subscription funds and green fees. They also claimed an amendment to the By-Laws suspending all shareholder voting rights except for five founders’ shares was passed without a meeting. The complaint prayed for a temporary restraining order and injunction against the respondents acting as officers/directors, appointment of a receiver, and damages for the alleged decrease in share value.
Respondents, in their Answer, denied the allegations, asserting that subscriptions were paid to the majority shareholder, financial statements were properly reflected and available, shareholders’ meetings were held, and the amended articles were publicly known. They also defended that any unpaid rentals were obligations of another entity and that the board was not guilty of mismanagement. Respondents contended that petitioners failed to show authority to file on behalf of the named shareholder corporation, failed to comply with requisites for a derivative suit and receivership, and filed a nuisance/harassment suit.
The RTC dismissed the complaint, holding it was a derivative suit where petitioners failed to exhaust intra-corporate remedies, such as making a demand on the board or stockholders. The RTC also noted petitioners lacked authorization from their co-petitioner corporation and their minimal shareholding (0.24%) indicated a potential nuisance suit. The Court of Appeals affirmed the RTC’s dismissal. Petitioners elevated the case to the Supreme Court via a Petition for Review on Certiorari.

ISSUE

Whether the Court of Appeals erred in affirming the dismissal of the complaint for failure to exhaust intra-corporate remedies, thereby treating it as a derivative suit.

RULING

The Supreme Court DENIED the petition and AFFIRMED the Court of Appeals’ Decision. The Court held that the complaint was correctly characterized as a derivative suit. A derivative suit is an action filed by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors or officers refuse to sue. The allegations in the complaint—such as fraud, non-disclosure of the articles amendment, mismanagement of funds, failure to hold meetings, and failure to provide financial reports—constituted causes of action for violations of fiduciary duties by corporate directors/officers that primarily wronged the corporation, with any injury to shareholders being incidental. The reliefs sought, including injunctive relief against the board and appointment of a receiver, were for the benefit of the corporation to prevent continued alleged mismanagement.
The Court ruled that petitioners failed to comply with the requirement under the Interim Rules of Procedure for Intra-Corporate Controversies to exhaust all remedies available under the articles, by-laws, or rules governing the corporation. The complaint contained no allegation that petitioners exerted reasonable efforts, such as making a demand on the board of directors or stockholders, to obtain the desired relief within the corporation before filing suit. This failure to exhaust intra-corporate remedies was a fatal procedural defect warranting dismissal. The Supreme Court found no reversible error in the appellate court’s affirmance of the RTC’s order of dismissal.