UNIVERSITY OF THE CORDILLERAS

COLLEGE OF LAW

REQUIREMENT FOR CORPORATION AND BASIC SECURITIES LAW

SUBMITTED BY:

ADCAPAN, CRIZAL
BADONGEN, RAYMON
ALAM-AM, BRENT
BALONGGAY, KHUBSIN JUDE

SUBMITTED TO:
HON. JENNIFER P. HUMIDING
 TABLE OF CONTENTS
General Concepts…………………………………………………………………………….
1. Under PD 902-A, over what type of cases did the SEC have original and
exclusive jurisdiction?......................
2. Does the SEC continue to have original and exclusive jurisdiction over such
cases? .....................................
3. When did the Proposed Interim Rules and Procedures for Intra-Corporate
Controversies under the Securities and Regulation Code (SRC) take effect?
4. Expedited resolution of the intra-corporate controversies was one of the goals
of the interim rules. What are some features of the rules that seek to facilitate
an expedited resolution of such cases? .....................................
5. Under the interim rules, what cases are subject to the original and exclusive
jurisdiction of the special commercial courts? .....................................
6. In Lu Ym vs Lu Ym, Gr No. 219902, etc. (Notice), 17 January 2019, citing
Medical Plaza Condominium v Cullen Gr No. 181416, November 2013, What
are the two conditions that must be satisfied for an action to be considered an
intra corporate controversy? .....................................
7. Is the SEC now completely disposed of jurisdiction over such cases? (Read:
Roman V SEC, GR NO. 196329, June 1 2016) .....................................
8. What cases that would otherwise involve intra corporate controversies are not
covered by, or subject to, the interim rules? (See interim rules and section
181 RCC) .....................................
9. What circumstances may be considered in determining whether a complete
asserting an intra corporate controversy is a nuisance suit?
10. In relation to appraisal rights, in what instances are appraisal rates available
to a dissenting stockholder? .....................................
11. In an intra corporate controversy, may the court issue a judgment before
pretrial? .....................................
12. May the court issue a judgment after pretrial? .....................................
13. At the trial of an intra corporate controversy, who may be presented as
witness.....................................
14. What timetable is the court to follow in an intra corporate controversy?...........
15. Are provisional remedies available to a litigant in an intra corporate
controversy? .....................................
Cases Covered by Interim Rules……………………………………………………………..
A. Fraud or misrepresentation

1. Are all cases involving fraud and misrepresentation contemplated

by the Interim Rules? Read: Reyes v. RTC Makati, GR No. 165744,
August 11, 2008.
2. Must the specific acts of fraud be detailed in the complaint to be
cognizable under the Interim Rules? Read: BP| v. Bacalla, GR No.
223404, July 15, 2020 citing Guy v. Guy, GR Nos. 189486,
September
 3. Are all intra-corporate controversies involving fraud necessarily
derived from derivative suits? (Read : Villamor v Umale GR no.
172843, September 24, 2014

B. Intra Corporate Controversies

1. What constitutes an intra-corporate controversy? Read: BPI v.

Bacalla, GR No. 223404, July 15, 2020
2. What is the relationship test?
3. What is the nature of the controversy test?
4. Must all intra-corporate controversies be susceptible of pecuniary
estimation? [Read: Dee v. harvest, GR No. 224834, March 15,
2017]
5. May an intra-corporate controversy exist even where one party to
the case does not strictly have the intra-corporate relationship?
(Read: BP v. Bacalla, GR No. 223404, July 15, 2020).`
6. Do all cases involving shares of stock constitute intra-corporate
controversies? [Read: WiseHoldings, Inc. v. Garcia, GR No.
199174 (Notice), 10 June 2019].
7. Are disputes involving corporate officers considered intra-corporate
controversies?
8. Who is a corporate officer?
9. Which court has jurisdiction over disputes between a corporation
and a corporate officer and between a corporation and a non-
corporate officer?
10. May decisions and orders of the Special Commercial Courts (SCs)
in intra-corporate controversies be stayed?
11. What is the venue of intra-corporate controversies?
12. What pleadings are allowed in intra-corporate controversies?
13. What pleadings are prohibited in intra-corporate controversies?
14. What must a complaint in an intra-corporate controversy contain?

C. ELECTION OR APPOINTMENT MATTERS

1. What are election contests (as defined in the Interim Rules)?

2. What must a complaint in an election contest contain?
3. Within what time period must an election contest complaint be
filed?
4. Can an issue involving an election protest filed beyond the 15-day
reglementary period be touched upon by the court? [Read:
Eizmendi Jr. v. Fernandez, GR No. 215280, September 5, 2018].
5. What action may the court take upon the filing of an election
contest complaint?
6. What is the period given to a defendant in an election contest case
to file an Answer?
 7. What action may the court take if the defendant does not file an
answer to an election contest complaint?
8. Is a pre-trial required in election cases? [Read: POTC v. Africa, GR
No. 184622, etc. July 3, 2013].
9. When may a court schedule a hearing on an election contest case
10. When must the hearing on an election contest case be completed?
11. Within what period must the court render a decision in an election
contest case?

D. DERIVATIVE SUITS

1. What is a derivative suit? Read the following:

a. Florete v. Florete, GR No. 174909, January 20, 2016, citing
Villamor v. Umale, GR No. 172843, September 24, 2014.)
b. Ago Realty and Development Corp. v. Ago, GR No.
210906, October 16, 2019 citing Chua v. CA, GR No.
150793, November 19, 2004)
2. How is a derivative suit differentiated from an individual suit or a
representative or class suit? [Read: Florete v. Florete, GR No.
174909, January 20, 2016]
3. What are the basis examples of an individual suit, a
representative suit a class suit and a derivative suit? [Cua Jr. v.
Tan, GR No. 181455-56, December 4, 2009)
4. What is the rationale of a derivative suit?
5. What is the authoritative basis of a derivative suit? [Ching v. Subic
Bay, GR No. 174353, September 10, 2014).
6. May the majority stockholders file a derivative suit in behalf of the
corporation? [Read: Mallare v. Huang, GR No. 249789, April 28,
2021 (Notice), citing Ago v. Ago].
7. Is a board resolution required to authorize the filing of a derivative
suit?
8. What are the requisites to be complied with for a valid derivative
suit to prosper?
9. Aside from the four requisites provided for in the Interim Rules,
Rule 8, Sec. 1, is there any other requirement for filing a derivative
suit? [Read: Villamor v. Umale, GR No. 172843, September 24,
2014].
10. Why is it necessary for a derivative suit to be brought in the name
of the corporation? [Read: Asset Privatization Trust v. CA, GR No.
121171, December 29, 1998, cited in Villamor v. Umale)
11. What happens if a derivative suit is not filed in the name of the
corporation but of the suing stockholder? [Read: Mallare v.
Huang, GR No. 249789, April 28, 2021 (Notice) & Florete v.
Florete, GR No. 174909, January 20, 2016]. See also Revised
Rules of Civil Procedure, Rule 10, Sec. 3)
 12. At what point in time must the person bringing the suit be a
stockholder of the corporation to validly institute a derivative suit?
13. What happens if the persons bringing the derivative suit are not
stockholders of the corporation? [ Read: PNCC v. Members of the
Board of Directors of the PNCC, GR No. 225943, February 22,
2017 (Notice).
14. May a third party be sued as a defendant in a derivative suit?
[Read: Hi-Yield Realty v. CA, GR No. 186663, 23 June 2009]
15. Can there be a derivative suit against the corporation's directors,
officers, or stockholders? [Read: Florete v. Florete]
16. How should the requirement of exhaustion of all remedies
available be complied with? [Read: Sps. Yu v. Yukayguan, GR
No. 177549, June 18, 2009)…
17. What is the underlying reason for the requirement of exhaustion of
all remedies available before a derivative suit is allowed?
18. May the requirement of exhaustion of all remedies available be
dispensed with?..
19. Does the requirement of exhaustion of all remedies available
before a derivative suit may be filed also apply in a family or close
corporation? [Read: Ago v. Ago]..
20. What is an appraisal right? What is the raison d'etre for the grant
of appraisal rights to minority stockholders? How does appraisal
right impact on the right to file a derivative suit?..
21. May fraud or misrepresentation arising from schemes and devices
employed by the BOD and officers of a corporation and which is
the basis for an intra-corporate action be also used as basis for
the filing of a derivative suit, and vice-versa? [read: Cua v. Tan,
GR No. 181455, December 4, 2009]…
22. What are the factors for the court to determine that a suit is a
nuisance or a harassment suit?..
23. Is the extent of the shareholding or interest of the suing
stockholder important in determining whether a derivative suit will
prosper? [Read: San Miguel Corporation v. Khan, GR No.
853330, August 11, 1989]…
24. Where is the venue of a derivative suit to annul a mortgage or
corporate real property alleged to have been instituted through
fraud and misrepresentation of the corporation’s BOD? [Read
also: Hi-Yield Realty v. CA, GR No. 168863, June 23, 2009]..

E. INSPECTION OF CORPORATE BOOKS AND RECORDS

1. What are the books and records a corporation is required to

keep?....
2. What are the stockholders’ rights vis-a-vis the above-mentioned
records and documents?...
3. May the right of inspection of corporate records be exercised
with respect to a fully owned subsidiary of a corporation where
the claimant is a stockholder? [Read: Gokongwei v. SEC, GR
No. L-45911, April 11, 1979)…
4. What is the limit to the right of inspection and right of
reproduction of corporate records?..
5. Who cannot exercise the right of inspection and reproduction of
corporate books and records?..
6. What is the penalty for stockholders who abuse their right of
inspection and reproduction of corporate books and records?..
7. Under Sec. 158 of the RCC, what is the penalty for abusing the
right of inspection and reproduction of corporate books and
records?..
8. What is the nature of the fine imposed in Section 158 of the
RCC against stockholders abusing their right of inspection and
reproduction and which office or entity has jurisdiction to impose
it? [Read: Tent v. Tullet Prebon Phils, Inc., GR No. 189158,
January 11, 2017…
9. What are the remedies (under the RCC) available to a director,
trustee, stockholder, or member who is denied of his or her right
of inspection and reproduction or corporate books and records?
[Read also: PASRC v. Lim, GR No. 172948, October 5, 2016]…
10. Does the authority of the SEC to issue an order directing the
inspection or reproduction of the requested records deprive the
SRC of its jurisdiction over complaint for inspection or corporate
books and records under the Interim Rules, Rule 1, Section 1(a)
(5) in relation to Rule 7 of the same Interim Rules?..
11. What is the penalty for the offense under Section 161 of the
RCC referred to in Section 73 of the same Code?..
12. What is the nature of the fine imposed in Section 161 and which
office/entity or court has the jurisdiction to impose it?..
13. What are the defenses against the stockholder’s right of
inspection and reproduction of corporate books and records?..
14. May an action for injunction and, consequently, a writ of
preliminary injunction, be availed of by the corporation to
prevent and enjoin a stockholder from exercising his/her right of
inspection and reproduction of corporate books and records?
[Read: PASR Corp. v. Lim, GR No. 172948, October 5, 2016]…
15. Which office / entity / court has jurisdiction over complaints for
violation of a subdivision homeowner’s right of inspection or
association books and records? [Read: Francisco v. Del
Castillo, GR No. 236726, September 14, 2021]….
16. What should be alleged in the complaint for inspection of
corporate books and records under the Interim Rules, Rule 1,
Sec. 1(a)(5) in relation to Rule 7 of the same Rules?..
17. What will the court do upon the filing of the complaint?..
 18. What is the period to serve summons on the defendant?..
19. What is the period to file an answer to the complaint for
inspection of corporate books and records?..
20. What should be alleged in the answer of the defendant?
21. What should be attached to the complaint and the answer?..
22. What happens if the complaint or the answer fails to attach the
affidavits of witnesses and the documentary and other evidence
in support thereof?..
23. What happens if the defendant fails to file an answer within ten
10-day reglementary period?..
24. Are submissions of pre-trial briefs and conduct of a pre-trial
conference required in actions involving inspection of corporate
books and records under the Interim Rules..
25. What is is the period for the court to render its decision in
complaints for inspection or corporate books and records?..
26. What will be the basis of the court in rendering its decision?..

F. Management Committee (Read also: Interim Rules on Corporate

Rehabilitation (now the Financial Rehabilitation Rules of Procedure
[2013])

1. Is the application for the creation of a management committee

an independent or stand-alone relief?..
2. What are the requirements for the creation of a management
committee..
3. What are the requirements for the appointment of a receiver
(Hiteroza case, G.R. No. 203527)..
4. Should the two requisites for the creation of a management
committee be proven to exist, or one of them will suffice?..
(VILLAMOR case 172843)
5. May the court create a management committee motu
proprio?..
6. What are the qualifications for the members of the
management committee?..
7. What are the badges of conflict of interest of a member of the
management committee?..
8. Are the badges of conflict of interest of a member of the
management committee the same for a receiving?..
9. What shall the court do when it finds the application for the
appointment of a receiver sufficient in form and substance?..
10. What are the powers of the management committee?..
11. What are the powers of a receiver….
12. What is the status enjoyed by the members of the
management committee and the receiver while in the
discharge of their powers and duties?...
 13. In what instances are the receiver and members of the
management committee immune from suit?....
14. What renders the receiver and members of the management
committee immune from suit?....
15. What should the receiver and the members of the
management committee do upon their appointment?....
16. When are the transactions of the previous management and
directors deemed in bad faith and rescissible?....
17. How many members are required for the management
committee to act or make a decision?........
18. How is the chairman of the management committee chosen?..
19. When is a member of the management committee deemed
removed and replaced by the court? .....................................
20. What should the management committee do upon its
discharge and dissolution? .....................................
21. Does the Court of Appeals have jurisdiction to place a
corporation under receivership and create a management
committee to take over the management and continue its
business operations during the pendency if the derivative
action before the RTC?.....................................
Flow Chart……………………………………………………………………………………
I. GENERAL CONCEPTS GUIDE QUESTIONS ON INTRA CORPORATE
CONTROVERSY
1. Under PD 902-A, over what type of cases did the SEC have original and
exclusive jurisdiction?

Under the Act, the Commission was reorganized into a collegial body; and was
given additional powers and functions, including quasi-judicial powers over intra-
corporate disputes as well as absolute jurisdiction, supervision and control over
all corporations, partnerships or associations that are the grantees of primary
franchise and/or a license or permit issued by the government to operate in the
Philippines.

