AGO REALTY & DEVELOPMENT CORPORATION (ARDC), EMMANUEL F.

AGO,
AND CORAZON CASTAÑEDA-AGO, petitioners, v. DR. ANGELITA F. AGO,
TERESITA PALOMA-APIN, AND MARIBEL AMARO, respondents.

G.R. No. 210906 - G.R. No. 211203, October 16, 2019

A. REYES, JR., J.:

FACTS: Petitioner Ago Realty & Development Corporation (ARDC) is a close corporation. Its
stockholders are the following petitioners except Angelita (Respondent):

Name Number of Subscribed Shares Amount

Emmanuel 2,498 P249,800.00
Corazon 1,000 P100,000.00
Victor 1 P100
Arthur 1 P100
Angelita 1,500 P150,000.00
Total 5000 P500,000.00

August 11, 2006 – Petitioner filed a complaint against respondents alleging that Angelita, in
connivance with Teresita P. Apin (Teresita), Maribel Amaro (Maribel), and certain local officials
of Legazpi City, introduced unauthorized improvements on corporate property. Teresita was
accused of operating a restaurant named "Kicks Resto Bar" in the improvements, while Maribel
was impleaded as Angelita's employee. On the other hand, the local officials were impleaded as
defendants since they were responsible for issuing the permits relative to the improvements
introduced by Angelita and the business concerns thereon.

Respondent Contention:

 Teresita denied all the allegations and averred that her restaurant was operating not on
Lot No. H-3, but on Lot No. 1-B, which is not ARDC's property.
 Angelita admitted to introducing improvements on the subject lots. She narrated that in
the 1960s, Emmanuel and Corazon immigrated to the United States, leaving the
management of ARDC's properties to her.
 All defendant’s common defense: That ARDC never authorized the institution of the
suit. Without a resolution emanating from the corporation's Board of Directors, it was
argued that Emmanuel, et al. had no legal standing to bring the case since the lots in
question belonged to ARDC.

RTC: It gave consideration to the undisputed fact that the properties in litigation belonged to
ARDC, concluding that Emmanuel, et al., in their individual capacities, were not the real parties
in interest.
CA: Affirmed RTC decision. held that since the cause of action belongs to ARDC, the case
instituted by petitioners was derivative in nature. As such, they should have first secured a
board resolution authorizing them to bring suit.

Petitioner Contention: Argued that a derivative suit does not require the imprimatur of the
board of directors. Since, in derivative suits, the corporation is usually under the control of the
wrongdoers, it would be absurd to require the stockholders to obtain board authority prior to
the commencement of litigation.

ISSUE/S: Whether or not Emmanuel, et al. may sue on behalf of ARDC absent a resolution or
any other grant of authority from its Board of Directors sanctioning the institution of the case?

RULING: The petitions have no merit.

Corporate powers are exercised by the board of directors:

One of the powers expressly granted by law to corporations is the power to sue. The power to
sue is lodged in the board of directors, acting as a collegial body. Thus, in the absence of any
clear authority from the board, charter, or by-laws, no suit may be maintained on behalf of the
corporation. A case instituted by a corporation without authority from its board of directors is
subject to dismissal on the ground of failure to state a cause of action.

In certain instances, however, the stockholders may sue on behalf of the corporation:

Jurisprudence has recognized certain instances when minority stockholders may bring suits on
behalf of corporations. Where the board of directors itself is a party to the wrong, either
because it is the author or because it refuses to take remedial action, equity permits individual
stockholders to seek redress. These actions have come to be known as derivative suits a suit by
a shareholder to enforce a corporate cause of action."

In derivative suits, it is the corporation that is the victim of the wrong it 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.

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of

directors or other persons may be classified into individual suits, class suits, and derivative suits.
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. 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 the protection
of all stockholders belonging to the same group. Where the acts complained of constitute a
wrong to the corporation itself, the cause of action belongs to the corporation and not to the
individual stockholder or member.
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. 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.

A board resolution is not needed for the institution of a derivative suit

The record reveals that the complaint was filed by Emmanuel, et al. While the caption states
that ARDC was also one of the plaintiffs, there is nothing showing that the corporation's Board
of Directors had authorized the filing of the case. Thus, the case is deemed as instituted by
Emmanuel, et al. without ARDC's acquiescence.

Petitioner argue that they have the right to file a derivative suit on behalf of ARDC. Since the
corporation was the victim of the wrong committed by defendants. This contention is wrong.

The derivative suit is an equitable remedy and one of last resort

Derivative suits are, therefore, grounded not on law, but on equity. Despite derivative suits
being grounded on equity, they cannot prosper in the absence of any or some of the requisites
enumerated in the Interim Rules of Procedure for Intra-Corporate Controversies.

Rule 8: 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 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 acts or acts complained of; and (4) The suits is not a
nuisance or harassment suit. The second requisite does not obtain in this case.

