Close Corporation

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TITLE XII

CLOSE
CORPORATION
Section 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 of the corporation’s issued stock of all


classes, exclusive of treasury shares, shall be
held of record by not more than a specified
number of persons not exceeding twenty (20).
2. All of the issued stock of all classes shall
be subject to one or more specified
restrictions on transfer permitted by this
Title.

3. The corporation shall not list in any stock


exchange or make any public offering of any
of its stock of any class.
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.
Section 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 which 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.
Section 98: Validity of Restrictions
on Transfer of Shares

Restrictions on the right to transfer


shares must appear in the articles of
incorporation and in the by-laws as well
as in the certificate of stocks;
otherwise, the same shall not be
binding on any purchaser thereof in
good faith.
Section 99: Issuance or
Transfer of Stock of a Close
Corporation in Breach of
Qualifying Conditions
Reasons of Restrictions on
Shares of Stock:
In a close corporation, the identity of
the other stockholders is important to each;
the incorporators have confidence in one
another which they may not have in
outsider. Furthermore, the incorporators
may feel that the success of enterprise
depends upon the retention of the
personnel who formed it or the may be a
manufacturing under secret processes that
they do not want outsiders to learn.
In the family corporation it is often the
desire of the father to pass the corporation
to his son without interference from others
outside the family. Any of these factors may
induce the incorporators to attempt to
restrict the transfer the stock.
Section 100: Agreements by
Stockholders
Agreements by and among the 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.
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 shall be invalidated as between
the parties on he 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 on the BOD.

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 strict fiduciary duties of
each other and among themselves.
Section 101: When board meeting is
unnecessary or improperly held.
Unless provided, any action by the directors
of a close corporation without a meeting
shall nevertheless valid if:
1. Before or after such action is taken,
written consent thereto is signed by all the
directors.
2. All the stockholders have actual or
implied knowledge of the action and make
no prompt objection thereto in writing.
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders.

4. All the directors have express or implied


knowledge of the action in question and
none of them prompt objection thereto in
writing.
Section 102: Pre-emptive right in close
corporation

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 or for
property or personal services, or in payment
of corporate debts, unless the articles of
incorporation provide otherwise.
Section 103: Amendment of
articles of incorporation
Any amendment to the articles of
incorporations which seeks to delete or
remove any provision required by this Title to
be contained in the articles of incorporation or
to reduce a quorum or voting requirement
stated in said articles of incorporation shall not
be valid or effective unless approved by the
affirmative vote of at least two-thirds of the
outstanding capital stock.
Section 104: Deadlocks