Specifically according to Section 5 of PD 902-A, SEC has original and exclusive

jurisdiction over the following:

a) Devices or schemes employed by or any acts, of the board of directors,

business associates, its officers or partnership, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or
organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership relations,

between and among stockholders, members, or associates; between any
or all of them and the corporation, partnership or association of which they
are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnerships or associations.
Section 5 of PD 902-A

2. Does the SEC continue to have original and exclusive jurisdiction over
such cases?
No. In BPI V. BACALLA GR NO. 223404 JULY 15, 2020

The Interim Rules traces its roots from Section 5.2 of R.A. No. 8799 which
transferred all cases under Sec. 5 of P.D. No. 902-A from the Securities and
Exchange Commission (SEC) to the courts of general jurisdiction or the
appropriate RTC. Under Sec. 5 of P.D. No. 902-A, the following cases were
transferred to the RTC:
(a) Devices or schemes employed by or any acts, of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of
 the stockholder, partners, members of associations or organizations registered
with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members, or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership
or association and the state insofar as it concerns their individual franchise or
right to exist as such entity;
(c) Controversies in the election or appointments of directors, trustees, officers,
or managers of such corporations, partnerships, or associations. (emphasis
supplied)
BPI V. BACALLA GR NO. 223404 JULY 15, 2020

3. When did the Proposed Interim Rules and Procedures for Intra-Corporate
Controversies under the Securities and Regulation Code (SRC) take effect?

The Interim Rule took effect on April 1, 2001, following its publication on March
13, 2001, in two newspapers of general circulation

4. Expedited resolution of the intra-corporate controversies was one of the

goals of the interim rules. What are some features of the rules that seek to
facilitate an expedited resolution of such cases?

All decisions and orders issued under these Rules shall immediately be
executory. No appeal or petition taken therefrom shall stay the enforcement or
implementation of the decision or order unless restrained by an appellate court.
Interlocutory orders shall not be subject to appeal.
Interim Rules, Rule 1, Section 4

5. Under the interim rules, what cases are subject to the original and exclusive
jurisdiction of the special commercial courts?

Under Rule 1 , Section 1(a) of the Interim Rules of Procedure for Intra-Corporate
Controversies (A.M. No. 01-2-04-SC), the cases subject to the original and
exclusive jurisdiction of the special commercial courts include the following:

Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which
may be detrimental to the interest of the public and/or of the stockholders,
partners, or members of any corporation, partnership, or association;

Controversies arising out of intra-corporate, partnership, or association relations,

between and among stockholders, members, or associates; and between, any or
all of them and the corporation, partnership, or association of which they are
stockholders, members, or associates, respectively;
 Controversies in the election or appointment of directors, trustees, officers, or
managers of corporations, partnerships, or associations;
Derivative suits, and .

Inspection of corporate books.

Rule 1, Section 1(a) of the Interim Rules of Procedure for Intra-Corporate
Controversies (A.M. No. 01-2-04-SC)

6. In Lu Ym vs Lu Ym, Gr No. 219902, etc. (Notice), 17 January 2019, citing

Medical Plaza Condominium v Cullen Gr No. 181416, November 2013, What are
the two conditions that must be satisfied for an action to be considered an intra
corporate controversy?

In determining whether a dispute constitutes an intra-corporate controversy, the

Court uses two tests, namely, the relationship test and the nature of the
controversy test.

An intra-corporate controversy is one that pertains to any of the following

relationships: (1) between the corporation, partnership, or association and the
public; (2) between the corporation, partnership, or association and the State
insofar as its franchise, permit or license to operate is concerned; (3) between
the corporation, partnership or association and its stockholders, partners,
members or officers; and (4) among the stockholders, partners or associates
themselves. Thus, under the relationship test, the existence of any of the above
intra-corporate relations makes the case intra-corporate.

Under the nature of the controversy test, "the controversy must not only be
rooted in the existence of an intra-corporate relationship, but must as well pertain
to the enforcement of the parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation." In other words, jurisdiction should be determined by considering
both the relationship of the parties as well as the nature of the question involved.

7. Is the SEC now completely disposed of jurisdiction over such cases? (Read:
Roman V SEC, GR NO. 196329, June 1 2016)

No. the SEC still retains sufficient powers to justify its assumption of jurisdiction
over matters concerning its supervisory, administrative and regulatory functions.

SECTION 5. Powers and Functions of the Commission

a) Have jurisdiction and supervision over all corporations, partnerships or
associations who are the grantees of primary franchises and/or a license or
permit issued by the Government;
(d) Regulate, investigate or supervise the activities of persons to ensure
compliance
 And

SECTION 53. Investigations, Injunctions and Prosecution of Offenses. 53.1. The

Commission may, in its discretion, make such investigations as it deems
necessary to determine whether any person has violated or is about to violate
any provision of this Code
Beyond doubt, therefore, is the authority of the SEC to hear cases regardless of
whether an action involves issues cognizable by the RTC, provided that the SEC
could only act upon those that are merely administrative and regulatory in
character. In other words, the SEC was never dispossessed of the power to
assume jurisdiction over complaints, even if these are riddled with intra-corporate
allegations, if their invocation of authority is confined only to the extent of
ensuring compliance with the law and the rules, as well as to impose fines and
penalties for violations thereof; and to investigate even motu proprio whether
corporations comply with the Corporation Code, the SRC, and the implementing
rules and regulations.
The SEC is not ousted of its regulatory and administrative jurisdiction to
determine and act if administrative violations were committed.
Roman V SEC, GR NO. 196329, June 1 2016

8. What cases that would otherwise involve intra corporate controversies are
not covered by, or subject to, the interim rules? (See interim rules and
section 181 RCC)

Cases under an unlisted corporation whose articles of incorporation or bylaws

provide an arbitration agreement for disputes between the corporation, its
stockholders or members, which arise from the implementation of the articles of
incorporation, or from intra-corporate relations.
Such cases are not covered by the interim rules; rather, they shall be referred to
arbitration in accordance to the articles of incorporation or bylaws
Section 181, Title XVII of the Revised Corporation Code

9. What circumstances may be considered in determining whether a complete

asserting an intra corporate controversy is a nuisance suit?

In determining whether a suit is a nuisance or harassment suit, the court shall

consider, among others, the following:
1. The extent of the shareholding or interest of the initiating stockholder or
member,
2. Subject matter of the suit;
3. Legal and factual basis of the complaint;
4. Availability of appraisal rights for the act or acts complained of; and
 5. Prejudice or damage to the corporation, partnership, or association in
relation to the relief sought.
Interim Rules, Rule 1, Section 1(b)

10. In relation to appraisal rights, in what instances are appraisal rates

available to a dissenting stockholder?

Section 80, Title X of the Revised Corporation Code provides that any stockholder
of a corporation shall have the right to dissent and demand payment of their fair
value of the shares in the following instances:
1. In case of an amendment to the article of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares , or
of authorizing preferences in any respect superior to those of outstanding
shares of any class , or of extending or shortening the term of corporate
existence
2. In case of sale, lease, exchange, transfer, mortgage, pledge, or other
disposition of all or substantially all of the corporate property and assets
as provided in this Code
3. In case of merger or consolidation
4. In case of investment of corporate funds for any purpose other than the
primary purpose of the corporation
Section 80, Title X of the Revised Corporation Code

11. In an intra corporate controversy, may the court issue a judgment before
pretrial?

Yes, according to Section 4, Rule 4 of Interim Rules of Procedure for Intra-

corporate Controversies, if, after submission of the pre-trial briefs, the court
determines that, upon consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be rendered, the court may
order the parties to file simultaneously their respective memoranda within a non-
extendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90)
days from the expiration of the period to file the memoranda.
Rule 4 of Interim Rules of Procedure for Intra-corporate Controversies

12. May the court issue a judgment after pretrial?

Yes, Rule 4 Section 5 provides that

SEC. 5. Pre-trial order; judgment after pre-trial. – The proceedings in the pre-
trial shall be recorded. Within ten (10) days after the termination of the pre-trial,
the court shall issue an order which shall recite in detail the matters taken up in
the conference, the actions taken thereon, the amendments allowed in the
pleadings, and the agreements or admissions made by the parties as to any of
 the matters considered. The court shall rule on all objections to or comments on
the admissibility of any documentary or other evidence, including any affidavit or
any part thereof. Should the action proceed to trial, the order shall explicitly
define and limit the issues to be tried and shall strictly follow the form set forth in
Annex "A" of these Rules.

The contents of the order shall control the subsequent course of the action,
unless modified before trial to prevent manifest injustice.
After the pre-trial, the court may render judgment, either full or partial, as
the evidence presented during the pre-trial may warrant.
Section 5 Rule 4 of Interim Rules of Procedure for intra-corporate
Controversies

13. At the trial of an intra corporate controversy, who may be presented as

witness?

Only persons whose affidavits were submitted may be presented as witnesses

According to paragraph 2, Section 1, Rule 5 of the Interim Rules, the affidavits
of the witnesses shall serve as their direct testimonies, subject to cross-
examination in accordance with existing rules on evidence

14. What timetable is the court to follow in an intra corporate controversy?

The Rules of Court, in so far as they may be applicable and are not inconsistent
with these Rules, are hereby adopted to form an integral part of these Rules.
Interim Rules, Rule 1, Section 2

15. Are provisional remedies available to a litigant in an intra corporate

controversy?
Yes, Rule 10,Section 1 of the Interims Rules on Intra Corporate controversies
provides that a party may apply for any of the provisional remedies provided in
the Rules of Court as may be available for the purposes. This may include
appointment of a receiver, preliminary injunction and temporary restraining
order/ However, no temporary restraining order or status quo order shall be
issued save in exceptional cases and only after hearing the parties and the
posting of a bond.
Rule 10, Section 1 of the Interim Rules on Intra Corporate controversies

II. CASES COVERED BY THE INTERIM RULES

A. FRAUD OR MISREPRESENTATION
1. Are all cases involving fraud and misrepresentation contemplated by the
Interim Rules? Read: Reyes v. RTC Makati, GR No. 165744, August 11,
2008.
CASES COVERED BY THE INTERIM RULES

No, P.D. No. 902-A enumerates the cases over which the SEC (now the RTC
acting as a special commercial court) exercises exclusive jurisdiction:

SEC. 5. In addition to the regulatory and adjudicative functions of the Securities

and Exchange Commission over corporations, partnership, and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

a) Devices or schemes employed by or any acts of the board of directors,

business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of
the stockholders, partners, members of associations or organizations registered
with the Commission.

Additionally, Not every allegation of fraud done in a corporate setting or

perpetrated by corporate officers will bring the case within the special commercial
court's jurisdiction. To fall within this jurisdiction, there must be sufficient nexus
showing that the corporation's nature, structure, or powers were used to facilitate
the fraudulent device or scheme.Sec. 5 of PD No. 902-A; Reyes v. RTC Makati,
GR No. 165744, August 11, 2008

2. Must the specific acts of fraud be detailed in the complaint to be cognizable

under the Interim Rules? Read: BP| v. Bacalla, GR No. 223404, July 15, 2020
citing Guy v. Guy, GR Nos. 189486, September

Yes. Since courts cannot rely on the caption of the complaint alone, and if the
complainant wishes to invoke the court's special commercial jurisdiction, the
complaint must show on its face what the claimed fraudulent corporate
acts are which require the application of the Interim Rules.

In cases governed by the Interim Rules of Procedure on Intra-Corporate

Controversies a bill of particulars is a prohibited pleading. It is essential,
therefore, for the complaint to show on its face what are claimed to be the
fraudulent corporate acts if the complainant wishes to invoke the court's
special commercial jurisdiction.

The act of fraud or misrepresentation complained of becomes a criterion in

determining whether the complaint on its face has merits, or within the
jurisdiction of special commercial court, or merely a nuisance suit.
 3. Are all intra-corporate controversies involving fraud necessarily derived
from derivative suits? (Read : Villamor v Umale GR no. 172843, September
24, 2014)

No.

Rule 1, Section 1 (a) (1) of the Interim Rules refers to acts of the board,
associates, and officers, amounting to fraud or misrepresentation, which may be
detrimental to the interest of the stockholders. This is different from a derivative
suit.

While devices and schemes of the board of directors, business associates, or

officers amounting to fraud under Rule 1, Section 1 (a) (1) of the Interim Rules
are causes of a derivative suit, it is not always the case that derivative suits are
limited to such causes or that they are necessarily derivative suits. Hence, they
are separately enumerated in Rule 1, Section 1 (a) of the Interim Rules:

SECTION 1. (a) Cases covered. These Rules shall govern the procedure to be
observed in civil cases involving the following:

(1) Devices or schemes employed by, or any act of, the board of directors,
business associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the public and/or of
the stockholders, partners, or members of any corporation, partnership, or
association;

Xxx xxx xxx xxx

(4) Derivative suits

Individual suits are filed when the cause of action belongs to the individual
stockholder personally, and not to the stockholders as a group or to the
corporation, e.g., denial of right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of stockholders, such as
when the rights violated belong to preferred stockholders, a class or
representative suit may be filed to protect the stockholders in the group

Villamor v Umale GR no. 172843, September 24, 2014)

B. INTRA CORPORATE CONTROVERSIES

1. What constitutes an intra-corporate controversy? Read: BPI v. Bacalla, GR

No. 223404, July 15, 2020 B. INTRA CORPORATE CONTROVERSIES
 To determine whether a case is an intra-corporate controversy, two tests are
used, namely, Relationship Test and the Nature of the Controversy Test.

Under the relationship test, the existence of any of the following relationships
makes the conflict intra-corporate:
1. between the corporation, partnership or association and the public;
2. between the corporation, partnership or association and the State insofar
as its franchise, permit or license to operate is concerned;
3. between the corporation, partnership or association and its stockholders,
partners, members or officers; and
4. among the stockholders, partners or associates themselves.

For as long as any of these intra-corporate relationships exist between the

parties, the controversy would be characterized as intra-corporate.

In the nature of the controversy test, the controversy must not only be rooted
in the existence of an intra-corporate relationship but must also pertain to the
enforcement of the parties' correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation.

2. What is the relationship test?

To determine whether a case involves an intra-corporate controversy, and is to

be heard and decided by the branches of the RTC specifically designated by the
Court to try and decide such cases, two elements must concur: (a) the status or
relationship of the parties, and [b] the nature of the question that is the subject of
their controversy.

Under the relationship test, there is an intra-corporate controversy when the

conflict is:
1. between the corporation, partnership, or association and the
public;
2. between the corporation, partnership, or association and the State
insofar as its franchise, permit, or license to operate is concerned;
3. between the corporation, partnership, or association and its
stockholders, partners, members, or officers; and
4. among the stockholders, partners, or associates themselves.

