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Close Corporation

This document defines and provides details on close corporations under Philippine law. Key points include: - A close corporation has no more than 20 shareholders, restrictions on share transfers, and does not list shares publicly. - The articles of incorporation of a close corporation can classify shares and directors, and require greater voting thresholds. Shareholders can elect to manage the business directly. - Restrictions on share transfers must be stated in the articles, bylaws, and share certificates to be binding. Non-compliance can result in rescission or refusal of registration. - Shareholder agreements before or after incorporation are generally valid unless inconsistent with the articles. Shareholders owe fiduciary duties to each other regarding management.

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389 views14 pages

Close Corporation

This document defines and provides details on close corporations under Philippine law. Key points include: - A close corporation has no more than 20 shareholders, restrictions on share transfers, and does not list shares publicly. - The articles of incorporation of a close corporation can classify shares and directors, and require greater voting thresholds. Shareholders can elect to manage the business directly. - Restrictions on share transfers must be stated in the articles, bylaws, and share certificates to be binding. Non-compliance can result in rescission or refusal of registration. - Shareholder agreements before or after incorporation are generally valid unless inconsistent with the articles. Shareholders owe fiduciary duties to each other regarding management.

Uploaded by

Ayra Bernabe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Close corporation

Section 95 – Definition and applicability of the provisions.


Close corporation – is one whose AOI provides:
a. It issued share of all classes, exclusive of treasury shares, shall be
held by not more than a specified number of persons, not
exceeding twenty (20);
b. The issued shares of all classes shall be subject to one (1) or more
specified restrictions on transfer as allowed by law;
c. It shall not list any of its shares in any stock exchange or make any
public offering. However, the corporation shall not be deemed close
corporation when at least two-thirds (2/3) of its voting stock or
voting rights is owner or controlled by another corporation which is
not close.
• Mining or oil companies, stock exchanges, banks, insurance
companies, public utilities, educational institutions and corporations
declared to be vested with public interest shall not be allowed to
incorporate as close corporation.
• All provisions of the RCC, not inconsistent with the provisions on
Close corporations may be applied suppletory manner.

Section 96 – Articles of Incorporation.


A close corporation AOI, may provide:
a. Classification of shares on rights, qualifications for owning or
holding the same, and restrictions on their transfers;
b. Classification of directors into one (1) or more classes, each of
whom may be voted for and elected solely by a particular share;
c. Greater quorum or voting requirements in meetings of shareholders
or directors than those provided in the RCC.

The AOI may provide that the business of the corporation may be
managed by the shareholders. Therefore, the shareholders shall be
subject to liabilities of directors. The AOI may also provide that the
officers or employees shall be elected or appointed directly by the
shareholders.
Section 97 – Validity of restriction on transfer of shares
The RCC allows restriction on transfers. The restriction should not be
more onerous or burdensome than granting existing shareholders the
option to purchase the shares of the transferring shareholder with such
reasonable terms, condition, or period. The restriction must be
provided in the:
a. AOI;
b. By-laws; and
c. stock certificate.
If the restrictions were not mentioned on the above documents, it shall
not be binding on any purchaser in good faith.
Section 98 – Effects of issuance or transfer of stock in breach.
In the event of breach on restriction of transfer, the RCC provides for
certain safeguard which are:
a. presumptive notice;
b. non-registration of transferred shares in the books of the
corporation; and
c. right to rescission.
Presumptive notice is present in the following situations:
d. If said shares were transferred to any of the person who is not
qualified to hold the said shares;
e. If the issuance would violate the number of shareholders as stated
in AOI
• The close corporation may refuse non-registration of the transferred
shares to the transferee. But, if the transfer was consented to by all
the shareholders of the close corporation, or if the AOI of the close
corporation has been amended, the transfer may be deemed valid
and shall be registered with the books of the corporation.
• The transferee/ purchaser of shares may rescind the transfer or
recover any applicable warranty.

Section 99 – Agreements by shareholders.


a. Agreements by and among shareholders executed before the
formation and organization of close corporation shall survive the
incorporation, provided it is not inconsistent with the AOI.
b. Agreement between to or more shareholders, in writing and signed
by the parties thereto, may provide that in exercising any voting rights,
the shares held by them shall be voted as provided therein or as they
may agree;
c. No provisions in any written agreement, signed by the shareholders
relating to corporate affairs shall be invalidated as between the parties
on the ground that its effect shall make them partners among
themselves;
d. A written agreement among some or all of the shareholders in close
corporation shall not be invalidated on the ground that it relates to the
management of the business of the corporation as it restricts the
powers of the board of directors.
e. The shareholders who actively engaged in the management or
operation of the business and affairs of a corporation shall be held
strict fiduciary duties to each other and among themselves.

Section 100 – When board meeting is unnecessary or improperly held.


Even so the meeting of the directors is without notice for that purpose,
the meeting shall be valid provided it is not in violation of by laws, and
the following are present:
a. Before or after said action, there is a written consent signed by all
the directors;
b. All the shareholders have actual or implied knowledge of the action
and make no prompt objection in writing;
c. The directors are accustomed to take informal action with express or
implied approval of all the shareholders; 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.

Any action taken at the meeting held without proper notice is deemed
ratified by a director who failed to attend, unless after having
knowledge thereof, the directors promptly file his/her written objection
with the corporate secretary.

Section 101 – Pre-emptive right in close corporations.


• The shareholders of a close corporation are given what we term as
pre-emptive rights as to all its shares, including treasury shares in
consideration for money, property, personal services, debt.

Section 102 – Amendment of AOI.


Any amendment in the AOI which seeks to delete or remove any
provision shall require two-thirds (2/3) affirmative of the outstanding
capital stock.

Section 103 – Deadlocks.


Deadlock is present in the following situations:
a. If the directors or shareholders are so divided respecting the
management of the corporation’s business and affairs; and
b. The votes required for any corporate action cannot be obtained,
with the consequences that the businesses and affairs of the
corporation can no longer be conducted.

In event of deadlock, any shareholder may petition the SEC to arbitrate


the dispute. The SEC has the authority to do the following acts:
c. Cancel or alter any provision contained in the AOI, by-laws, or any
shareholder’s agreement;
d. Cancel, alter or enjoin any resolution or act of the corporation or its
board of directors, shareholders, of officers;
c. Direct or prohibit any act of the corporation or its board of directors,
shareholders, officers, or other persons party to the action;
d. Require the purchase, at the fair value the shares of any shareholder,
regardless of availability of unrestricted retained earnings by the
corporation or the shareholder;
e. Appoint provisional director;
f. Order the dissolution of the corporation; or
h. Grant such other relief as the circumstances may warrant.

Provision director is impartial person who is neither a shareholder or


creditor of the corporation or any subsidiary or affiliate of the
corporation, whose qualification may be determined by SEC.
Section 104. Withdrawal of shareholder or dissolution of the
corporation.
Any shareholder who decides to withdraw from the corporation for any
reason may initiate the following action:
a. Compel the corporation to purchase his/her shares at fair value, not
less than par or issued value;
b. Compel the dissolution of the corporation whenever acts of the
directors or officers are illegal, fraudulent, dishonest, oppressive or
unfairly prejudicial to the corporation or its shareholders.

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