A close corporation is one where the stock is held by a small number of shareholders who are usually involved in managing the company. To be a close corporation, the articles of incorporation must specify that the stock is held by 20 or fewer shareholders, is subject to restrictions on transfer, and is not publicly traded. Certain types of companies like banks and utilities cannot be close corporations. Close corporations have characteristics like shareholders being personally liable for corporate actions and preemptive rights extending to all stock issuances. Restrictions on transferring stock are allowed if they give existing shareholders first refusal rights. Board meetings can be unnecessary if all shareholders consent to an action.
A close corporation is one where the stock is held by a small number of shareholders who are usually involved in managing the company. To be a close corporation, the articles of incorporation must specify that the stock is held by 20 or fewer shareholders, is subject to restrictions on transfer, and is not publicly traded. Certain types of companies like banks and utilities cannot be close corporations. Close corporations have characteristics like shareholders being personally liable for corporate actions and preemptive rights extending to all stock issuances. Restrictions on transferring stock are allowed if they give existing shareholders first refusal rights. Board meetings can be unnecessary if all shareholders consent to an action.
A close corporation is one where the stock is held by a small number of shareholders who are usually involved in managing the company. To be a close corporation, the articles of incorporation must specify that the stock is held by 20 or fewer shareholders, is subject to restrictions on transfer, and is not publicly traded. Certain types of companies like banks and utilities cannot be close corporations. Close corporations have characteristics like shareholders being personally liable for corporate actions and preemptive rights extending to all stock issuances. Restrictions on transferring stock are allowed if they give existing shareholders first refusal rights. Board meetings can be unnecessary if all shareholders consent to an action.
A close corporation is one where the stock is held by a small number of shareholders who are usually involved in managing the company. To be a close corporation, the articles of incorporation must specify that the stock is held by 20 or fewer shareholders, is subject to restrictions on transfer, and is not publicly traded. Certain types of companies like banks and utilities cannot be close corporations. Close corporations have characteristics like shareholders being personally liable for corporate actions and preemptive rights extending to all stock issuances. Restrictions on transferring stock are allowed if they give existing shareholders first refusal rights. Board meetings can be unnecessary if all shareholders consent to an action.
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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 A closely-held corporation defined in Sec. 96. It focuses more on the number emphasizes a determination of shareholders in the on the part of the participants corporation at that particular in the enterprise to keep time, indicating that they are outsiders from acquiring any few in number. interest in the business. 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 WIDELY HELD CORPORATION CLOSE CORPORATION Number of Stockholders No limit Not exceeding 20 (CC, Sec. 96) Public Offering/ Listing of Shares in Allowed Not Allowed (CC, Sec. 96) the Stock Exchange Who may exercise corporate Corporate powers are exercised, all The articles of incorporation of a Powers business conducted and all close corporation may provide that property of such corporations the business of the corporation controlled and held by the board of shall be managed by the directors or trustees (CC, Sec. 23) stockholders of the corporation rather than by a board of directors. (CC, Sec. 97) Qualification of Stockholders Qualifications of stockholders are Specific qualifications are usually not normally prescribed provided for. (CC,Sec. 97) Restriction on transfers of shares A restriction need not be provided There must be a restriction on the for 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
WIDELY HELD CORPORATION CLOSE CORPORATION
Appraisal Right 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) Interference of SEC as to the Not allowed. Based on the Business Allowed in case of deadlocks. (CC, management of the Corporation’s Judgment Rule Sec. 104) business. Widely held vs. Close corporation
WIDELY HELD CORPORATION CLOSE CORPORATION
Dissolution For voluntary dissolutions, approval Dissolution may be effected by any of majority of the Board of stockholder upon petition to the Directors or Trustees and of SEC whenever any of acts of the stockholders representing 2/ 3 of directors, officers or those in the outstanding capital stock or 2/3 control of the corporation is illegal, of the members in case of non- or fraudulent, or dishonest, or stock corporations is necessary. oppressive or unfairly prejudicial to (CC, Sec. 118 and 119) 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 Amendment as to the matters stockholders representing at least stated in Sec. 103 requires 2/3 of the outstanding capital affirmative vote of at least 2/3 of stock. (CC, Sec. 16) the outstanding capital stock. (CC, Sec. 103) Objection in a meeting without Oral objection is sufficient to Written objection is required. (CC, 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)