REYES VS. RTC MAKATI G.R. No. 165744, August 11, 2008

3. What is the nature of the controversy test?

In the case of Cacho v Balagtas, the Court says that an intra-corporate

controversy does not wholly rely on the relationship of the parties. The incidents
 of their relationship must also be considered. Hence, the nature of the
controversy test

The controversy must not only be rooted in the existence of an intra-corporate

relationship, but must as well pertain to the enforcement of the parties' correlative
rights and obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation. If the relationship and its incidents
are merely incidental to the controversy or if there will still be conflict even if the
relationship does not exist, then no intra-corporate controversy exists.

4. Must all intra-corporate controversies be susceptible of pecuniary

estimation? [Read: Dee v. harvest, GR No. 224834, March 15, 2017]

No. This is because, depending on the nature of the principal action or remedy
sought, an intra-corporate controversy may involve a subject matter that is either
capable or incapable of pecuniary estimation.

If it is primarily for the recovery of a sum of money, the claim is considered

capable of pecuniary estimation, and whether jurisdiction is in the municipal
courts or in the Regional Trial Courts would depend on the amount of the claim.
However, where the basic issue is something other than the right to recover a
sum of money and the money claim is purely incidental to, or a consequence of,
the principal relief sought, this Court has considered such actions as cases
where the subject of the litigation may not be estimated in terms of money and
are cognizable exclusively by the Regional Trial Courts.

Harvest All's Complaint and Amended Complaint reveal that its main purpose is
to have Alliance hold its 2015 ASM on the date set in the corporation's by-laws,
or at the time when Alliance's SRO has yet to fully materialize, so that their voting
interest in the corporation would somehow be preserved. Thus, Harvest All
sought the nullity of the Alliance Board Resolution passed on May 29, 2015,
which indefinitely postponed the corporation's 2015 ASM pending completion of
its subscription to the SRO. Certainly, Harvest All's prayer for nullity, as well as
the concomitant relief of holding the 2015 ASM as scheduled in the by-laws, do
not involve the recovery of sums of money.

The mere mention of Alliance's impending SRO valued at P1 billion cannot

transform the nature of Harvest All's action into one capable of pecuniary
estimation, considering that:

a. Harvest All do not claim ownership of, or much less entitlement to, the shares
subject of the SRO; and

b. Such mention was merely narrative or descriptive in order to emphasize the

severe dilution that their voting interests as minority shareholders would suffer if
the 2015 ASM were to be held after the SRO was completed.
 If, in the end, a sum of money or anything capable of pecuniary estimation would
be recovered by virtue of Harvest All's complaint, then it would simply be the
consequence of their principal action. Clearly, therefore, Harvest All's action was
incapable of pecuniary estimation.
If Harvest All's complaint ultimately results in the recovery of money or anything
capable of pecuniary estimation, then that would only be the outcome of their
main action. Clearly, therefore, Harvest All's action was incapable of pecuniary
estimation.

5. May an intra-corporate controversy exist even where one party to the case
does not strictly have the intra-corporate relationship? (Read: BP v.
Bacalla, GR No. 223404, July 15, 2020).

Yes, an intra-corporate controversy may exist even if one party to the case does
not strictly have an intra-corporate relationship. Intra-corporate controversies
typically involve disputes among stockholders, directors, officers, or other
individuals directly involved in the affairs of a corporation. However, in certain
circumstances, disputes involving non-stockholders or external parties may also
be considered intra-corporate controversies if they arise from or relate to the
internal affairs of the corporation.

In BPI v. Bacalla , GR No. 223404 , that an intra corporate controversy must not
only be rooted in the existence of an intra-corporate relationship but must also
pertain to the enforcement of the parties' correlative rights and obligations under
the Corporation Code and the internal and intra-corporate regulatory rules of the
corporation. If the dispute involves matters such as corporate governance, the
exercise of corporate powers, rights, and obligations under corporate bylaws or
articles of incorporation, or other internal corporate issues, it may be classified as
an intra-corporate controversy.

6. Do all cases involving shares of stock constitute intra-corporate

controversies? [Read: WiseHoldings, Inc. v. Garcia, GR No. 199174
(Notice), 10 June 2019].

No. The fact that the case involves shares of stock to be used as payment for
lease rentals does not convert it into an intra-corporate controversy.

In this case, the Court ruled that the cause of action in petitioners' complaints is
an ordinary civil case and not an Intra-Corporate Controversy. First, there is no
corporate relationship between petitioners and Sunrich, whose shares of stock
are the subject of the controversy. Second, the nature of the controversy in the
present case does not refer to an intra-corporate dispute.

7. Are disputes involving corporate officers considered intra-corporate

controversies?
 A corporate officer's dismissal is always an intra-corporate controversy, a subject
matter falling within the Regional Trial Court's (RTC) jurisdiction.Tabang v.
National Labor Relations Commission 334 Phil. 424, 430 (1997)
Section 5 (c) of PD 902-A, as amended by Subsection 5.2, Section 5 of Republic
Act No. 8799, which provides that the regional trial courts exercise exclusive
jurisdiction over all controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships or associations

8. Who is a corporate officer?

In the case of Cacho v. Balagtas, the Court provided that to be considered a

corporate officer, only two conditions are met, vis.: (1) the position occupied was
created by a charter/by-laws, and (2) the officer was elected or appointed by the
corporation’s board of directors to occupy said position.

Section 24 of the Revised Corporation Code explicitly provides for the election
of the corporation’s president, treasurer, and such other officers as may be
provided for in the by-laws. The Court interprets and rules this provision that for
any other corporate position not included in this provision, it must be expressly
mentioned in the by-laws in order to be considered as a corporate office

9. Which court has jurisdiction over disputes between a corporation and a

corporate
officer and between a corporation and a non-corporate officer?

In the case of a corporation and a corporate officer, the RTC exercies legal
authority to adjudicate. If the dispute is between the corporation and a non-
corporate officer, the Labor Arbiter has jurisdiction.

Matling Industrial and Commercial Corp. v. Ricardo Coros

G.R. No. 157802. October 13, 2010

10. May decisions and orders of the Special Commercial Courts (SCs) in intra-
corporate controversies be stayed?

Yes. The Decisions and orders of the Special Commercial Courts (SCs) in intra-
corporate controversies may be subject to a stay, depending on the
circumstances and applicable laws. The possibility of a stay of the court's
decision or order would depend on the specific rules and procedures governing
the particular jurisdiction where the case is being heard.

In general, a stay of the court's decision or order may be sought through various
legal mechanisms, such as:
 1. Motion for Stay: A party dissatisfied with the court's decision or order
may file a motion for a stay of execution or implementation. This motion
requests the court to temporarily suspend or delay the enforcement or
effect of the decision or order.
2. Appeal or Petition for Review: In some jurisdictions, a party may
exercise their right to appeal or file a petition for review with a higher
court. The filing of an appeal or petition may automatically or
conditionally stay the execution of the lower court's decision or order.
3. Temporary Restraining Order (TRO) or Injunction: A party may also
seek a temporary restraining order or injunction from a higher court to
temporarily halt the enforcement or implementation of the lower court's
decision or order pending the resolution of the appeal or petition.

11. What is the venue of intra-corporate controversies?

According to Section 5 of the Interim Rules of Procedure for Intra-Corporate

Controversies, the venue of intra-corporate controversies shall be commenced
and tried in the Regional Trial Court which has jurisdiction over the principal
office of the corporation, partnership, or association concerned. Where the
principal office of the corporation, partnership or association is registered in the
Securities and Exchange Commission as Metro Manila, the action must be filed
in the city or municipality where the head office is located.
Interim Rules of Procedure for Intra-Corporate Controversies, Rule 1,
Section 5

12. What pleadings are allowed in intra-corporate controversies?

 Under the Sec. 2 of Rule 2 of the Interim rules of procedure for intra-
corporate controversies, the only pleadings allowed are:

 SEC. 2. Pleadings allowed. – The only pleadings allowed to be filed under

these Rules are the complaint, answer, compulsory counterclaims or
cross-claims pleaded in the answer, and the answer to the counterclaims
or cross-claims

 Section 2, Rule 2 of Interim rules of procedure for intra-corporate

controversies

13. What pleadings are prohibited in intra-corporate controversies?

According to Section 8, Rule 1 of the Interim Rules, the following pleadings are
prohibited:
1. Motion to dismiss;
2. Motion for a bill of particulars;
 3. Motion for new trial, or for reconsideration of judgment or order, or for re-
opening of trial;
4. Motion for extension of tie to file pleadings, affidavits or any other paper,
except those filed due to clearly compelling reasons. Such motions must
be verified and under oath; and
5. Motion for postponement and other motions of similar intent, except those
filed due to clearly compelling reasons. Such motions must be verified and
under oath.
Interim Rules of Procedure for Intra-Corporate Controveries, Rule 1,
Section 8

14. What must a complaint in an intra-corporate controversy contain?

Rule 2, Section 4 of the Interim Rules of Procedure for Intra-Corporate

Controveries provide for the contents of a complaint regarding intra-corporate
controversies.

SECTION 4. Complaint. The complaint shall state or contain:

(1) the names, addresses, and other relevant personal or juridical

circumstances of the parties;
(2) all facts material and relevant to the plaintiff's cause or causes of action,
which shall be supported by affidavits of the plaintiff or his witnesses and
copies of documentary and other evidence supportive of such cause or
causes of action;
(3) the law, rule, or regulation relied upon, violated, or sought to be
enforced;
(4) a certification that (a) the plaintiff has not theretofore commenced any
action or filed any claim involving the same issues in any court, tribunal, or
quasi-judicial agency, and, to the best of his knowledge, no such other
action or claim is pending therein; (b) if there is such other action or claim, a
complete statement of the present status thereof; and (c) if he should
thereafter learn that the same or similar action or claim has been filed or is
pending, he shall report that fact within five (5) days therefrom to the court;
and
(5) the relief sought.

Interim Rules of Procedure for Intra-Corporate Controveries, Rule 2,

Section 4

C. ELECTION OR APPOINTMENT MATTERS

1. What are election contests (as defined in the Interim Rules)?
Under Section 2 of Rule 6 of the Interim Rules of Procedure for Intra-corporate
Controversies, an election contest refers to any controversy or dispute involving
title or claim to any elective office in a stock or non-stock corporation, the
 validation of proxies, the manner and validity of elections, and the qualifications
of candidates, including the proclamation of winners, to the office of director,
trustee or other officer directly elected by the stockholders in a close corporation
or by members of a non-stock corporation where the articles of incorporation or
by-laws so provide.
Interim Rules, Rule 6, Section 2

2. What must a complaint in an election contest contain?

Section 3, Rule 6 of the Interim Rules provides that the complaint must state that
(1) The case was filed within fifteen (15) days from the date of the election if the
by-laws of the corporation do not provide for a procedure for resolution of the
controversy, or within fifteen (15) days from the resolution of the controversy by
the corporation as provided in its by-laws; and (2) The plaintiff has exhausted all
intra-corporate remedies in election cases as provided for in the by-laws of the
corporation.
This is in addition to the provision of Section 4 of the same rule stating that within
two (2) days from the filing of the complaint, the court, upon a consideration of
the allegations thereof, may dismiss the complaint outright if it is not sufficient in
form and substance, or, if it is sufficient, order the issuance of summons which
shall be served, together with a copy of the complaint, on the defendant within
two (2) days from its issuance.
Interim Rules, Rule 6, Section 3 (1), (2)
3. Within what time period must an election contest complaint be filed?
The election contest complaint must be filed within fifteen (15) days from the date
of the election if the by-laws of the corporation do not provide for a procedure for
resolution of the controversy, or within fifteen (15) days from the resolution of the
controversy by the corporation as provided in its by-laws as stated under Section
3, Rule 6 in relation to election contests of the Interim Rules.
Interim Rules, Rule 6, Section 3 (1)
4. Can an issue involving an election protest filed beyond the 15-day
reglementary period be touched upon by the court? [Read: Eizmendi Jr. v.
Fernandez, GR No. 215280, September 5, 2018].
No, the court cannot entertain an issue involving an election protest filed beyond
the 15-day reglementary period. In the case of Eizmendi Jr. v. Fernandez, the
Court agreed that the RTC’s decision to dismiss an election complaint made
after the 15-day reglementary period is in accordance with the provisions of the
Interim Rules specifically Section 3, Rule 1 because such act promotes the
objective of securing a just, summary, speedy and inexpensive determination of
 every action or proceeding. This is in addition to Section 4, Rule 6, which grants
the court the power to dismiss outright the complaint if the allegations are not
sufficient in form and substance. Therefore, following these rules, the filing of a
complaint beyond the reglementary period should not be entertained by the
court.

