TITLE XII – CLOSE CORPORATIONS
Section 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 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 issued stock of all classes shall be subject to one (1) or more specified restrictions on transfer permitted under 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 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 suppletority, except as otherwise provided under this Title.
Section 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) 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 the board of directors. So long as the provision continues in effect, no meeting of stockholders need to be called to elect directors: Provided, That the 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.
Section 97. Validity of Restrictions on Transfer of Shares. – Restrictions on the right to transfer shares must appear in the articles of incorporation, in the bylaws, 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 third person.
Section 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.
(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 such fact.
(c) If a stock certificate of a close corporation of a close corporation conspicuously shows restriction on transfer of 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.
(d) Whenever a person to whom stock of 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; (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, the corporation may, at its option, 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 subsection (a), (b), or (c), has been consented by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title.
(f) The term “transfer”, as used in this section is not limited to a transfer for value.
(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.
Section 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 arrangements 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.
(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 or as agreed, or in accordance with a procedure agreed upon by them.
(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.
(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 of 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.
(e) Stockholders actively engaged in the management or operation of the business and affairs of the 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.
Section 100. When a Board Meeting is Unnecessary or Improperly Held. – Unless the bylaws 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 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.
Section 101. Preemptive Right in Close Corporation. – 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.
Section 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 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.
Article 103. Deadlocks. – Notwithstanding any contrary provision in the close corporation’s articles of incorporation, bylaws, or stockholder’s 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 shall have the 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 retained earnings in its books; (e) appointing 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 absent and agreement or in the event of disagreement between the provisional director and the corporation.
Section 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 held at fair value, which shall not be less than the par or stated value, when the corporation has sufficient assets in the 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 dissolution of such corporation whenever any acts of the directors, officers, or those in control of the corporation are illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.
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