Close corporations are provided under and governed by Title XII of the Revised Corporation Code, without prejudice to the suppletory application of other provisions. The pertinent provisions are discussed below.
WHAT MAKES A CLOSE CORPORATION
A close corporation is one whose articles of incorporation provides that:
- (a) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20;
- (b) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted under Title XII of the Revised Corporation Code; and
- (c) the corporation shall not list in any stock exchange or make any public offering of its stocks of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.
NOT ALLOWED COMPANIES
Any corporation may be incorporated as a close corporation, except:
- mining companies
- oil companies
- stock exchanges
- insurance companies
- public utilities
- educational institutions
- corporations declared to be vested with public interest
ARTICLES OF INCORPORATION
The articles of incorporation of a close corporation may provide for:
- (a) A classification of shares or rights, the qualifications for owning or holding the same, and restrictions on their transfers;
- (b) A classification of directors into 1 or more classes, each of whom may be voted for and elected solely by a particular class of stock; and
- (c) Greater quorum or voting requirements in meetings of stockholders or directors than those provided in the Revised Corporation Code.
The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors.
The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.
DIRECT MANAGEMENT BY STOCKHOLDERS
In case the articles of incorporation provide that the business of the corporation shall be managed by the stockholders, rather than by a board of directors, no meeting of stockholders need be called to elect directors.
In such case, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of the Revised Corporation Code, unless the context clearly requires otherwise.
In case the corporation is management by stockholders, they shall be subject to all liabilities of directors.
VALIDITY OF RESTRICTIONS
Restrictions must appear in all three documents; otherwise, the same shall not be binding on any purchaser in good faith.
The restrictions on transfer of shares shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated.
The preemptive right of stockholders in a close corporation extends to both issued and unissued shares:
Issued shares: In case of valid restrictions on the right to transfer shares, existing stockholders or the corporation has the option to purchase the shares of the transferring stockholder. If, upon the expiration of the prescribed period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell their shares to any third person.
Unissued shares: The preemptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
WITHDRAWAL OF STOCKHOLDER
Any stockholder of a close corporation may, for any reason, compel the corporation to purchase shares held, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock. The purchase must be for fair value, which shall not be less than the par or issued value.
EFFECTS OF ISSUANCE OR TRANSFER IN BREACH OF QUALIFYING CONDITIONS
(a) If a stock of a close corporation is issued or transferred to any person who is not eligible to be a holder thereof under any provision of the articles of incorporation, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of the ineligibility to be a stockholder.
(b) If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be stockholders of record, and if the certificate for such stock conspicuously states such number, and the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact.
(c) If a stock certificate of a close corporation conspicuously shows a restriction on transfer of the corporation’s stock and the transferee acquires the stock in violation of such restriction, the transferee is conclusively presumed to have notice of the fact that the stock was acquired in violation of the restriction.
(d) Whenever a person to whom stock of a close corporation has been issued or transferred has or is conclusively presumed under this section to have notice of: (1) the person’s ineligibility to be a stockholder of the corporation; or (2) that the transfer of stock would cause the stock of the corporation to be held by more than the number of persons permitted under its articles of incorporation; or (3) that the transfer violates a restriction on transfer of stock, and the corporation may, at its option, refuse to register the transfer in the name of the transferee.
(e) The provisions of subsection (d) shall not be applicable if the transfer of stock, though contrary to subsections (a), (b) or (c), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title.
(f) The term “transfer”, as used in this section, is not limited to a transfer for value.
(g) The provisions of this section shall not impair any right which the transferee may have to either rescind the transfer or recover the stock under any express or implied warranty.
AGREEMENTS BY STOCKHOLDERS
(a) Agreements duly signed and executed by and among all stockholders before the formation and organization of a close corporation shall survive the incorporation and shall continue to be valid and binding between such stockholders, if such be their intent, to the extent that such agreements are consistent with the articles of incorporation, irrespective of where the provisions of such agreements are contained, except those required by Title XII to be embodied in said articles of incorporation.
(b) A written agreement signed by 2 or more stockholders may provide that in exercising any voting right, the shares held by them shall be voted as provided or as agreed, or in accordance with a procedure agreed upon by them.
(c) No provision in a written agreement signed by the stockholders, relating to any phase of corporate affairs, shall be invalidated between the parties on the ground that its effect is to make them partners among themselves.
(d) A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the ground that it relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors: Provided, that such agreement shall impose on the stockholders who are parties thereto the liabilities for managerial acts imposed on directors by the Revised Corporation Code.
(e) Stockholders actively engaged in the management or operation of the business and affairs of a close corporation shall be held to strict fiduciary duties to each other and among themselves. The stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.
ACTIONS WITHOUT BOARD MEETING
Unless the bylaws provide otherwise, any action taken by the directors of a close corporation without a meeting called properly and with due notice shall nevertheless be deemed valid if:
- (a) Before or after such action is taken, a written consent thereto is signed by all the directors; or
- (b) All the stockholders have actual or implied knowledge of the action and make no prompt objection in writing; or
- (c) The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or
- (d) All the directors have express or implied knowledge of the action in question and none of them makes a prompt objection in writing.
ACTIONS IN IMPROPERLY HELD BOARD MEETING
An action within the corporate powers taken at a meeting held without proper call or notice, is deemed ratified by a director who failed to attend. The action is not deemed ratified if the director who was absent, after having knowledge thereof, promptly files his written objection with the secretary of the corporation.
If the directors or stockholders are so divided on the management of the corporation’s business and affairs that the votes required for a corporate action cannot be obtained, with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the SEC, upon written petition by any stockholder, shall have the power to arbitrate the dispute.
In the exercise of such power, the SEC shall have authority to make appropriate orders, such as:
- (a) cancelling or altering any provision contained in the articles of incorporation, bylaws, or any stockholder’s agreement;
- (b) cancelling, altering or enjoining a resolution or act of the corporation or its board of directors, stockholders, or officers;
- (c) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action;
- (d) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders;
- (e) appointing a provisional director;
- (f) dissolving the corporation; or
- (g) granting such other relief as the circumstances may warrant.
Provisional director. A provisional director:
- Shall be an impartial person who is neither a stockholder nor a creditor of the corporation or any of its subsidiaries or affiliates, and whose further qualifications, if any, may be determined by the SEC.
- Is not a receiver of the corporation and does not have the title and powers of a custodian or receiver.
- Shall have all the rights and powers of a duly elected director, including the right to be notified of and to vote at meetings of directors until removed by order of the SEC or by all the stockholders.
- Entitled to compensation, which shall be determined by agreement between such director and the corporation, subject to approval of the SEC, which may fix the compensation absent an agreement or in the event of disagreement between the provisional director and the corporation.
AMENDMENTS OF ARTICLES OF INCORPORATION
Any amendment to the articles of incorporation which seeks to delete or remove any provision required by Title XII or to reduce a quorum or voting requirement stated in said articles of incorporation shall require the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.
DISSOLUTION OF CLOSE CORPORATION
Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such corporation whenever any of acts of the directors, officers, or those in control of the corporation is illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.