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TITLE 12: Close Corporations
Guide Questions:
1. What are the specific provisions governing close corporations that are
very advantageous or beneficial to its shareholders?
Section 99 of this Code provides that the shareholders are permitted to
agree on how the management of the corporation may be carried out,
and/or to assume the functions of incorporation.
Section 101 secures the pre-emptive right of shareholders in a close
corporation.
Under Section 104 of this code, the law permits a shareholder to
withdraw and compel the corporation to pay for the fair value of his
shares, provided the corporation has sufficient assets to pay for its debts
and liabilities.
2. On the other hand, what specific provisions may have contributed to the
small number of close corporations in the Philippines?
A close corporation, according to Section 95 of this code, is one whose
articles of incorporation contain explicit restrictions on the number of
persons who may own its shares, but in no case exceed 20, on the
transfer of shares and on the listing of any of its shares in the stock
exchange. It is the presence of all these restrictions in the articles of
incorporation that makes a corporation a close corporation.
A close corporation’s main feature is the limited number of natural
persons who own the corporation. A corporation is not considered a
closed corporation if 2/3 of its voting shares is owned or controlled by
another corporation that does not qualify as a close corporation.
3. Are there other more effective modes of resolving deadlocks that you
could think of that should have been included in Sec. 103?
The Commission as arbitrator may order the “put back” of shares,
appoint a provisional director, order dissolution, cancel, alter a provision
in the articles, stockholders or officers, or other parties to the action or
grant other relief as may be warranted by the circumstances.
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4. Differentiate the power to arbitrate provided in Sec. 103 and the
arbitration for corporations in Sec. 181
According to Section 103, in the absence of an arbitration clause in the
articles of incorporation, the power to arbitrate is given to the
commission itself to arbitrate and resolve the dispute. The Commission
is authorized to do any powers enumerated in Section 103 of this Code.
On the other hand, the Commission exercising its power to arbitrate
under Section 103 is different from the shareholders submitting their
dispute to arbitration under Section 181. Section 181 provides that an
arbitration agreement may be provided in the articles of incorporation or
bylaws of a corporation. This is an effective and efficient resolution of
intra-corporate disputes through arbitration which arise from the
implementation of the articles of incorporation or by law, or from
intracorporate relations.
A close corporation is not precluded from resorting to arbitration under
Section 181 provided it is in its articles or bylaws.
5. Can a close corporation avail of arbitration under Sec. 181 as a mode of
resolving a deadlock?
Yes. The parties may trigger the arbitration clause, if stipulated in the
articles of incorporation.
6. What are the implications and consequences where the business of a
close corporation is managed by its stockholders rather than a board?
According to Section 96 of this Code, the implications and
consequences where the business of a close corporation is managed by
its stockholders rather than a board are as follows;
a. There is no need for a stockholders meeting to elect directors.
b. Unless the context clearly requires otherwise, the stockholders shall
be deemed the directors who will apply the provisions of the Code.
c. Such stockholders shall be subject to all liabilities of directors.
d. All or specified officers or employees shall be elected or appointed
by stockholders instead of by the board.
7. What are the effects of a transfer of shares of a close corporation in
breach of a restriction on transfer:
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• To Third Parties – There will be a presumption to have notice of
the face of the person’s ineligibility to be a stockholder
• Resulting to more than 20 Stockholders – would cause the
stock to be held by more than such number of persons. The
person whom such stock is issued or transferred is conclusively
presumed to have notice of the fact.
• Without offering the shares first to Stockholders – the
Stockholders or corporation may, at its option, refuse to register
the transfer in the name of the transferee.
8. Differentiate a provisional director from an emergency director.
II.
According to Section 103 of this code, a provisional director is not a
receiver or custodian of the corporation. Strictly, he is not an arbiter. He
is considered a regular director, with a right to attend and vote at
meetings of the board. In a divided board, a provisional director may
break the deadlock by casting his vote in favor of a resolution for or
against a corporate action.