5. What action may the court take upon the filing of an election contest
complaint?
As discussed under Section 4, Rule 6 of the Interim Rules of Procedure for Intra-
corporate Controversies, the court may, within two (2) days from the filing of the
complaint, either dismiss the complaint or issue summons after examining the
sufficiency of the complaint in form and in substance.
Interim Rules, Rule 6, Section 4
6. What is the period given to a defendant in an election contest case to file an
Answer?
The defendant is given ten (10) days from service of summons and the complaint
to file an answer as provided under Section 5, Rule 5 of the Interim Rules.
Interim Rules, Rule 6, Section 5
7. What action may the court take if the defendant does not file an answer to an
election contest complaint?
The actions that the court may take if the defendant does not file an answer to an
election contest complaint are either dismissing the complaint or granting relief
prayed for as the records may warrant.
Under Rule 2, Section 7 of the Interim Rules of Procedure for Intra-Corporate
Controversies, if the defendant does not file an answer to an election contest
complaint, such defendant shall be declared in default and upon motion or motu
proprio, the court shall render judgment either dismissing the complaint or
granting the relief prayed for as the records may warrant. In no case shall the
court award a relief beyond or different from that prayed for.
Interim Rules, Rule 2, Section 7
8. Is a pre-trial required in election cases? [Read: POTC v. Africa, GR No. 184622,
etc. July 3, 2013].
It was held in the case of POTC v. Africa that pre-trial is not required in election
cases pursuant to Rule 6, Section 4 of the Interim Rules of Procedure for Intra-
Corporate Controversies.
 Section 4 of Rule 6 of the Interim Rules of Procedure for Intra-Corporate
Controversies provides that the trial court, within two days from the filing of the
complaint, may outrightly dismiss the complaint upon a consideration of the
allegations thereof if the complaint is not sufficient in form and substance, or, if
the complaint is sufficient, may order the issuance of summons which shall be
served, together with a copy of the complaint, on the defendant within two days
from its issuance.
Therefore, Rule 6 does not require that the RTC acting as a special commercial
court should first conduct a pre-trial conference before it could render its
judgment in a corporate election contest.
9. When may a court schedule a hearing on an election contest case?
The court may schedule a hearing on an election contest case if it finds the need
to hold a hearing to clarify specific factual matters.
Interim Rules, Rule 6, Section 8(a)
10. When must the hearing on an election contest case be completed?
The hearing on an election contest case must be completed not later than 15
days from the date of the first hearing.
Interim Rules, Rule 6, Section 8(b)
11. Within what period must the court render a decision in an election contest
case?
The court must render a decision in an election contest case within 15 days from
receipt of the last pleading, or from the date of the last hearing, as the case may
be. Interim Rules, Rule 6, Section 9
D. DERIVATIVE SUITS
1. What is a derivative suit? Read the following:
a) Florete v. Florete, GR No. 174909, January 20, 2016, citing Villamor v. Umale,
GR No. 172843, September 24, 2014.)
b) Ago Realty and Development Corp. v. Ago, GR No. 210906, October 16, 2019
citing Chua v. CA, GR No. 150793, November 19, 2004)
Derivative suit is defined as “an action filed by stockholders to enforce a
corporate action." A derivative suit, therefore, concerns "a wrong to the
corporation itself." It is the corporation that is the victim of the wrong.As such, it is
the corporation that is properly regarded as the real party in interest, while the
relator-stockholder is merely a nominal party. The corporation must be impleaded
so that the benefits of the suit accrue to it and also because it must be barred
from bringing a subsequent case against the same defendants for the same
 cause of action. Stated otherwise, the judgment rendered in the suit must
constitute res judicata against the corporation, even though it refuses to sue
through its board of directors.
2. How is a derivative suit differentiated from an individual suit or a representative
or class suit? [Read: Florete v. Florete, GR No. 174909, January 20, 2016]
Individual suits are filed when the cause of action belongs to the individual
stockholder personally and not to the stockholders as a group or to the
corporation, e.g., denial of the right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of stockholders, such as
when the rights violated belong to preferred stockholders, a class or
representative suit may be filed to protect the stockholders in the group.
A derivative suit "is an action filed by stockholders to enforce a corporate
action. It concerns "a wrong to the corporation itself. The real party in interest is
the corporation, not the stockholders filing the suit. The stockholders are
technically nominal parties but are nonetheless the active persons who pursue
the action for and on behalf of the corporation.
3. What are the basis examples of an individual suit, a representative suit a class
suit and a derivative suit? [Cua Jr. v. Tan, GR No. 181455-56, December 4, 2009)
Individual suit- Where a stockholder or member is denied the right of inspection,
his suit would be individual because the wrong is done to him personally and not
to the other stockholders or the corporation.
Class or representative suit- Where the wrong is done to a group of
stockholders, as where preferred stockholders’ rights are violated, a class or
representative suit will be proper for protecting all stockholders belonging to the
same group. A direct action is one filed by the shareholder individually or on
behalf of a class of shareholders to which he or she belongs for injury to his or
her interest as a shareholder.
Derivative suit- In cases of mismanagement where the wrongful acts are
committed by the directors or trustees themselves, a stockholder or member may
sue on behalf of a corporation in what eventually became known as a "derivative
suit." As the Supreme Court has explained: "A shareholder's derivative suit seeks
to recover for the benefit of the corporation and its whole body of shareholders
when injury is caused to the corporation that may not otherwise be redressed
because of failure of the corporation to act. Thus, ‘the action is derivative, i.e., in
the corporate right, if the gravamen of the complaint is injury to the corporation,
or to the whole body of its stock and property without any severance or
distribution among individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.
4. What is the rationale of a derivative suit?
 In cases of mismanagement where the wrongful acts are committed by the
directors or trustees themselves, a stockholder or member may find that he has
no redress because the former are vested by law with the right to decide whether
or not the corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy. Because of
the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or are the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder
is regarded as the nominal party, with the corporation as the party in interest.
5. What is the authoritative basis of a derivative suit? [Ching v. Subic Bay, GR No.
174353, September 10, 2014).
A stockholder’s right to institute a derivative suit is not based on any express
provision of the Corporation Code or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its stockholders for violation of
their fiduciary duties. The legal standing of minority stockholders to bring
derivative suits is not a statutory right, there being no provision in the Corporation
Code or related statutes authorizing the same, but is instead a product of
jurisprudence based on equity. However, a derivative suit cannot prosper without
first complying with the legal requisites for its institution.
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate
Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
6. May the majority stockholders file a derivative suit in behalf of the corporation?
[Read: Mallare v. Huang, GR No. 249789, April 28, 2021 (Notice), citing Ago v.
Ago].
No, the majority stockholders file a derivative suit in behalf of the corporation.
 In Ago Realty & Development Corporation v. Ago, the Court explained that
majority stockholders who have undisputed corporate control cannot resort to
derivative suits when nothing is preventing the corporation itself from filing the
case. The interests of the majority stockholders should have been protected by
the board through affirmative action.
7. Is a board resolution required to authorize the filing of a derivative suit?
No, a board resolution is not required to authorize the filing of a derivative suit. A
derivative suit is brought by a shareholder on behalf of the corporation to
vindicate the corporation's rights when the board itself is unable or unwilling to
sue due to misconduct or control by the wrongdoers. If the board is implicated in
the wrongdoing, requiring their approval for the suit would be illogical. It would
essentially give them control over whether they are held accountable.
Thus, a derivative suit is an equitable exception to the rule that the corporate
power of suit is exercisable only through the board of directors (Metrobank v.
Salazar Realty Corporation, G.R. No. 218738, March 09, 2022).
8. What are the requisites to be complied with for a valid derivative suit to
prosper?
1. He was a stockholder or member at the time the acts or transactions subject of
the action occurred and at the time the action was filed;
2. He exerted all reasonable efforts and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or partnership to obtain the relief
he desires;
3. No appraisal rights are available for the act or acts complained of; and
4. The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
Interim Rules, Rule 8, Sec. 1
9. Aside from the four requisites provided for in the Interim Rules, Rule 8, Sec. 1,
is there any other requirement for filing a derivative suit? [Read: Villamor v.
Umale, GR No. 172843, September 24, 2014].
The fifth requisite for filing derivative suits, while not included in the enumeration,
is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The
action brought by the stockholder or member must be "in the name of [the]
corporation or association.”
10. Why is it necessary for a derivative suit to be brought in the name of the
corporation? [Read: Asset Privatization Trust v. CA, GR No. 121171, December
29, 1998, cited in Villamor v. Umale).
 Not only is the corporation an indispensible party, but it is also the present rule
that it must be served with process. The reason given is that the judgment must
be made binding upon the corporation inorder that the corporation may get the
benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words, the corporation must be
joined as party because it is its cause of action that is being litigated and
because judgment must be a res judicata against it.
11. What happens if a derivative suit is not filed in the name of the corporation
but of the suing stockholder? [Read: Mallare v. Huang, GR No. 249789, April 28,
2021 (Notice) & Florete v. Florete, GR No. 174909, January 20, 2016]. See also
Revised Rules of Civil Procedure, Rule 10, Sec. 3).
If a derivative suit is not filed in the name of the corporation but of the suing
stockholder, it may result in the dismissal of the suit. The suing stockholder must
file the derivative suit in the name of the corporation to validly assert the rights
and claims of the corporation. Filing the suit in the name of the stockholder alone
may be considered improper and may lead to the dismissal of the case.
In the case of Mallare v. Huang, the courts emphasized the requirement that a
derivative suit must be filed in the name of the corporation. In these cases, the
stockholders who filed the suits were not able to meet this requirement, and as a
result, their suits were dismissed.
Furthermore, Rule 10, Section 3 of the Revised Rules of Civil Procedure also
states that a derivative suit must be brought by or on behalf of the corporation. It
is important to follow this procedural requirement to ensure the validity of the
derivative suit.
12. At what point in time must the person bringing the suit be a stockholder of the
corporation to validly institute a derivative suit?
To validly institute a derivative suit, the person bringing the suit must be a
stockholder of the corporation at the time of the act or transaction complained of
and at the time of filing the suit. The Revised Corporation Code does not specify
a specific point in time, but it requires the shareholder to have a current
ownership interest in the corporation when the alleged wrongdoing occurred and
when the lawsuit is initiated. The number of shares held by the shareholder is not
material, as long as they were a stockholder during the relevant period.
13. What happens if the persons bringing the derivative suit are not stockholders
of the corporation? [ Read: PNCC v. Members of the Board of Directors of the
PNCC, GR No. 225943, February 22, 2017 (Notice).
Under the Corporation Code, where a corporation is an injured party, its power to
sue is lodged in its board of directors or board of trustees; but an individual
stockholder may be permitted to institute a derivative suit on behalf of the
corporation in order to protect or vindicate corporate rights whenever the officials
of the corporation refuse to sue, or are the ones to be sued, or hold control of the
 corporation. In a derivative suit, the corporation is the real party-in-interest; the
suing stockholder, on behalf of the corporation, is only a nominal party.
Section 1, Rule 8 of the Interim Rules of Procedure for Intra-Corporate
Controversies (A.M. No. 01-2-04-SC, March 13, 2001), which enumerates the
requisites for a proper derivative suit, provides:
Section 1. Derivative Action. A stockholder or member may bring an action in the
name of a corporation or association, as the case may be, provided that:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fact alone that the petitioners were not themselves stockholders of the
PNCC clearly indicated their lack of legal standing to initiate the action as a
derivative suit on behalf of the PNCC. As correctly emphasized by the RTC, the
derivative suit could not prosper without the petitioners first complying with the
legal requisites for its institution.
14. May a third party be sued as a defendant in a derivative suit? [Read: Hi-Yield
Realty v. CA, GR No. 186663, 23 June 2009]
Yes. A third party may be sued as a defendant in a derivative suit. In the case of
Hi-Yield Realty v. CA, the court ruled that for a derivative suit to be successful,
the complaining stockholder must allege that they are suing on behalf of the
corporation and all other similarly situated stockholders.
In the case mentioned, the petitioner satisfied this requirement by stating in their
petition that they were instituting the proceeding through a derivative suit to
address wrongs done to the corporation and to vindicate corporate rights due to
mismanagement and abuses committed by its officers and controlling
stockholders, particularly Leonora H. Torres. The petitioner explained that they
acted as a minority stockholder seeking redress for the corporation. Thus, a third
party may be sued as a defendant in a derivative suit.

15. Can there be a derivative suit against the corporation's directors, officers, or
stockholders? [Read: Florete v. Florete]
 Yes, a suit may be had against the corporation's directors, officers, or
stockholders through a derivative suit.
In the case of Florete vs Florete, while the Marcelino, Jr. Group stockholders
were entitled to seek relief, they should have pursued it through a derivative suit
on behalf of the corporation, rather than in their individual capacity or as a group
of stockholders. An individual stockholder is permitted to institute a derivative suit
on behalf of the corporation wherein he holds stocks to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or are
the ones to be sued or hold the control of the corporation. In such actions, the
suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest. A derivative action is a suit by a shareholder to enforce a
corporate cause of action.
Therefore, a derivative suit can be had against the corporation's directors,
officers, or stockholders if their actions are detrimental to the corporation and its
shareholders.
16. How should the requirement of exhaustion of all remedies available be
complied with? [Read: Sps. Yu v. Yukayguan, GR No. 177549, June 18, 2009).
In Yu, et al. v. Yukayguan, the Court rejected the argument that attempts
between stockholders to amicably settle a corporate dispute constitute "all
reasonable efforts to exhaust all remedies available." It was held that: The
allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to
petitioner Anthony regarding their dispute hardly constitutes "all reasonable
efforts to exhaust all remedies available." Joseph's affidavit failed to mention any
other remedies provided in Winchester, Inc.'s articles of incorporation or by-laws,
which might have been pursued but were not. Thus, to comply with the
exhaustion of all remedies available, a written demand must be made to the
board of directors or the utilization of any other internal mechanisms provided for
in the corporation's articles of incorporation, by-laws, or applicable laws and
regulations.
17. What is the underlying reason for the requirement of exhaustion of all
remedies available before a derivative suit is allowed?
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies requires that the stockholder filing a derivative suit should have
exerted all reasonable efforts to exhaust all remedies available under the articles
of incorporation, by-laws, laws, or rules governing the corporation or partnership
to obtain the relief he desires; and to allege such fact with particularity in the
complaint. The obvious intent behind the rule is to make the derivative suit the
final recourse of the stockholder after giving the corporation all other remedies to
address and resolve the issues internally had failed.
18. May the requirement of exhaustion of all remedies available be dispensed
with?
 No, the requirement of exhaustion of all remedies available cannot be dispensed
with. Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies lays down the following requirements which a
stockholder must comply with in filing a derivative suit.
“Being a derivative suit under Rule 8 of the Interim Rules, the stockholders and
members may bring an action in the name of the corporation or association
provided that he (the minority stockholder) exerted all reasonable efforts and
alleged the same with particularity in the complaint to exhaust of (sic) all
remedies available under the articles of incorporation, by-laws or rules governing
the corporation or partnership to obtain the reliefs he desires.” (Ching v. Subic
Bay Golf and Country Club, Inc., G.R. No. 174353, September 10, 2014)
19. Does the requirement of exhaustion of all remedies available before a
derivative suit may be filed also apply in a family or close corporation? [Read:
Ago v. Ago]
Yes, the requirement of exhaustion of all remedies available before a derivative
suit may be filed is also applicable in a family or close corporation.
In the case of Ago v. Ago, assuming arguendo that ARDC is a close family
corporation, the same cannot be considered a justification for noncompliance
with the requirements for the filing of a derivative suit. Also, In the case of Yu v.
Yukayguan, The fact that Winchester, Inc. is a family corporation does not
exempt respondents from complying with the formalities and requirements of
filing a derivative suit. The court emphasized that there is no legal basis for
treating family corporations differently from other types of corporations in this
regard.
20. What is an appraisal right? What is the raison d'etre for the grant of appraisal
rights to minority stockholders? How does appraisal right impact on the right to
file a derivative suit?
In the case of Cua Jr. vs. Tan etc., the court explained that under Article 81 of the
Revised Corporation Code, appraisal right means that a stockholder who
dissented and voted against the proposed corporate action may choose to get
out of the corporation by demanding payment of the fair market value of his
shares.
When a person invests in the stocks of a corporation, he subjects his investment
to all the risks of the business and cannot just pull out such investment should
the business not come out as he expected. He will have to wait until the
corporation is finally dissolved before he can get back his investment, and even
then, only if sufficient assets are left after paying all corporate creditors. His only
way out before dissolution is to sell his shares should he find a willing buyer. If
there is no buyer, then he has no recourse but to stay with the corporation.
However, in certain specified instances, the Code grants the stockholder the right
to get out of the corporation even before its dissolution because there has been a
 major change in his contract of investment with which he does not agree and
which the law presumes he did not foresee when he bought his shares. Since the
will of two-thirds of the stocks will have to prevail over his objections, the law
considers it only fair to allow him to get back his investment and withdraw from
the corporation.
The court found the argument of respondents Miguel, et al., regarding the
unavailability of appraisal rights to be without merit. They argued that appraisal
rights were not available to them because PRCI stockholders had not yet voted
on the intended property-for-shares exchange between PRCI and JTH at the
time they filed their complaint. However, the court noted that respondents Miguel,
et al., themselves caused the unavailability of appraisal rights by prematurely
filing their complaint. They filed Civil Case No. 07-610 before the resolution
approving the property-for-shares exchange could be presented to the PRCI
stockholders for approval or rejection. This action deprived them of the
opportunity to exercise appraisal rights, as those rights are typically available to
stockholders who vote against proposed corporate actions.
By filing their complaint prematurely and seeking nullification of the board's
resolution before exhausting other available remedies, respondents Miguel, et
al., failed to comply with the requirement to exhaust all reasonable remedies
under the articles of incorporation, by-laws, laws, or rules governing the
corporation. This requirement is intended to ensure that the derivative suit is the
final recourse of the stockholder, pursued only after all other avenues for relief
have been exhausted

21. May fraud or misrepresentation arising from schemes and devices employed
by the BOD and officers of a corporation and which is the basis for an intra-
corporate action be also used as basis for the filing of a derivative suit, and vice-
versa? [read: Cua v. Tan, GR No. 181455, December 4, 2009].

