Derivative Suite

Atlantis Realty Corporation (ARC), a local firm engaged in real estate development, plans to sell one of its prime assets -a three-hectare land valued at about P100- million. For this purpose, the board of directors of ARC unanimously passed a resolution approving the sale of the property for P75-million to Shangrila Real Estate Ventures (SREV), a rival realty firm. The resolution also called for a special stockholders meeting at which the proposed sale would be up for ratification.

Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop the sale. He then commences a derivative suit for and in behalf of the corporation, to enjoin the board of directors and the stockholders from approving the sale.

a. Can Atty. Edric, who owns only one (1) share in the company, initiate a derivative suit? Why or why not?

b. If such a suit is commenced, would it constitute an intra-corporate dispute? If so, why and where would such a suit be filed? If not, why not?

c. Will the suit prosper? Why or why not?

a. Yes Atty. Edric can file a derivative suit. Regardless of the number of shares held, a stockholder may file a derivative suit for and in behalf of the corporation when by virtue of a corporate act the interest of the corporation will be prejudiced and the shareholder has no other remedy either because the board refuses to act or the board itself is involved in the corporate act being questioned. In this case, the corporation will obviously incur loss if the sale of its asset will prosper and since the board itself was the one who initiated the sale Atty. Edric has no other effective remedy but to file a derivative suit.

b. Yes a derivative suit is considered an intra- corporate dispute and such falls under the jurisdiction of the RTC acting as a special commercial court.

c. Yes the suit will prosper. A derivative suit is one commenced by a stockholder for and in behalf of the corporation to question or enjoin a corporate act which is prejudicial to the interest of the corporation and the stockholder/s has left with no other remedy because the board itself which is supposed to safeguard the interest of the corporation refuses to act or is the one involved in the questioned corporate act. All the requisites for a derivative suit to prosper is present in this case, the sale of the corporate asset for a lower amount is obviously prejudicial to the corporation considering that the buyer is the rival corporation. Since the board itself was the one who initiated and authorized the sale and if such would be approved in the stockholder’s meeting Atty. Edric has no other remedy but to file a derivative suit because his share is obviously not sufficient to enjoin the sale of the property. (2009 Bar Question)