Important Reminders:

1. Blue italicized texts are codal provisions

2. Black texts are discussions of the instructor

TITLE XII
CLOSE CORPORATIONS
SEC. 95. Definition and Applicability of Title. – A close corporation, within the meaning
of this Code, is one whose articles of incorporation provides that: (a) 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); (b) all the issued
stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title; and (c) the corporation shall not list in any stock exchange or make
any public offering of its stocks 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 this 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 other Titles in this Code shall apply suppletorily, except as
otherwise provided under this Title.

Discussion:

A close corporation is one whose articles of incorporation provides that:

(a) 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 20;

(b) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted under Title XII of the Revised Corporation Code;
and

(c) the corporation shall not list in any stock exchange or make any public
offering of its stocks of any class.

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Notwithstanding the foregoing, a corporation shall not be deemed 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.

These peculiar features of a close corporation are brought by the manner in which a close
corporation is managed. Close corporations are often run by family members wherein the
management of the corporation is purposely restricted within the family or a small circle
of trusted individuals. While stockholders of a regular stock corporation separately leave
the management duties to its board of directors, the stockholders of a close corporation
also act as the board of directors since they themselves manage the close corporation.
Thus, there exists a common identity between the stockholders and the corporate
manager in a close corporation (Hector S. De Leon, The Corporation Code of the
Philippines Annotated 2002).

Companies not allowed to form Close Corporation

1. mining companies
2. oil companies
3. stock exchanges
4. banks
5. insurance companies
6. public utilities
7. educational institutions
8. corporations declared to be vested with public interest

All of these enumerations all have one thing in common and that is all of them are vested
with public interest. Say for example oil and mineral resources. We all know that under
the Constitution these are owned by the State and the exploration, development,
utilization, and processing thereof shall be under its full control and supervision. The State
however may directly undertake such activities, or it may enter into mineral agreements
with contractors.

Note that the companies that are not allowed to form close corporation is not limited to
those engaged only in mining, oil, stock exchanges, banks, insurance, public utilities, and
educations institutions. The Second paragraph of Section 95 is very clear that all
corporations declared to be vested with public interest are not allowed to form close
corporation.

Question: What is public interest? Who decides which company is vested with
public interest?

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Public interest has no exact definition. As a matter of fact, the Supreme Court had already
ruled that "Public concern" like "public interest" is a term that eludes exact definition. Both
terms embrace a broad spectrum of subjects which the public may want to know, either
because these directly affect their lives, or simply because such matters naturally arouse
the interest of an ordinary citizen. In the final analysis, it is for the courts to determine in
a case by case basis whether the matter at issue is of interest or importance, as it relates
to or affects the public. i

Note however, that Congress by legislative fiat can of course pass a law and declare
certain companies to be vested with public interest and therefore not allowed to form close
corporation. That is precisely why you have the enumerations in the second paragraph of
Section 95.

Not a close corporation

Take not that even if the AOI of a corporation provides the following:

(a) 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 20;

(b) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted under Title XII of the Revised Corporation Code;
and

(c) the corporation shall not list in any stock exchange or make any public
offering of its stocks of any class.

But if one of the stockholders is a CORPORATION who owns at least 2/3 of its voting
stock or voting rights it cannot be considered as a close corporation. The law expressly
states “corporation”, if it happens that at least 2/3 o the voting stocks is owned by another
juridical entity such as a partnership or a cooperative then it will still be considered as a
close corporation.

SEC. 96. Articles of Incorporation. – The articles of incorporation of a close corporation

may provide for: (a) A classification of shares or rights, the qualifications for owning or
holding the same, and restrictions on their transfers, subject to the provisions of the
following section; (b) A classification of directors into one (1) or more classes, each of
whom may be voted for and elected solely by a particular class of stock; and (c) 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, no meeting of stockholders need be called to elect directors: Provided, That the

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stockholders of the corporation shall be deemed to be directors for the purpose of
applying the provisions of this Code, unless the context clearly requires otherwise:
Provided, further, That the stockholders of the corporation shall be subject to all liabilities
of directors. 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.

Discussion:

The AOI of a close corporation may provide for the following:

1. A classification of shares or rights, the qualifications for owning or holding the same,
and restrictions on their transfers

Unlike an ordinary corporation where any prospective stockholder/investor can readily

purchase shares of stocks for as long as they can pay the subscription price, in a close
corporation it is not enough that a person has the financial capacity to pay for the
subscription price. The close corporation can provide additional qualification for owning
shares such as but not limited to limiting the acquisition of shares to family members
within a certain degree only or limiting the number of shares that each one of them could
purchase. The same is true with regards to the imposition of restrictions on the transfers
of such shares. Unlike in an ordinary stock corporation, the stockholder can always sell
his shareholdings without asking for consent or authority from the corporation of the
transfer of said shares of stock.

Note that the close corporation cannot simply impose any restrictions it wants when it
comes to the transfer of shares. This is because under Section 97 of the RCC it is
provided therein that the 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.