No, fraud or misrepresentation arising from schemes and devices employed by

the BOD and officers of a corporation cannot be the basis for both an intra-
corporate action and a derivative suit simultaneously.

If the wrong is done to the corporation itself, the cause of action belongs to the
corporation and a derivative suit is proper. The corporation is an indispensable
party in a derivative suit. The suing stockholder is a mere nominal party, with the
corporation being the real party in interest. Thus, a derivative suit is proper when
the action is based on the devices and schemes employed by the Board of
Directors that amounts to mismanagement, misrepresentation, fraud and bad
faith.

However, a derivative suit cannot prosper without first complying with the legal
requisites, such as exhausting all available remedies to obtain the desired relief.
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
 Controversies (IRPICC) lays down the following requirements which a
stockholder must comply with in filing a derivative suit:

Sec. 1. Derivative action. A stockholder or member may bring an action in the

name of a corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to
obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

Failure to satisfy these requirements will result in the dismissal of the derivative
suit. In summary, the same acts of fraud or misrepresentation by the BOD and
officers cannot be the basis for both an individual/class suit and a derivative suit
simultaneously. The nature of the wrong determines whether an individual suit or
a derivative suit is proper.

In the case of Cua vs. Tan, the Supreme Court points out that every derivative
suit is necessarily grounded on an alleged violation by the BOD of its fiduciary
duties, committed by mismanagement, misrepresentation, or fraud, with the latter
two situations already implying bad faith. If the Court upholds the position of
respondents Miguel, et al. that the existence of mismanagement,
misrepresentation, fraud, and/or bad faith renders the right of appraisal
unavailable it would give rise to an absurd situation. Inevitably, appraisal rights
would be unavailable in any derivative suit. This renders the requirement in Rule
8, Section 1 (3) of the IRPICC superfluous and effectively inoperative.

On the other hand, in order that a stockholder may sue on behalf of the
corporation, he must allege with some particularity in his complaint that he has
exhausted his remedies within the corporation by making a sufficient demand
upon the directors or other officers for appropriate relief with the expressed intent
to sue if relief is denied. Thus, if the wrong is done to the stockholder personally
or to a group of stockholders, an individual suit is proper. For example, if a
stockholder is denied the right of inspection, his suit would be individual because
the wrong is done to him personally and not to the other stockholders or the
corporation.

22. What are the factors for the court to determine that a suit is a nuisance or a
harassment suit?
 Rule 1, Sec. 1(b) of The Interim Rules of Procedure for Intra-Corporate
Controversies lays down the factors for the court to determine that a suit is a
nuisance or harassment suit:

1. The extent of the shareholding or interest of the initiating stockholder or

member.

2. Subject matter of the suit.

3. Legal and factual basis of the complaint.

4. Availability of appraisal rights for the act or acts complained of.

5. Prejudice or damage to the corporation, partnership, or association in

relation to the relief sought.

In case of nuisance or harassment suits, the court may, moto proprio or upon
motion, dismiss the case.

23. Is the extent of the shareholding or interest of the suing stockholder

important in determining whether a derivative suit will prosper? [Read: San
Miguel Corporation v. Khan, GR No. 853330, August 11, 1989].

No, the extent of the shareholding or interest of the suing stockholder is not
determinative of whether a derivative suit will prosper. Even a minority of
stockholders can file a derivative suit on behalf of the corporation, as long as the
legal requisites for filing such a suit are met.

In the case of San Miguel Corporation vs. Khan, the Supreme Court rules that a
shareholder has the legal capacity to bring a derivative suit in his own right
regardless of the number of shares he owns. It is not necessary to be a director
or officer to bring a derivative action. The bona fide ownership by a stockholder
of stock in his own right suffices to invest him with standing to bring a derivative
action for the benefit of the corporation. The number of his shares is immaterial
since he is not suing in his own behalf, or for the protection or vindication of his
own particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation.

24. Where is the venue of a derivative suit to annul a mortgage or corporate real
property alleged to have been instituted through fraud and misrepresentation of
the corporation’s BOD? [Read also: Hi-Yield Realty v. CA, GR No. 168863, June
23, 2009].

The suit is cognizable by the Regional Trial Court or the special commercial
courts, provided the legal requisites for a derivative suit are met.
 In the case of Hi-Yield Realty vs. CA, Roberto Torres filed a Petition for
Annulment of Real Estate Mortgage and Foreclosure Sale over two parcels of
land against Hi-Yield Realty Inc. with the Regional Trial Court of Makati City. The
Court of Appeals maintained that the action is primarily a derivative suit to
redress the alleged unauthorized acts of its corporate officers and major
stockholders in connection with the lands. Further, the nullification of the
mortgage and foreclosure sale would just be a logical consequence of a decision
adverse to the officers and stockholders.

The Supreme Court determined that the nature of the petition filed in the RTC
was a derivative suit, even though it was captioned as a petition for annulment of
real estate mortgage and foreclosure sale. The court explained that derivative
suits are governed by a special set of rules, including rules on venue.

As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-
SC states:

SEC. 5. Venue. All actions covered by these Rules shall be commenced

and tried in the Regional Trial Court which has jurisdiction over the
principal office of the corporation, partnership, or association concerned.
Where the principal office of the corporation, partnership or association is
registered in the Securities and Exchange Commission as Metro Manila,
the action must be filed in the city or municipality where the head office is
located.

Thus, the Court of Appeals did not commit grave abuse of discretion when it
found that respondents correctly filed the derivative suit before the Makati RTC
where Hi-Yield had its principal office.

E. INSPECTION OF CORPORATE BOOKS AND RECORDS

1. What are the books and records a corporation is required to keep?

Sec. 73 of the Revised Corporation Code provides that every corporation

shall keep and carefully preserve at its principal office all information
relating to the corporation, including but not limited to:

1. The articles of incorporation and bylaws of the corporation and all

their amendments;
2. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members, group
structures, intra-group relations, ownership data, and beneficial
ownership;
3. The names and addresses of all the members of the board of
directors or trustees and the executive officers;
4. A record of all business transactions;
5. A record of the resolutions of the board of directors or trustees and
of the stockholders or members;
 6. Copies of the latest reportorial requirements submitted to the
Commission; and
7. Books of minutes of board meetings

The book of minutes shall contain the following:

1. Date and time of meeting

2.Place of holding the meeting
3.How meeting was authorized
4.The fact that notice was given
5. Whether the meeting is special or regular
6.If special meeting, the objective must be stated
7.The present and absent stockholders
8.Every act done at the meeting

The Stock and Transfer Book shall contain the following:

1.All stocks in the name of the shareholders

2. Amount paid and unpaid on all stocks and the date of payment of any
installment

3. Alienation, sale and transfer of stocks

4. Other entries which the by-laws shall provide

2. What are the stockholders’ rights vis-a-vis the above-mentioned records and
documents?

Under Sec. 73 of the Revised Corporation Code of the Philippines, stockholders

have the right to inspect corporate books and records, including the right to
demand, in writing, copies or excerpts from said records at the stockholder's
expense.

To exercise the right to inspect, the following requisites must concur:

1. It must be exercised at reasonable hours on business days;

2.The stockholder must not have improperly used any information he

secured through any previous examination; and

3.The demand is made in good faith and for a legitimate purpose.

Any officer or agent who refuses to allow inspection in accordance with the Code
shall be liable for damages and guilty of an offense punishable under the Code. If
the refusal is pursuant to a board resolution, the liability extends to the directors
who voted for the refusal. The corporation may raise as a defense that the
stockholder demanding inspection is not acting in good faith or for a legitimate
 purpose. However, the burden of proof is on the corporation to show the
improper purpose.

Proper purposes for inspection include ascertaining the company's financial

condition, value of shares, mismanagement, obtaining a shareholder list for proxy
solicitation, and obtaining information in aid of litigation against the corporation or
its officers. On the other hand, improper purposes that may justify denial include
obtaining business secrets, competitor information, or investment/advertising
lists.

In summary, stockholders have a broad right to inspect corporate books and

records for legitimate purposes, which the corporation can only deny by proving
the stockholder's improper motive. Refusal to allow inspection can lead to liability
for the corporation and its officers.

3. May the right of inspection of corporate records be exercised with respect to a

fully owned subsidiary of a corporation where the claimant is a stockholder?
[Read: Gokongwei v. SEC, GR No. L-45911, April 11, 1979).

Yes, the right of inspection of corporate records can be exercised with respect to
a fully owned subsidiary of a corporation where the claimant is a stockholder,
especially where a corporation owns approximately no property except the
shares of stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company. In such cases, the legal fiction of
distinct corporate entities may be disregarded, and the books, papers and
documents of all the corporations may be required to be produced for
examination.

Digest: Gokongwei v. SEC, GR No. L-45911, April 11, 1979

Facts: John Gokongwei, Jr., the petitioner, was a stockholder of San

Miguel Corporation (SMC). SMC had business interests spanning various
industries, including food and beverages, packaging, and agriculture,
among others.

In the late 1940s, SMC had ventured into the international beer
manufacturing business by acquiring the Hongkong Brewery & Distillery
Ltd. This foreign investment was later restructured in the 1970s through
the establishment of a subsidiary company called San Miguel
International, Inc. (SMI), incorporated in Bermuda. SMI essentially served
as the holding company for SMC's foreign beer brewing operations.

As a substantial stockholder of SMC, Gokongwei sought to exercise his

right to inspect the corporate records, including those pertaining to SMI,
SMC's fully-owned foreign subsidiary. However, SMC denied Gokongwei's
request to inspect and copy certain documents related to SMI, arguing
 that as a stockholder of the parent company, he did not have the right to
access the records of its separate subsidiary entity.

This denial prompted Gokongwei to file a petition with the Securities and
Exchange Commission (SEC), asserting his statutory right as a
stockholder to inspect not only SMC's records but also those of its wholly-
owned subsidiary, SMI. SMC maintained its stance, contending that the
records of its separate subsidiary were not subject to Gokongwei's
inspection rights as a stockholder of the parent company.

Issue: May the right of inspection of corporate records be exercised with

respect to a fully owned subsidiary of a corporation where the claimant is
a stockholder?

Ruling: The right of inspection of corporate records can be exercised with

respect to a fully owned subsidiary of a corporation where the claimant is
a stockholder of the parent corporation, especially where a corporation
owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding
company. In such cases, the legal fiction of distinct corporate entities may
be disregarded, and the books, papers and documents of all the
corporations may be required to be produced for examination by the
stockholder of the parent company.

The Court held that since San Miguel International, Inc. was a fully owned
subsidiary of San Miguel Corporation, and considering SMI's records were
in SMC's possession and control, it would be in accord with equity and fair
dealing to allow the petitioner John Gokongwei, Jr., who was a
stockholder of SMC, to inspect and examine the books and records of SMI
that were held by SMC.

The Supreme Court cited the principle that "where a corporation owns
approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding
company, the legal fiction of distinct corporate entities may be disregarded
and the books, papers and documents of all the corporations may be
required to be produced for examination."

The stockholder's right of inspection extends to the subsidiary's records

when the subsidiary is merely an instrumentality or agent of the parent
corporation, and the parent essentially owns no other property except the
subsidiary's shares.

4. What is the limit to the right of inspection and right of reproduction of

corporate records?

Section 73 of the Revised Corporation Code, limitation for this right of inspection
and right of reproduction of corporate records are the following:
 1. The right must be exercised at reasonable hours on business
days;

2.the director, trustee, stockholder or member has not improperly

used any information he secured through any previous
examination;

3. demand is made in good faith or for a legitimate purpose;

4.the inspecting or reproducing party must respect and is bound by

confidentiality rules under prevailing laws such as the intellectual
property code, data privacy act, securities regulation code, and the
rules of court; and

5.the requesting party who is not a stockholder or member of

record, or who is a competitor, director, officer, controlling
stockholder or otherwise represents the interest of a competitor
shall have no right to inspect or demand reproduction of corporate
records.

5. Who cannot exercise the right of inspection and reproduction of corporate

books and records?

The following are the persons who cannot exercise the right of inspection and r
eproduction of corporate books and records:

1. a requesting party who is not a stockholder or member of record

2.a competitor, director, officer, controlling stockholder; or

3.represents the interests of a competitor shall have no right to

inspect or demand reproduction of
corporate records.

According to Section 73 of the Revised Corporation Code, a requesting party

who is not a stockholder or member of record, or is a competitor, director, officer,
controlling stockholder or otherwise represents the interests of a competitor shall
have no right to inspect or demand reproduction of corporate records. The right
to inspect does not extend to confidential records or information protected by law
or by the corporation's internal rules.
6. What is the penalty for stockholders who abuse their right of inspection and
reproduction of corporate books and records?

