Section 95: Definition and Applicability of Close Corporation Provisions

A Close Corporation is a unique type of corporation that is characterized by limited

ownership and specific restrictions on the transfer of its shares. Unlike publicly traded
corporations, close corporations are not open to the general public for share purchases,
and their ownership is typically restricted to a small group of individuals, often family
members or close associates.

Key Characteristics of a Close Corporation:

1. Limited Number of Shareholders:

o A close corporation can have no more than 20 shareholders. This is one of

the defining features that diBerentiates it from a public corporation, where
the number of shareholders is not restricted.

2. Restrictions on the Transfer of Shares:

o In a close corporation, the shares cannot be freely transferred or sold to

anyone outside of the group of shareholders. These restrictions may require
that shares be sold only to other shareholders or, in many cases, to family
members if the corporation is family-owned.

o Example: If a family member wants to sell their shares, they may be required
to oBer them first to other family members or shareholders, preventing
outside parties from becoming owners.

3. No Public OFering of Shares:

o The shares of a close corporation are not listed on any stock exchange, such
as the Philippine Stock Exchange (PSE). This means that shares are not
available to the general public for purchase.

o In contrast, for publicly traded corporations like Ayala, BPI, or BDO, shares
can be bought by anyone through a broker, and they are openly traded on the
stock market.

4. Exemption for Ownership by Another Corporation:

o A corporation will not be considered a close corporation if at least 2/3 of its

voting stock or voting rights is owned by another corporation that is publicly
traded.
 o Example: If ABC Corporation is a close corporation but DEF Corporation (a
public corporation) owns 800 of its 1,000 shares, ABC Corporation will no
longer be classified as a close corporation because it is controlled by a
public entity.

5. Prohibited Industries:

o Certain types of businesses cannot incorporate as close corporations. This

includes mining or oil companies, banks, insurance companies, public
utilities, and other corporations vested with public interest. This restriction
exists because these industries typically involve large public or economic
interests that require more transparency and accountability than a close
corporation can provide.

6. Applicability of Other RCC Provisions:

o The Revised Corporation Code (RCC) applies to close corporations unless

there are specific provisions within the close corporation framework that
conflict with the general RCC rules. In other words, general corporation laws
will apply to close corporations as long as they do not contradict the special
provisions for close corporations.

Additional Insights:

• Flexibility and Control:

o A close corporation oBers a more flexible and controlled ownership

structure, making it ideal for family businesses or small groups of investors
who want to keep control over the corporation's direction and prevent
outside interference.

o The restrictions on share transfers help maintain the close-knit nature of

ownership, which can be especially valuable in family businesses where the
goal is to keep ownership within the family.

• Drawbacks:

o While close corporations oBer control and privacy, they also face limitations
in raising capital since they cannot sell shares to the public. This means that
close corporations must rely on the personal funds of their shareholders or
other private financing options.

Possible Teacher Questions:

 1. What is a close corporation?

o A close corporation is a type of corporation where the shares are owned by a

small number of individuals (not more than 20) and are not available for
public purchase or traded on a stock exchange. Share transfers are often
restricted.

2. What are the restrictions on transferring shares in a close corporation?

o Shareholders of a close corporation cannot freely transfer their shares to

anyone. Typically, shares must be oBered to other shareholders or family
members first, and transfers may be subject to approval.

3. Why can’t certain industries like banks or mining companies be close

corporations?

o Industries like banks, mining companies, and public utilities are prohibited
from being close corporations because they involve public interest and
require greater transparency and regulatory oversight.

4. When is a corporation no longer considered a close corporation?

o A corporation is no longer considered a close corporation if 2/3 or more of

its voting stock or voting rights is owned or controlled by another
corporation that is publicly traded.

5. How does the Revised Corporation Code apply to close corporations?

o The RCC applies to close corporations except when there are specific
provisions for close corporations that conflict with the general RCC rules.

Scenarios of Who is Right and Who is Wrong:

1. Scenario 1: Share Transfer to Outsider

o Situation: Seokjin, a shareholder in a close corporation, wants to sell his

shares to an outside investor who is not a current shareholder or family
member.

o Who is wrong: Seokjin is wrong because he cannot sell his shares to an

outsider without first oBering them to other shareholders. This restriction is a
key feature of close corporations.