On the other hand, an emergency director is an insider, in contrast to a
provisional director who is an outsider. A corporate officer elected by the
unanimous vote of the remaining directors of the board in an ordinary
corporation is an example of an emergency director.
I. PPE Corporation (PPEC) was organized by 6 retired female nurses.
They applied for SEC registration using the CRS approved form of
articles for stock corporations. However, it was their intention to fix
the maximum of PPEC stockholders at 6 , that when one of them
wants to sell, the rest would have a right of first refusal to her
shares, and never would the corporation become public. All these
conditions were contained in a Stockholders Agreement that they
had executed and notarized but unfortunately were not in the PPEC
Articles submitted to, and subsequently registered with, the SEC.
After almost two years of successful operation, a deadlock situation
arose whereby 3 stockholders were pitted against the other 3. The
lawyer of one of the stockholders opined that since PPEC is a close
corporation, they can petition the SEC to resolve the deadlock in
accordance with Sec 103. Is the lawyer correct?
Yes. The lawyer is correct because since the conditions intended
were not placed in the PPEC’s Articles and there was no arbitration
clause stipulated in the articles of incorporation, the parties, through
Section 103 of this code, may petition the Commission to intervene
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and break the deadlock. Under this provision, the Commission,
upon the petition by any stockholder, shall have the power to
arbitrate the dispute.
Section 99 provides that agreements by and among stockholders
shall survive the incorporation of the corporation and shall continue
to be valid and binding between and among them if such is their
intent. Hence, it was clear that the 6 retired female nurses had the
intention to fix the maximum of PPEF stockholders that were
contained in a Stockholders Agreement that they executed and
notarized.
A close corporation has 7 stockholders, with 4 of them always voting
uniforrmly as one thus the majority while 3 others by force of
circumstance became the minority. While the corporation has not
yet experienced any major corporate decisions requiring 2/3 vote to
be taken up, the majority’s decisions related to day to day
operations, regulatory compliance, increasing salaries and fringe
benefits, and participation in profits, among others were already
being felt by the minority as oppressive and putting them in a
squeeze out freeze out situation. Which of the following options
would be the best for the minority? Explain the pros and cons of
each option.
The option that I will be recommending for the 3 minority
stockholders is to opt to withdraw as stockholders. This way, they
will be able to “put back” their shares or to compel the corporation to
pay them for their fair value.
This will be a win-win situation because since they are always
forced to become the minority, the corporation need not to go
through the process of amending the articles of the corporation
which requires the affirmative vote of at least 2/3. Also, the
dissolution of their company will be prevented by just withdrawing as
stockholders and getting their shares back or be paid for their fair
value.
a. Amend the articles and convert to an ordinary corporation –
According to Section 102, an amendment to the articles of
incorporation may delete or remove any provision or to reduce a
quorum, or voting requirement. Section 102, permits a higher
voting requirement if so provided in the articles of the close
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corporation. In contrast, such higher voting requirement is not
made available under the Code to ordinary corporations.
b. Withdraw as stockholders
Section 104 allows 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 issued
value, when the corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock. A
shareholder of a close corporation is allowed to “put back” his
shares or to compel the corporation to pay him their fair value.
The articles of a close corporation may not prevent its
stockholder from exercising his right to withdraw. Neither is this
right premised on the existence of a deadlock. Unrestricted
retained earnings is neither a precondition; it is sufficient that
there are assets in the books of the corporation to cover its
debts and liabilities exclusive of capital stock. However, the
corporate trust fund may be impaired thus creditors may shy
away from extending credit or ooperations may be disrupted as
the close corporation is precluded from listing or raising funds
from the public.
c. Dissolve the corporation.
