Everett v Asia Banking Corporation

Sec 59. Voting Trust Agreement | J. Ostrand | Nov 3, 1926

Doctrine: In these circumstances, it is obvious that a demand upon the Board to institute action and prosecute the
same effectively would have been useless, and the law does not require litigants to perform useless acts.
Summary: Plaintiffs executed a Voting Trust Agreement where they placed their shares in Teal & Company in trust
to Mullen, the General Manager of Asia Banking Corporation. Thereafter, Mullen caused the removal from the
Board of Directors of every person who was a stockholder of the Company and substituted them with directors,
officers, and employees of the Bank. The defendants gave new mortgages upon the property of the Company to
the Bank and had the same foreclosed. They then transferred the business and assets of Teal & Company to
Philippine Motors Corporation, a new corporation whose incorporators are the defendants. Plaintiffs demanded that
Mullen return the stock of T&C, which were transferred by virtue of the Voting Trust Agreement, but the same was
refused. Hence this petition. Defendants filed a demurrer, alleging that Teal & Company should have been included
as a necessary plaintiff and that plaintiffs, not being stockholders of Philippine Motors Corporation, had no right to
proceed against it.

Facts:
 Plaintiffs Harrie Everett, Ellis Teal, et al. are principal stockholders of Teal & Company (T&C), a domestic
corporation. The defendant, Asia Banking Corporation (ABC), is a foreign banking corporation licensed to do
business in the Philippines, while defendants Nicholas Mullen, Alfred Kelly, et al. were officers, agents, and
employees of ABC.
 Since its organization, T&C had done its banking business and financing almost exclusively thru ABC. By
reason of the continued relations, the officers of T&C had acquired trust and confidence in the integrity of ABC
and its officers.
 By Dec 1922, T&C was indebted to ABC in the sum of P750,000, which sum was secured by mortgage on its
personal property and the improvements upon the real estate occupied by it.
 Toward the end of 1922, ABC, through its manager, Mullen, represented to T&C and its managers that for the
protection of both ABC and T&C, it was advisable for them both that ABC should temporarily obtain control of
the management and affairs of T&C in order that the affairs of T&C could be conducted by ABC without outside
interference.
o To this end, it would be necessary for the stockholders in T&C to place their shares therein in a Voting
Trust to be held by the Bank for the benefit of T&C. If this were done, ABC would finance T&C under
its own supervision.
o If and when T&C were successful and in position to resume independent operation, the trust would be
terminated and the stock returned to its true owners. It was further represented that in case at any
time ABC decided to discontinue operation under said trust then the stock would be so returned.
 It was further represented by ABC and Mullen, its General Manager, that in order to protect the mutual interests
of ABC and T&C, it was necessary to carry into effect the voting trust without the knowledge of the creditors.
 Thus, plaintiffs were induced to sign and deliver to ABC a “Voting Trust Agreement,” which was executed by
the plaintiff stockholders, and a MOA executed by the Company.
 Subsequent to the execution and delivery of the VTA and MOA, the voting trustee, Mullen, caused and
procured the displacement and removal from the Board of Directors of each and every person who was at the
time of the execution of the said voting trust a stockholder of the company.
o He then substituted in their place the defendants, who were at the time directors, officers, and
employees of ABC.
o Thereafter, at no subsequent time did trustee Mullen allow to act as a director in T&C any person who
was in fact a stockholder in T&C. Moreover, no one of the so-called directors so placed ever purchased
from any stockholder of T&C a single share of the capital stock thereof, or paid to any stockholder or
the Company any money or consideration whatsoever for the stock by virtue of the assumed
ownership.
 In other words, T&C was exclusively controlled and managed by said defendants, none of whom had any legal
or equitable right to a voice in the control or management thereof.
 In their scheme to defraud plaintiffs, defendants proceeded to remove from office the Secretary of the
Company and to discharge from employment all the old responsible managers and foremen therein.
Thereafter, they substituted them for creatures of their own choosing.
  Thereafter, the defendants conducted the business of the Company without consulting the stockholders
thereof, and denied to the stockholders any knowledge or information as to their actions.
 The defendants gave new mortgages upon the properties of T&C to ABC, without regard to the interest of
T&C and looking solely to the advantage of ABC.
 The defendants also gave pledges and mortgages from T&C to ABC and entered into contracts as directed
by the Bank, and permitted the Bank to foreclose the same. These were done wholly without regard to the
best interests of T&C itself in disregard to the duties and obligations of a trustee.
 Defendants also permitted ABC to bring suits against T&C, in which the Company was not represented by
anyone having its interest at heart. By reason of such, ABC in truth occupied the position of both plaintiff and
defendant, deluding the courts into giving judgments where the rights of the real parties were concealed and
unknown.
 Defendants later executed and filed with the Bureau of Commerce and Industry the articles of incorporation
of a corporation called Philippine Motors Corporation (PMC).
 At the time of such incorporation, all of the defendants was an officer or employee of ABC. Plaintiff have no
information nor means of knowing whether the money alleged to have been described by them for their shares
of stock in PMC was of their personal funds or if it was money furnished them by ABC.
 In case such subscriptions were of their personal moneys, such incorporation was a fraud upon plaintiffs for
the reason that it was intended for the sole purpose of taking over the assets of T&C.
 After the incorporation of PMC, ABC turned over to PMC all of the business and assets of T&C. With the
connivance of defendants in their double capacity as directors of both corporations, they permitted PMC to
enter and possess itself of the premises and goodwill of T&C and to carry on the said business for the sole
benefit of the new corporation.
 Plaintiffs were ignorant of the exact relations existing between ABC and PMC since the Bank refused to return
to them their stock in T&C or to dissolve the Voting Trust or in any wise allow them to regain control of the
Company or its records.
 As plaintiffs, by reason of their ignorance, could not allege positively, they instead charge in the alternative:
o That PMC is a fictitious entity created by ABC through the control of its employees and that the
defendants, acting as pretended incorporators, stockholders, and directors, when in truth they have
no personal property interest therein. PMC has no legal existence as it is the Bank operating under a
disguise.
 Said corporation so pretendedly created is in violation of ABC’s duties and obligations
assumed by it as Trustee of the stockholders of the Company; or
o In case the individual defendants created PMC, and the same is the property of themselves as
stockholders and bona fide investors of money in the stock of the same, such creation and all
subsequent operations of PMC were a fraud upon plaintiffs.
 Mullen, being the voting trustee of T&C and at the same time being the manager of ABC,
together with the other individual defendants, being officers and directors of T&C, took
advantage of their position by suing T&C to defraud plaintiffs.
 Plaintiffs demanded that Mullen return the stock of T&C, which were transferred by virtue of the VTA, but the
same was refused.
 It is believed that defendants are now planning to sell PMC and all its assets to a new purchaser, in which
new purchaser the said defendants will have interest.
 Thus, plaintiffs pray that the court enjoin defendants from transferring PMC or any of the capital stock therein
to any person or corporation. They also pray that the court order defendants to cancel the Voting Trust and to
return to plaintiffs their shares of stock in T&C, and to regain from defendants their pretended positions in and
control of T&C.
 The lower court sustained the demurrer filed by defendants. It held that T&C should have been joined as party
plaintiff and that as far as PMC is concerned, the plaintiffs, not being stockholders in that corporation, had no
legal right to proceed against it in this case.