2. Scenario 2: Incorrect Number of Shareholders

 o Situation: A close corporation allows its 21st shareholder to join without
amending its articles of incorporation.

o Who is wrong: The corporation is wrong because a close corporation can

have no more than 20 shareholders. By exceeding this number, the
corporation violates its status as a close corporation and must either
restructure or amend its documents.

3. Scenario 3: Public Listing of Shares

o Situation: The board of a close corporation decides to list its shares on the
Philippine Stock Exchange to raise capital.

o Who is wrong: The board is wrong because one of the conditions of being a
close corporation is that shares cannot be publicly listed or oBered on a
stock exchange.

4. Scenario 4: Ownership by a Public Corporation

o Situation: XYZ Corporation is a close corporation with 15 shareholders. A

public corporation acquires 70% of XYZ Corporation’s shares.

o Who is right: The public corporation is right in acquiring the shares, but XYZ
Corporation will no longer be considered a close corporation because it is
now controlled by a publicly traded entity.

Conclusion:

Close corporations provide a flexible and controlled structure, especially suitable for family
businesses or small groups of investors. However, they come with strict limitations on the
number of shareholders and the transfer of shares to maintain control within a small circle.
The RCC provisions ensure transparency in larger, public-interest businesses, while the
special rules for close corporations allow for more privacy and control.

Section 96: Articles of Incorporation (AOI) of a Close Corporation

This section of the Revised Corporation Code (RCC) outlines the provisions that may be
included in the Articles of Incorporation (AOI) of a Close Corporation. These provisions are
more flexible than those of public corporations and are designed to fit the unique structure
of close corporations, where ownership and management are more tightly controlled.

Key Provisions in the AOI of a Close Corporation:

1. Classification of Shares and Restrictions on Transfer:

o The AOI may classify shares into diBerent categories, which could have
diBerent rights and restrictions. For instance, some shares may not carry
voting rights, or they may have certain restrictions on transfer.

o Restrictions on Transfer: Close corporations typically have limitations on

the transfer of shares. This means that shareholders cannot freely sell their
shares to just anyone; they may only transfer shares under certain
conditions, such as oBering them first to other shareholders or family
members.

o Example: If the AOI states that shares can only be transferred to existing
shareholders, a shareholder wishing to sell their shares must oBer them first
to other shareholders before selling to an outsider.

2. Classification of Directors and Voting Rights:

o The AOI may allow for the classification of directors into one or more
categories. Certain classes of shares may have the exclusive right to elect
specific directors.

o This means that the election process can be tailored according to the AOI,
granting certain shareholders more influence over who is chosen as a
director.

o Example: In a close corporation with two classes of shares, Class A

shareholders might elect one set of directors, while Class B shareholders
elect another set. This allows specific shareholders more control over who
manages the company.

3. Quorum and Voting Requirements:

o The AOI can impose greater quorum or voting requirements than what is
typically required by the RCC.

o A quorum is the minimum number of shareholders or directors needed to

hold a meeting and make valid decisions. In a standard corporation, a
quorum is often 50% of shareholders + 1. However, in a close corporation,
the AOI might raise this requirement to ensure that more shareholders
participate in key decisions.

o Example: If a corporation has 1,000 shares issued, the normal quorum

would be 501 shares (50% + 1). But the AOI could specify that a quorum of
 700 shares is required for meetings to proceed, ensuring that a larger portion
of shareholders is involved.

4. Management by Shareholders:

o The AOI may provide that the business of the corporation is managed directly
by the shareholders, rather than by a board of directors.

o This provision allows shareholders to directly manage the business, which

is often more practical in close corporations, where there may be fewer
owners.

o Liability: If shareholders manage the business, they assume the same

liabilities as directors under the law. This means that they are held
accountable for their actions and decisions just as directors would be in a
traditional corporation.

o Example: In a close corporation with five shareholders, they may decide to

directly run the company instead of electing a formal board of directors.
Since they are acting as the decision-makers, they bear the same legal
responsibilities and liabilities as directors.

5. Election or Appointment of OFicers:

o The AOI can also specify that oBicers or employees are elected or
appointed directly by the shareholders, bypassing the board of directors.
This provision grants shareholders greater direct control over the company’s
operations.