Section 73 of the Revised Corporation Code (RCC) provides, any stockholder

who abuses the right to inspect and reproduce corporate records shall be subject
to administrative sanctions of Section 158 of RCC, without prejudice to the
provisions of the Intellectual Property Code and the Data Privacy Act.

Section 158 Administrative Sanctions. – If, after due notice and hearing, the
Commission finds that any provision of this Code, rules or regulations, or any of
the Commission’s orders has been violated, the Commission may impose any or
all of the following sanctions, taking into consideration the extent of participation,
nature, effects, frequency and seriousness of the violation:

Imposition of a fine ranging from Five thousand pesos (P5,000.00) to Two million
pesos (P2,000,000.00), and not more than One thousand pesos (P1,000.00) for
each day of continuing violation but in no case to exceed Two million pesos
(P2,000,000.00);

Issuance of a permanent cease and desist order;

Suspension or revocation of the certificate of incorporation; and

Dissolution of the corporation and forfeiture of its assets under the conditions in
Title XIV of this Code.

7. Under Sec. 158 of the RCC, what is the penalty for abusing the right of
inspection and reproduction of corporate books and records?

Under Section 158 of the Revised Corporation Code (RCC), the penalty for
abusing the right of inspection and reproduction of corporate books and records
is not explicitly stated. However, Section 73 of the RCC provides that any
stockholder who abuses the rights granted under this section shall be penalized
under Section 158 of this Code, without prejudice to the provisions of the
Intellectual Property Code and the Data Privacy Act. This implies that the penalty
for abuse of the right of inspection and reproduction of corporate records is
subject to the provisions of Section 158, which may include administrative
sanctions by the Securities and Exchange Commission (SEC) or other penalties
under the RCC and other laws.

Here’s the the following sanctions under section 158, taking into consideration
the extent of participation, nature, effects, frequency and seriousness of the
violation:

(a) Imposition of a fine ranging from Five thousand pesos (P5,000.00) to

Two million pesos (P2,000,000.00), and not more than One thousand
 pesos (P1,000.00) for each day of continuing violation but in no case to
exceed Two million pesos (P2,000,000.00);

(b) Issuance of a permanent cease and desist order; (C) Suspension or

revocation of the certificate of incorporation; and (d) Dissolution of the
corporation and forfeiture of its assets under the conditions in Title XIV of
this Code.

8. What is the nature of the fine imposed in Section 158 of the RCC against
stockholders abusing their right of inspection and reproduction and which office
or entity has jurisdiction to impose it? [Read: Tent v. Tullet Prebon Phils, Inc., GR
No. 189158, January 11, 2017.

The case of Tent v. Tullet Prebon Phils, Inc., G.R. No. 189158, January 11,
2017, does not specifically address Section 158 of the Revised Corporation Code
(RCC). The jurisdiction to impose fines under Section 144 for violations of the
Corporation Code primarily lies with the courts. However, the Securities and
Exchange Commission (SEC) may also play a role in administrative proceedings
related to the dissolution of a corporation or other related sanctions.

The SEC can impose administrative fines or penalties and also recommend
further action in court, where criminal penalties, including fines and
imprisonment, could be considered for disloyalty by acquiring business
opportunities that should belong to the corporation.

Section 158 grants the SEC the power to impose administrative sanctions when
it "finds that any provision of this Code, rules or regulations, or any of the [SEC's]
orders has been violated." Section 158 imposes penalties pursuant to an
administrative proceeding where the evidence of violation need only be based on
substantial evidence. It seems clear that with the grant under Section 158, the
SEC has the power to impose the administrative sanction of dissolution against
erring corporations.

According to UCPB v. SEC, Section 158 of the Revised Corporation Code of the
Philippines introduces administrative sanctions that the Securities and Exchange
Commission (SEC) can impose for violations of the Code. This includes fines,
cease and desist orders, suspension or revocation of certificates, and dissolution.

Tent v. Tullet Prebon Phils, Inc., GR No. 189158, January 11, 2017

Facts: Tullett had been operating its inter-dealer broking business in the
Philippines since 1995. In August 2008, the Tradition Group, seeking to
expand its presence in Asia, tasked two of its executives - British national
James A. Ient and Filipino-German Maharlika C. Schulze - with
establishing a Philippine subsidiary called Tradition Financial Services
Philippines, Inc. (Tradition Philippines).
However, Tullett claimed that Ient and Schulze did not proceed in good
faith. According to Tullett, its former President and Managing Director
Jaime Villalon and former director Mercedes Chuidian conspired with Ient
and Schulze to sabotage Tullett's operations.

The alleged conspiracy involved orchestrating the mass resignation of

Tullett's entire brokering staff through a series of clandestine meetings
away from Tullett's offices. At these meetings, Tullett's brokers were
purportedly induced to sign employment contracts with the newly-formed
Tradition Philippines. Ient and Schulze were present at some of these
meetings where the employment contracts and indemnity agreements
were distributed.

Tullett further claimed that its brokers were instructed by Tradition

Philippines' lawyer on how to resign from Tullett. The brokers were also
allegedly told to call up Tullett's clients to inform them about joining
Tradition Philippines in an effort to divert business away from Tullett.

Based on these alleged actions, Tullett filed criminal complaints against

Villalon, Chuidian, Ient, Schulze and others, accusing them of violating
Sections 31 and 34 of the Corporation Code through acts of disloyalty and
breach of fiduciary duties to Tullett. The complaints sought to apply the
penal sanctions under Section 144 of the Code.

Issue: Whether violations of Sections 31 and 34 could be considered

criminal offenses punishable under Section 144.

Ruling: The Supreme Court ruled that violations of Sections 31 and 34

cannot be treated as criminal offenses punishable under the penal
sanctions prescribed in Section 144.

The Supreme Court anchored its decision on several key reasons. Firstly,
it found no clear, unambiguous legislative intent expressed in the
Corporation Code to categorically define breaches of Sections 31 and 34
as criminal transgressions. The text of Section 144 itself was deemed
ambiguous on this point.

Crucially, the Court drew a stark contrast between the language employed
in Sections 31 and 34 vis-a-vis Section 74 of the same Code. Unlike
Section 74 which explicitly states that a violation of the right to inspect
corporate records "shall be an offense" punishable under Section 144,
Sections 31 and 34 glaringly lacked any such express criminalization
provision.

The Court reasoned that if legislators truly intended Sections 31 and 34

violations to attract criminal liability, they could have easily replicated the
unequivocal language used in Section 74. This glaring omission
suggested a lack of legislative will to criminalize those sections.
 Furthermore, the Court examined the legislative deliberations and found
them centered solely on the civil remedies outlined in Sections 31 and 34
themselves, such as damages, accounting of profits and restitution. There
was no indication whatsoever of any intent to elevate breaches to the
realm of criminal culpability via Section 144.

The Court also considered that Sections 31 and 34 were essentially meant
to codify common law principles of fiduciary duties, for which remedies
have traditionally been civil in nature.

Applying the rule of lenity which requires ambiguities in penal statutes to

be resolved in favor of the accused, the Court concluded that the
ambiguity regarding Section 144 applicability to Sections 31 and 34 must
be construed against treating such violations as criminal offenses.

The Supreme Court ruled that while Sections 31 and 34 of the Corporation
Code impose civil liabilities like damages and profit disgorgement for
breaches of fiduciary duty, such violations cannot attract the penal
sanctions of fines or imprisonment under Section 144 of the same Code.
The Court's decision provided much-needed clarity while promoting
judicious interpretation of regulatory business laws.

9. What are the remedies (under the RCC) available to a director, trustee,
stockholder, or member who is denied of his or her right of inspection and
reproduction or corporate books and records? [Read also: PASRC v. Lim, GR No.
172948, October 5, 2016].

A corporation’s objections to a stockholder’s right to inspect records must be

raised defensively, with sufficient evidence if it is to be recognized judicially. The
proper remedy for enforcing the right of inspection lies with the stockholder
through a writ of mandamus, not a petition for injunction filed by the corporation.

The right to inspect under Section 74 of the Corporation Code is subject to

limitations regarding the stockholder’s good faith and legitimate purpose, which
must be raised defensively by the corporation.

1. The burden of proving bad faith or illegitimate purpose lies with the
corporation.

2. A writ of preliminary injunction requires an actual existing right to be

protected and its actual or threatened violation.

3. Injunctions are not designed to protect contingent or future rights and

cannot be granted on allegations without evidence of an actual right.
 4. An action for injunction filed by a corporation is generally unavailable to
prevent stockholders from exercising their right to inspection of records.

10.Does the authority of the SEC to issue an order directing the inspection or
reproduction of the requested records deprive the SRC of its jurisdiction over
complaint for inspection or corporate books and records under the Interim Rules,
Rule 1, Section 1(a)(5) in relation to Rule 7 of the same Interim Rules?

Yes, Section 8, Rule 1 of the Interim Rules on Intra-Corporate Controversies

under the Securities Regulation Code (RA 8799). The Motion for Dissolution of
the Writ of Preliminary Injunction was likewise denied on the ground that the writ
does not completely result in unjust denial of petitioners' right to inspect the
books of the corporation. The RTC further stated that if no preliminary injunction
is issued, petitioners may, before final judgment, do the act which PASAR is
seeking the Court to restrain which will make ineffectual the final judgment that it
may afterward render.

11.What is the penalty for the offense under Section 161 of the RCC referred to in
Section 73 of the same Code?

The offense mentioned in Section 73 is now punishable under Section 161

(Violation of Duty to Maintain Records, to Allow their Inspection, or Reproduction)
of the RCC, which imposes a fine ranging from P10,000.00 to P200,000.00, at
the discretion of the court, taking into consideration the seriousness of the
violation and its implications, and a fine ranging from P20,000.00 to P400,000.00
when the violation is injurious or detrimental to the public.

12.What is the nature of the fine imposed in Section 161 and which office/entity or
court has the jurisdiction to impose it?

With the enactment of the Revised Corporation Code the right to inspect
corporate books and records can now be found under Section 73 thereof, and
the consequence for its violation, under Section 161of the said law, which
changed the penalty imposed by Section 144 of the Old Corporation Code.

The penalties impose under this section shall be without prejudice to the
Commission's exercise of its contempt powers under Section 157 hereof.
13.What are the defenses against the stockholder’s right of inspection and
reproduction of corporate books and records?

Under Section 74- The Court has held that a corporation’s objections to the right
to inspect must be raised as a defense:

the person demanding to examine and copy excerpts from the corporation’s
records and minutes has not improperly used any information secured through
any previous examination of the records of such corporation.

the demand is made in good faith or for a legitimate purpose.

The latter two limitations, however, must be set up as a defense by the

corporation if it is to merit judicial cognizance. As such, and in the absence of
evidence, the PCGG cannot unilaterally deny a stockholder from exercising his
statutory right of inspection based on an unsupported and naked assertion that
private respondent’s motive is improper or merely for curiosity or on the ground
that the stockholder is not in friendly terms with the corporation’s officers.

14. May an action for injunction and, consequently, a writ of preliminary

injunction, be availed of by the corporation to prevent and enjoin a stockholder
from exercising his/her right of inspection and reproduction of corporate books
and records? [Read: PASR Corp. v. Lim, GR No. 172948, October 5, 2016].

No, the Court held that the Court of Appeals correctly found the RTC’s issuance
of a preliminary injunction as a grave abuse of discretion. The appellate court
rightfully utilized a petition for certiorari to lift the injunction, rendering PASAR’s
procedural arguments regarding dissolution moot.

15. Which office / entity / court has jurisdiction over complaints for violation of a
subdivision homeowner’s right of inspection or association books and records?
[Read: Francisco v. Del Castillo, GR No. 236726, September 14, 2021].

The office / entity / court that has jurisdiction over complaints for violating a
subdivision homeowner’s right of inspection or association books and records is
the Housing and Land Use Regulatory Board (HLURB). This is because the
HLURB is tasked with resolving intra-association disputes under Republic Act
No. 9904, which governs homeowners' associations. The Supreme Court
 affirmed that such disputes fall within the exclusive jurisdiction of the HLURB,
rather than the Regional Trial Court (RTC).

16. What should be alleged in the complaint for inspection of corporate books
and records under the Interim Rules, Rule 1, Sec. 1(a)(5) in relation to Rule 7 of
the same Rules?

Rule 7, Sec. 2 provides that in addition to the requirements in section 4, Rule 2 of

these Rules, the complaint must state the following:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate
orders or records and/or to be furnished with financial statements under Sections
74 and 75 of the Corporation Code of the Philippines;

(2) A demand for inspection and copying of books and records and/or to be
furnished with financial statements made by the plaintiff upon defendant;

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons
given for such refusals, if any; and

(4) The reasons why the refusal of the defendant to grant the demands of the
plaintiff is unjustified and illegal, stating the law and jurisprudence in support
thereof.

17. What will the court do upon the filing of the complaint?

Rule 7, Sec. 3 provides the duty of the court upon the filing of the complaint. -
Within two (2) days from the filing of the complaint, the court, upon a
consideration of the allegations thereof, may dismiss the complaint outright if it is
not sufficient in form and substance, or, if it is sufficient, order the issuance of
summons which shall be served, together with a copy of the complaint, on the
defendant within two (2) days from its issuance.

18. What is the period to serve summons on the defendant?

The period to serve summons on the defendant is within two (2) days from its
issuance as provided for under Sec. 3, Rule 7 of R.A. No. 8799.

19. What is the period to file an answer to the complaint for inspection of
corporate books and records?
 Sec. 4, Rule 7 provides that the defendant shall file his answer to the complaint,
serving a copy thereof on the plaintiff, within ten (10) days from the service of
summons and the complaint.

20. What should be alleged in the answer of the defendant?

In addition to the requirements in Section 6, Rule 2 of the Rules, the answer must
state the following:

(1) The grounds for the refusal of defendant to grant the demands of the
plaintiff, stating the law and jurisprudence in support thereof;

(2) The conditions or limitations on the exercise of the right to inspect

which should be imposed by the court; and cralaw:red

(3) The cost of inspection, including manpower and photocopying

expenses, if the right to inspect is granted.

21. What should be attached to the complaint and the answer?

Under Rule 2, Section 4 and 6 of INTERIM RULES OF PROCEDURE FOR

INTRA-CORPORATE CONTROVERSIES, here are the following that should be
attached to the complaint and the answer.

