a. Close Corporations

Characteristics of a close corporation

A close corporation, within the meaning of the Revised Corporation Code, is one whose articles of incorporation provides that:

• 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 twenty (20)
• All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title
• The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (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 the Revised Corporation Code. (Sec. 95)¹

Suppletory Effect

The provisions of other Titles of the Revised Corporation Code shall apply suppletorily except insofar as Title of Close Corporation otherwise provides. (Sec. 95)²

Management of a close corporation

• 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.
• When they manage, stockholders are liable as directors;
• There is no need to call a meeting to elect directors;
• To the extent that the stockholders are actively engaged in the management, said stockholders shall be liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

Companies That Cannot Be Close Corporations (MIPES-BOO)

• Mining companies;
• Insurance companies;
• Public utilities;
• Educational institutions;
• Stock exchanges;
• Banks;
• Oil companies;
• Other corporations declared to be vested with public interest.

Validity Of Restrictions On Transfers Of Shares (Sec 97)

Restrictions on the right to transfer shares must appear in:

• The articles of incorporation;
• The by-laws; and
• In the certificate of stock

Otherwise, the same shall not be binding on any purchaser thereof in good faith.

Said restrictions 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 therein.

If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.

Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions. –

• If shares of stock of a close corporation are 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.
• 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.
• 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.
• 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:
• the person’s ineligibility to be a stockholder of the corporation; or
• 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
• 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.
• 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.
• The term “transfer”, as used in this section, is not limited to a transfer for value.
• 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. (Sec. 98)³

Note: Even if the transfer of shares is made in violation of the restrictions enumerated under [Sec. 98 of RCC]⁴, such transfer is still valid if it has been consented to by all the shareholders of the close corporation and the corporation cannot refuse to register the transfer of shares in the name of the transferee. (Florete v. Florete, G.R. No. 223321, 2 April 2018)⁵

Need for factual determination of close corporation to apply

Before courts can allow the operation of Section 98⁶ to a case, there must first be a factual determination that the corporation is indeed a close corporation. There needs to be a presentation of evidence on the relevant restrictions in the articles of incorporation and bylaws of the corporation. (Andaya v. Rural Bank of Cabadbaran, Inc., G.R. No. 188769, 3 August 2016)⁷

When board meeting is unnecessary or improperly held (Sec. 100)⁸

General Rule: Any action taken by the directors without a board meeting shall be deemed INVALID.

Exception: The following shall nonetheless be valid despite the lack of a valid board meeting, unless the by-laws provide otherwise

• Before or after such action is taken, a written consent thereto is signed by all the directors; or
• All the stockholders have actual or implied knowledge of the action and make no prompt objection in writing; or
• The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or
• All the directors have express or implied knowledge of the action in question and none of them makes a prompt objection in writing.

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, unless after having knowledge thereof, the director promptly files his written objection with the secretary of the corporation.

Pre-Emptive Rights Of Stockholders In Close Corporations (Sec 101)⁹

General Rule: It 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

Exception: Unless the articles of incorporation provide otherwise.

Amendment of the articles of incorporation (Sec. 102)

Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title or to reduce a quorum or voting requirement stated in said articles of incorporation shall require the affirmative vote of at least two- thirds (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.

Power To Buy-Back Shares Of Close Corporations v. Appraisal Right In Stock Corporations

Corporations v. Stock Corporations

Educational Corporations –R.A. No. 11232, Section 105¹⁴