OTHER

CORPORATIONS
OTHER CORPORATIONS
 CLOSE CORPORATIONS
A close corporation is one which AOI provides that:

1. All of 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;

2. All of the issued stock of all classes shall be subject to one

or more specified restrictions on transfer permitted by the
provisions on close corporations; and
3. The corporation shall not list in any stock exchange or make
any public offering of any of its stock of any class.

4. Notwithstanding the foregoing, a corporation shall be

deemed NOT 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 within the
meaning of this Code.
Any corporation may be incorporated as a
close corporation, EXCEPT: (MOSBI-PEP)
1. Mining or Oil companies,
2. Stock exchanges,
3. Banks,
4. Insurance companies,
5. Public utilities,
6. Educational institutions and
7. Corporations declared to be vested with Public interest in
accordance with the provisions of the Corporation Code. (CC, Sec.
96)
 Not all corporations with 20 or less
stockholders are close corporations
•The Corporation is not a close
corporation even if the shares
belong to only twenty or less
stockholders if not all the requisites
(under Sec. 96) are present.
CHARACTERISTICS OF A CLOSE
CORPORATION
 Nature of a close corporation
• A close corporation is essentially an incorporated
partnership in which the stockholders consider each
other as partners but which the law treats as a
corporation. Thus, stockholders in a close
corporation are very much like members in a
partnership. They owe to one another the same duty
of utmost good faith and diligence that partners owe
one another. This strict duty applies particularly to
controlling stockholders.
Peculiar characteristic of a close corporation

•What is outstandingly peculiar

with a close corporation is the fact
that all the outstanding stock is
owned by the persons who are
active in the management and
conduct of the business.
 Other characteristics of a close corporation (8)
1. Where the AOI provides that the business of the
corporation shall be managed by the stockholders
themselves rather than by a BOD, then the stockholders
shall be deemed to be the directors with all the liabilities
imposed by the Code on directors. (CC, Sec. 97) The
stockholders shall likewise be personally liable for corporate
torts unless the corporation has obtained reasonably
adequate liability insurance. (CC, Sec. 100)

2. Quorum may be greater than mere majority. (ibid)

3. Restrictions on transfer of shares can be
validly imposed. Right of first refusal can be
exercised. (CC, Sec. 98)

4. Any action by the directors of a close

corporation without a meeting shall
nevertheless be deemed valid if any of the
circumstances on Sec. 101, CC is present.
5. Pre-emptive right extends to all stock
issuances, including treasury shares. (CC, Sec.
102)

6. Deadlock in the board is settled by the

SEC, on the written petition by any
stockholder. (CC, Sec. 104)
7. A stockholder may withdraw and avail of
his right of appraisal. (CC, Sec. 105)

8. The rules primarily governing close

corporations are set forth under Title XII of
the Corporation Code. Other titles of the
Code apply suppletorily.
 Close corporation vs. Closely-held Corporation

CLOSE CORPORATION CLOSELY HELD CORPORATION

A close corporation is that
defined in Sec. 96. It
emphasizes a determination
on the part of the participants
in the enterprise to keep
outsiders from acquiring any
interest in the business.
A closely-held corporation
focuses more on the number
of shareholders in the
corporation at that particular
time, indicating that they are
few in number.
VALIDITY ON RESTRICTIONS ON
TRANSFER OF SHARES
 Rationale for stock transfer restrictions in
close corporations
• The reason for the stock transfer restriction in close
corporation is that the stockholders seek to maintain
delectus personae. The close corporation is
essentially an incorporated partnership, wherein one
of the major objectives of the shareholders is to
remain close and be able to prevent changes in the
control of the corporation which might otherwise
result from the transfer of voting shares. (De Leon,
2010)
 Conditions for validity of restrictions on
transfer of shares
1. Restrictions on the right to transfer shares must appear in the
AOI and in the by-laws as well as in the certificate of stock,
otherwise they shall not be binding on any purchaser thereof in
good faith; and
2. They shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares
of the transferring stockholders with such reasonable terms,
conditions, or period stated therein. (CC, Sec. 98)