Deadlock- signifies a standstill in the


management of the corporate affairs
resulting from the evenly divided action of
directors or stockholders in a close
corporation.
The SEC shall have authority to make
such order as it deems appropriate,
including an order:
1. Canceling or altering any provision contained in
the articles of incorporation, by-laws, or any
stockholders’ agreement.
2. Canceling altering or enjoining any resolution or
other act of the corporation or its BOD,
stockholders or officers.
3. Directing or prohibiting any act of the
corporation or its BOD, stockholders, officers, or
other persons party to the action.
4. 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.
5. Appointing a provisional director.
6. Dissolving the corporation.
7. Granting such other relief as the
circumstances may warrant.
Sec. 105. Withdrawal of stockholder or
dissolution of corporation
– In addition without prejudice to the other
rights and remedies available to a
stockholder under this Title, any
stockholder of a close corporation may, for
any reason compel the said corporation to
purchase his shares at their fair value, which
shall not be less than their par or issued
value, when the corporation has sufficient
assets in its book to cover its debts and
liabilities exclusive of capital stocks:
Provided, That any stockholder of a close
corporation may, by written to the Securities
and Exchange Commission, compel the
dissolution of such corporation whenever
any of the acts of the directors, officers or
those in control of the corporation is illegal,
or fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or whenever corporate assets
are being misapplied or wasted.
SPECIAL CORPORATIONS
Chapter 1
EDUCATIONAL
CORPORATIONS
SEC. 106. Incorporation
– Educational corporations shall be
governed by special laws and by the general
provision of this code.
Sec. 107. Pre- requisites to incorporation
- Except upon favorable recommendation
of the Ministry of Education and Culture,
the Securities and Exchange Commission
shall not accept or approve the articles of
incorporation and by-laws of any
educational institution.
Sec.108. Board of trustees
- Trustees of educational institutions
organized as non-stock corporations shall not
be less than five (5) nor more than fifteen
(15): Provided, however, that the number of
trustees shall be multiples of five.
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of
trustees of incorporated schools, colleges, or
other institutions of learning shall, as soon
as organized, so classify themselves that the
term of office of one-fifth of their number
shall expire every year. Trustees there after
elected to fill vacancies, occurring before the
expiration of a particular term, shall hold
office only for the unexpired period. Trustees
elected thereafter to fill vacancies caused by
expiration of term shall hold office for 5
years. A majority of the trustees shall
constitute a quorum for the transaction of
business. The powers and authority of
trustees shall be defined in the by-laws.
For institutions organized as stock
corporation, the number and term of
directors shall be governed by the provisions
on stock corporations.
Chapter 2
RELIGIOUS
CORPORATIONS
Sec.109. Classes of religious corporations
- Religious corporations may be incorporated
by one or more persons. Such corporations
maybe classified into corporations sole and
religious societies.
Religious corporations shall be governed
by this Chapter and by the general
provisions on non-stock corporations insofar
as they may be applicable.
Sec.110.Corporation Sole
- For the purpose of administering and
managing, as trustees, the affairs, property
and temporalities of any religious
denomination, sect or church, a corporation
sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi or other
presiding elder of any religious
denomination, sect or church.
Sec. 111. Articles of Incorporation
- In order to become a corporation sole, the
chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious
denomination, sect or church must file with
the Securities and Exchange Commission
articles of incorporation
Sec. 112. Submission of the articles of
incorporation
- The articles of incorporation must be
verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop,
minister, priest, rabbi or presiding elder, as
the case may be, and accompanied by a copy
of the com-mis-sion, certificate of election or
letter of appointment of such chief
archbishop, priest, bishop, minister, rabbi
or presiding elder, duly certified to be
correct by any notary public.
From and after the filing with the
Securities and Exchange Commission of the
said articles of incorporation, verified by the
affidavit or affirmation, and accompanied by
the documents mentioned in the presiding
paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder as
the case may be,
shall become a corporation sole, and all
temporalities, estate and properties of the
religious denomination, sect or church
theretofore administered or managed by
him as a corporation sole, for the use
purpose, behalf and sole benefit of his
religious denomination, sect or church,
including hospitals, schools, colleges, orphan
asylums parsonages and cemeteries thereof.
Sec. 113. Acquisition and alienation of
property
- Any corporation sole may purchase and
hold real estate and personal property for its
church, charitable, benevolent or
educational purposes, and may receive
bequests or gifts of such purposes. Such
corporation may mortgage or sell real
property held by it upon obtaining an order
for that purpose from the Court of First
Instance of the
province where the property is situated; but
before the order is issued proof must be
made to the satisfaction of the court that
notice of the application for leave to
mortgage or sell has been given by
publication or otherwise in such manner and
for such time as said court may have
directed, and that it is to the interest of the
corporation that leave to mortgage or sell
should be granted.
The application for leave to mortgage or sell
must be made by petition, duly verified, by
the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by
any member of the religious denomination,
sect or church represented by the
corporation.
Sec. 114. Filling of vacancies
- The successors in office of any chief
archbishop, bishop, priest, minister, rabbi, or
presiding elder in a corporation sole shall
become the corporation sole on their accession
to office; and shall be permitted to transact
business as such on the filing with the Securities
and Commission (SEC) of a copy of their
commission, certificates of election, or letters of
appointment duly certified by any notary public.
Sec. 115. Dissolution
- A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the
Securities and Commission (SEC) a verified
declaration of dissolution.
The declaration of dissolution shall set forth:

1. The name of the corporation


2. The reason for dissolution and winding up
3. The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church
4. The names and addresses of the persons who
are to supervise the winding up of the affairs of
the corporation
Sec. 116. Religious societies
- Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect, or church, unless
forbidden by the constitution, rules, regulations,
or discipline of the religious denomination, sect
or church of which it is a part, or by competent
authority, may upon written consent and/or by
an affirmative vote at a meeting called for the
purpose of two-thirds (2/3) of its membership,
properties and estate by filing with the Securities
and Exchange Commission.
Articles of incorporation verified by the
affidavit of the presiding elder, secretary, or
clerk or other member of such religious
society or religious order, or diocese, synod or
district organization of the religious
denomination, sect or church, setting forth the
following:

