I. Introduction and Legal Basis
The close corporation is a unique corporate vehicle under Philippine law, primarily governed by Title XII, Chapter III of the Revised Corporation Code (RCC) of the Philippines (Republic Act No. 11232). It is designed for small, closely-knit groups of stockholders, often family members or a few business associates, who actively manage the enterprise. The law recognizes the distinct needs of such entities by allowing greater flexibility, informality, and restrictions on share transfers to preserve the personal and fiduciary relationships among shareholders.
II. Definition and Distinguishing Characteristics
A close corporation is defined as one whose articles of incorporation provide that: (a) all issued stock is held by a limited number of persons, not exceeding twenty (20); (b) all issued stock is subject to transfer restrictions as provided in the RCC; and (c) the corporation shall not list its shares in any stock exchange or offer them to the public. The essence is the confluence of ownership, management, and a personal relationship akin to a partnership.
III. Formation and Mandatory Provisions
To incorporate as a close corporation, the Articles of Incorporation must expressly contain the following: (1) a statement that it is a close corporation; (2) the names and addresses of the original stockholders constituting the “limited number” (max. 20); (3) a provision that all issued stock shall be subject to one or more of the authorized transfer restrictions; and (4) any other provision the stockholders deem necessary. Without these mandatory declarations, a corporation is not considered a close corporation, even if its shareholding is de facto limited.
IV. Transfer Restrictions on Shares
A cornerstone of the close corporation is the restriction on share transfers to prevent the entry of unwanted outsiders. The RCC authorizes restrictions such as: granting the corporation or other stockholders an option to purchase the shares; consent requirements from the board or stockholders; or a prohibition on transfer to designated persons. These restrictions must be noted conspicuously on the stock certificates. A transfer in violation of these restrictions is void.
V. Governance and Operational Informality
Close corporations enjoy significant flexibility in management: (a) Direct Stockholder Management: The Articles may dispense with a board of directors, allowing stockholders to manage directly as if they were partners. (b) Supermajority or Unanimity: The Articles may require a supermajority or even unanimous vote for board or stockholder actions. (c) Informal Agreements: Stockholders may enter into written agreements to regulate corporate affairs, including voting trusts or pooling agreements, which are binding even if contrary to general corporate norms, provided they are not illegal or contrary to public policy.
VI. Arbitration of Disputes
To resolve internal deadlocks or controversies without court intervention, the Articles may include a provision for compulsory arbitration. Any controversy arising from the implementation of the Articles, or any intra-corporate dispute, can be submitted to arbitration pursuant to the applicable arbitration law.
VII. Pre-Emptive Right and Issuance of Additional Shares
Stockholders of a close corporation have an absolute pre-emptive right to subscribe to new issuances of shares in proportion to their shareholdings, unless denied by the Articles. This is stricter than in ordinary corporations and is crucial to maintaining the proportionate ownership and control balance.
VIII. Liability for Mismanagement and Piercing the Corporate Veil
Given the overlap of ownership and control, stockholders actively managing the business may be held liable for corporate acts if they assume to act as the corporation without clear authority. Furthermore, the pervasive control exercised by stockholders makes the doctrine of piercing the corporate veil more readily applicable in close corporations to prevent fraud, illegality, or injustice.
IX. Practical Remedies
Stockholders in a close corporation facing oppression, deadlock, or breach of agreements have several remedies: (a) Injunctive Relief: To enforce transfer restrictions or prevent unauthorized acts. (b) Derivative Suit: To redress wrongs committed against the corporation by insiders. (c) Petition for Dissolution: Under the RCC, any stockholder may petition for dissolution on grounds of deadlock, oppression, or that the corporate assets are being misapplied. (d) Exercise of Appraisal Right: In cases of fundamental corporate changes, an objecting stockholder may demand payment of the fair value of their shares. (e) Specific Performance: To enforce arbitration clauses or stock purchase agreements. (f) Direct Action for Damages: Where a stockholder’s personal rights are violated by a co-stockholder’s breach of fiduciary duty or a stockholder agreement. Proactive drafting of comprehensive stockholders’ agreements, alongside the Articles, is the most critical preventive measure to define rights, remedies, and exit mechanisms clearly.