05A Close Corporations

SPECIAL TYPES OF CORPORATION
CORPORATE MANAGEMENT JURISPRUDENCE

CLOSE CORPORATIONS
SEC. 95, REVISED CORPORATION CODE
• A close corporation, within the meaning of this Code, is one

whose articles of incorporation provide that:
(1) 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);
(2) all the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and
(3) 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.
CLOSE CORPORATIONS
• What is required is not only the concurrence of the three

requisites present in Section 95, but such status/limitation
must also be expressed in the Articles of Incorporation.
• Any corporation may be incorporated as a close corporation,

except mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational institutions
and corporations declared to be vested with public interest.
CLOSE CORPORATIONS
• The concept of a close corporation organized for the purpose of

running a family business or managing family property has
formed the backbone of Philippine commerce and industry.
• Through this device, Filipino families have been able to turn
their humble, hard-earned life savings into going concerns
capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of
hard work.
• A family corporation should serve as a reward for years of hard
work— as a rallying point for family unity and prosperity, not as
a flashpoint for familial strife. (Gala v. Ellice Agro-Industrial
Corp., 418 SCRA 431 [2003])
CLOSE CORPORATION’S AOI
SEC. 96 , REVISED CORPORATION CODE
• The articles of incorporation of a close corporation may provide:

1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers
as may be stated therein, subject to the provisions of the
following section;
2. For a classification of directors into one or more classes, each
of whom may be voted for and elected solely by a particular
class of stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this 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.
RESTRICTION ON TRANSFER
OF SHARES
SEC. 98 & 99, BP BLG. 68
• Restrictions on the right to transfer shares must appear in the

articles of incorporation and in the by-laws as well as 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.
BREACH OF QUALIFYING CONDITIONS
SEC 98, REVISED CORPORATION CODE
• The transferee is conclusively presumed to have notice of the

restriction or condition on shares of stock transferred.
• The corporation cannot be compelled to register the transfer of
stock in the name of the transferee. The transfer, however, shall
be binding upon the corporation where it has been consented
to by all stockholders of the close corporation.
• The breach of any restriction in the issuance or transfer of stock
is without prejudice to the right of the transferee to rescind the
transaction or recover warranty, express or implied.
PRE-EMPTIVE RIGHTS
• A preemptive right is a privilege that may be extended to

certain shareholders of a corporation that grants them the
right to purchase additional shares in the company prior to
shares being made available for purchase to the general
public in the event of a seasoned offering, which is a
secondary issuing of stock shares.
• The pre-emptive 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.
AMENDMENT OF THE AOI
• Any amendment to the articles of incorporation which seeks to

delete or remove any provision required to be contained in the
articles of incorporation 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.
BINDING AGREEMENTS
BY STOCKHOLDERS
• An agreement among stockholders in an ordinary corporation

that relates to the conduct of the business affairs of the
corporation as to restrict or interfere with the discretion or
powers of the board of directors would be invalid.
• On the other hand, in the realism of close corporation thereof,
the law recognizes the ability of parties to arrange their affairs by
specific contract terms operating within the corporate structure.
• In a close corporation, the sanctity of the “corporate entity” is
given less emphasize to allow the parties to primarily be
governed by the specific contracts they enter into at the time of
“incorporating” their enterprise.
• Contracts entered into by stockholders in behalf of the
corporation is considered valid between the parties in a close
corporation.
NO NECESSITY OF BOARD
Unless the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the
directors; or
2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
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.
• The action of a director of a close corporation without meeting is deemed
valid. The exception is when the by-laws otherwise provide.
DEADLOCKS
• If the director or stockholders of a close corporation are so

divided with respect to the management of its business and
affairs that votes required for any corporate action cannot
be obtained, generally, the SEC upon written petition by any
stockholder, shall have the power to arbitrate the dispute.
• This power of the SEC may be exercised notwithstanding any
provision in the AOI or by-laws or agreement of
stockholders. The SEC can make the appropriate order
including dissolution if it deems it best if the business is
unsuccessful, otherwise, it may appoint a provisional
director as additional member of the board.
WITHDRAWAL & DISSOLUTION
SEC. 105, BP BLG. 68
• Any stockholder of a close corporation may, for any reason,

compel the said corporation to purchase his shares at their fair
value, which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books to cover
its debts and liabilities exclusive of capital stock.
• Any stockholder of a close corporation may petition (written)
the SEC to compel the dissolution of such corporation 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.

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05A Close Corporations

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SPECIAL TYPES OF CORPORATION

CORPORATE MANAGEMENT JURISPRUDENCE

• A close corporation, within the meaning of this Code, is one

• What is required is not only the concurrence of the three

• Any corporation may be incorporated as a close corporation,

• The concept of a close corporation organized for the purpose of

• The articles of incorporation of a close corporation may provide:

• Restrictions on the right to transfer shares must appear in the

• The transferee is conclusively presumed to have notice of the

• A preemptive right is a privilege that may be extended to

• Any amendment to the articles of incorporation which seeks to

• An agreement among stockholders in an ordinary corporation

• If the director or stockholders of a close corporation are so

• Any stockholder of a close corporation may, for any reason,

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