Before instituting a derivative suit, the relator-stockholder must exert all reasonable efforts to
exhaust all remedies available under the articles of incorporation, the by-laws, and the laws or
rules governing the corporation or partnership to obtain the relief he or she desires. The rule is
to make the derivative suit the final recourse.

The record shows that Emmanuel, Corazon, and Angelita came together for a special
stockholders' meeting on August 11, 2006. However, their attempt to resolve the dispute
turned sour when Angelita walked out before the meeting even started. Contrary to the
postulation of Emmanuel and Corazon, their attempt to settle the dispute with Angelita can
hardly be considered "all reasonable efforts to exhaust all remedies available. More
importantly, an apparent remedy available to Emmanuel, et al. was to cause ARDC itself,
through its Board of Directors, to directly institute the case. Because of their controlling interest
in the corporation, Emmanuel, et al. could have prevailed upon the board to pass a resolution
authorizing any of them to file the case and sign the certification against forum shopping.

In the normal course of things, when a corporation is wronged, the board will readily litigate in
order to protect the majority's corporate interests. For the minority, on the other hand, this
may not be the case. In situations where the board's decision is tantamount to breaching the
trust reposed in it by the minority, equity necessitates that the aggrieved stockholders be given
a remedy. Thus, the minority, in a derivative capacity, may sue or defend on behalf of the
corporation.

Due to their control over the board of directors, the majority should not ordinarily be allowed
to resort to derivative suits. Where a corporation under the effective control of the majority is
wronged, board-sanctioned litigation should take precedence over derivative actions. After all,
the law expressly vests the power to sue in the board of directors, and a remedy based on
equity, such as the derivative suit, can prevail only in the absence of one provided by statute.  In
other words, majority stockholders who have undisputed corporate control cannot resort to
derivative suits when there is nothing preventing the corporation itself from filing the case.

In this case Emmanuel, et al. alleged that, together, they own 70% of ARDC's shares of capital
stock. General Information Sheet, shows that, out of ARDC's 5,000 shares of stock, 3,500 belong
to Emmanuel, et al. collectively, while only 1,500 belong to Angelita. Clearly, the case was
instituted by the stockholders holding the controlling interest in ARDC. If ARDC truly desired to
vindicate its rights, it should have done so through its Board of Directors. Considering the
majority shareholdings of the plaintiffs a quo, their interests should have been protected by the
board through affirmative action. However, this could not happen because ARDC did not have a
board of directors. There is no showing that ARDC's stockholders ever met to elect its governing
board. Before the trial court, Emmanuel admitted that ARDC never held any stockholders'
meetings from the time it was incorporated until 2005. (1989 – 2005)

There is likewise no showing that ARDC held an election for its Board of Directors. While
Emmanuel, Corazon, and Angelita came together for a special stockholders' meeting on August
11, 2006, no election was held then. The failure of ARDC's majority stockholders to elect a
board of directors must be taken against them. To be sure, there was nothing preventing
Emmanuel, et al. from holding a meeting for the purpose of electing a board, even in
Angelita's absence or over her objection. It is admitted that the plaintiffs a quo hold a majority
of ARDC's capital stock, by virtue of which they could have constituted a board to exercise the
corporation's powers. If they had done so, the instant case could have been instituted by ARDC
itself.
The role of the board of directors is impressed with such importance that corporate business
cannot properly be conducted without it.

Majority shareholders cannot be allowed to bypass the formation of a board and directly
conduct corporate business themselves. The Court cannot stress enough that the law
mandates corporations to exercise their powers through their governing boards. To allow
Emmanuel, et al. to forego the election of directors, and directly commence and prosecute this
case would not only downplay the key role of the board in corporate affairs, but also
undermine the theory of separate juridical personality.

A corporation is an entity with a legal personality separate and distinct from the people
comprising it. A wrong done to a corporation does not vest in its shareholders a cause of action
against the wrongdoer. Since the corporation is the real party in interest, it must seek redress
itself. Here, because ARDC is the victim of the act complained of, the cause of action does not
lie with Emmanuel, et al. The corporation should have filed the case itself through its board of
directors. However, this could not be done since those responsible for the institution of this
case never bothered to elect a governing body to wield ARDC's powers and to manage its
affairs. Their omission cannot be without consequence. The aggrieved stockholders cannot
now come before the Court, claiming that their remedy is a derivative suit. Their failure to elect
a board ultimately resulted in their failure to exhaust all legal remedies to obtain the relief
they desired. Emmanuel, et al. should not be allowed to use a derivative suit to shortcut the
law.

Emmanuel's designation as President was ineffectual because ARDC did not have a board of
directors. Section 25 of the Corporation Code explicitly requires the president of a corporation
to concurrently hold office as a director. This only serves to further highlight the key role of the
board as a corporate manager. By designating a director as president of the corporation, the
law intended to create a close-knit relationship between the top corporate officer and the
collegial body that ultimately wields the corporation's powers.