Further, Section 104 also provides that the stockholders may
opt to dissolve the corporation. The right of a shareholder of a
close corporation to petition the SEC for its dissolution is not
premised on the existence of a deadlock. The exercise of this
right by a shareholder is not subject to the requirements of a
derivative suit. There is no need for prior board and/or
shareholders’ approval. All that is required is for the
shareholder-petitioner to be able to establish that the acts of the
directors, officers or those in control of the corporation were
illegal, fraudulent, dishonest, oppressive or unfairly prejudicial to
the corporation or any shareholder. This right is akin to the
“corporate waste doctrine” or the right given to a shareholder to
seek relief whenever corporate assets are being misapplied or
wasted.
Lecture Notes:
BRIEF BACKGROUND ON CLOSE CORPORATIONS
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In 1964, a US court resolving the case of Galler v Galler came out with a
suggestion on the need for special statutes for close corporations. In response,
17 state legislatures adopted special provisions in their general corporation
statutes designed specifically for close corporations. These provisions have
come to be known as “Integrated Close Corporation Statutes.” These Statutes
varied from state to state but share certain common characteristics. They are all
opt-in statutes which means that eligible close corporations must specifically
elect close corporation status. If an eligible corporation opts to be governed by
the special rules contained in the state’s Statute, that corporation will be treated
as a special subset of corporations and will be allowed to dispense with some of
the formalities associated with the shareholder, director and officer hierarchy of
corporate governance. In other words, in 17 states, close corporations which
meet certain statutory requirements can voluntarily elect to be governed under a
separate governance scheme.
“Relatively few corporations have opted for special close corporation treatment in
states in which that election is available x x x. It is, however, fair to conclude that,
in general, the Integrated Close Corporation Statutes never accomplished their
desired goal. The Integrated Close Corporation Statutes which had their heyday
in the 1980s the decade in which most of such statutes were adopted, never
received wide-spread acceptance. It is unlikely that more of such statutes will be
adapted in the future, due to the advent of the LLC x x x.”
(Joseph Shade, “Business Associations in a Nutshell” Second Edition, Thomson
West 2006, p.120).
Meanwhile, in the Philippines, close corporations were formally introduced in the
old Corporation Code enacted in 1985. It contained for the first time, the
provisions specifically applicable to close corporations. In the words of the
Supreme Court:
“However, as Act No. 1459  was unable to keep up with modern commerce, it
was replaced by Batas Pambansa Blg. 68, otherwise known as the Corporation
Code. The new law codified various jurisprudential pronouncements made under
its predecessor, clarified the obligations of corporate directors and officers, and
defined close  corporations, providing special rules for their formation and the
ownership of their stock. It also dispensed with the old restrictions pertinent to
agricultural and mining corporations, the limitations on corporate ownership of
real property, and the penal clauses integrated into certain provisions of the
law.”  (Ago Realty & Development Corp. v. Ago, G.R. Nos. 210906 & 211203,
[October 16, 2019])
Since the inclusion of provisions specifically applicable to close corporations
(Secs. 96 to 105) in the old Corporation Code, however, there has been no
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substantial growth in their number. Similar to the outcome in the 17 US states
that had enacted specific statutes governing close corporations, very few
corporations in the Philippines opted to be governed by Secs. 96 to 105.
Nevertheless, the very same Sections were reenacted and have been retained
in the Revised Corporation Code, enacted in Feb 2019, as Secs. 95 to 104.
Otherwise, the vested rights of those very few close corporations may have be
impaired. Moreover, their vested rights remain protected under Sec.184.
MAJOR FEATURES OF CLOSE CORPORATIONS
1. Specific shareholder-group representation through
• Special quorum and/or voting requirements
• Certain class or number of directors or shareholders may
effectively veto certain corporate actions
2. Restrictions on transfer of shares
3. Prescribed number or qualifications of natural persons who may become
shareholders
4. Recognition of pre-incorporation agreements as valid and binding
5. Close corporations are in the nature of incorporated limited partnerships
6. A corporation with 2/3 or more of its voting share owned or controlled by
another corporation is disqualified to be a close corporation
DEFINITION
SEC. 95
A close corporation is one whose articles of incorporation provide 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 Title XII; and
c. the corporation shall not list in any stock exchange nor make any public
offering of its stocks of any class.