Additional Insights:

• Flexibility in Governance:

o The AOI of a close corporation allows for more customization in how the
company is run. For instance, the ability to classify shares or impose stricter
quorum requirements gives the corporation more control over decision-
making.

o This flexibility is ideal for close corporations, where ownership is typically

held by a small, tightly knit group. Shareholders often prefer to be more
hands-on in managing the business, and the AOI can be structured to reflect
this.
 • Liability Considerations:

o Shareholders who take on direct management of the company must be

aware of the increased liability they face. Just like directors, they are
responsible for ensuring the company operates in compliance with the law.
This could include financial accountability, adherence to corporate
governance principles, and responsibility for any damages caused by
negligent decisions.

• Tailored Management Structure:

o A close corporation can design a management structure that suits its

specific needs. Whether it’s allowing shareholders to directly manage the
company, or designating certain shares with specific voting rights, the AOI
provides the framework for tailored governance.

Possible Teacher Questions and Suggested Answers:

1. What restrictions can be placed on the transfer of shares in a close

corporation?

o In a close corporation, the AOI can impose restrictions on share transfers,

such as requiring shares to be oBered to existing shareholders first or limiting
sales to family members. These restrictions prevent outsiders from gaining
ownership and help maintain control within a small group.

2. How does the quorum requirement in a close corporation diFer from that in a
traditional corporation?

o In a traditional corporation, the quorum is usually set at 50% + 1 of the

shareholders or directors. However, a close corporation’s AOI can specify a
higher quorum, ensuring that a greater number of shareholders must be
present to make decisions.

3. Can shareholders manage a close corporation directly?

o Yes, the AOI of a close corporation can provide that shareholders directly
manage the business, bypassing the need for a board of directors. However,
shareholders who manage the company assume the same legal liabilities
as directors.

4. What are the consequences of shareholders managing the business directly?

 o If shareholders manage the business directly, they become liable for the
same obligations and responsibilities as directors, including ensuring
compliance with corporate laws and being accountable for business
decisions.

5. Why might a close corporation classify its directors or shares?

o A close corporation may classify its directors or shares to give certain

shareholders specific rights or control over certain decisions, such as
electing directors or having diBerent voting powers. This allows for more
tailored decision-making.

Scenarios: Who is Right and Who is Wrong?

1. Scenario 1: Shareholder Transfers Shares to an Outsider

o Situation: Jimin, a shareholder of a close corporation, transfers his shares to

an outsider without oBering them to the other shareholders first, even though
the AOI restricts such transfers.

o Who is wrong: Jimin is wrong because the AOI restricts the transfer of
shares to outsiders. He should have first oBered the shares to the existing
shareholders.

2. Scenario 2: Shareholders Managing the Business

o Situation: In a close corporation, the shareholders decide to manage the

business directly and bypass the election of a board of directors, as allowed
by the AOI.

o Who is right: The shareholders are right if the AOI permits them to manage
the business directly. However, they must understand that they are now
liable as directors under the law.

3. Scenario 3: Quorum Requirements Not Met

o Situation: The AOI of a close corporation requires 700 shares for a quorum,
but only 600 shares are represented at the meeting. The shareholders
proceed with the meeting and make decisions.

o Who is wrong: The shareholders are wrong because the required quorum of
700 shares was not met, making any decisions made in the meeting invalid.
Conclusion:

Section 96 of the RCC gives close corporations significant flexibility in shaping their
governance structure through the AOI. These provisions allow for tailored management and
ownership structures, such as classifying shares, restricting share transfers, and allowing
shareholders to directly manage the business. However, shareholders must be aware of
the legal liabilities they assume when taking on these roles, and the corporation must
adhere to the provisions set out in its AOI for its decisions to be valid.

Section 97: Validity of Restriction on Transfer of Shares

This section of the Revised Corporation Code (RCC) emphasizes the ability of close
corporations to restrict the transfer of shares. These restrictions are a fundamental
aspect of close corporations, as they aim to keep ownership within a defined group,
typically family members or existing shareholders, and prevent external parties from
gaining control of the corporation.

