CLOSED CORPORATION d.

Transfer of stocks to others

which would increase the
Definition of close corporation number of stockholders to
more than the maximum are
a. all of the corporation’s issued invalid;
stock of all classes, exclusive e. Corporate actions may be
of treasury shares, shall be binding even without a
held of record by not more formal board meeting, if the
than a specified number of director had knowledge or
persons, not exceeding ratified the informal action of
twenty (20); the others, unless after
b. subject to specified having knowledge thereof,
restrictions on transfers; the director promptly files his
c. and it shall not list in any written objection with the
stock exchange or make any secretary of the corporation;
public offering of its stocks of f. Pre-emptive right extends to
any class. all stocks issued, including
re-issuance of treasury
Notwithstanding the foregoing, a shares, whether for money or
corporation shall not be deemed a for property or personal
close corporation when at least services, or in payment of
two-thirds (2/3) of its voting stock corporate debts, unless the
or voting rights is owned or articles provides otherwise;
controlled by another corporation g. Deadlocks in the board may
which is not a close corporation be settled by the SEC, on
within the meaning of the RCC. written petition by any
stockholder;
Principal characteristics of a h. A stockholder may withdraw
Close Corporation: for any reason and avail
himself of his right of
a. The business of the appraisal when the
corporation may be managed corporation has sufficient
by the stockholders of the assets in its books to cover
corporation rather than by a its debts and liabilities
board of directors; exclusive of capital stock.
b. If a corporation is classified
as a close corporation, a
board resolution authorizing Close Corporations (BAR Q & A)
the sale or mortgage of the
corporate property is not Q: Malyn, Schiera and Jaz are the
necessary to bind the directors of Patio Investments, a
corporation for the action of close corporation formed to run the
its president; Patio Café, an al fresco coffee shop
c. Quorum may be greater than in Makati City. In 2000, Patio café
a mere majority; began experiencing financial
reverses, consequently, some of
the checks it issued to its beverage dissolved during the
distributors and employees pendency of the suit?
bounced. Explain. (2005 BAR)

In October 2003, Schiera informed A:

Malyn that she found a location for
a second café in Taguig City. Malyn 1. YES, although Malyn refused
objected because of the dire the business before,
financial condition of the nevertheless, using the
corporation. resources and credit standing
of the company, Schiera and
Sometime in April 2004, Malyn Jaz clearly demonstrated that
learned about Fort Patio Café the business could have been
located in Taguig City and that its successfully pursued in the
development was undertaken by a name of the close
new corporation known as Fort corporation. More
Patio, Inc., where both Schiera and importantly, Schiera and Jaz
Jazz are directors. Malyn also found are guilty of diverting the
that Schiera and Jaz, on behalf of resources of the close
Patio Investments, had obtained a corporation to another entity,
loan of P500,000.00 from PBCom equivalent to fraud and bad
Bank, for the purpose of opening faith.
Fort Patio Café. This loan was
secured by the assets of Patio
Investments and personally
guaranteed by Schiera and Jaz. 2. YES. Where corporate
directors are guilty of breach
Malyn then filed a corporate of trust, a stockholder may
derivative action before the institute a suit in behalf of
Regional Trial Court of Makati City himself and other
against Schiera and Jaz, alleging stockholders for the benefit
that the two directors had of the corporation, to bring
breached their fiduciary duties by about a redress of a wrong
misappropriating money and assets inflicted directly upon the
of Patio investments in the corporation and indirectly
operation of Fort Patio Café. upon the stockholders (Reyes
vs. Tan, 3 SCRA 198).
a. Did Schiera and Jaz violate
the principle of corporate In this case, Schiera and Jaz
opportunity? Explain. breached a fiduciary duty
b. Was it proper for Malyn to file when they used the property
a derivative suit with prayer of Patio investments in the
for injunctive relief? Explain. operation of Fort Patio café
c. Assuming that a derivative despite the latter’s financial
suit is proper, may the action condition to the prejudice of
continue if the corporation is the corporation. Further, an
 individual stockholder may UnitedCigarette Corporation,
institute a suit in behalf of a 348 SCRA 48)
corporation, wherein he holds
stocks, in order to protect
corporate rights whenever
the officials of the
corporation refuse to sue, or
are the ones to be sued or Q: Ten classmates, all graduates of
hold the control of the Class ’78 of the Los Banos School
corporation (Republic Bank v. of Agriculture and Husbandry,
Cuaderno). Furthermore, the decided to form “Gatas Atbp., Inc.”,
demand on the Board of the principal purpose of which is to
Directors to file a derivative produce, package, and sell
suit would be a futile carabao’s milk. The Articles of
formality since majority of Incorportation provided, among
the Board is the precursor of others, that the business of the
the wrongful act. Injunction is corporation shall be managed by
likewise proper to prevent the stockholders of the corporation
foreclosure of the assets of rather than by a board of directors
the corporation used as and restricts the transfer of shares
security of the loan availed to outsiders. One of the ten
by the two erring Board of classmates, Mr. Sakit-ulo,
Directors. disgruntles at the way the affairs of
the corporation was being handled,
3. YES, under Section 145 of demanded that all the ten
the Corporation Code, no stockholders meet to elect
right or remedy in favor of or directors, citing Section 50 of the
against any corporation shall Corporation Code. Meanwhile,
be removed or impaired Sakit-tiyan, sued all the ten
either by the subsequent classmates- stockholders for
dissolution of said damages for violation of the Food,
corporation. No reason can Drugs Cosmetics Act– a cockroach
be conceived why a suit was found in the milk she drank,
already commenced by the the package bearing the inscription
corporation during its “produced, packaged and sold by
existence to proceed to final Gatas Atbp., Inc.” (1988 BAR)
judgment and execution
thereof because even a mere a) Can Mr. Sakit-ulo demand that a
trustee (of a dissolved stockholders meeting be called to
corporation), who, by fiction, elect directors of the corporation?
merely continues the legal
personality may commence a b) Does Ms. Sakit-tiyan have a
suit which can proceed to cause of action against all the ten
final judgment even beyond classmates-stockholders, albeit no
the 3- year period of negligence has been proven?
liquidation. (Knecht v.
A: because Alberto, one of the
stockholders, opposed the transfer
a. “Gatas Atbp., Inc.” is a close on the ground that the same
corporation, and its Articles of violated the by-laws. Alberto
Incorporation can, as it did, provide offered to buy the shares at P12.50
that the business of the corporation per share, as fixed by the by-laws
be managed by the stockholders or a total price of P125,000 only.
rather than by a board of directors.
The presence of this provision in While the by-laws of Sta. Ana
the Articles of Incorporation, provides that the right of first
precludes Sakit-ulo from refusal can be exercised “at a price
demanding that the stockholders not exceeding 25% more than the
meet in order to elect directors of par value of such shares, the
the company. Articles of Incorporation simply
provides that the stockholders of
b. Ms. Sakit-tiyan has a cause of record” shall have preferential right
action against the stockholders to purchase the said shares.” It is
who, under the law, are deemed to silent as to pricing. (1994 BAR)
be directors and subject to
liabilities as such. Said stockholders A: YES. In a close corporation, the
are made personally liable for restriction as to the transfer of
corporate torts unless the shares has to be stated/ annotated
corporation has obtained in the Articles of Incorporation, the
reasonably adequate liability By-Laws and the certificate of
insurance. Negligence need not be stock. This serves as notice to the
proven to warrant liability by person dealing with such shares
manufacturers of foodstuffs for like Rafael in this case. With such
death or injury caused by any notice, he is bound by the pricing in
obnoxious or harmful substance the By- Laws.
used.

