Legaspi Towers 300, Inc. vs. Muer

A suit to nullify the election of directors is a direct action by stockholders to protect their personal right to vote and be voted upon, not a derivative suit by the corporation. Since the corporation does not possess the right to vote, it is not the real party-in-interest in an action to invalidate a board election, and any attempt to include the corporation as plaintiff is improper.

The case arose from a contested annual meeting and election of directors of Legaspi Towers 300, Inc., a condominium corporation. The dispute centered on the validity of the election held on April 2, 2004, where the incumbent board declared adjournment due to lack of quorum, while a group of members claimed a valid quorum existed and proceeded to elect a new board. The controversy further involved procedural questions regarding the amendment of complaints to implead the corporation as plaintiff and the nature of the suit as derivative or direct.

• Legaspi Towers 300, Inc. is a condominium corporation with 5,723 members entitled to vote.
• Pursuant to the by-laws, petitioners Lilia Marquinez Palanca, Rosanna D. Imai, Gloria Domingo, and Ray Vincent, as the incumbent Board of Directors, set the annual meeting and election for April 2, 2004, at 5:00 p.m.
• Out of 5,723 members, 1,358 were supposed to vote through proxies, which were critical for achieving the required quorum of at least 2,863 votes (50% plus 1).
• The Committee on Elections found most proxy votes irregular and questionable at face value.
• Due to lack of time to authenticate the proxies, petitioners adjourned the meeting for lack of quorum.
• Respondents challenged the adjournment and proceeded with the election, claiming that 2,938 votes were present (in person or by proxy), constituting a quorum.
• Respondents declared themselves elected as the new Board of Directors for 2004-2005 and submitted a General Information Sheet to the SEC.
• Petitioners filed a Complaint for Declaration of Nullity of Elections before the RTC on April 13, 2004.
• Petitioners subsequently filed an Amended Complaint and then a Second Amended Complaint seeking to implead Legaspi Towers 300, Inc. as plaintiff, represented by petitioners as the "incumbent reconstituted Board of Directors."
• The SEC, through Counsel Nicanor P. Patricio, attended the April 2, 2004 meeting and reported that the Board had fixed the proxy deadline at 5:00 p.m. of April 1, 2004, and that the meeting was adjourned despite objections from unit owners, who then gathered and proceeded with the election.
• The trial court initially issued an Order dated April 26, 2004, which petitioners interpreted as admitting the Second Amended Complaint, but later clarified this was a clerical error and that the word should have been "received" rather than "admitted."
• A new set of Board of Directors was subsequently elected for the years 2005-2006.

• The trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction in reversing its earlier ruling (Order dated April 26, 2004) which had already admitted the Second Amended Complaint.
• The Second Amended Complaint was intended as a direct action by the corporation acting through petitioners as the reconstituted Board of Directors in a hold-over capacity, not as a derivative suit.
• Petitioners had the authority as the rightful Board of Directors to bring an action in representation of Legaspi Towers 300, Inc. to protect the corporation's right to be managed by duly-elected directors.
• Legaspi Towers 300, Inc. is a real party-in-interest as it stands to be most affected by the controversy involving the determination of whether the by-laws were properly carried out.
• The Court of Appeals erred in ruling that the subsequent elections for 2005-2006 rendered the issue moot and academic, as the nullification of the 2004-2005 election remained a live controversy.

• The election held on April 2, 2004, was legitimate and lawful, as evidenced by the SEC Counsel's report confirming the existence of a quorum and proper proceedings.
• The Second Amended Complaint was actually a derivative suit, which was improper because the corporation was not the injured party—the alleged wrong was done to the individual stockholders, not the corporation.
• The inclusion of Legaspi Towers 300, Inc. as plaintiff was made without authority from the current Board of Directors, who had already assumed management and were recognized by the trial court.
• The case had become moot and academic due to the valid election of a new set of directors for the years 2005-2006, rendering any decision on the 2004-2005 election of little or no practical value.

• Procedural:
  • Whether the trial court committed grave abuse of discretion in issuing the Orders dated July 21, 2004, and September 24, 2004, denying the Motion to Admit Second Amended Complaint, despite the earlier Order dated April 26, 2004.
• Substantive Issues:
  • Whether the Second Amended Complaint was a proper derivative suit or a direct action by the corporation.
  • Whether Legaspi Towers 300, Inc. could be impleaded as plaintiff in an action to nullify the election of its directors.
  • Whether the petition had become moot and academic due to the subsequent election of a new board for the term 2005-2006.