SEC. 4. Complaint. – The complaint shall state or contain:

1. the names, addresses, and other relevant personal or juridical

circumstances of the parties;

2. all facts material and relevant to the plaintiff’s cause or causes of

action, which shall be supported by affidavits of the plaintiff or his
witnesses and copies of documentary and other evidence supportive of
such cause or causes of action;

3. the law, rule, or regulation relied upon, violated, or sought to be

enforced;

4. a certification that (a) the plaintiff has not theretofore commenced any
action or filed any claim involving the same issues in any court, tribunal or
 quasi-judicial agency, and, to the best of his knowledge, no such other
action or claim is pending therein; (b) if there is such other action or claim,
a complete statement of the present status thereof; and (c) if he should
thereafter learn that the same or similar action or claim has been filed or is
pending, he shall report that fact within five (5) days therefrom to the court;
and

5. the relief sought.

SEC. 6. Answer. – The defendant shall file his answer to the complaint, serving a
copy thereof on the plaintiff, within fifteen (15) days from service of summons.

In the answer, the defendant shall:

1. Specify each material allegation of fact the truth of which he admits;

2. Specify each material allegation of fact the truth of which he does not
admit. Where the defendant desires to deny only a part of an averment, he
shall specify so much of it as true and material and shall deny only the
remainder;

3. Specify each material allegation of fact as to which truth he has no

knowledge or information sufficient to form a belief, and this shall have the
effect of a denial;

5.State the defenses, including grounds for a motion to dismiss under the
Rules of Court;

6. State the law, rule, or regulation relied upon;

7. Address each of the causes of action stated in the complaint;

8. State the facts upon which he relies for his defense, including affidavits
of witnesses and copies of documentary and other evidence supportive of
such cause or causes of action;

9. State any compulsory counterclaim/s and cross-claim/s; and

10. State the relief sought.

22. What happens if the complaint or the answer fails to attach the affidavits of
witnesses and the documentary and other evidence in support thereof?

Under Rule 2, Section 8 of INTERIM RULES OF PROCEDURE FOR INTRA-

CORPORATE CONTROVERSIES.
 SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be
based on personal knowledge, shall set forth such facts as would be
admissible in evidence, and shall show affirmatively that the affiant is
competent to testify on the matters stated therein. The affidavits shall be in
question and answer form, and shall comply with the rules on admissibility
of evidence.

Affidavits of witnesses as well as documentary and other evidence shall

be attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the
pre-trial brief required under these Rules. Affidavits and other evidence
not so submitted shall not be admitted in evidence, except in the following
cases:

1.Testimony of unwilling, hostile, or adverse party witnesses. A witness is

presumed prima facie hostile if he fails or refuses to execute an affidavit
after a written request therefor;

2.If the failure to submit the evidence is for meritorious and compelling
reasons; and

3.Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted
not later than five (5) days prior to its introduction in evidence.

23. What happens if the defendant fails to file an answer within ten 10-day
reglementary period?

Under A.M. No. 01-2-04-SC Rule 2. Sec. 7. Effect of failure to answer. - If the
defendants fails to file an answer within the period above provided, the court,
within ten (10) days from the lapse of the said period, motu proprio or upon
motion, shall render judgment as warranted by the allegations of the complaint,
as well as the affidavits, documentary and other evidence on record. In no case
shall the court award a relief beyond or different from that prayed for.

24. Are submissions of pre-trial briefs and conduct of a pre-trial conference

required in actions involving inspection of corporate books and records under
the Interim Rules?

Under Rule 4, Section 1 of INTERIM RULES OF PROCEDURE FOR INTRA-

CORPORATE CONTROVERSIES.
 SECTION 1. Pre-trial conference; mandatory nature. – Within five (5) days
after the period for availment of, and compliance with, the modes of
discovery prescribed in Rule 3 hereof, whichever comes later, the court
shall issue and serve an order immediately setting the case for pre-trial
conference and directing the parties to submit their respective pre-trial
briefs. The parties shall file with the court and furnish each other copies of
their respective pre-trial brief in such manner as to ensure its receipt by
the court and the other party at least five (5) days before the date set for
the pre-trial.

The parties shall set forth in their pre-trial briefs, among other matters, the
following:

1. Brief statement of the nature of the case, which shall summarize the
theory or theories of the party in clear and concise language;

2. Allegations expressly admitted by either or both parties;

3. Allegations deemed admitted by either or both parties;

4. Documents not specifically denied under oath by either or both parties;

5. Amendments to the pleadings;

6. Statement of the issues, which shall separately summarize the factual

and legal issues involved in the case;

7. Names of witnesses to be presented and the summary of their

testimony as contained in their affidavits supporting their positions on each
of the issues;

8. All other pieces of evidence, whether documentary or otherwise and

their respective purposes;

9. Specific proposals for an amicable settlement;

10. Possibility of referral to mediation or other alternative modes of dispute

resolution;

11. Proposed schedule of hearings; and

12.Such other matters as may aid in the just and speedy disposition of the
case.

25. What is is the period for the court to render its decision in complaints for
inspection or corporate books and records?
 Under Rule 5, Section 5 of INTERIM RULES OF PROCEDURE FOR INTRA-
CORPORATE CONTROVERSIES,

SEC. 5. Decision after trial. – The court shall render a decision not later
than (90) days from the lapse of the period to file the memoranda, with or
without said pleading having been filed.

26. What will be the basis of the court in rendering its decision?

Sec. 7. Decision. - The court shall render a decision based on the pleadings,
affidavits and documentary and other evidence attached thereto within fifteen
(15) days from receipt of the last pleading. A decision ordering defendants to
allow the inspection of books and records and/or to furnish copies thereof shall
also order the plaintiff to deposit the estimated cost of the manpower necessary
to produce the books and records and the cost of copying, and state, in clear and
categorical terms, the limitations and conditions to the exercise of the right
allowed or enforced.

F. Management Committee (Read also: Interim Rules on Corporate Rehabilitation

(now the Financial Rehabilitation Rules of Procedure [2013])

1. Is the application for the creation of a management committee an

independent or stand-alone relief?
No. it is not an independent or stand-alone relief.
In the case of Sy Chim v. Sy Siy Ho & Sons, Inc., G.R. No. 164958, the court
held that the application for the creation of a management committee an
independent or stand-alone relief is not an independent or stand-alone relief
because the creation and appointment of a management committee and a
receiver is an extraordinary and drastic remedy to be exercised with care and
caution; and only when the requirements under the Interim Rules are shown. It is
a drastic course for the benefit of the minority stockholders, the parties-litigants,
or the general public allowed only under pressing circumstances and, when there
is inadequacy, or ineffectual exhaustion of legal or other remedies. The power to
intervene before the legal remedy is exhausted and misused when it is exercised
in aid of such a purpose. The power of the court to continue a business of a
corporation, partnership, or association must be exercised with the greatest care
and caution. There should be a full consideration of all the attendant facts,
including the interest of all the parties concerned.
 In the case of Hiteroza, G.R. No. 203527, the court held that the appointment of
the school’s receiver was not based on the presence of the requirements of
Section 1, Rule 9 of the Interim Rules, but based on the "inability of the parties to
work out an amicable settlement of their dispute, and in order to enable the court
to ascertain the veracity of the claim of the [spouses Hiteroza] that Charito has
unjustifiably failed and refused to comply with the final Decision in this case
dated May 14, 2010."

2. What are the requirements for the creation of a management committee

Under Section 1, Rule 9 of the Interim Rules of Procedure for Intra-Corporate
Controversies. The requisites for the creation of a management committee are as
follows:

Section 1. Creation of a management committee. - As an incident to any

of the cases filed under these Rules or the Interim Rules Corporate
Rehabilitation, a party may apply for the appointment of a management
committee for the corporation, partnership or association, when there is
imminent danger of:

(1) Dissipation, loss, wastage or destruction of assets or other properties;

and
(2) Paralyzation of its business operations which may be prejudicial to the
interest of the minority stockholders, parties-litigants or the general public

3. What are the requirements for the appointment of a receiver (Hiteroza case,
G.R. No. 203527)

the requirements in section 1, Rule 9 of the Interim Rules of Procedure for Intra-
Corporate Controversies apply to both the creation of a management committee
and/or the appointment of a receiver.

Section 2, Rule 9 of the Interim Rules, on the other hand, provides for the
appointment of a receiver, to quote:

SEC. 2. Receiver. — In the event the court finds the application to be

sufficient in form and substance, the court shall issue an order: (a)
appointing a receiver of known probity, integrity and competence and
without any conflict of interest as hereunder defined to immediately take
over the corporation, partnership or association, specifying such powers
as it may deem appropriate under the circumstances, including any of the
powers specified in section 5 of this Rule; (b) fixing the bond of the
receiver; (c) directing the receiver to make a report as to the affairs of the
entity under receivership and on other relevant matters within sixty (60)
days from the time he assumes office; (d) prohibiting the incumbent
management of the company, partnership, or association from selling,
 encumbering, transferring, or disposing in any manner any of its properties
except in the ordinary course of business; and (e) directing the payment in
full of all administrative expenses incurred after the issuance of the order.

While the caption of Section 1, Rule 9 states "the creation of a management

committee," the requirements stated in Section 1 apply to both the creation of a
management committee and the appointment of a receiver, as can be gleaned
from Section 2, Rule 9 which refers to "the application sufficient in form and
substance." The "application" referred to in Section 2 on Receiver is the same
application referred to in Section 1 of Rule 9.

4. Should the two requisites for the creation of a management committee be

proven to exist, or one of them will suffice? (VILLAMOR case 172843)

In the case of Villamor, G.R. No. 172843, the court held that, A corporation may
be placed under receivership, or management committees may be created to
preserve properties involved in a suit and to protect the rights of the parties under
the control and supervision of the court. Management committees and receivers
are appointed when the corporation is in imminent danger of:
"(1) [dissipation, loss, wastage or destruction of assets or other properties; and
(2) paralysation of its business operations that may be prejudicial to' the interest
of the minority stockholders, parties-litigants, or the general public."

Applicants for the appointment of a receiver or management committee need to

establish the confluence of these two requisites. This is because appointed
receivers and management committees will immediately take over the
management of the corporation and will have the management powers specified
in law. This may have a negative effect on the operations and affairs of the
corporation with third parties, as persons who are more familiar with its
operations are necessarily dislodged from their positions in favour of appointees
who are strangers to the corporation's operations and affairs.

5. May the court create a management committee motu proprio?

NO. the court cannot motu proprio create a management committee. The
following requisites under Section 1, Rule 9 of the interim rules of Procedure for
Intra-Corporate Controversies must concur before the creation of a management
committee, to wit:

(1) Dissipation, loss, wastage or destruction of assets or other properties;

and
(2) Paralyzation of its business operations which may be prejudicial to the
interest of the minority stockholders, parties-litigants or the general public
 In the case of Villamor, G.R. No. 172843, the Court of Appeals has no power to
appoint a receiver or management committee. The Regional Trial Court has
original and exclusive jurisdiction to hear and decide intra-corporate
controversies, including incidents of such controversies. These incidents include
applications for the appointment of receivers or management committees.
However, In the case of Hiteroza, G.R. No. 203527, the Supreme Court held that
the CA correctly attributed grave abuse of discretion on the part of the RTC when
the RTC prematurely appointed a receiver without sufficient evidence to show
that there is an imminent danger of: (1) dissipation, loss, wastage, or destruction
of assets or other properties; and (2) paralysation of its business operations that
may be prejudicial to the interest of the minority stockholders, parties-litigants, or
the general public. The RTC explicitly stated in its May 14, 2010 decision that
there was yet no evidence to support the Sps. Hiteroza’s allegations on Charito’s
fraud and misrepresentation to justify the appointment of a receiver.

6. What are the qualifications for the members of the management

committee?

The members of the management committee shall have the same qualifications
and none of the disqualifications as those prescribed for the rehabilitation
receiver under this Rule.
In case a member of the management committee is a juridical person, the
relevant provisions governing juridical persons as rehabilitation receivers shall
apply.

7. What are the badges of conflict of interest of a member of the management

committee?

ANSWER:
No person may be appointed as a rehabilitation receiver or as a member of a
management committee, or be engaged by the rehabilitation receiver or the
management committee if he has a conflict of interest.
An individual shall be deemed to have conflict of interest if he is so situated as to
be materially influenced in the exercise of his judgment for or against any party to
the proceedings. A conflict of interest of an individual employed or contracted by
the rehabilitation receiver or the management committee or its members shall be
deemed to be a conflict of interest of the rehabilitation receiver or the
management committee.
8. Are the badges of conflict of interest of a member of the management
committee the same for a receiving?

ANSWER:
Yes, they are the same but in addition to a rehabilitation receiver, he may be
deemed to have a conflict of interest if:

1. he is a creditor, owner, partner or stockholder of the debtor;

2. he is engaged in a line of business which competes with the debtor;
3. he is, or was within five (5) years from the filing of the petition, a
director, officer, owner, partner, or employee or the auditor or accountant
of the debtor;
4. he is, or was within two (2) years from the filling of the petition, an
underwriter of the outstanding securities of the debtor;
5. he is related by consanguinity or affinity within the fourth civil degree to
any individual creditor, owner/s of the sole proprietorship-debtor, partners
of a partnership-debtor, or to any stockholder, director, officer, employee,
or underwriter of the corporation-debtor; or
6. he has any indirect or direct material interest in the debtor or any
creditor.

9. What shall the court do when it finds the application for the appointment of
a receiver sufficient in form and substance?

ANSWER:
The court, in its sound discretion, shall appoint such receiver if it finds the
application for the appointment sufficient in form and substance.

10. What are the powers of the management committee?

ANSWER:
The management committee shall have the power to take custody of and control
all assets and properties owned or possessed by the debtor. It shall take the
place of the management and governing body of the debtor, and assume their
powers, rights and responsibilities.
The management committee may overrule or revoke the actions of the previous
management or governing body of the debtor.
Without limiting the generality of the foregoing, the specific powers and duties of
the management committee, whose members shall also be considered as
officers of the court, are the following:
A. to investigate the acts, conduct, properties, liabilities, and financial condition of
the corporation, association or partnership under management;
B. to examine under oath the directors and officers of the entity and any other
witnesses that the committee may deem appropriate;
 C. to report to the court any ascertained fact pertaining to the causes of the
problems, fraud, misconduct, mismanagement and irregularities committed by
any other person;
D. to use the services of or employ such person or persons, such as lawyers,
accountants, auditors, appraisers and staff as are necessary to perform its
functions and duties as management committee;
E. to report to the court any material adverse change in the business of the entity
under management;
F. to evaluate the existing equity, capital, assets and liabilities, earnings and
operations of the entity under management;
G. to determine and recommend to the court the best way to salvage and protect
the interest of the creditors, stockholders and the general public, including the
rehabilitation of the entity under management;
H. to prohibit and report to the court any encumbrance, transfer, or disposition of the
debtor’s property outside of the ordinary course of business or beyond what is
allowed by the court;
I. to prohibit and report to the court payments made outside the ordinary course of
business;
J. to have unlimited access to the employees, premises, books, records and
financial documents of the entity under management during business hours;
K. to inspect, copy, photocopy or photograph any document, paper, book, account
or letter, whether in the possession of the entity or other persons, that pertain to
the business of the debtor;
L. to gain entry into any property owned by the entity under management for the
purposes of inspecting, measuring, surveying, or taking photos or videos of any
designated relevant object or operation thereon;
M. to bring to the attention of the court any material change affecting the entity’s
ability to meet its obligations;
N. to take the appropriate steps to modify, nullify or revoke transactions coming to
its knowledge which it deems detrimental or prejudicial to the interest of the entity
under management;
O. to recommend the termination of the proceedings and the dissolution of the entity
if it determines that the continuance in business of such entity will no longer work
to the best interest of the stakeholders and creditors, in accordance with the
purposes of the act;
P. to apply to the court for any order or directive that it may deem necessary or
desirable to aid it in the exercise of its powers and performance of its duties and
functions, including the power to examine parties and witnesses under oath; and
Q. to exercise such other powers as the court may, from time to time. confer upon it.