Key Points:

1. Restriction on Share Transfers:

o Close corporations often impose restrictions on the transfer of shares to

control who becomes a shareholder. This is one of the core features of close
corporations.

o The RCC allows restrictions on transfers, but these restrictions must not be
more onerous or burdensome than giving existing shareholders the option
to purchase the shares of a transferring shareholder. Essentially, the law
permits restrictions but ensures they are fair and not overly restrictive.

2. Reasonable Terms for Share Transfers:

o Any restriction placed on the transfer of shares must allow existing

shareholders a reasonable opportunity to purchase the shares under fair
conditions and within a reasonable time frame.

o The RCC ensures that restrictions cannot be unreasonable or overly

complicated, which might frustrate the transfer of shares or impose unfair
conditions on the shareholder looking to sell.

3. Valid Documents for Restrictions:

 o For a restriction on the transfer of shares to be valid, it must be explicitly
stated in at least one of the following:

§ The Articles of Incorporation (AOI),

§ The By-laws of the corporation, or

§ The stock certificate (the physical document representing ownership

in the company).

o If a restriction is not indicated in any of these documents, it will not be

binding on any purchaser acting in good faith. This means that the purchaser
can buy the shares without being subject to any unstated or hidden
restrictions.

4. Consequences of Not Specifying the Restriction:

o If the restriction on share transfers is not included in the AOI, by-laws, or

stock certificate, it becomes ineFective. Therefore, the shares can be sold to
anyone, regardless of any informal agreement between the shareholders.

o A purchaser in good faith—someone who is unaware of any unstated

restrictions—cannot be bound by a restriction that is not properly
documented.

Examples:

1. Restriction on Share Transfer Not Documented:

o Scenario: ABC Corporation is a close corporation with 10 shareholders. The

shareholders have a verbal agreement that no one can sell their shares to
outsiders. However, this restriction is not included in the AOI, by-laws, or
stock certificates.

o What happens: Shareholder John decides to sell his shares to an outsider.

Since the restriction is not properly documented, John is legally allowed to
sell his shares to the outsider, and the other shareholders cannot block the
sale.

2. Reasonable Restriction on Share Transfer:

o Scenario: In XYZ Corporation, the AOI states that any shareholder wishing to
sell their shares must first oBer them to the other shareholders. The price
 must be the fair market value, and the shareholders have 60 days to decide
if they want to buy.

o What happens: Shareholder Anna wants to sell her shares. She oBers them
to the other shareholders first, as required by the AOI. The shareholders
decline within the 60-day period, so Anna can now sell her shares to an
outsider. This is a reasonable restriction, as the shareholders had the
opportunity to buy the shares under fair terms and within a set time frame.

3. Unreasonable Restriction on Share Transfer:

o Scenario: In DEF Corporation, the AOI states that any shareholder who
wants to sell their shares must oBer them to the other shareholders at half
the market value, and the shareholders have 180 days to decide.

o What happens: This restriction could be seen as onerous and unfair

because it forces the selling shareholder to sell at a significant discount and
imposes a long waiting period. This might be considered a violation of the
RCC, which requires restrictions to be reasonable and not excessively
burdensome.

Additional Insights:

• Purpose of Restrictions: Restrictions on the transfer of shares in close

corporations are designed to maintain control within a small group of individuals.
This ensures that ownership stays within a trusted circle, such as family members or
existing shareholders, and prevents external parties from becoming shareholders
without approval.

• Protecting Shareholders: The RCC's requirement for restrictions to be reasonable

protects shareholders from being trapped in unfair situations. For example, the RCC
prevents situations where shareholders are forced to sell their shares at an unfairly
low price or wait for an excessively long period before they can complete a transfer.

• Good Faith Purchasers: A purchaser in good faith is someone who buys shares
without knowledge of any undisclosed restrictions. If a restriction is not properly
documented in the AOI, by-laws, or stock certificates, a good faith purchaser cannot
be held to that restriction. This ensures transparency and fairness in transactions.

Possible Teacher Questions and Suggested Answers:

 1. Where must restrictions on share transfers be documented for them to be
valid?

o Restrictions on the transfer of shares must be documented in the Articles of

Incorporation (AOI), the By-laws, or the stock certificate to be valid.

2. What happens if a restriction on the transfer of shares is not documented in the

AOI, by-laws, or stock certificate?

o If the restriction is not documented in any of these places, it is not binding

on a purchaser acting in good faith, meaning the shares can be sold without
being subject to the restriction.