A corporation whose 2/3 or more of its voting stock or voting rights is owned or
controlled by another corporation is NOT a close corporation.
SEC. 95 lists the corporations that cannot be incorporated as a close corporation
namely:
1. Mining or oil companies,
2. Stock exchanges,
3. Banks,
4. Insurance companies,
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5. Public utilities,
6. Educational institutions, and
7. Corporations declared to be vested with public interest in accordance
with the provisions of the Code.
In the case of San Juan Structural and Steel Fabricators Inc v CA, GR 129459,
Sep 29, 1998, the Supreme Court held that the articles of incorporation of the
subject corporation does not contain any provision stating that:
1. the number of stockholders shall not exceed 20, or
2. a preemption of shares is restricted in favor of any stockholder or of the
corporation, or
3. listing its stocks in any stock exchange or making a public offering of
such stocks is prohibited.
From its articles, it is clear that Respondent is not a close corporation. Moreover,
just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock did not make subject corporation a close corporation.
The "[m]ere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities." So, too, a narrow distribution
of ownership does not, by itself, make a close corporation.
In finding the subject property answerable for the obligations of MSI, the CA
characterized respondent spouses as stockholders of a close corporation who,
as such, are liable for its debts. This conclusion is baseless.
To be considered a close corporation, an entity must abide by the requirements
laid out in Section 96 of the  Corporation Code, which reads: x x x
In San Juan Structural and Steel Fabricators, Inc. v. Court of
Appeals, this Court held that a narrow distribution of ownership does
not, by itself, make a close corporation. Courts must look into the articles
of incorporation to find provisions expressly stating that (1) the number
of stockholders shall not exceed 20; or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation; or (3) the
listing of the corporate stocks in any stock exchange or making a public
offering of those stocks is prohibited.
Here, neither the CA nor the RTC showed its basis for finding that MSI is a close
corporation. The courts a quo did not at all refer to the Articles of Incorporation
of MSI. The Petition submitted by respondent in the rehabilitation proceedings
before the RTC did not even include those Articles of Incorporation among its
attachments. 
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In effect, the CA and the RTC deemed MSI a close corporation based on the
allegation of Spouses Cruz that it was so. However, mere allegation is not
evidence and is not equivalent to proof.   For this reason alone, the CA rulings
should be set aside.
(Bustos v. Millians Shoe, Inc., G.R. No. 185024, [April 24, 2017], 809 PHIL 226-
235)
On the other hand, in Naguiat v NLRC, GR No. 116123, Mar 13, 1997, in
resolving the issue of whether or not to hold Sergio F. Naguiat, CFTI president,
solidarily liable with CFTI, the Supreme Court said that he should be held liable
because CFTI is a "close family corporation” under Sec. 99 ( e ) of the old Code
which provides:
“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.”
The fifth paragraph of Section 99 of the old Code specifically imposes personal
liability upon the stockholder actively managing or operating the business and
affairs of a close corporation.. Hence, Sergio Naguiat is held solidarily liable for
corporate tort because he had actively engaged in the management and
operation of CFTI, a close corporation.
Neither can Emmanuel, et al., take refuge in their assertion that ARDC is a close
family corporation. They claim that the stockholders of a close corporation may
take part in the active management of corporate affairs. Hence, they, as ARDC's
stockholders, are legally invested with the power to sue for the corporation.
As correctly claimed, under Section 97 of the  Corporation Code,  a close
corporation may task its stockholders with the management of business,
essentially designating them as directors. However, the law is clear that a close
corporation must do so through a provision to that effect contained in its articles
of incorporation. Nowhere, in ARDC's Articles of Incorporation can such a
provision be found. There is nothing that expressly or impliedly allows
Emmanuel,  et al., and Angelita, or any of them, to manage the corporation.