1. That the religious society or religious order,


or diocese, synod, or district organization is a
religious organization of some religious
denomination, sect or church
2. That two-thirds (2/3) of its membership
have given their written consent or have
voted to incorporate at a duly convened
meeting of the body
3. Desiring to incorporate is not forbidden by
competent authority or by the constitution,
rules, regulations or discipline
4. Desires to incorporate for the
administration of its affairs, properties and
estate
5. The place where the principal office of the
corporation is to be established and located,
which place must be within the Philippines
6. The names, nationalities, and residences
of the trustees elected, the board of trustees
to be not less than five (5) nor more than
fifteen (15)
DISSOLUTION
Concept of dissolution
- The dissolution of a corporation means the
termination of its existence by surrender,
cancellation or other extinguishment of its
charter so that not only are the corporations
affairs wound up and its assets distributed
among creditors and stockholders, but the
corporation also ceases to exist as a
corporation.
Sec. 117. Methods of dissolution
- A corporation formed or organizes under
the provisions of this code may be dissolved
voluntarily or involuntarily.
Sec. 118. Voluntarily dissolution where no
creditors are affected
- In case dissolution of a corporation does
not prejudice the rights of any creditor
having a claim against such corporation,
then such dissolution may be affected by
majority vote of the board of directors or
trustees, vote of stockholders owning at
least two-third of the outstanding capital
stock or of at least two-third of the members
at a meeting
Sec. 119. Voluntary dissolution where creditors
are affected
- Where the dissolution of a corporation may
prejudice the rights of any creditor, a petition for
dissolution of a corporation shall be filed with
the Securities and Exchange Commission. The
petition shall be signed by a majority of its board
of directors or trustees or other officers having
the management of its affairs, verified by its
president or secretary or one of it's directors or
trustees, and that it's dissolution was resolved
Upon by the affirmative vote of the stockholders
at least two-thirds of the outstanding capital
stock or by at least two-third of the members.
If the petition is sufficient in form and
substance, the Commission, by an order reciting
the purpose of the petition, shall fix a date on or
before which objections thereto may be filed by
any person, which date shall not be less than 30
days nor more than 60 days after the entry of
the order.
Upon 5 days notice, the Commission shall
proceed to hear the petition and try any issue
made by the objections filed; and if no such
objection is sufficient, and the material
allegations of the petition are true, it shall
render judgment dissolving the corporation and
directing such disposition of its assets as justice
requires, and may appoint a receiver to collect
such assets and pay the debts of the
corporation.
Effects of corporate dissolution

1. A corporation which has been legally


dissolved is dead and it no longer enjoys an
existence for any purpose;
2. At any time during said three years said
corporation is authorized and empowered to
convey all of it's property to trustees for the
benefit of members, stockholders, or creditors
and others interested.
Two legal steps in dissolution

1. The termination of the corporate existence,


at least as far as the right to go on doing
ordinary business is concerned; and
2. The winding up of its affairs, the payment of
its debts and the distribution of its assets
among the shareholders upon termination of
its existence by limitation or lawful dissolution.
Methods of corporate dissolution

- Voluntarily
- Involuntarily

Dissolution take place by:


1. The expiration of the term of the corporation
stated in the articles of incorporation;
2. Failure to organize and commence business
under Section 22.
Involuntary dissolution may take place in the
following ways:

1. Expiration of the term for which it was lawfully


organized;
2. By legislative enactment;
3. By failure to organize and commence business;
and
4. By dissolution as ordered by the Securities and
Exchange Commission.
Sec. 120. Dissolution by shortening corporate
team
- A voluntary dissolution may be effected by
amending the articles of incorporation to
shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to
the Securities and Exchange Commission in
accordance with this Code. Upon approval, the
corporation shall be deemed dissolved without
any further proceedings.
Sec. 121. Involuntary dissolution
- A corporation may be dissolved by the
Securities and Exchange Commission upon filing
of a verified complaint and after proper notice
and hearing on grounds provided by existing
laws, rules and regulations.
Sec. 122. Corporate Liquidation
- Every corporation whose charter expires by its
own limitation or is annualled by forfeiture or
otherwise, or whose corporate existence for
other purposes is terminated in any other
manner, shall nevertheless be continued as a
body corporate for 3 years after the time when it
would have been so dissolved.
Methods for Liquidation

1. Liquidation by the directors themselves;


2. Liquidation by a duly appointed receiver; and
3. Liquidation by trustees to whom the board of
directors had conveyed the corporate assets.
Thank you

Prepared by:
Ana Mickaela M. Eng
Jerwin O. Magalona
Princess R. Reyteran

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