3. What does the RCC say about the reasonableness of restrictions on share
transfers?

o The RCC states that any restriction on share transfers must not be more
onerous or burdensome than granting existing shareholders the option to
purchase the shares under reasonable terms and within a reasonable time
frame.

4. Can a shareholder sell their shares to anyone if the restriction is not properly
documented?

o Yes, if the restriction is not properly documented in the AOI, by-laws, or stock
certificate, the shareholder can sell their shares to anyone, and the sale will
be valid.

5. Why does the RCC require restrictions on share transfers to be reasonable?

o The RCC requires restrictions to be reasonable to prevent shareholders from

being unfairly restricted in selling their shares. This ensures that
shareholders can exit the corporation without facing excessive limitations.

Scenarios: Who is Right and Who is Wrong?

1. Scenario 1: Share Transfer with No Written Restriction

o Situation: J-Hope is a shareholder in a close corporation. The shareholders

have an informal agreement that shares cannot be sold to outsiders.
However, this restriction is not mentioned in the AOI, by-laws, or stock
certificate. J-Hope sells his shares to an outsider.
 o Who is right: J-Hope is right. Since the restriction is not properly
documented, it is not valid, and J-Hope is free to sell his shares to anyone.

2. Scenario 2: Unreasonable Restriction on Share Transfer

o Situation: Sarah wants to sell her shares in a close corporation. The AOI
requires her to sell at half the market value, and the other shareholders have
180 days to decide whether to buy. Sarah believes this restriction is too
burdensome.

o Who is wrong: The corporation is wrong. The RCC requires restrictions on

share transfers to be reasonable. Requiring Sarah to sell at half the market
value and imposing a long waiting period is likely an unreasonable
restriction.

3. Scenario 3: Valid Restriction on Share Transfer

o Situation: In a close corporation, the AOI states that shares must first be
oBered to existing shareholders at market value, and the shareholders have
60 days to respond. David wants to sell his shares and follows this process,
but the shareholders decline to buy within the 60-day period.

o Who is right: David is right. He followed the valid restriction outlined in the
AOI, and since the shareholders declined within the specified time frame, he
is now free to sell the shares to an outsider.

Conclusion:

Section 97 ensures that restrictions on the transfer of shares in close corporations are
clearly documented and reasonable. This balances the need for close corporations to
maintain control over ownership with the rights of shareholders to sell their shares under
fair conditions. It prevents undue burdens on shareholders while ensuring that restrictions
are transparent and enforceable.

Section 98: EFects of Issuance or Transfer of Stock in Breach

Section 98 of the Revised Corporation Code (RCC) provides safeguards for close
corporations when the rules on the restriction of share transfers (outlined in Section 97)
are violated. This section outlines the consequences and remedies available to the
corporation and the shareholders if shares are issued or transferred in breach of the valid
restrictions on transfer.

Key Points:

1. Presumptive Notice:

o The law assumes that all shareholders of a close corporation are aware of
the restrictions on the transfer of shares. This is called presumptive notice.
It means that even if a shareholder claims they were unaware of the
restrictions, it is presumed that they know about the rules because they are
clearly stated in the corporation's Articles of Incorporation (AOI), by-laws, or
stock certificates.

o For example, if a close corporation restricts the transfer of shares to

outsiders and requires the shares to be oBered to existing shareholders first,
all shareholders are presumed to know and follow this rule.

o Situations where presumptive notice is present: a. If the shares are

transferred to a person who is not qualified to hold those shares, such as an
outsider in a family-owned close corporation. b. If the transfer would violate
the number of shareholders allowed in the AOI. For example, if the AOI
limits the number of shareholders to 10 and a sale would result in 11
shareholders, the presumption arises that the sale is invalid.

2. Non-Registration of Transferred Shares:

o If shares are sold or transferred in violation of Section 97 (without following

the restrictions), the close corporation has the right to refuse to register the
transferred shares in its stock transfer book. This is significant because
unregistered shares are not binding on the corporation, meaning that the
new owner would not have rights as a shareholder (such as the right to vote
or receive dividends).

o For example, if a shareholder sells their shares to an outsider without oBering

them first to the existing shareholders (as required by the AOI), the
corporation can refuse to register the sale. As a result, the outsider would not
be recognized as a valid shareholder in the corporation.

