ABC Corporation increased its Authorized Capital Stock by issuing 1,000 additional shares. X, a shareholder, notified ABC Corporation in writing of her desire to exercise her pre-emptive right on 100 of the 1,000 additional shares. ABC Corporation, however, did not respond. Upon learning that ABC Corporation had already sold all the 1,000 additional shares to new stockholders, X filed a derivative suit on behalf of the corporation to enforce her pre-emptive right. Is the action proper? Reason(s).
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No, the derivative suit filed by X is not proper. Under Section 38 of the Revised Corporation Code (R.A. No. 11232) and jurisprudence, a derivative suit lies only to enforce a corporate cause of action for a wrong done
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Quick check
What is the primary statutory purpose of pre-emptive rights under Section 38 of the Revised Corporation Code?
Pre-emptive rights protect existing stockholders from dilution of their voting power and equity interest in the corporation.
Which essential element distinguishes a derivative suit from an individual suit brought by a stockholder?
A derivative suit requires that the cause of action belongs to the corporation to redress an injury done directly to the entity.
Why is a derivative suit improper when a corporation illegally denies a stockholder's pre-emptive right?
A derivative suit is improper because denying pre-emptive rights directly injures the individual shareholder rather than the corporation.
To whom does the recovery or relief accrue in a successful derivative suit filed on behalf of a corporation?
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If a shareholder's personal right to subscribe to additional shares is denied by the board of directors, what is her proper remedy?
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Learn more about these topics
1. Pre-emptive Rights Nature
Under Section 38 of the Revised Corporation Code (R.A. No. 11232), a pre-emptive right is the preferential right of existing stockholders to subscribe to all issues or dispositions of shares of any class in proportion to their respective shareholdings. The primary purpose of pre-emptive rights is to protect existing stockholders from the dilution of their voting power and equity interest in the corporation. Because pre-emptive rights belong personally to individual shareholders, any wrongful denial or infringement of these rights inflicts a direct, personal injury upon the affected stockholder rather than a collective injury upon the corporate entity.
2. Derivative Suit Requisites
A derivative suit is an action brought by a stockholder in the name and on behalf of the corporation to redress a wrong committed against the corporation or to enforce a corporate cause of action. Under established corporation law jurisprudence, a derivative suit requires that the injury be suffered directly by the corporation itself and only indirectly by the stockholders. If the harm or breach of duty directly injures an individual stockholder's personal rights, such as voting rights or pre-emptive subscription rights, the proper remedy is an individual or direct suit rather than a derivative action.
3. Direct Versus Derivative
Distinguishing between direct individual actions and derivative suits depends on who suffered the primary injury resulting from the wrongful corporate act. In a derivative suit, the cause of action belongs strictly to the corporation, and any recovery or relief obtained accrues directly to the corporate treasury. Conversely, in an individual action, the cause of action belongs personally to the aggrieved shareholder, and the remedy redresses the specific personal loss suffered. Denying a shareholder her pre-emptive right to subscribe to new shares violates her personal contractual right, making a derivative suit procedurally improper.