NOTE: Any transfer made should not result in exceeding the

number of stockholders as allowed by the Code.
 Exercise of right of first refusal
• The corporation or the stockholders have the right of first
refusal, that is, the stockholder who wants to sell his shares
to any third person must first offer it either to the
corporation or to the other existing stockholders usually
under the same terms and conditions. The right pertains to
shares already issued to stockholders. If the existing
stockholders or the corporation fails to exercise the option
to purchase within the period stated, the transferring
stockholder may sell his shares to any third person. (CC,
Sec. 98)
 Option period to exercise the right of first
refusal
•The option period to exercise the right of first
refusal is that period stated in the AOI, By-laws
and Certificate of Stock. The SEC likewise limits
the period to 1 month which is deemed
sufficient for the stockholders or for the
corporation to signify their desire to buy the
shares of stock being offered for sale by any
stockholder
 AOI cannot provide that the consent of the
corporation shall be obtained in case the stockholder
sells his shares
•The AOI cannot provide that the
consent of the corporation shall be
obtained in case the stockholder
sells his shares because such
restriction is more onerous than
the right of first refusal.
ISSUANCE OR TRANSFER OF STOCK IN
BREACH OF QUALIFYING CONDITION
 Transfer

•The term “transfer” as used

in Sec. 99, is not limited to a
transfer for value. This,
therefore, includes
donations. (CC, Sec. 99[6])
Refusal to register the transfer of stock by a
close corporation
•A close corporation may, at its
option, refuse to register the
transfer of stock in the name of
the transferee if the person is not
qualified to be a stockholder and
has notice thereof.
• Any person to whom stock of a close corporation has been issued
or transferred has, or is conclusively presumed to have notice:
a. That he is a person not eligible to be a holder of stock of the
corporation;
b. b. The transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons
permitted by its articles of incorporation to hold stock of the
corporation; and
c. c. The transfer of stock is in violation of a restriction on transfer
of stock. (CC, Sec. 99 [4])
 Conclusive presumption of knowledge of
restrictions
•There is a conclusive presumption of
knowledge of restrictions when the stock
certificate issued or transferred conspicuously
shows the qualifications of persons entitled to
be holders of record; number of persons, not
exceeding 20 allowed to be stockholders; and
other restrictions as provided in the AOI of the
close corporation. (CC, Sec. 99 [1], [2], [3])
Stock transfers in violation of the restrictions can
still be registered in the books of the
Corporation
• Stock transfers in violation of the restrictions can still be
registered in the books of the Corporation in the following cases:
1. If all the stockholders consent;
2. 2. If the AOI of the close corporation was duly amended. (CC,
Sec. 99 [5])

NOTE: In both the above cases, the corporation will no longer be a

close corporation if the conditions under Sec. 96 will no longer be
present, as in the case where the transfer results in the presence
of more than 20 stockholders.
Breach of any of these restrictions does not bar
rescission by the transferee of the transaction
•The breach in any of the restrictions
shall not in any way impair any right of
a transferee regarding any right to
rescind the transaction or to recover
under any applicable warranty, express
or implied. (CC, Sec. 99[7])
WHEN BOARD MEETING IS UNNECESSARY OR
IMPROPERLY HELD
 Effect of unnecessary or improperly held
board meeting
• Unless the by-laws of the close corporation otherwise provides, any action
by the directors of a close corporation without a meeting shall be valid if:
(CKAO)
1. Before or after such action is taken, written Consent is signed by all the
directors
2. All the stockholders have actual or implied Knowledge of the action and
make no prompt objection
3. The directors are Accustomed to take informal action with the express or
implied acquiescence of all the stockholders
4. All the directors have express or implied knowledge of the action in
question and make no prompt Objection thereto.
•If a director's meeting is held without proper
call or notice, an action taken therein within
the corporate powers is deemed ratified by a
director who failed to attend, unless he
promptly files his written objection with the
secretary of the corporation after having
knowledge thereof. (CC, Sec. 101)
PRE-EMPTIVE RIGHT
Pre-emptive right in an ordinary corporation
vs. Pre-emptive right in a close corporation
•As compared to ordinary corporations,
in close corporations, the pre-emptive
right can be exercised even as to stocks
issued for corporate purposes or for
payment of a previously contracted
debt.
AMENDMENT OF THE ARTICLES OF
INCORPORATION
 Requirements for the amendment of the AOI to delete or
remove any provision required for close corporations or to
reduce a quorum or voting requirement stated in the AOI
• Any amendment to the articles of incorporation which seeks to
delete or remove any provision required for close corporations or
to reduce a quorum or voting requirement stated in the articles
of incorporation must be:
1. Approved by the affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock:
a. Whether with or without voting rights, or
b. A greater proportion of shares as may be specifically
provided in the articles of incorporation
2. In a meeting duly called for the purpose.
DEADLOCKS
 Deadlock in a close corporation
• It is when the directors or stockholders are so divided
respecting the management of the business and affairs of
the corporation that the votes required for any corporate
action cannot be obtained and as a result, business and
affairs can no longer be conducted to the advantage of the
stockholders generally. (CC, Sec. 104)