3. Right to Rescission:

o The close corporation has the right to rescind (cancel) the sale of shares that
violate the restrictions. If the transfer is found to be in breach, the
 corporation can go to court to have the transaction undone. This allows the
corporation to ensure that its ownership structure remains in compliance
with the restrictions outlined in its governing documents.

o The corporation may also refuse to recognize the transferee as a shareholder,

protecting the integrity of the corporation's close-knit ownership structure.

4. Exceptions to Non-Registration:

o There are two situations where the corporation might still recognize the sale,
even if it initially breaches the transfer restrictions:

§ Consent of all shareholders: If all shareholders agree to the transfer,

it can be registered despite the initial breach.

§ Amendment of the AOI: If the AOI is amended to allow the transfer

(for example, increasing the number of shareholders), the transfer
may be registered.

5. Transferee's Right to Rescind:

o The transferee (the person who bought the shares) also has the right to
rescind the transfer or recover any applicable warranties if the transfer was
invalid or violated the restrictions. This means that if someone unknowingly
buys shares that cannot legally be transferred to them, they can seek to
cancel the sale and recover their payment.

Additional Insights:

• Safeguarding the Close Corporation: Section 98 reinforces the idea that close
corporations are meant to maintain a tight control over ownership. The safeguards
ensure that ownership remains within the intended group of individuals (e.g., family
members or a select group of shareholders). By enforcing restrictions on share
transfers, the corporation prevents outsiders from acquiring ownership without the
proper consent.

• The Importance of Compliance: This section emphasizes the need for

shareholders and potential buyers to comply with the corporation's Articles of
Incorporation, by-laws, and the stock certificate. Failure to comply with the
restrictions results in non-recognition of the transfer by the corporation, rendering
the transaction ineBective.
 • Balance Between Flexibility and Control: While the corporation has the right to
enforce restrictions on the transfer of shares, the law also provides flexibility in
certain cases. For example, if all shareholders consent or the AOI is amended, the
corporation can choose to allow and register the transfer. This provides a balance
between maintaining control and allowing for exceptions when necessary.

Examples:

1. Invalid Transfer Due to Exceeding the Shareholder Limit:

o Scenario: XYZ Corporation’s AOI limits the number of shareholders to 10.

John, a shareholder, sells his shares to an outsider, which would increase the
total number of shareholders to 11.

o What happens: The sale is presumed to be invalid because it violates the

restriction in the AOI. The corporation can refuse to register the sale in its
stock transfer book, and the transaction can be rescinded.

2. Valid Transfer with Consent:

o Scenario: ABC Corporation restricts the transfer of shares to outsiders in its

AOI, requiring shares to be oBered to existing shareholders first. However, all
shareholders agree to allow Peter, an outsider, to purchase shares from a
current shareholder.

o What happens: Since all shareholders consented to the transfer, it can be

registered in the corporation’s stock transfer book, even though it initially
violated the restriction.

3. Non-Qualified Transferee:

o Scenario: DEF Corporation is a family-owned close corporation. One of the

shareholders sells their shares to an outsider who is not a family member, in
violation of the AOI which limits ownership to family members.

o What happens: The corporation refuses to register the transfer in the stock
transfer book, and the sale is rescinded. The shares remain within the family,
as intended by the AOI.

4. Transferee Seeks Rescission:

 o Scenario: Jane buys shares from a shareholder of a close corporation, but
later finds out that the AOI prohibits the sale of shares to outsiders. The
corporation refuses to register her as a shareholder.

o What happens: Jane can seek to rescind the sale and recover her payment
because the transfer was invalid and violated the corporation’s restrictions.

Possible Teacher Questions and Suggested Answers:

1. What is presumptive notice in the context of share transfers in a close

corporation?

o Answer: Presumptive notice means that all shareholders are assumed to be

aware of the restrictions on the transfer of shares, even if they claim
otherwise. This assumption is based on the fact that these restrictions are
documented in the AOI, by-laws, or stock certificates.

2. What happens if shares are transferred in violation of the restrictions in the

AOI?

o Answer: If shares are transferred in violation of the restrictions in the AOI, the
corporation can refuse to register the transfer in its stock transfer book. The
sale will not be binding on the corporation, and the corporation may also
have the right to rescind the sale.