Hence, the merger of stock ownership and active management that
Emmanuel, et al., rely on cannot be applied to ARDC.  1. There is no need for a stockholders meeting to elect
(Ago Realty & Development Corp. v. Ago, G.R. Nos. 210906 & 211203, [October
16, 2019])
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Close Corporation v Nonstock Corporation
For close corporations, Sec. 95 states that the provisions of Title XII shall
primarily govern them provided that other Titles shall apply suppletorily except as
otherwise provided under Title XII.
For nonstock corporations, Sec. 86 states that the provisions governing stock
corporations, when pertinent, shall be applicable to nonstock corporations,
except as may be covered by specific provisions of Title XI.
APPLICABILITY TO CLOSE CORPORATIONS
Further, assuming  arguendo  that ARDC is a close family corporation, the same
cannot be considered a justification for non-compliance with the requirements for
the filing of a derivative suit. In  Ang v. Sps. Ang,  the Court declared:
The fact that [SMBI] is a family corporation does not exempt private
respondent Juanito Ang from complying with the Interim Rules. In the x x
x Yu  case, the Supreme Court held that a family corporation is not
exempt from complying with the clear requirements and formalities of
the rules for filing a derivative suit. There is nothing in the pertinent laws
or rules which state that there is a distinction between x x x family
corporations x x x and other types of corporations in the institution by a
stockholder of a derivative Suit. (Citation omitted)
(Ago Realty & Development Corp. v. Ago, G.R. Nos. 210906 & 211203, [October
16, 2019])
ARTICLES OF INCORPORATION
SEC. 96 Contents of the Articles of Incorporation of a Close Corporation
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.
d. The business of the corporation shall be managed by the stockholders
rather than a board of directors thus:
directors.
2. Unless the context clearly requires otherwise, the
stockholders shall be deemed the directors who will apply
the provisions of the Code.
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3. Such stockholders shall be subject to all liabilities of
directors.
4. All or specified officers or employees shall be elected or
appointed by stockholders instead of by the board
TRANSFER OF SHARES OF A CLOSE CORPORATION
SEC. 97 Validity of Restrictions on Transfer of Shares
• Restrictions must appear in the articles, bylaws and stock certificates
• Otherwise, the same shall not be binding on any purchaser in good faith
• Restrictions shall not be more onerous than granting to existing
stockholders or the close corporation, the option to purchase the shares
of the transferring stockholder
• with such reasonable terms, conditions or period as
stated
• upon expiration of said period, if existing stockholders
or the corporation fails to exercise the option, the
transferring stockholder may sell his shares to any third
person
EFFECTS OF ISSUANCE OR TRANSFER IN BREACH OF QUALIFYING
CONDITIONS
SEC. 98
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 of the stockholder.
If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty, 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 the fact.
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.
Sec. 98
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(d) Whenever a person to whom stock of a close corporation has been issued or
transferred has or is conclusively presumed 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 to be held by more than
the number of persons permitted under its articles of incorporation or
3. that the transfer violates a restriction or 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 though
contrary to (a), (b) or (c ) has been consented to by all the stockholders or if the
close corporation has amended its articles in accordance with Title XII
(f) Transfer is not limited to one for value
(g) The provisions of Sec. 98 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.
Respondents primarily challenge the  mandamus suit on the grounds that the
transfer violated the bank stockholders' right of first refusal and that petitioner
was a buyer in bad faith. Both parties refer to Section 98 of the  Corporation
Code  to support their arguments, which reads as follows: x x x
It must be noted that Section 98 applies only to  close corporations. Hence,
before the Court can allow the operation of this section in the case at bar, there
must first be a factual determination that respondent Rural Bank of Cabadbaran
is indeed a close corporation. There needs to be a presentation of evidence on
the relevant restrictions in the articles of incorporation and bylaws of the said
bank. From the records or the RTC Decision, there is apparently no such
determination or even allegation that would assist this Court in ruling on these
two major factual matters. With the foregoing, the validity of the transfer cannot
yet be tested using that provision. These are the factual matters that the parties
must first thresh out before the RTC. 