• Procedural:
  • The trial court did not commit grave abuse of discretion. Courts have the inherent power to amend and control their processes and orders to make them conformable to law and justice.
  • A judge has the inherent right, while his judgment is still under his control, to correct errors, mistakes, or injustices, including clerical errors such as the use of the word "admitted" instead of "received" in the April 26, 2004 Order.
  • The admission of the Second Amended Complaint was properly denied as it was legally improper to include the corporation as plaintiff.
• Substantive:
  • The Second Amended Complaint was not a proper derivative suit but was intended to be a direct action. However, the Court held that the action was actually a direct suit by the petitioners as stockholders, not by the corporation.
  • The right to vote is a personal right of a stockholder, not of the corporation. Since the corporation does not have the right to vote, it cannot be the real party-in-interest in an action to nullify the election of directors.
  • The cause of action devolves on the petitioners as stockholders whose rights to vote and to be voted upon were directly affected by the election of the new board. The wrong was done to the stockholders personally, not to the corporation.
  • The inclusion of Legaspi Towers 300, Inc. as plaintiff was improper because both parties were acting in their personal capacities as competing claimants to the board positions.
  • The petition was moot and academic because the valid election of a new set of Board of Directors for the years 2005-2006 rendered the challenge to the 2004-2005 election of little or no practical and legal purpose.

• Derivative Suit vs. Individual Suit vs. Class Suit — A derivative suit is brought by a stockholder on behalf of the corporation to protect or vindicate corporate rights when the corporation itself refuses to sue. An individual suit is proper when the wrong is done to the stockholder personally (e.g., denial of right to inspection). A class suit is proper when the wrong is done to a group of stockholders. In this case, the challenge to the election of directors was a direct action because the right to vote is a personal right of stockholders, and the wrong was done to them, not the corporation.
• Requisites of a Derivative Suit — (1) The party bringing suit must be a shareholder at the time of the act or transaction complained of; (2) Exhaustion of intra-corporate remedies (demand on the board); and (3) The cause of action actually devolves on the corporation, with the wrongdoing or harm having been caused to the corporation and not to the particular stockholder. The Court found the third requisite lacking because the alleged wrong affected the stockholders' voting rights, not the corporation itself.
• Real Party-in-Interest — The corporation is not the real party-in-interest in a suit to nullify the election of directors because the corporation does not possess the right to vote. The stockholders, as the ones exercising the right to vote and suffering the direct injury from an invalid election, are the real parties-in-interest.
• Mootness — A case becomes moot and academic when the issues raised have lost their practical significance due to supervening events, such as the election of a new set of directors for a subsequent term, rendering any decision on the previous election without practical effect.

• "A derivative suit must be differentiated from individual and representative or class suits, thus: 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."
• "But 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."
• "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."
• "Petitioners are the injured party, whose rights to vote and to be voted upon were directly affected by the election of the new set of board of directors. The party-in-interest are the petitioners as stockholders, who wield such right to vote. The cause of action devolves on petitioners, not the condominium corporation, which did not have the right to vote."
• "The courts have the inherent power to amend and control their processes and orders so as to make them conformable to law and justice."

• Cua, Jr. v. Tan, G.R. Nos. 181455-56 & 182008, December 4, 2009 — Cited for the distinction between derivative suits, individual suits, and class suits, and for the definition and requirements of a derivative suit.
• San Miguel Corporation v. Kahn, G.R. No. 85339, August 11, 1989 — Cited for the requisites of a derivative suit, specifically that the cause of action must devolve on the corporation and the wrong must have been caused to the corporation.
• Bitong v. Court of Appeals, G.R. No. 123553, July 13, 1998 — Cited for the proposition that the stockholder's right to file a derivative suit is impliedly recognized when the law makes corporate directors liable for damages suffered by the corporation for violation of fiduciary duties.
• Sta. Maria v. Ubay, A.M. No. 595-CFI, December 11, 1978 — Cited for the principle that courts have the inherent power to amend and control their processes and orders to conform to law and justice.

• Corporation Code, Section 23 — Defines the board of directors as the body that exercises corporate powers, and provides that directors hold office for one year until their successors are elected and qualified. Cited to establish that the newly-elected board had assumed the authority to manage corporate affairs.
• Corporation Code, Section 36 — Enumerates corporate powers, including the power to sue and be sued in its corporate name. Cited in the context of determining the corporation's capacity to sue, but distinguished from the specific right to vote which belongs to stockholders.