3. Can a transfer of shares be valid if it violates the restrictions in the AOI?

o Answer: Yes, a transfer of shares can still be valid if all shareholders consent
to the transfer or if the AOI is amended to allow it. In such cases, the transfer
may be registered with the corporation.

4. What rights does the transferee have if they unknowingly buy shares in violation
of the restrictions?

o Answer: The transferee has the right to rescind the sale and recover their
payment if the transfer was made in violation of the restrictions and the
corporation refuses to register the transfer.

Scenarios: Who is Right and Who is Wrong?

1. Scenario 1: Share Transfer Without Notice of Restriction

 o Situation: V sells his shares in a close corporation to his friend Jungkook,
who is not a shareholder. The AOI requires shares to be oBered to existing
shareholders first. V did not follow this process, and the corporation refuses
to register the transfer.

o Who is right: The corporation is right. V violated the restriction by not

oBering the shares to the existing shareholders, and the corporation can
refuse to recognize the sale.

2. Scenario 2: Sale with Shareholder Consent

o Situation: Sarah wants to sell her shares in a close corporation to an

outsider. The AOI restricts transfers to existing shareholders, but all the
current shareholders agree to allow the sale.

o Who is right: Sarah is right. Since all shareholders consented to the transfer,
the sale can be registered in the corporation's stock transfer book, and the
transfer is valid.

3. Scenario 3: Transferee Seeks Rescission

o Situation: Emily buys shares from a shareholder in a close corporation, but

later discovers that the AOI restricts the sale of shares to outsiders. The
corporation refuses to register the sale.

o Who is right: Emily is right. She can seek to rescind the sale and recover her
payment because the sale violated the restrictions, and the corporation did
not register the transfer.

Conclusion:

Section 98 enforces the integrity of close corporations by ensuring that the transfer of
shares complies with documented restrictions. It protects the corporation from unwanted
external ownership and ensures that any breach of transfer restrictions can be corrected
through non-registration or rescission of the sale. At the same time, it provides flexibility in
cases where shareholders agree to make exceptions.

Section 99: Agreements by Shareholders

Section 99 of the Revised Corporation Code (RCC) governs the agreements between
shareholders in a close corporation. A close corporation is characterized by fewer
shareholders and less formal governance compared to regular corporations. In such
corporations, shareholders often wish to retain close control over business decisions,
including restrictions on the transfer of shares, voting rights, and management. Section 99
provides the legal framework for shareholders to enter into agreements that reflect their
unique needs and expectations, provided these agreements do not violate the
corporation's Articles of Incorporation (AOI).

Key Points:

1. Agreements Survive Incorporation:

o Pre-Incorporation Agreements: Any agreements made by shareholders

before the formation of the close corporation shall remain valid after
incorporation, provided they do not conflict with the AOI. This ensures that
shareholders can plan ahead and trust that their agreements will remain
enforceable even after the corporation is legally established.

o Example: If the shareholders of a family business agree, before forming the

corporation, that shares should not be sold to non-family members, this
agreement will continue to be eBective once the corporation is formed as
long as it aligns with the AOI.

2. Voting Agreements:

o Shareholders can agree in writing to vote their shares together or in a

specific manner. This is particularly useful when shareholders want to unite
their voting power to make decisions or elect directors. The agreement must
be in writing and signed by the shareholders involved.

o Example: Two shareholders holding 60% of the shares may agree to vote as a
block to ensure they can elect a specific director. Such an agreement
provides them with greater control over corporate decisions.

3. No Invalidity for Creating a Partnership-Like Relationship:

o Even if an agreement among shareholders creates an arrangement that

resembles a partnership (i.e., a close working relationship and shared
responsibilities), the agreement will not be invalidated. This ensures that
close corporations, which often operate more like partnerships due to their
small size and informal governance, are not penalized for adopting such
agreements.
 o Example: A group of shareholders agrees to share the profits and losses of
the corporation in a way that resembles a partnership structure. While the
corporation remains a legal entity separate from a partnership, this
agreement among the shareholders is valid as long as it doesn’t breach the
AOI.