2. A classification of directors into 1 or more classes, each of whom may be voted for
and elected solely by a particular class of stock; and

In a close corporation, it is not only the shares of stock which can be divided into classes.
In a close corporation the directors themselves are subject to classifications. In an
ordinary stock corporation, all the directors are equal, that is they have the same set of
rights and obligations. Classification of directors in a close corporation is not the same as
those Directors in an ordinary stockholder who are holders of founders’ share. If you still
recall, the holders of founders’ share are given the exclusive right to vote and be voted
for in the election of directors for a limited period not to exceed five (5) years from the
date of incorporation. In founders share, the right attaches from a certain class of stock
(founders share) and not from the director. In close corporation, the right attaches from
the classification of director itself.

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If X corporation has three (3) classes of common shares denominated as Common A,
Common B and Common C. The close corporation may provide in its AOI that only
holders of Common A shares can vote for a certain class of director/s. Or only holders of
Common B can vote for this class of director/s. Or only holders of Common B and
Common C can vote for a particular class of director/s and so on and so forth.

3. Greater quorum or voting requirements in meetings of stockholders or directors than

those provided in the Revised Corporation Code.

Under the RCC, the quorum or voting requirements whether it is a stockholders or

directors’ meeting is a simple majority and that is 50%+1. Note that a corporation whether
a close corporation or an ordinary corporation may provide a different voting requirements
or quorum.

For ordinary stock corporations, the Bylaws may provide for a quorum that is other than
simple majority. For the meetings of directors in ordinary stock corporation. Its Bylaws or
AOI may provide for a greater majority instead of just a simple majority. However for close
corporations, it does not matter whether it be a stockholders or directors’ meeting, they
can impose a quorum that is greater than a simple majority if it is provided in their AOI.

Other peculiar characteristics of a close corporation

1. Stockholders directly managing the corporation

-In an ordinary stock corporation, the management and operation of the corporation is
lodged with the Board of Directors (BoD). The reason behind this is not only because the
law says so but for obvious practical reasons. An ordinary corporation is composed of
more than 20 stockholders. They could even number in the hundreds and thousands.
Can you just imagine if there are hundreds or thousands managing the corporation at the
same time? But because of the peculiar structure of a close corporation. That is
composing of not more than 20 stockholders, the stockholders themselves may run the
corporation themselves if so provided in its AOI. And because the stockholders are
themselves managing the corporation there is no need for the conduct of a stockholders
meeting for the purpose of electing the members of the BOD. This management
arrangement shall continue for as long as it is provided in the AOI that the stockholders
shall manage the close corporation.

2. Stockholders are deemed to be directors for purpose of applying the relevant provisions
of the RCC

Note that just because the stockholders are directly managing the close corporation it
does not necessarily follow that they also automatically become directors. Remember, a
stockholder will only become a director if he is named as such in the AOI or subsequently
elected as a director. But for purposes of applying certain provisions of the RCC they shall
be deemed as directors. Note that there are several corporate actions that require the
concurrence of an affirmative act from the BOD and the stockholders.

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 Like for example, the sale of all or substantially all of the properties and assets of the
corporation. Such corporate act must be approved by a majority of the BoD and
authorized by a vote of the the stockholders representing at least twothirds (2/3) of the
outstanding capital stock. In a close corporation where it is stated in the AOI that the
management of the corporation shall be vested with the stockholders directly, who will
then constitute as the BoD for purposes of complying with the majority votes requirement
when there is not a single elected director? That is why it is provided in Section 96 that
the stockholders themselves shall be deemed to be directors in such a situation.

There are other corporation acts which requires an affirmative act on the part of the BoD,
so in the case of a close corporation where it is stated in the AOI that the management of
the corporation shall be vested with the stockholders directly they shall be deemed as the
directors.

3. The stockholders shall be subject to all liabilities of directors.

This is just the logical effect if the stockholders themselves are managing the corporation.
Because the stockholders fill the shoes of the members of the BoD they are also subject
to all liabilities of a director.

4. All officers or employees or specified officers or employees shall be elected or

appointed by the stockholders.
Another peculiar characteristic of a close corporation is that the officers or employees of
the corporation shall be elected or appointed by the stockholders themselves if it is
provided in the bylaws. Remember, in an ordinary corporation, the corporate officers are
appointed by the BoD and not the stockholders directly.

SEC. 97. Validity of Restrictions on Transfer of Shares. – Restrictions on the right to

transfer shares must appear in the articles of incorporation, in the by-laws, as well as in
the certificate of stock; otherwise, the same shall not be binding on any purchaser 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. 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 their shares to any third person.
Discussion:
Restrictions on the transfer of shares is valid even if it is only provided in the AOI and not
in the by-laws as well as in the stock certificate for as long as the said shares are not
transferred to another. This is implied in Section 96 where it is stated therein that a close
corporation may AOI restrictions on the transfer of shares. However, in order for the said
restrictions to be valid and binding to any subsequent purchaser in good faith, the said

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restrictions must not only appear in the AOI, but it must also appear in the by-laws and in
the stock certificate itself.
Again, the restrictions on the transfer cannot not be more onerous or burdensome 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. If
the period provided expires and none of the existing stockholders exercise their option to
purchase, then the transferring stockholder may now sell his/her shares to any third
person.

SEC. 98. Effects of Issuance or Transfer of Stock in Breach of Qualifying Conditions. –

(a) If a stock of a close corporation is 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.
Discussion:
Subsection (a) of SEC 98 talks about conclusive presumption. If you already had your
subject evidence you will learn that there are two kinds of presumptions under rule 131
of the Rules of evidence. That is conclusive and disputable presumptions. Under Section
2 of rule 131 there are only two enumerated conclusive presumptions. Paragraph a of
Section 98 is one of those presumptions that is not found on your Rules of Evidence. It is
important to distinguish disputable presumption from conclusive presumption because
unlike a disputable presumption, a conclusive presumption cannot be rebutted by any
evidence to the contrary. In other words
In Subsection (a) of SEC 98 it is important to note that the eligibility requirements of
becoming as stockholder in a close corporation must not only be stated in the AOI but
more importantly it must be shown conspicuously on the stock certificate itself. Because
in such a situation if a stock of a close corporation is issued or transferred to any person
who is not eligible to be a holder thereof such person is conclusively presumed to have
notice of the fact of the ineligibility to be a stockholder. This is important because once it
is conclusively presumed that the transferee is ineligible he cannot later on raise the
defense that he/she is a purchase in good faith.
(b) 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.

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Discussion:
Subsection (b) is another conclusive presumption not found in your rules of evidence.
Again, to be considered as conclusive presumption, the fact that the AOI of a close
corporation states the number of persons, not exceeding twenty (20), who are entitled to
be stockholders of record, is also conspicuously stated on the stock certificate.
Subsection (b) talks of a situation where the transfer or issuance of stocks to another
would cause the corporation to go beyond the maximum allowed stockholders of record
in a close corporation (20 stockholders). In other words, the transferee or purchaser would
be become the 21st stockholder.
Subsection (b) is sort of calls for the application of the rule of caveat emptor which
requires the purchaser to be aware of the supposed title of the vendor and one who buys
without checking the vendor’s title takes all the risks and losses consequent to such
failure. I say it is sort of because it is not expressly stated in the law but merely implied.
The prospective purchaser/subscriber must exercise due diligence in ascertaining that in
purchasing or subscribing shares of a close corporation such transaction would not result
in exceeding the maximum allowed stockholders of record. Otherwise, if it is
conspicuously stated on the stock certificate that the number of persons who are entitled
to be stockholders of record shall not exceed (20) and the issuance or transfer of stock
to prospective purchaser/subscriber 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. Again, since it is conclusively presumed then that
person cannot claim as purchaser in good faith.
Example: If a close corporation already has 20 stockholders of record and A being one of
the 20 owns 10,000 shares. If later on A transfers half of that or 5,000 shares to B and if
B despite the fact that on the stock certificate it clearly states that the stockholders of
record shall not exceed (20) decides to purchase anyway, B cannot later on claim that he
is unaware that the said transaction has caused the close corporation to exceed beyond
20 stockholders. In such a situation B should have first conducted due diligence before
purchasing the said shares of stock. Perhaps ask from the corporation if such transaction
would cause the corporation to exceed the number of stockholders.

(c) 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.
Discussion:
Again subsection (c) is another type of conclusive presumption that is not found on your
Rules of Evidence. Under this subsection if the restriction on the transfer of stock is

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conspicuously shown on stock certificate and the transferee acquires the stock in violation
of such restriction then the transferee is conclusively presumed to have notice of the fact
that the stock was acquired in violation of the restriction.

For example if it is conspicuously shown on the stock certificate that any stockholder of
record has the preemptive right to buy any share offered for sale by any stockholder of
the company and despite this restriction the transferee still purchases the stocks covered
by the said stock certificate even though the stockholders of record has not exercised
their preemptive right yet, then the transferee is conclusively presumed to have acquired
the stocks in violation of such restriction.

Qualifying Conditions
must be conspicuously
shown in the stock
certificate
It should be emphasized that the qualifying conditions mentioned in subsections (a), (b),
and (c) must be conspicuously shown on the stock certificate itself in order for the
conclusive presumption to arise. This is because, these qualifying conditions are normally
found in the AOI of the close corporation. However, these conditions are not regular items
or information provided in the stock certificate. Generally, a stock certificate will only show
the name of the issuer; the name of the subscriber; the total number of stocks subscribed
and the par or issued value for each stock.

(d) 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: (1) the
person’s ineligibility to be a stockholder of the corporation; or (2) 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 (3) 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.
Discussion:
Subsection (d) talks about the effects or consequence of issuing or transferring a stock in
breach of the previously mentioned qualifying conditions. The consequence is that the
close corporation is given the option to accept or refuse to register the transfer in the
name of the transferee.
(e) 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

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the close corporation, or if the close corporation has amended its articles of incorporation
in accordance with this Title.
Subsection (d) talks about a situation where even if there is a breach of any of the
previously mentioned qualifying conditions, the close corporation loses the option to
refuse the registration of the transfer in the name of the transferee. The corporation loses
the option under subsection (d) if:
1. the transfer of stock has been consented to by all the stockholders of the close
corporation; or
2. The close corporation has amended its articles of incorporation.
Note that the amendment of the AOI of the close corporation is not just any amendment
but an amendment that has the effect of abrogating the qualifying condition affected. So
if the amendment merely pertains to the change of principal office of the close corporation
then definitely it has no bearing at all.
Another instance where the corporation loses the option is when the transfer is consented
to by all the stockholders.
The case of Florete Sr. et al vs. Florete Jr. et alii is an interesting one.
FACTS: The case involves a close corporation called Marsal and Co. Inc. (Marsal Inc.).
Paragraph 7 of the AOI of Marsal Inc provides therein that:
“xxx Any stockholder who desires to sell his share of stock in the company
must notify in writing the Board of Directors of the company of his intention to
sell. The Board of Directors upon receipt of such notice must immediately
notify all stockholders of record within five days upon receipt of the letter of
said stockholder. Any stockholder of record has the preemptive right to buy
any share offered for sale by any stockholder of the company on book value
base[d] on the balance sheet approved by the Board of Directors. The
aforementioned preemptive right must be exercised by any stockholder of the
company within ten (10) days upon his receipt of the written notice sent to him
by the Board of Directors of the offer to sell. Any sale or transfer in violation of
the above terms and conditions shall be null and void. The above terms and
conditions must be printed at the back of the stock certificate.”
The capital profile of Marsal Inc. was as follows:
Name Shareholdings

Marceline M. Florete, Sr. 7,569 shares

Rogelio M. Florete 3,489 shares

Ma. Elena F. Muyco 3,489 shares

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 Marcelino M. Florete, Jr. 3,489 shares

Teresita F. Menchavez 3,464 shares

On September 19, 1989, Teresita Florete Menchavez died. In 1992, Ephraim

Menchavez, Teresita's husband, filed a Petition for Issuance of Letters of
Administration over her estate. An Amended Opposition was filed by petitioner Rogelio
Florete, Sr. and Marsal, represented by petitioner as President thereof, with Atty. Raul
A. Muyco, the husband of respondent Ma. Elena, as counsel, on the ground of
Ephraim's incompetency. Ephraim, however, was later granted letters of
administration. In 1995, Ephraim, the special administrator, entered into a
Compromise Agreement and Deed of Assignment 7 with petitioner Rogelio ceding all
the shareholdings of Teresita in various corporations owned and controlled by the
Florete family, which included the 3,464 shares in Marsal corporation, as well as her
shares, interests and participation as heir in all the real and personal properties of her
parents to petitioner Rogelio. A Motion to Approve Compromise Agreement and Deed
of Assignment was filed by respondent Ephraim, through counsel Atty. Henry Villegas,
with the conformity of Atty. Raul Muyco, the oppositors' counsel. The motion was
granted and approved by the Probate Court in its Order dated February 14, 1995.

On October 3, 1990, Marcelino Florete, Sr., patriarch of the Florete family, died.
An intestate proceeding to settle his estate was filed by petitioner Rogelio, who was later
appointed as administrator of the estate. Petitioner Rogelio filed a project of partition
enumerating therein all the properties of the estate of Marcelino Sr. in accordance with
the inventory earlier filed with the intestate court. In the Order dated May 16, 1995, the
court approved the project of partition adjudicating to petitioner Rogelio one-half (1/2)
share of the whole estate; and to respondents Ma. Elena and Marcelino Jr., the undivided
one-fourth (1/4) share each of the enumerated properties. In the same Order, the Probate
Court had noted the sale of all the shares of the late Teresita which she inherited from
her deceased parents to petitioner Rogelio.
ISSUE: Whether or not the court approved Compromise Agreement and Deed of
Assignment assigning all the shareholdings of Teresita in various corporations owned by
the Florete family, as well as her shares, interests and participation as heir in all the real
and personal properties of her parents to petitioner Rogelio Florete Sr violated the
restriction on transfer of sale found in the AOI of Marsal Inc.
RULING: ||| While it would appear that petitioner estate of Teresita, through its
administrator Ephraim and petitioner Rogelio, did not comply with the procedure on
the sale of Teresita's Marsal shares as stated under paragraph 7 of the AOI, however,
it appeared in the records that respondents had nonetheless been informed of such
sale to which they had already given their consent thereto as shown by the following
circumstances:
First. Teresita died on September 19, 1989. Her husband Ephraim filed a
petition for letters of administration of her estate in 1992, and alleged the following:

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 xxx xxx xxx
6. That the herein petitioner, as one of the legal heirs of the deceased,
Teresita Florete Menchavez, had on several occasions, requested
decedent's brothers and sisters to make a settlement and liquidation of
the estate left by the said deceased Teresita Florete Menchavez and to
deliver it to all the legal heirs what is due to each and every one of them,
but this has not been done. x x x
Petitioner Rogelio filed an Opposition thereto which was later amended to
include MARSAL & CO., INC. as represented by its President, herein petitioner.
Notably, Atty. Raul A. Muyco was the oppositors' counsel and he is also the husband
of respondent Ma. Elena. Subsequently, a Compromise Agreement and Deed of
Assignment was entered into between petitioner estate through Ephraim and
petitioner Rogelio with respect to Teresita's shares of stocks in various
corporations which included the 3,464 shares in Marsal. A Motion to Approve
Compromise Agreement and Deed of Assignment was filed by administrator
Ephraim, through counsel, with the conformity of Atty. Muyco which was
approved by the probate court. It bears stressing that Atty. Muyco was not only
acting as counsel of petitioner Rogelio but also of Marsal. Thus, it would be
impossible for Atty. Muyco, who had the duty to protect Marsal's interest in the
intestate proceedings of Teresita's estate, not to have informed respondents of
such compromise agreement since they are the stockholders and Board of
Directors of Marsal who would be deprived of their preemptive right to the
Marsal shares. cEaSHC
Second. The sale of all of Teresita's shares which she inherited from her
deceased parents which were sold to petitioner Rogelio, and which included the 3,464
Marshal shares, had also been made known to respondents in the intestate
proceedings to settle the estate of Marcelino Florete, Sr., who died on October 3,
1990. Petitioner Rogelio was later appointed as the administrator of the estate. In the
Order dated May 16, 1995, the probate court stated, among others, that:
x x x The said deceased left the following heirs, namely:
Rogelio M. Florete, Ma. Elena Florete Muyco and Marcelino
Florete Jr.
Further the deceased had a daughter by the name of Teresita
Florete-Menchavez who predeceased him, having died on September
8, 1989 in the City of Iloilo leaving the following heirs;
xxx xxx xxx
On February 24, 1995, this Court has noted, as prayed by the
counsel for the petitioner, of the sale by Ephraim Menchavez, the special
administrator of the intestate estate of the late Teresita F. Menchavez,
of all the shares of the late Teresita F. Menchavez inherited from her
deceased parents Marcelino and Salome Florete, to Rogelio M. Florete.
xxx xxx xxx

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 On May 5, 1995, no other heirs aside from those mentioned
earlier have appeared in court to file their claim with regard to the
property owned by the late Marcelino Florete, Sr. This Court, therefore,
declared that Marcelino Florete, Sr. who died intestate in the City of Iloilo
on October 3, 1990 had left only the following heirs, namely: 1. Rogelio
M. Florete; 2. Ma. Elena Florete Muyco; 3. Marcelino Florete Jr.; 4.
Teresita Florete-Menchavez. The last named heir predeceased the
decedent and left the following children, namely: 1. Mary Ann Therese
Menchavez; 2. Christine Joy Menchavez; 3. Rosie Jill Menchavez; 4.
Diane Grace Menchavez; and 5. Ma. Rosario Menchavez.
All the shares of Teresita F. Menchavez, however, which she
inherited from her parents were sold by Ephraim Menchavez, the special
administrator of the estate of Teresita Menchavez, to petitioner Rogelio
M. Florete. The sale was duly approved by the intestate court.
As stated earlier, on April 27, 1995, the administrator, through
counsel, filed a Project of Partition enumerating therein all the properties
of the estate in accordance with the inventory filed before this Court on
March 3, 1995, which properties are enumerated as follows:
I. REAL PROPERTIES
xxx xxx xxx
II. PERSONAL PROPERTIES
xxx xxx xxx
This court hereby adjudicates the above-mentioned properties to
the following heirs:
1. Rogelio M. Florete, married to Imelda Florete, the
one half share of the whole estate;
2. Ma. Elena Florete Muyco, married to Raul
Muyco, the undivided 1/4 share of the above-enumerated
properties;
3. Marcelino M. Florete, Jr., married to Susan
Florete, the undivided 1/4 share of all the properties as
above enumerated.
This proceeding is hereby considered close and terminated.
Furnish the Register of Deeds of the province of Iloilo and the
province of Rizal with copies of this Order.
There was already substantial compliance with paragraph 7 of the AOI when
respondents obtained actual knowledge of the sale of Teresita's 3,464 Marsal shares
to petitioner Rogelio as early as 1995. In fact, respondents had already given their
consent and conformity to such sale by their inaction for 17 years despite knowledge
of the sale.”

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 The Supreme Court citing Section 99 of the old code (currently Section 98 of the
RCC) then held that even if the transfer of stocks is made in violation of the restrictions
enumerated under Section 99, such transfer is still valid if it has been consented to by
all the stockholders of the close corporation and the corporation cannot refuse to
register the transfer of stock in the name of the transferee. In the said case, the Supreme
Court found that the sale of Teresita's 3,464 Marsal shares had already been consented
to by respondents and may be registered in the name of petitioner Rogelio.

The Supreme Court also found that all the stockholders of Marsal Inc. had actual
knowledge of the sale of Teresita’s shares to petitioner Rogelio and consented to the
same because the parties were in fact the same ones who executed the court approved
Compromise Agreement and Deed of Assignment. Note that the Supreme Court also
applied the principle of estoppel by laches in ruling that the respondents had already
given their consent and conformity to the sale by their inaction for 17 years despite
knowledge of the sale. In other words, the consent of all the stockholders need not
necessarily be express or in writing. Their consent may be implied from their inaction to
assert their right.

(f) The term “transfer”, as used in this section, is not limited to a transfer for value.
Discussion:
The term transfer is not just limited to the assignment or sale of stock for value or in
exchange for money, property, etc. The term transfer could also refer to gratuitous
transfer of stocks such through a deed of donation or any other arrangement that does
not include anything of value as a consideration.

(g) 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.

Discussion:
Just because the corporation has the option to refuse the registration of the transfer in
the name of the transferee, does not mean that the transferee no longer has any rights.
Subsection (g) is very clear that the provisions of Section 98 shall not impair the right of
the transferee to rescind the transfer or recover the stock under any express or implied
warranty.

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Remedies of the transferee
1. Rescission
Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and
not merely its termination." Hence, rescission creates the obligation to return the object
of the contract. It can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore. To rescind is to declare a contract void at
its inception and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to abrogate it from the
beginning and restore the parties to their relative positions as if no contract has been
made.iii
If the transferee exercises his/her right to rescind the contract, he/she is obliged to return
to the transferor the shares covered and the latter in turn must return to the transferee the
amount received in exchange for the stocks.
2. Recover stock under any express or implied warrant.
For this remedy to apply, refer to the relevant provisions of the New Civil Code. There are
actually numerous Articles under the NCC that deals with express and implied warranty
so just read them again.

SEC. 99. Agreements by Stockholders. –

(a) Agreements duly signed and executed by and among all stockholders before the
formation and organization of a close corporation shall survive the incorporation and shall
continue to be valid and binding between such stockholders, if such be their intent, to the
extent that such agreements are consistent with the articles of incorporation, irrespective
of where the provisions of such agreements are contained, except those required by this
Title to be embodied in said articles of incorporation.
Discussion:
Subsection (a) is an example of the legal precept that procedural rights must yield to
substantive rights. If you already have your subject evidence, there is a provision in the
Rules of Evidence called Parol evidence rule, specifically on Sec 9 of rule 130:
“3. PAROL EVIDENCE RULE
Sec. 9. Evidence of written agreements. — When the terms of an agreement
have been reduced to writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written
agreement.

15
 However, a party may present evidence to modify, explain or add to the terms
of written agreement if he puts in issue in his pleading:
(a)An intrinsic ambiguity, mistake or imperfection in the written agreement;
(b)The failure of the written agreement to express the true intent and
agreement of the parties thereto;
(c)The validity of the written agreement; or
(d)The existence of other terms agreed to by the parties or their
successors in interest after the execution of the written agreement.
The term "agreement" includes wills.”
If you look at subsection (d) of Section 9 rule 130, it would appear that subsection
(a) of Section 99 of the RCC is contrary or inconsistent with subsection (d) of Section 9
rule 130. Note that subsection (a) of Section 99 of the RCC apparently calls for the
application of the parol evidence rule.
Regardless of whether subsection (a) of Section 99 of the RCC calls for the
application of the parol evidence rule, one thing is clear that procedural rules cannot be
used to frustrate substantial rights. The Supreme Court has time and again upheld the
theory that the rules of procedure are designed to secure and not to override substantial
justice. These are mere tools to expedite the decision or resolution of cases, hence, their
strict and rigid application which would result in technicalities that tend to frustrate rather
than promote substantial justice must be avoided.iv
Under subsection (a) if all of stockholders have signed and executed written
agreements prior to the formation and organization of the close corporation, such written
agreement shall survive the incorporation and shall continue to be valid and binding
between such stockholders, if such be their intent, to the extent that such agreements are
consistent with the articles of incorporation. Note that the prior agreements by all of the
stockholders must not be inconsistent with any of the provisions of the AOI of the close
corporation. The prior agreement may modify, explain or add to the terms of the AOI but
it cannot supersede, abrogate or otherwise be inconsistent with the provisions in the AOI.
(b) A written agreement signed by two (2) or more stockholders may provide that in
exercising any voting right, the shares held by them shall be voted as provided as agreed,
or in accordance with a procedure agreed upon by them.
Discussion:
This is similar voting trust agreement under Section 58 of the RCC. Subsection (b) simply
means that if two or more stockholders come to a written agreement among themselves
that in the exercise of the voting right of the shares held by them it shall be exercised in
accordance with the procedure and manner provided by them in the said written

16
agreement. If it is agreed that they shall unanimously vote as one in all matters requiring
their votes then such should be followed and binding upon them all.

(c) No provision in a written agreement signed by the stockholders, relating to any phase
of corporate affairs, shall be invalidated between the parties on the ground that its effect
is to make them partners among themselves.
Discussion:
Subsection (c) emphasizes that the whatever written agreement signed by 2 or more
stockholders but not all the stockholders is valid provided of course it does not violate any
of the provisions of the RCC or any other laws.
Those stockholders who are not party to such an agreement and are therefore envious
or perhaps wary or suspicious of their motives, then such stockholders (non-party) cannot
invalidate the agreement signed by the others on the ground that it is in effect making
them partners among themselves.
(d) A written agreement among some or all of the stockholders in a close corporation shall
not be invalidated on the ground that it relates to the conduct of the business and affairs
of the corporation as to restrict or interfere with the discretion or powers of the board of
directors: Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed on directors by this Code.
Discussion:
Subsection (d) talks of a situation where some or all the stockholders have come to a
written agreement granting one or two or all of them powers which relates to the conduct
of the business and affairs of the corporation or in other words powers that are normally
wielded by the BoD. In such a situation the said agreement cannot be invalidated on the
ground that it restricts or interferes with the discretion or powers of the board of directors.
But the consequence is that the stockholders who are parties to the agreement shall
likewise be subjected to the same liabilities for managerial acts imposed on Directors
under the RCC.

(e) Stockholders actively engaged in the management or operation of the business and
affairs of a close corporation shall be held to strict fiduciary duties to each other and
among themselves. The stockholders shall be personally liable for corporate torts unless
the corporation has obtained reasonably adequate liability insurance
Discussion:
In an ordinary stock corporation, the BoD is in charge with the management or operation
of the business and affairs of the corporation. In a close corporation, the management or
operation of the close corporation is handed to some, if not all of the stockholders.

17
Logically and for obvious reasons, those stockholders who are actively engaged in the
management or operation of the business and affairs of the close corporation are
expected to act with strict fiduciary duties to each other and among themselves.
The stockholders holding fiduciary duties owes a legal duty to the corporation, and strict
care must be taken to ensure that no conflict of interest arises between the fiduciary and
the corporation. The fiduciary nature of the relationship between the managing
stockholders and the close corporation imposes upon them the duty among others, to
account for the money or property collected or received on behalf of the corporation.
Regular stock corporation can invoke the doctrine of separate juridical personality in order
to avoid liability. If you recall, this doctrine provides that a corporation has a legal
personality separate and distinct from that of people comprising it. By virtue of that
doctrine, stockholders of a corporation enjoy the principle of limited liability: the corporate
debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a
corporation does not make one's property the property also of the corporation.

Note that unlike an ordinary stock corporation, the stockholders of the close corporation
are liable for torts. In other words, they can be directly sued for tortious acts committed
by the corporation through its agents. Note that the liability is limited to torts and not to
any other civil liabilities. Because in the case of Bustos vs. Millians Shoe Inc.v, although
the SC ruled that Milllans Shoe Inc cannot be considered as a close corporation, the SC
nevertheless held and quoted hereunder that:

“Section 97 of the Corporation Code (currently Section 96 of the RCC)

only specifies that "the stockholders of the corporation shall be subject
to all liabilities of directors." Nowhere in that provision do we find any
inference that stockholders of a close corporation are automatically
liable for corporate debts and obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation

Code explicitly provides for personal liability of stockholders of close
corporation, viz:

Sec. 100. Agreements by stockholders. -

xxxx

5. To the extent that the stockholders are actively engaged in the

management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall
be personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance. (Emphasis
supplied)”

18
SEC. 100. When a Board Meeting is Unnecessary or Improperly Held. – Unless the by-
laws provide otherwise, any action taken by the directors of a close corporation without a
meeting called properly and with due notice shall nevertheless be deemed valid if:
(a) Before or after such action is taken, a written consent thereto is signed by all the
directors; or
(b) All the stockholders have actual or implied knowledge of the action and make no
prompt objection in writing; or
(c) The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; 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.
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.
Discussion:
As a rule, a corporation can only perform certain acts after it has been authorized to do
so by the BoD. This authority will only come out after a BoD had its meeting and a written
resolution is passed. This is not the case for close corporation however, because the first
paragraph of section 100 talks of a situation where a corporate act is done without a prior
meeting authorizing such act.
General Rule: Any action taken by the directors of a close corporation without a meeting
shall nevertheless be deemed valid if it falls any of the following:
a. Consented to in writing by all of the directors; or
b. All of the stockholders have actual or implied knowledge but did not make any prompt
objection in writing; or
c. the infirmarian action is customary and it is with the express or implied a acquiescence
of all the stockholders
d. All the directors have actual or implied knowledge but did not make any prompt
objection writing.

19
Exception: Unless it is expressly stated in the by-laws that an unnecessary or improperly
held board meeting is invalid
The last paragraph of Section 100 deals with a situation where there is a meeting
conducted but it was improperly called, or no proper notice was given to some
stockholders/directors thereby depriving them of the opportunity to attend a scheduled
meeting. In such a situation any action within the corporate powers taken at the 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.

SEC. 101. Preemptive Right in Close Corporations. – The preemptive 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.
Discussion:
Preemptive right refers to the right granted to existing stockholders of record to have the
first option to subscribe to any future issuance or purchase any disposition of shares of a
corporation in proportion to their respective shareholdings in the corporation.
Generally this right extends to all stocks including reissuance of treasury shares. Unless
of course this right is limited by the AOI.

SEC. 102. Amendment of Articles of Incorporation. – 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.
Discussion:
Section 102 talks about amendment to the AOI of a close corporation which seeks to
delete or remove any provision required under title XII or to reduce a quorum or voting
requirements stated in the AOI. In such a situation in order for the amendment, deletion
or removal of the said provision to be valid it should garner the affirmative vote of at least
two-thirds (2/3) of the outstanding capital stock (both voting and non-voting stocks) or if
a greater proportion of shares is provided in the AOI then quorum requirement under the
AOI should be followed.

20
These required provisions are those provisions found under Title XII of the RCC which
basically distinguishes a close corporation from any other corporations. Example are
those found under Section 95 and Section 96.
Note that Section 102 is silent as to the required votes for amendments that do not seek
to delete or remove any provision required under Title XII or which reduces the quorum
requirement stated in the AoI. Like amendments to the principal office of the corporation
or change the corporate name. The answer can be found on the last paragraph of Section
95 which states that the provisions of this Title shall primarily govern close corporations:
Provided, That other Titles in this Code shall apply suppletorily, except as otherwise
provided under this Title. In other words, the provisions pertaining to the amendments to
the AOI found in other provisions of the RCC shall be applied suppletorily. Specifically
Section 15 of the RCC.

SEC. 103. Deadlocks. – Notwithstanding any contrary provision in the close corporation’s
articles of incorporation, bylaws, or stockholders’ agreement, if the directors or
stockholders are so divided on the management of the corporation’s business and affairs
that the votes required for a corporate action cannot be obtained, with the consequence
that the business and affairs of the corporation can no longer be conducted to the
advantage of the stockholders generally, the Commission, upon written petition by any
stockholder, shall have the power to arbitrate the dispute. In the exercise of such power,
the Commission shall have authority to make appropriate orders, such as: (a) cancelling
or altering any provision contained in the articles of incorporation, bylaws, or any
stockholder’s agreement; (b) cancelling, altering or enjoining a resolution or act of the
corporation or its board of directors, stockholders, or officers; (c) directing or prohibiting
any act of the corporation or its board of directors, stockholders, officers, or other persons
party to the action; (d) requiring 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; (e) appointing a provisional director;
(f) dissolving the corporation; or (g) granting such other relief as the circumstances may
warrant.
A provisional director shall be an impartial person who is neither a stockholder nor a
creditor of the corporation or any of its subsidiaries or affiliates, and whose further
qualifications, if any, may be determined by the Commission. A provisional director is not
a receiver of the corporation and does not have the title and powers of a custodian or
receiver. A provisional director shall have all the rights and powers of a duly elected
director, including the right to be notified of and to vote at meetings of directors until
removed by order of the Commission or by all the stockholders. The compensation of the
provisional director shall be determined by agreement between such director and the
corporation, subject to approval of the Commission, which may fix the compensation

21
absent an agreement or in the event of disagreement between the provisional director
and the corporation.
Discussion:
Deadlock is a situation wherein the directors or stockholders are so divided on the
management of the corporation’s business and affairs that the votes required for a
corporate action cannot be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of the stockholders
generally, the SEC, upon written petition by any stockholder, shall have the power to
arbitrate the dispute.
In case of a deadlock, the SEC can enter and settle dispute. In arbitrating the dispute
between the stockholders, the SEC is authorized to through an Order issued, any of the
following:
(a) cancelling or altering any provision contained in the articles of incorporation, bylaws,
or any stockholder’s agreement;
(b) cancelling, altering or enjoining a resolution or act of the corporation or its board of
directors, stockholders, or officers;
(c) directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action;
(d) requiring 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;
(e) appointing a provisional director;
(f) dissolving the corporation; or (g) granting such other relief as the circumstances may
warrant.

Among the powers of the SEC in case of deadlock is the appointment of a provisional
director. The provisional director is someone that is neither a stockholder nor does he/she
have any interest in the close corporation. A provisional director also has the same rights
as that of elected directors.
The law is very clear that a provisional director is not a receiver. Obviously, since a
provisional director is still a director, he/she does not have the title and powers of a
custodian or receiver

SEC. 104. Withdrawal of Stockholder or Dissolution of Corporation. – In addition and

without prejudice to other rights and remedies available under this Title, any stockholder
of a close corporation may, for any reason, compel the corporation to purchase shares
22
held at fair value, which shall not be less than the par or issued value, when the
corporation has sufficient assets in its books to cover its debts and liabilities exclusive of
capital stock: Provided, That any stockholder of a close corporation may, by written
petition to the Commission, compel the dissolution of such corporation whenever any of
acts of the directors, officers, or those in control of the corporation is illegal, fraudulent,
dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or
whenever corporate assets are being misapplied or wasted.
Discussion:
Withdrawal of a stockholder of a close corporation is similar to the exercise of appraisal
right of a dissenting stockholder in an ordinary stock corporation. However, unlike a
dissenting stockholder the withdrawal of a stockholder in a close corporation could be
done for any reason.
The withdrawing stockholder can compel the corporation to purchase the shares he/she
owns at fair value, which cannot be less than the par or issued value. Unlike in an ordinary
corporation, the withdrawing stockholder of a close corporation can compel the payment
even if the corporation has no unrestricted retained earnings. It is enough that the
corporation has sufficient assets in its books to cover its debts and liabilities exclusive of
capital stock or in other words a positive owner’s equity (excluding capital stock).
Dissolution of a close corporation
Generally, a corporation may be dissolved either voluntary or involuntarily. However in
the case of a close corporation, another method of dissolving a close corporation is
through a written petition filed before the SEC by any stockholder on the ground that the
acts of the directors, officers, or those in control of the corporation is illegal, fraudulent,
dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or
whenever corporate assets are being misapplied or wasted.
-END-

IMPORTANT CASES:
1. G.R. No. L-72119
2. G.R. No. 223321
3. G.R. No. 185024

i Legaspi vs. Civil Service

ii Florete, Sr. v. Florete, Jr.,
iii Fong vs. Duenas, G.R. No. 185592, June 15, 2015

23
iv G.R. No. 208224, November 22, 2017
v G.R. No. 185024, April 4, 2017

24