11. What are the powers of a receiver?

Answer: Under Section 26 of the Financial Rehabilitation Rules of Procedure, the
powers of a receiver are as follows:
SECTION 26. Powers, Duties and Functions of Rehabilitation
Receiver. The rehabilitation receiver shall be deemed an officer of the
 court with the principal duty of preserving and maximizing the value of the
assets of the debtor during the rehabilitation proceedings, determining the
viability of the rehabilitation of the debtor, preparing and recommending a
Rehabilitation Plan to the court, and implementing the approved
Rehabilitation Plan.
To this end, and without limiting the generality of the foregoing, the
rehabilitation receiver shall have the following powers, duties and
responsibilities:
(A) to verify the accuracy of the petition, and correct, if necessary, the
annexes such as the Schedule of Debts and Liabilities and the Inventory
of Assets submitted in support to the petition;
(B) to accept and incorporate, when justified, amendments to the Schedule of
Debts and Liabilities;
(C) to evaluate the validity, genuineness and true amount of all the claims
against the debtor and to recommend to the court the disallowance of claims and
rejection of amendments to the Schedule of Debts and Liabilities that lack
sufficient proof and justification;
(D) to submit to the court, and make available for the creditors' review, a revised
Schedule of Debts and Liabilities;
(E) to investigate the acts, conduct, properties, liabilities and financial condition of
the debtor, the operation of its business and the desirability of the continuance
thereof, and any other matter relevant to the proceeding or to the formulation of a
Rehabilitation Plan;
(F) to sue and recover, with the approval of the court, all amounts owed to, and
all properties pertaining to the debtor, including all property or money of the
debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or
which constitute undue preference of creditor/s;
(G) to examine under oath the directors and officers of the debtor and any other
witnesses that he may deem appropriate;
(H) to make available to the creditors the documents and notices necessary for
them to follow and participate in the proceedings;
(I) to report to the court any fact ascertained by him to pertain to the causes of
the debtor's problems, fraud, preferences, dispositions, encumbrances,
misconduct, mismanagement and irregularities committed by the stockholders,
directors, management, or any other person against the debtor;
(J) to employ such specialized professionals and other experts such as lawyers,
accountants, auditors, appraisers and staff, with the approval of the court, whose
services are necessary in assisting the rehabilitation receiver in performing his
duties and functions in accordance with Section 37 of this Rule;
(K) to monitor the operations of the debtor and to immediately report to the court
any material adverse change in the debtor's business;
(L) to evaluate the existing assets and liabilities, earnings and operations of the
debtor;
(M) to determine and recommend to the court the best way to salvage and
protect the interests of the creditors, stockholders and the general public;
(N) to study the Rehabilitation Plan proposed by the debtor or any Rehabilitation
Plan submitted during the proceedings, together with any comments made
thereon;
(O) to prohibit and report to the court any encumbrance, transfer or disposition of
the debtor's property outside of the ordinary course of business or what is
allowed by the court;
(P) to prohibit and report to the court any payments made by the debtor outside
of the ordinary course of business;
(Q) to have unlimited access to the debtor's employees, premises, books,
records and financial documents during business hours;
(R) to inspect, copy, photocopy or photograph any document, paper, book,
account or letter, whether in the possession of the debtor or other persons, that
pertain to the business of the debtor;
(S) to gain entry into any property owned by the debtor for the purpose of
inspecting, measuring, surveying or photographing it or any designated relevant
object or operation thereon;
(T) to take possession, control and custody, and to preserve the value of all of
the debtor's assets;
(U) to notify counterparties and the court as to contracts that the debtor has
decided to confirm, pursuant to Section 56 of this Rule;
(V) to be notified of and to attend all meetings of the board of directors and
stockholders of the debtor;
(W) to recommend any modification of an approved Rehabilitation Plan as he
may deem appropriate;
(X) to bring to the attention of the court any material change affecting the debtor's
ability to meet the obligations under the Rehabilitation Plan;
(Y) to recommend the appointment of a management committee in the cases
provided for under Section 31 of this Rule;
(Z) within the soonest possible time, to submit a report to the management
committee, if one has been constituted pursuant to Section 31 of this Rule, on
the status and condition of the debtor and on the actions taken by the receiver
with regard to the proceedings;
 (AA) to recommend the termination of the proceedings and the dissolution of the
debtor if he determines that the debtor's continuance in business is no longer
feasible or profitable or no longer works to the best interest of the stockholders,
parties-litigants, creditors or the general public;
(BB) to apply to the court for any order or directive that he may deem necessary
or desirable to aid him in the exercise of his powers and performance of his
duties and functions;
( to make quarterly reports on the status and progress of the rehabilitation, or as
often as may be required by the court; and
(DD) to exercise such other powers as may from time to time be conferred upon
him by the court.
The court may limit the powers and functions of the rehabilitation receiver, as
may be appropriate.

12. What is the status enjoyed by the members of the management committee
and the receiver while in the discharge of their powers and duties?
Under Section 26 of the Financial Rehabilitation Rules of Procedure, it states that
“the rehabilitation receiver shall be deemed an officer of the court with the
principal duty of preserving and maximizing the value of the assets of the debtor
during the rehabilitation proceedings, determining the viability of the rehabilitation
of the debtor, preparing and recommending a Rehabilitation Plan to the court,
and implementing the approved Rehabilitation Plan.”

13. In what instances are the receiver and members of the management
committee immune from suit?
Under Section 38 of the Financial Rehabilitation Rules of Procedure, it states
that:
SECTION 38. Immunity from Suit. The rehabilitation receiver, the
members of the management committee, and all persons they engage
shall not be subject to any action, claim or demand for any act or omission
in good faith in the exercise of their powers and functions under the Act,
these Rules, or other actions approved by the court.

14. What renders the receiver and members of the management committee
immune from suit?
Under Section 38, of the Financial Rehabilitation Rules of Procedure, it states
that:
Immunity from Suit. — The rehabilitation receiver, the members of the
management committee, and all persons they engage shall not be subject
to any action, claim or demand for any act or omission in good faith in the
 exercise of their powers and functions under the Act, these Rules, or other
actions approved by the court.

15. What should the receiver and the members of the management committee do
upon their appointment?
Role of the Receiver:
Section 32
Role of the Rehabilitation Receiver Upon Assumption of Management of
the Debtor. — When directed by the court to assume management of the
debtor as provided in the foregoing section, the rehabilitation receiver shall
continue to exercise the same powers under Section 26 of this Rule in
addition to those powers and duties expressly given to the management
committee as provided in the succeeding section or those necessarily
implied therefrom.
Role of the Management Committee:
Section 33
Role of the Management Committee. — When appointed pursuant to
Section 31 of this Rule, the management committee shall have the power
to take custody of and control all assets and properties owned or
possessed by the debtor. It shall take the place of the management and
governing body of the debtor, and assume their powers, rights and
responsibilities.
The management committee may overrule or revoke the actions of the
previous management or the governing body of the debtor.
Without limiting the generality of the foregoing, the specific powers and
duties of the management committee, whose members shall also be
considered as officers of the court, are the following:
A. to investigate the acts, conduct, properties, liabilities, and financial condition of
the corporation, association or partnership under management;
B. to examine under oath the directors and officers of the entity and any other
witnesses that the committee may deem appropriate;
C. to report to the court any ascertained fact pertaining to the causes of the
problems, fraud, misconduct, mismanagement and irregularities committed by
any other person;
D. to use the services of or employ such person or persons, such as lawyers,
accountants, auditors, appraisers and staff as are necessary to perform its
functions and duties as management committee;
 E. to report to the court any material adverse change in the business of the entity
under management;
F. to evaluate the existing equity, capital, assets and liabilities, earnings and
operations of the entity under management;
G. to determine and recommend to the court the best way to salvage and protect
the interest of the creditors, stockholders and the general public, including the
rehabilitation of the entity under management;
H. to prohibit and report to the court any encumbrance, transfer, or disposition of the
debtor's property outside of the ordinary course of business or beyond what is
allowed by the court;
I. to prohibit and report to the court payments made outside the ordinary course of
business;
J. to have unlimited access to the employees, premises, books, records and
financial documents of the entity under management during business hours;
K. to inspect, copy, photocopy or photograph any document, paper, book, account
or letter, whether in the possession of the entity or other persons, that pertain to
the business of the debtor;
L. to gain entry into any property owned by the entity under management for the
purposes of inspecting, measuring, surveying, or taking photos or videos of any
designated relevant object or operation thereon;
M. to bring to the attention of the court any material change affecting the entity's
ability to meet its obligations;
N. to take the appropriate steps to modify, nullify or revoke transactions coming to
its knowledge which it deems detrimental or prejudicial to the interest of the entity
under management;
O. to recommend the termination of the proceedings and the dissolution of the entity
if it determines that the continuance in business of such entity will no longer work
to the best interest of the stakeholders and creditors, in accordance with the
purposes of the Act;
P. to apply to the court for any order or directive that it may deem necessary or
desirable to aid it in the exercise of its powers and performance of its duties and
functions, including the power to examine parties and witnesses under oath; and
Q. to exercise such other powers as the court may, from time to time, confer upon it.

16. When are the transactions of the previous management and directors deemed
in bad faith and rescissible?
Section 57
 Rescission or Nullity of Certain Pre-Commencement Transactions. — Any
transaction prior to the commencement date entered into by the debtor or
involving its funds or assets may be rescinded or declared null and void on the
ground that it was executed with intent to defraud a creditor or creditors or that it
constitutes undue preference of creditors. Without limiting the generality of the
foregoing, a disputable presumption of these designs shall arise if the
transaction:
A. provides unreasonably inadequate consideration to the debtor and is executed
within ninety (90) days prior to the commencement date;
B. involves an accelerated payment of a claim to a creditor within ninety (90) days
prior to the commencement date;
C. provides security or additional security executed within ninety (90) days prior to
the commencement date;
D. involves creditors who obtained or received more than their pro rata share in the
assets of the debtor, on a transaction executed at a time when the debtor was
insolvent; or
E. is intended to defeat, delay or hinder the ability of the creditors to collect claims,
where the effect of the transaction is to put assets of the debtor beyond the reach
of creditors or to otherwise prejudice the interests of creditors.

17. How many members are required for the management committee to act or
make a decision?
Section 35
Action by Management Committee. — A majority of all members shall be
necessary for the management committee to act or make a decision.

18. How is the chairman of the management committee chosen?

Section 34 (C)
The third member, who shall act as chairman of the management
committee, shall be nominated by the first and second members within
ten (10) days from the appointment. In case of disagreement between the
first and second members, or failure to nominate, the court shall appoint
the third member.

19. When is a member of the management committee deemed removed and

replaced by the court?
Under Section 24 of the Financial Rehabilitation Rules of Procedure, it states
that:
 Section 24: Objection to Conflict of Interest. — Within ten (10) days from
receipt of the disclosure of conflict of interest provided under the
preceding Section, any party to the proceedings adversely affected by the
appointment of the persons to the positions mentioned above may file his
objection to the appointment of the rehabilitation receiver or a member of
the management committee, or to the employment by them of
professionals, experts or employees. The court may disregard the conflict
of interest if it finds that it will not be detrimental to the general interest of
the stakeholders.
Failure to file a timely objection shall be deemed a waiver of the conflict of
interest rule.
Should the court decide that the objection has merit and that the conflict of
interest will be detrimental to the general interest of the stakeholders, it shall
dismiss the rehabilitation receiver having conflict of interest and appoint a new
one. Should the person concerned be a member of the management committee
or one employed by the rehabilitation receiver or the management committee as
a professional or expert, the court shall dismiss the person having conflict of
interest and direct the rehabilitation receiver or management committee to
appoint or employ a new one in his place, as the case may be.

20. What should the management committee do upon its discharge and
dissolution?
Under Section 33 of the Financial Rehabilitation Rules of Procedure, it states
that:
Section 33: Role of the Management Committee. — When appointed
pursuant to Section 31 of this Rule, the management committee shall
have the power to take custody of and control all assets and properties
owned or possessed by the debtor. It shall take the place of the
management and governing body of the debtor, and assume their powers,
rights and responsibilities.
The management committee may overrule or revoke the actions of the previous
management or the governing body of the debtor.

21. Does the Court of Appeals have jurisdiction to place a corporation under
receivership and create a management committee to take over the management
and continue its business operations during the pendency if the derivative action
before the RTC?
No, the Court of Appeals has no power to appoint a receiver or management
committee. In the case of Villamor v. Umali, the Regional Trial Court has original
and exclusive jurisdiction to hear and decide intra-corporate
controversies, including incidents of such controversies. These incidents include
applications for the appointment of receivers or management committees.
"The receiver and members of the management committee are considered
officers of the court and shall be under its control and supervision." They are
required to report to the court on the status of the corporation within sixty (60)
days from their appointment and every three (3) months after.
When respondent Balmores filed his petition for certiorari with the Court of
Appeals, there was still a pending action in the trial court. No less than the Court
of Appeals stated that it allowed respondent Balmores’ petition under Rule 65
because the order or resolution in question was an interlocutory one. This means
that jurisdiction over the main case was still lodged with the trial court.
The court making the appointment controls and supervises the appointed
receiver or management committee. Thus, the Court of Appeals’ appointment of
a management committee would result in an absurd scenario wherein while the
main case is still pending before the trial court, the receiver or management
committee reports to the Court of Appeals.