NOTE: Dissolution of the corporation is one of the possible

consequences of deadlock. (CC, Sec. 104)
 Remedy in case of deadlocks in a close
corporation
• The SEC may be asked, upon written petition by any stockholder,
to intervene. And SEC shall have the authority to do the
following:
1. To arbitrate the dispute
2. Cancel or alter any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
3. Cancel, alter or enjoin any resolution or act of the corporation
or its board of directors, stockholders, or officers;
4. Direct or prohibit any act of the corporation or its board of
directors, stockholders, officers, or other persons party to the
action;
5. Require 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;
6. Appoint a provisional director;
7. Dissolve the corporation; or
8. Grant such other relief as the circumstances may
warrant.
 SEC can interfere with the management of a close
corporation in case of disagreement of the stockholders or
directors
•In case of deadlock in the
management of the corporation,
the SEC may intervene and can do
certain acts which would have not
been allowed to do in open
corporations.
 Provisional director
• A provisional director is an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary
or affiliate of the corporation. A provisional director has all the
rights and powers of a director of the corporation, including the
right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all
the stockholders.

NOTE: A provisional director is not considered as a receiver of the

corporation. He does not have the title and powers of a custodian
or receiver.
 Widely held vs. Close corporation
Number of Stockholders
Public Offering/ Listing of Shares in
the Stock Exchange
Who may exercise corporate
Powers
Qualification of Stockholders
Restriction on transfers of shares
WIDELY HELD CORPORATION
No limit
Allowed
Corporate powers are exercised, all
business conducted and all
property of such corporations
controlled and held by the board of
directors or trustees (CC, Sec. 23)
Qualifications of stockholders are
not normally prescribed
A restriction need not be provided
for
CLOSE CORPORATION
Not exceeding 20 (CC, Sec. 96)
Not Allowed (CC, Sec. 96)
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.
(CC, Sec. 97)
Specific qualifications are usually
provided for. (CC,Sec. 97)
There must be a restriction on the
transfer of shares (CC, Sec. 96)
 Widely held vs. Close corporation
WIDELY HELD CORPORATION CLOSE CORPORATION
Pre-emptive Right All stockholders of a stock corporation The pre-emptive right of
shall enjoy pre-emptive right to stockholders in close corporations
subscribe to all issues or disposition of shall extend to all stock to be
shares of any class, in proportion to
issued, including reissuance of
their respective shareholdings, unless
such right is denied by the AOI or treasury shares, whether for
amendment thereto: Provided, that money or for property or personal
such pre-emptive right shall not extend services, or in payment of
to shares to be issued in compliance corporate debts, unless the AOI
with laws requiring stock offerings or provide otherwise. (CC, Sec. 102)
minimum stock ownership by the
public; or to shares to be issued in good
faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange
for property needed for corporate
purposes or in payment of a previously
contracted debt. (CC, Sec. 39)
 Widely held vs. Close corporation
Appraisal Right
Interference of SEC as to the
management of the Corporation’s
business.
WIDELY HELD CORPORATION CLOSE CORPORATION
Only to those cases provided by Can be exercised with or without
law under Sec. 42 and 81. reason and regardless of whether
the corporation has unrestricted
Required that the Corporation has retained earnings. (CC, Sec. 105)
unrestricted retained earnings at
the time of demand. (CC, Sec. 82)
Not allowed. Based on the Business Allowed in case of deadlocks. (CC,
Judgment Rule Sec. 104)
 Widely held vs. Close corporation
WIDELY HELD CORPORATION
Dissolution For voluntary dissolutions, approval
of majority of the Board of
Directors or Trustees and of
stockholders representing 2/ 3 of
the outstanding capital stock or 2/3
of the members in case of non-
stock corporations is necessary.
(CC, Sec. 118 and 119)
CLOSE CORPORATION
Dissolution may be effected by any
stockholder upon petition to the
SEC whenever any of acts of the
directors, officers or those in
control of the corporation is illegal,
or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to
the corporation or any stockholder,
or whenever corporate assets are
being misapplied or wasted. (CC,
Sec. 105)
 Widely held vs. Close corporation

WIDELY HELD CORPORATION CLOSE CORPORATION

Amendment of AOI Requires vote or written assent of
stockholders representing at least
2/3 of the outstanding capital
stock. (CC, Sec. 16)
Objection in a meeting without Oral objection is sufficient to
proper notice preserve the right of the director to Sec. 101)
question the validity of an action
taken in a meeting held without
proper notice. (CC, Sec. 53)
Amendment as to the matters
stated in Sec. 103 requires
affirmative vote of at least 2/3 of
the outstanding capital stock. (CC,
Sec. 103)
Written objection is required. (CC,