CUA V.

TAN

FACTS: Philippine Racing Club Inc. (PRCI) was organized to carry on the business of a racecourse in all
its branches and promote the breeding of better horses in the Philippines. PRCI owns two real
properties: (1) the Sta. Ana Ractrack or the “Makati property” and (2) the “Cavite property”. PRCI
management decided that it was best to spin off the management and development of the Makati
property to a wholly owned subsidiary. It then opted to acquire another domestic corporation, JTH
Davies Holdings, Inc. (JTH).

PRCI management determined that it could initially acquire 41,928,290 shares, or 95.55% of the
outstanding capital stock of JTH. The PRCI Board of Directors held a meeting on 26 Sep 2006. Among
the directors present were petitioners Santiago Sr., Santiago Jr., and Solomon, as well as respondent
Dulay. After deliberating on the matter of the acquisition of JTH by PRCI, all the directors present,
except respondent Dulay, voted affirmatively to pass and approve the following resolutions: (1)
Declaration of Intention to Acquire and Purchase Shares of Stock of Another Company; (2) a Special
Stockholders’ meeting; (3) Authorized Attorney-in-Fact and Proxy. The next day, PRCI entered into a
Sale and Purchase Agreement for the acquisition from JME of 99.5% of the outstanding capital stock
of JTH. In the Special Stockholders’ Meeting held on 7 November 2006, attended by stockholders with
481,045,887 shares or 84.42% of the outstanding capital stock of PRCI, the acquisition by PRCI of JTH
was presented for approval. Several stockholders expressed their satisfaction with PRCI’s decision to
purchase JTH shares due to the latter’s goodwill.

Thereafter, PRCI again engaged the assistance of SGV. It was then determined that the Makati property
could be transferred to JTH in exchange for the unissued portion of the latter’s recently increase
authorized capital stock. The matter of the proposed exchange was approved by the PRCI Board of
Directors in its meeting, again with the lone dissent of respondent Dulay. Subsequently, the Annual
Stockholders’ Meeting of PRCI was scheduled. It included the property-for-shares exchange between
PRCI and JTH, which was supposed to be presented for approval by stocjholders under their agenda
during the special meeting. However, respondents Miguel, et al., as minority stockholders of PRCI filed
before the RTC a Complaint, denominated as a Derivative Suit with prayer for Issuance of
TRO/Preliminary Injunction, against the directors of PRCI and/or JTH based on their alleged devices or
schemes amounting to fraud or misrepresentation.

ISSUE: Whether or not respondents’ complaint constituted a valid derivative suit? NO

RULING: It is well settled in this jurisdiction that where corporate directors are guilty of a breach of
trust — not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. A derivative suit, however, must be differentiated
from individual and representative or class suits. 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.

According to the SC, 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.’ In contrast,
"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. The two actions are
mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct
action) or the corporation (derivative action)."