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Corpo Close Corp Slides
Corpo Close Corp Slides
Chapter 15
Definition
Definition
Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All the corporations 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 () of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation within the meaning Code.
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 in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other
Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
Definition
The ultimate effect of the special provisions of the law on close corporations is to furnish another form of
business organization - a de facto corporation with a corporate shell. It is referred to sometimes as a
hybrid of both the corporate and partnership forms, an incorporated partnership or corporation de jure
but a de facto partnership.
This is because a close corporation may partake the nature of a partnership in that the stockholders
thereof take an active role in the management of the corporate affairs either as directors, officers or even
perhaps as partners in management which is akin to the partnership form of business. This, in fact, is the
main distinction between a close corporation and the ordinary stock corporation where, in the latter, the
stockholders have hardly a voice in management except perhaps to elect the directors.
Despite this, the stockholders who are active in management still enjoy limited liability to the extent of their
subscription in so far as corporate obligations are concerned. It will be noted, however, that under no. 5
Sec. 100 of the Code, they are made personally liable for corporate torts unless they have obtained a
reasonably adequate insurance liability.
Close Corporations
Close Corporations
Close corporations must contain the three provisions required to be indicated in
the AOI as provided by Sec. 96. Absent any of the provisions required by the said
section, the corporation, will not, for all legal intents and purposes, be considered
as a close corporation and would thus not be governed by Title XII of the Code,
but by the general provisions governing ordinary corporation. A corporation does
not become a close corporation because man and his wife owns 99.86% of the
capital stock (San Juan Structural Steel vs. CA). The qualifying conditions
required by law must be complied with.
owned by another corporation
owned by another corporation
Even if another corporation owns or controls of the voting stocks of a close
corporation, the latter may still be considered as such close corporation if the
corporation or controlling shares is also a close corporation.
Business with public interest
Business with public interest
Business with public interest may not be formed as a close corporation under the
second paragraph of Sec. 95. Sec. 140 of the Code lays down a similar policy
authorizing NEDA to recommend to the legislature the setting of maximum limits to
family or group ownership of stock in corporations vested with public interest, and
the determination of whether or not it should be vested with public interest within
its domain.
Permissive provisions
Sec. 97. Articles of incorporation. - 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. So long as this provision
continues in effect:
The articles of incorporation may likewise provide that all officers or employees or that specified officers or
employees shall be elected or appointed by the stockholders, instead of by the board of directors.
Classification of shares
Classification of shares
Under no. 1 of the previous slide, the close corporation may classify its shares into
different classes to be held of record only by the specified persons. Example:
Classes A, B and C. Class A is to be held only by the incorporators; Class B by
their relatives within the third civil degree of consanguinity or affinity; Class C by
their close business associates.
Classification of Directors
Classification of directors
Under no. 2, a close corporation may provide for a classification of directors into one or more class, each
of whom may be voted for and elected solely by a particular class of stock.
Example: 1,000 class A shares; 500 class B shares; and 200 class C shares. The AOI may provide that
each class shall have a representation in the BOD regardless of the number of shares within each class.
So, if the close corporation has 5 directors, then the AOI may allocate 3 directors for Class A shares, 1 for
B and 1 for C. Within each class, cumulative voting may also be exercised by the stockholders of such
class to elect their representative in the board. But to the extent that each class can elect its own directors
regardless of the number of shares in such class, cumulative voting may, in effect be restricted. This is so
because there is no provision for a classification of directors, then Class A stockholders, b cumulating
their votes (5x1000) will have 5,000 votes and can elect 3 directors with 1,666 votes each. Class B
shares, having 2,500 votes can vote 2 members and Class C shares having only 1,000 votes cannot be
guaranteed to any seat in the board.
Quorum and voting requirement
Quorum and voting requirement
A close corporation may provide for a greater quorum or voting requirement under
no. 3. Although the AOI or By-laws of other stock corporations may provide for
greater quorum and voting requirements in directors meeting as provided in Sec.
25 of the Code, those for stockholders meeting, unlike in a close corporation, may
not be altered or increased. This provisions in effect, increases the veto power of
the minority stockholders.
Direct management by stockholders
Direct management by stockholders
The AOI of the close corporation may provide that the corporation shall be managed by the stockholders
rather than by the BOD. If such be the case, the stockholders are deemed directors and are subject to all
the rights and liabilities of a director. However, their liability would be more extensive in that they are
personally liable for torts unless, again, the corporation has obtained reasonably adequate liability
insurance. As distinguished from the ordinary stock corporation, directors hereof are liable for corporate
torts only if they have been negligent or acted fraudulently in the performance of their functions. As to
what is reasonably adequate liability insurance would vary depending on the facts and circumstances of
the case.
In order that the provisions allowing a close corporation to do away with a BOD may be effective, the
same must contain the continuing provisions required in par. 2 of Sec. 97: