CLOSE CORPORATION

1. What is a Close Corporation?

Close Corporation 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 any stock exchange or make any public
offering of any of its stock of any class. (Section 96, Corporation Code)

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 governed by Title XII of the Code,
but by the general provisions governing ordinary corporation.

2. What if 2/3 of the outstanding capital stock is owned by another corporation which is also a close
corporation, will it be a close corporation?
No, it will only be a close corporation if 2/3 of the voting stocks of a close corporation is also owned by a close
corporation. It must be voting stocks. BASIS: 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. (Section 96, Corporation
Code)
3. Kind of corporations that cannot be a close corporation

Mining or oil companies

Stock exchange
Banks and insurance companies
Public utilities
Educational institutions
Corporations vested with public interest

4. Classification of Shares
The close corporation may classify its shares into different classes to be held of record only by specified persons.
(Sec.97, par. 1) EXAMPLE: Class A - to be held by the incorporators; Class B - to be held by their relatives within
the third civil degree of consanguinity or affinity; Class C - to be held by their close business associates.
5. Classification of Directors
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. (Sec.97, par. 2)
EXAMPLE: AOI has 1,000 Class A shares, 500 Class B shares; 200 Class C shares. The articles of incorporation
may provide that each class shall have a representation in the Board of Directors regardless of the number of
shares within each class. If 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 if there is no provision for a classification of directors, then Class A stockholders, by
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.
6. Quorum and Voting Requirement in a Close Corporation vs. in an Ordinary Stock Corporation
In a close corporation, the articles of incorporation may provide for a greater quorum and voting requirement in
meetings of both stockholders or directors to increase the veto power of minority stockholders, unlike in a stock
corporation wherein only directors meetings may provide for greater quorum requirement and in stockholders
meeting which may not be altered or increased, as provided for in section 25, following the doctrine of limited
capacity.
7. May the AOI of a Close Corporation provide who will manage the corporation?
Yes. 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.
8. Election of Officers in a Close Corporation vs. in an Ordinary Stock Corporation
In a close corporation, it allows the articles of incorporation to provide that all officers or employees shall be
elected or appointed by the stockholders instead of the board of directors. In ordinary close corporations, the
officers are elected or appointed by the board.
9. Restrictions on Transfer of Shares in Ordinary Stock Corporation vs, in a Close Corporation
In ordinary stock corporations, the restrictions must appear in the articles of incorporation as well as the certificate
of stocks. In a close corporation, the restrictions must appear in the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not be binding on any purchaser thereof in good faith. (Sec.98)
10. What if the stockholders do not want to exercise their right or option to purchase may it be sold to any
person?
Yes, to any third person. The Corporation Code provides that: 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 (Section 98, last sentence)
11. What if there are already 20 stockholders and they want to add 2 more, may it compel?
In ordinary stock corporations, they may compel by mandamus. In close corporations, may not be compelled to
admit because it breaches the qualifying conditions.
12. Since they cannot be compelled, may they admit?
Yes, provided all the stockholders consented or instead of consenting they decide to amend their articles of
incorporation.
They will have to amend the articles of incorporation to accommodate other purchasers of share. It will cease to
be a close corporation if it amends and becomes in excess of 20.
13. What if other stockholders object to register? What will be the SHs remedy or recourse?

SH is not, however, left without any recourse as he may compel the close corporation to purchase his shares at
their fair value for any reason subject only to the condition laid down in Sec. 105 of the Code.
14. How about the transferee? What will be his remedy?
The transferee may rescind the transaction or to recover from the transferor under any applicable warrantly,
express or implied.
15. IMPORTANT provision
Sec. 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the formation and organization of a close corporation,
signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that such agreements are not
inconsistent 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.
2. An agreement between two or more stockholders, if in writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to any phase of the corporate affairs,
shall be invalidated as between the parties on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close corporation shall not be invalidated on the
ground that it so 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 by this Code on directors.
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.

16. When may the directors in a close corporation validly act even without a meeting?
Sec. 101. When board meeting is unnecessary or improperly held. - 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.

5. 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.
17. PRE-EMPTIVE RIGHTS
Section 102. Pre-emptive right in close corporations

Section 39. Power to deny pre-emptive right

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.

All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend
to shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the
approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment
of a previously contracted debt.

In a close corporation the pre-emptive right is broadened to include all issues without exception unless
denied or limited by the articles of incorporation

Section 39 is the governing provision concerning rights of the stockholder in an ordinary stock
corporation and it may be denied. If it is not denied a stockholder can exercise his pre-emptive rights for
all issues of shares whether money, property or previously incurred indebtedness.

18. What happens in case of DEADLOCK? What will be the remedy?

Section 104 of the Corporation Code provides for a remedy.
Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of
a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's
business and affairs that the votes required for any 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 Securities and Exchange Commission, upon written petition by any stockholder, shall have
the power to arbitrate the dispute.
19. Section 104 of the Corporation Code gives the SEC a very wide discretion in respect to management of a
close corporation in the event of a DEADLOCK. It may:
1. Cancel or alter any provision in the AOI, by-laws or any stockholders agreement;
2. Cancel, alter or enjoin any resolution or other act of the corporation or its BOD, stockholders or officers;
3. Prohibit any act of the corporation or its BOD, stockholders or officers or other persons party to the action;
4. Requiring the purchase of the par value of the shares of any stockholders, either by the corporation regardless of
availability of unrestricted retained earnings, or by the other shareholders;
5. Appointment of a provisional director; - the second paragraph of Sec. 104 will govern. The provisional director may
break the deadlock by casting the deciding vote.

6. Dissolving the corporation; or

7. Other relief as the circumstances may warrant.

20. Section 105 - Dishonesty is a ground for dissolution of a close corporation. Even one stockholder may petition
for dissolution.
CLOSE CORPORATION
ORDINARY STOCK CORPORATION
1. The number of stockholders cannot exceed 20
No limitation as to number of shareholder
2. To the extent that all stockholders can be deemed Maximum number of directors is 15
directors, the number of directors can effectively be
more than 15
3. Shares of stock are subject to specified restrictions
Generally no restriction on transfer of shares
4. Shares of stock are prohibited from being listed in the No prohibition
stock exchange or offered for sale to the public
5. Stockholders may take an active part in corporate Management is lodged in the Board of Directors
management by vesting management to them rather
than a Board of Director
6. Those active in management are personally liable for Directors are liable for torts only if they have acted
corporate torts unless the corporation has obtained an negligently or fraudulently
adequate liability insurance
7. Directors can validly act even without a meeting
Directors must, as a rule, act as a body at a duly
constituted meeting
8. Agreements between stockholders regarding the Not valid and binding since stockholders agreement
operations of the business can validly be made
cannot limit the discretion of the Board to manage
corporate affairs
9. To the extent that directors may be classified into one Ordinarily, no such classification and no restrictions on
or more classes and to be voted solely by a particular cumulative voting
class of stock, cumulative voting may, in effect, be
restricted
10. The articles of incorporation may provide that all Officers are elected by the Board of Directors
officers shall be elected or appointed by the
stockholders
11. It may provide for greater quorum and voting Although the articles of incorporation or by-laws may
requirements in meetings of stockholders and provide for greater quorum and voting requirements in
directors
directors meeting under section 25, those for
stockholders meeting cannot generally be altered
12. Restriction on transfer of shares should be indicated Valid and binding if indicated in the articles of
in the articles of incorporation, by-laws and stock incorporation and stock certificates
certificates
13. Pre-emptive rights of stockholders is broader as it Pre-emptive rights may be denied as provided for in
include all issues without exception
section 39
14. A stockholder may withdraw and compel the Unless he sells his shares, a stockholder cannot get back
corporation to purchase his shares for any reason his investment nor compel the corporation to buy his
with the limitation only that the corporation has shares except in the exercise of his appraisal right
sufficient assets to cover its liabilities exclusive of
capital stock
15. The proper forum may interfere in the management Courts cannot interfere I the business judgment of the
directors/stockholders BUSINESS JUDGMENT RULE.

of a close corporation in case of deadlocks under

Section 104, even of the directors/stockholders are
acting in good faith
16. Any stockholder may petition the SEC for corporate Dissolution may be had only on the grounds provided by
dissolution on grounds among others, provides for in the provisions of the Code on dissolution and P.D. 902-A,
section 105
as amended
What is BUSINESS JUDGMENT RULE? - questions of policy and management are left solely to the honest decision
of the board of directors and the courts are without authority to substitute its judgment as against the former. The
directors are business managers and as long as they act in good faith, its actuations are not subject to judicial
review.

CASES
Manuel Dulay Enterprises vs. CA
-

Manuel Dulay here is the President, General Manager and Treasurer. He cannot act both as president and
treasurer at the same time.

In the instant case, petitioner corporation is classified as a close corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not necessary to bind the
corporation for the action of its president. At any rate, corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed ratified by the absent director unless the latter
promptly files his written objection with the secretary of the corporation after having knowledge of the
meeting which, in this case, petitioner Virgilio Dulay failed to do.

It cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had
absolute control over the business and affairs of the corporation.

Petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private
respondents by Manuel Dulay is valid and binding.

Naguiat vs. NLRC

-

Section 100 par. 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.

Antolin T. Naguiat was the vice president of the CFTI. Although he carried the title of "general manager" as
well, it had not been shown that he had acted in such capacity. Furthermore, no evidence on the extent of
his participation in the management or operation of the business was proferred. In this light, he cannot be
held solidarily liable for the obligations of CFTI and Sergio Naguiat to the private respondents
EUNICE R. TABINAS
Arellano University School of Law