(Andaya v. Rural Bank of Cabadbaran, Inc., G.R. No. 188769 (Resolution),
[August 3, 2016], 792 PHIL 324-336)
AGREEMENTS BY STOCKHOLDERS
SEC 99
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a. Agreements by and among stockholders shall survive the
incorporation of the corporation and shall continue to be valid
and binding between and among them:
i. If such be their intent; and
ii. To the extent that such agreements are not
inconsistent with the articles of incorporation, except
those required by Title XII to be embodied in said
articles of incorporation.
b. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, shall not be invalidated when:
i. It provides that in exercising any voting rights, the
shares held by them all be voted as therein provided, or
as they may agree, or as determined in accordance
with a procedure agreed upon by them;
ii. Relating to any phase of the corporate affairs, and if the
effect is to make them partners among themselves;
iii. 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.
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.
CORPORATE TORT
Our jurisprudence is wanting as to the definite scope of "corporate tort."
Essentially, "tort" consists in the violation of a right given or the omission of a
duty imposed by law. Simply stated, tort is a breach of a legal duty. Article 283 of
the Labor Code mandates the employer to grant separation pay to employees in
case of closure or cessation of operations of establishment or undertaking not
due to serious business losses or financial reverses, which is the condition
obtaining at bar. CFTI failed to comply with this law-imposed duty or obligation.
Consequently, its stockholder who was actively engaged in the management or
operation of the business should be held personally liable.
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Furthermore, in  MAM Realty Development vs.NLRC, 244 SCRA 797, June 2,
1995, the Court recognized that a director or officer may still be held solidarily
liable with a corporation by specific provision of law. thus: ". . . A corporation,
being a juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate agents, are
not theirs but the direct accountabilities of the corporation they represent. True,
solidary liabilities may at times be incurred but only when exceptional
circumstances warrant such as, generally, in the following cases: . . . 4. When a
director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action." As pointed out earlier, the fifth paragraph of Section 100
of the Corporation Code specifically imposes personal liability upon the
stockholder actively managing or operating the business and affairs of the close
corporation. The Court here finds no application to the rule that a corporate
officer cannot be held solidarity liable with a corporation in the absence of
evidence that he had acted in bad faith or with malice. In the present case,
Sergio Naguiat is held solidarily liable for corporate tort because he had actively
engaged in the management and operation of CFTI, a close corporation.
(Naguiat v. National Labor Relations Commission, G.R. No. 116123, [March 13,
1997], 336 PHIL 545-565)
GOVERNANCE OF A CLOSE CORPRATION
In a close corporation, it is typical for the stockholders to designate themselves
as the directors. They may also appoint or elect themselves as officers. Thus,
the same persons may be making the decisions at all levels. Some problems
that may arise are.
1. When a board decides, it is on a “one man one vote” basis. One director
may own only 100 shares as opposed to another director’s 10,000
shares yet each one of them has only one vote to cast for or against a
proposed board resolution e.g. declaration of dividends.
2. On the other hand, when the decision is in the hands of the shareholders
e.g. exercise of a major corporate power, the vote required is based on
ownership of outstanding capital stock - whether the total number of
shares or aggregate value of shares. In the example above, the
shareholder with 10,000 shares may be able to swing the vote either
way, while the shareholder of 100 shares may not affect the outcome at
all.
3. Indeed, while shareholders in a close corporation may agree to vote
each other as director, it is the general perception that they cannot in
advance agree how each one of them would vote as an individual
director.