Issue: W/N plaintiff stockholders may bring the action even without a Board resolution authorizing the same - YES

Held:
 It is a well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the
corporation. Instead, the action must be brought by the Board of Directors.
 Defendants argue that the plaintiff stockholders, not having made any demand on the Board to bring the
action, are not the proper parties plaintiff. It is the corporation, T&C, which is the necessary party plaintiff.
  However, like most rules, the rule in question has its exceptions. It is alleged in the complaint, and
consequently admitted through the demurrer, that T&C is under the complete control of the defendants.
o In these circumstances, it is obvious that a demand upon the Board to institute action and prosecute
the same effectively would have been useless, and the law does not require litigants to perform
useless acts.
 The conclusion of the lower court that plaintiffs, not being stockholders in PMC, had no legal right to proceed
against said corporation, rests upon a misconception of the character of the action.
o Here, it was necessary for plaintiffs to set forth in full the history of the various transactions which
eventually led to the alleged loss of their property. In making a full disclosure, references to PMC
appear to have been inevitable.
o In any case, plaintiffs seek no judgment against PMC itself at this stage of the proceedings.
 The court below also erred in holding that the investigation of the transactions referred to in the complaint is
not within the province of the courts.
o That discovery, such as that demanded in this case, is one of the functions of a court of equity is so
well-established as to require no discussion.
 The Court held that plaintiffs state a good cause of action for equitable relief and their complaint is not in any
respect fatally defective.

Disposition: The judgment of the court below is therefore reversed, the defendants' demurrer is overruled, and it is
ordered that the defendants answer the complaint within ten days from the return of the record to the Court of First
Instance. So ordered.