G.R. No. L-5174, March 17, 1911
CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL., defendants-appellees.

FACTS

Candido Pascual, a stockholder of Banco Español-Filipino, filed a derivative suit on behalf of the bank against its directors (defendants). The amended complaint alleged two causes of action: (1) For the years 19031907, the defendants, without stockholder consent, deducted their compensation from the bank’s gross income instead of net profits, defrauding the bank of approximately ₱20,000 annually; and (2) For the years 18991902, the defendants’ predecessors committed the same illegality, and the defendants, as the only officials aware of the fraud, neglected to investigate or recover the amounts. Pascual claimed that the defendants constituted a majority of the board, preventing the corporation from suing in its own name, and that he had exhausted all intra-corporate remedies. The trial court sustained a demurrer to both causes of action, ruling that Pascual failed to state a cause of action because he did not allege he was a stockholder at the time of the transactions complained of.

ISSUE

1. Whether a stockholder may maintain a derivative suit for corporate wrongs that occurred before he became a stockholder.
2. Whether the amended complaint states a cause of action for the first and second causes of action.

RULING

1. As to the first cause of action (transactions during 19031907): The demurrer was reversed. The Court held that a stockholder may maintain a derivative suit for wrongs committed during his ownership of shares. Since Pascual alleged he was a stockholder during the period when the defendants’ fraudulent acts occurred (19031907), he had standing to sue on behalf of the corporation. The complaint sufficiently stated a cause of action.

2. As to the second cause of action (transactions during 18991902): The demurrer was affirmed. The Court ruled that a stockholder who was not a shareholder at the time of the fraudulent transactions, and whose shares did not devolve upon him by operation of law, cannot maintain a derivative suit for those prior wrongs. Pascual acquired his shares in 1903, after the 18991902 transactions. He thus had no standing to sue for corporate injuries that occurred before his stock ownership, unless the wrongs continued or specially injured himwhich was not alleged. The corporation’s right to challenge prior frauds was extinguished by its acquiescence, and subsequent stockholders could not revive that right.

The Court emphasized that in derivative suits, the corporation is the real party in interest, and a stockholder’s rights are merged with the corporation. The case was remanded for further proceedings on the first cause of action.