4. However, based on the provisions of the Code on close corporations,
the provisions stating that stockholders acting as directors and/or
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officers shall be subject to all the liabilities of directors (Sec. 96) and that
stockholders who are parties themselves, have liabilities for managerial WHEN A BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD
acts imposed on directors, are held to strict fiduciary duties to each other
and among themselves, and shall be personally liable for corporate torts SEC. 100 Unless the bylaws provide otherwise, an action taken by the directors
unless the corporation has obtained reasonably adequate liability of a close corporation without a meeting called property and with due notice shall
insurance. (Sec. 99) nevertheless be deemed valid if:

Furthermore, we find that the CA seriously erred in portraying the import of a. Before or after such action is taken, a written consent thereto is signed
Section 97 of the Corporation Code. Citing that provision, the CA concluded that by all the directors;
"in a close corporation, the stockholders and/or officers usually manage the b. All the stockholders have actual or implied knowledge of the action and
business of the corporation and are subject to all liabilities of make no prompt objection in writing;
directors,  i.e., personally liable for corporate debts and obligations."  c. The directors are accustomed to take informal action with the express or
implied acquiescence of all stockholders; or
However, Section 97 of the Corporation Code  only specifies that "the d. All the directors have express or implied knowledge of the action in
stockholders of the corporation shall be subject to all liabilities of directors." question and none of them makes a prompt objection in writing.
Nowhere in that provision do we find any inference that stockholders of a close
corporation are automatically liable for corporate debts and obligations.  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
Parenthetically, only Section 100, paragraph 5, of the  Corporation Code explicitly knowledge thereof, the director promptly files his written objection with the
provides for personal liability of stockholders of close corporation,  viz.: secretary of the corporation.

Sec. 100. Agreements by stockholders. — xxx xxx xxx
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)
As can be read in that provision, several requisites must be present for its
applicability. None of these were alleged in the case of Spouses Cruz. Neither
did the RTC or the CA explain the factual circumstances for this Court to discuss
the personally liability of respondents to their creditors because of "corporate
torts."  (Manuel R. Dulay Enterprises, Inc. v. Court of Appeals, G.R. No. 91889, [August
We thus apply the general doctrine of separate juridical personality, which
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.  The preemptive right of stockholders in a close corporation shall extend to all
(Bustos v. Millians Shoe, Inc., G.R. No. 185024, [April 24, 2017], 809 PHIL 226-
235)
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, a
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. Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to private respondents spouses Veloso is null and void as the
alleged Board Resolution No. 18 was passed without the knowledge and consent
of the other members of the board of directors cannot be sustained. The sale of
the subject property to private respondents by Manuel Dulay is valid and binding.
27, 1993])
PREEMPTIVE RIGHT IN CLOSE CORPORATIONS
SEC. 101
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.

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Note: Preemptive right generally extends to all issuances of stock except in
cases that may have been provided in the articles of the close corporation. In
ordinary corporations, preemptive right shall not extend to shares issued in
compliance with laws requiring stock offerings or minimum stock ownership; or to
shares issued in good faith with the approval of stockholders representing 2/3 of
the outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt (SEC 38).
AMENDMENT OF ARTICLES OF INCORPORATION
SEC. 102
1. Any amendment to the articles of incorporation which seeks to delete or
remove any provision required by Title XII or to reduce a quorum or
voting requirement stated in said articles shall:
a. require the affirmative vote of at least two-thirds (2/3) of the
outstanding capital,
b. whether with or without voting rights, or
c. 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,
d. at a meeting duly called for the purpose.
Note: SEC 102 permits a higher voting requirement if so provided in the articles
of the close corporation. In contrast, such higher voting requirement is not made
available under the Code to ordinary corporations.
DEADLOCKS
SEC. 103
A corporate deadlock occurs when the stockholders or directors are divided on
the management of the corporation that the normal business and affairs of the
corporation cannot be conducted.
Upon the written petition by any stockholder of the closed corporation to the
Commission, the latter shall have the power to arbitrate the dispute and they can
issue the following orders as stated in the Code:
a. cancelling or altering any provision contained in the articles of
incorporation, bylaws, or any stockholders 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,
stockholder, officers or other persons party to the action
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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. A provisional director is an impartial
person who is neither a stockholder or a creditor of the corporation or is
connected to any of its subsidiaries and affiliates, any further
qualifications may be provided by the Commission.