Q: Rafael inherited from his uncle

10,000 shares of Sta. Ana Q: Datu Commercial Corporation
Corporation, a close corporation. (DCC), a publicly listed company
The shares have a par value of with the Philippine Stock Exchange,
P10.00 per share. Rafael notified incorporated Kidlat Close
Sta. Ana that he was selling his Corporation (KCC), investing into
shares at P70 per share. There 91% of its outstanding capital. The
being no takers among the chairman, president, and executive
stockholders, Rafael sold the same vice-president of DCC are
to his cousin Vicente (who is not a incorporators of KCC, each holding
stockholder) for P700,000. 3% of the outstanding capital
stock. The articles of incorporation
The Corporate Secretary refused to of KCC provided: 1) a limit on the
transfer the shares in Vicente’s number of shareholders, which
name in the corporate books shall never exceed five; 2) a right
of first refusal; and 3) a prohibition special laws and by the general
on the shares from being listed or provisions of the RCC. The special
being publicly offered. Pending the law applicable to educational
issuance by the Securities and corporations is RA No. 7798,
Exchange Commission (SEC) of the otherwise known as the
Certificate of Registration, the vice- Educational Act of 1982, as
president of KCC entered into a amended.
long-term contract of lease on
behalf of KCC, which was declared Number and term of Trustees
therein as undergoing for Educational Corporations:
incorporation with the SEC. Is DCC
qualified to be an incorporator of Unlike in an ordinary nonstock
KCC although it is a juridical entity? corporation where the number of
Explain your answer. (2023 BAR) trustees may or may not be more
than 15, the number of trustees in
A: Yes, under Section 10 of the educational institutions organized
Revised Corporation Code, juridical as nonstock corporation shall not
persons are now allowed to be be less than 5 nor more than 15:
incorporators. However, KCC Provided, that the number of
cannot be considered a close trustees shall be in multiples of five
corporation since 91% of its (5)
outstanding capital is owned by
DCC, a publicly listed company. Unless otherwise provided in the
Under the law, a corporation articles of incorporation or bylaws,
cannot be considered a close the board of trustees of
corporation if at least 2/3s of its incorporated schools, colleges, or
voting stock is owned or controlled other institutions of learning shall,
by another corporation which is not as soon as organized, so classify
a close corporation within the themselves that the term of office
meaning of the RCC. (Central Bar of one-fifth (1/5) of their number
Q&A by Dean Nilo Divina, 2024) shall expire every year. Trustees
thereafter elected to fill vacancies,
EDUCATIONAL CORPORATION occurring before the expiration of a
particular term, shall hold office
Educational corporations are those only for the unexpired period.
organized for educational Trustees elected thereafter to fill
purposes, particularly the vacancies caused by expiration of
establishment and maintenance of term shall hold office for five (5)
a school, college or university. years. A majority of the trustees
shall constitute a quorum for the
How are educational corporations transaction of business. The
organized? powers and authority of trustees
shall be defined in the bylaws.
Educational corporations may be
organized as a stock or nonstock For institutions organized as stock
corporation. They are governed by corporations, the number and term
of directors shall be governed by
the provisions on stock
corporations (Sec 106 of the RCC)

(no previous bar questions)