(1) The provisional director is not a receiver of the corporation
and does not have the title and powers of a custodian or
receiver.
(2) 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.
f. dissolving the corporation; and
g. granting such other relief as the circumstances may warrant.
A deadlock in a close corporation may mean that its business and affairs can no
longer be conducted to the advantage of the stockholders generally.
A shareholder of a close corporation may petition the SEC to arbitrate their
dispute. The SEC has the power to arbitrate through the issuance of appropriate
orders toward resolving or terminating the dispute.
SEC exercising its power to arbitrate under Sec. 103 is different from the
shareholders submitting their dispute to arbitration under Sec. 181. A close
corporation is not precluded from resorting to arbitration under Sec. 181 provided
it is in its articles or bylaws.
The SEC as arbitrator may do the following to break a deadlock:
 Order the “put back” of shares
 Appoint a provisional director
 Order dissolution
 Cancel, alter a provision in the articles, bylaws or shareholders
agreement
 Direct or prohibit any act of directors, stockholders or officers, or other
parties to the action
 Grant other relief as may be warranted by the circumstances
WITHDRAWAL OF STOCKHOLDER
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SEC. 104
In addition and without prejudice to other rights and remedies available under
Title XII, 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 issued value, when the corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital stock.
1. A shareholder of a close corporation is allowed to “put back” his shares
or to compel the corporation to pay him their fair value.
2. This right is different from, and not subject to the rules on, the appraisal
right.
3. The articles of a close corporation may not prevent its stockholder from
exercising his right to withdraw.
4. Neither is this right premised on the existence of a deadlock.
5. Unrestricted retained earnings is neither a precondition; it is sufficient
that there are assets in the books of the corporation to cover its debts
and liabilities exclusive of capital stock
6. The corporate trust fund may be impaired thus:
• Creditors may shy away from extending credit; or
• Operations may be disrupted as the close corporation is
precluded from listing or raising funds from the public.
DISSOLUTION OF CORPORATION
SEC 104
Any stockholder of a close corporation may be written petition to the SEC,
compel the 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.
• This right is akin to the “corporate waste doctrine” or the right given to a
shareholder to seek relief whenever corporate assets are being
misapplied or wasted.
ADVANTAGES AND DISADVANTAGES OF A CLOSE CORPORATION
1. Persons in joint venture may want the features of a partnership and
limited liability in their business relationship and a close corporation
allow them to have those features.
2. Management and control may be in the hands of the shareholders
themselves.
3. The shareholders agreement does have primary over a pertinent
provision(s) of Title XII.
4. Shareholders of close corporations may not attain maximum potential in
terms of fair value for their chares because of restrictions on their
transfer.
5. The likelihood of deadlock may be higher in close corporations than in
ordinary corporations.
6. The operations of a close corporation may be vulnerable to disruption
because of SEC intervention in a deadlock situation.
• A shareholder may withdraw and the close corporation may be
compelled to pay fair value requiring only sufficient assets albeit
not unrestricted retained earnings but nevertheless lead to
depletion of capital
• Creditors’ buffer against corporate losses may also be affected.
7. There is always a threat or the possibility of unexpected dissolution upon
a single shareholder’s petition.

DISSOLUTION OF A CLOSE CORPORATION

• The right of a shareholder of a close corporation to petition the SEC for

its dissolution is not premised on the existence of a deadlock.
• The exercise of this right by a shareholder is not subject to the
requirements of a derivative suit.
• There is no need for prior board and/or shareholders’ approval.
• All that is required is for the shareholder-petitioner to be able to establish
that the acts of the directors, officers or those in control of the
corporation were illegal, fraudulent, dishonest, oppressive or unfairly
prejudicial to the corporation or any shareholder.

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