4. Agreements Restricting the Powers of the Board of Directors:

o Shareholders in a close corporation may agree, in writing, to restrict or alter

the powers of the board of directors. This is another way close corporations
can operate with more flexibility. Normally, the board of directors manages
the business, but in a close corporation, shareholders can take a more active
role in decision-making, sometimes bypassing the board altogether.

o Example: The shareholders of a close corporation agree to retain the power

to approve certain business decisions, like entering into major contracts or
selling company assets, instead of leaving these decisions to the board of
directors. This allows the shareholders to maintain greater control over the
corporation.

5. Fiduciary Duties:

o Shareholders who are actively involved in the management or operation of

the corporation owe each other strict fiduciary duties. This means that they
must act in good faith and in the best interest of the corporation and the
other shareholders. The fiduciary duty prevents conflicts of interest and
ensures that the business is run fairly and ethically.

o Example: In a family-owned close corporation, if one shareholder is in

charge of managing the business, they must ensure that their decisions
benefit the corporation and not just themselves. If they breach this duty (e.g.,
by misusing company funds for personal purposes), they can be held
accountable by the other shareholders.

6. Informal Management:

o Close corporations often operate with informal management structures

because they have fewer shareholders who may be friends, family, or long-
time business partners. This informality is recognized under the RCC, which
allows these corporations to operate without strict adherence to formal
corporate governance rules, as long as their agreements are in place and
respected.
 o Example: In a close corporation owned by three siblings, they may agree to
run the business without regular board meetings, trusting each other to
handle day-to-day operations. This informal management is acceptable as
long as it doesn’t conflict with the AOI or by-laws.

Additional Insights:

1. Flexibility in Close Corporations:

o Section 99 recognizes the flexibility needed in close corporations. These

entities are typically smaller, and their shareholders often have more
personal relationships than those in large corporations. As a result, formal
corporate structures may not be necessary or eBicient. The ability to enter
into agreements that tailor voting rights, management responsibilities, and
share transfer restrictions gives shareholders the flexibility to manage the
corporation in a way that suits their needs.

2. Written Agreements:

o The law places importance on the written nature of agreements. By

requiring shareholder agreements to be in writing and signed, the RCC
ensures that there is clear documentation of the shareholders' intentions.
This prevents disputes over informal or verbal agreements and ensures that
the terms are enforceable.

3. Fiduciary Duties:

o Fiduciary duties are important in ensuring that shareholders who take part in
managing the business act with the best interest of the corporation in mind.
These duties include loyalty, care, and good faith. Shareholders must avoid
conflicts of interest, disclose relevant information, and make decisions that
benefit the corporation and not just themselves.

4. Limiting the Powers of Directors:

o In most corporations, the board of directors has significant power. However,

in close corporations, shareholders can agree to limit or remove some of
those powers and manage the business themselves. This aligns with the
informal nature of these entities but still respects the corporate structure as
long as the limitations are agreed upon in writing.
Examples:

1. Voting Agreement in a Close Corporation:

o Scenario: Anna, Bob, and Carla are the shareholders of a close corporation.
They hold 40%, 35%, and 25% of the shares, respectively. Anna and Bob
agree in writing to vote together on major corporate decisions, ensuring that
they have a majority vote (75%) on any resolution.

o What happens: This agreement allows Anna and Bob to control the outcome
of corporate decisions, such as electing directors or approving significant
transactions. Since the agreement is in writing and signed by both
shareholders, it is valid and enforceable.

2. Agreement Resembling a Partnership:

o Scenario: Five friends start a close corporation and agree to share profits
equally, even though they hold diBerent percentages of shares. Their
agreement also involves sharing management responsibilities like partners in
a partnership.

o What happens: While their agreement may resemble a partnership, it will

not be invalidated. The corporation remains a legal entity, and the agreement
is enforceable as long as it aligns with the AOI.

3. Fiduciary Duty Violation:

o Scenario: Three shareholders, Dan, Ellen, and Frank, are actively involved in
managing their close corporation. Dan secretly enters into a deal that
benefits his separate business, at the expense of the corporation.

o What happens: Dan has breached his fiduciary duties to Ellen, Frank, and
the corporation. He can be held accountable for his actions and may face
legal consequences, such as being required to repay the corporation for the
lost opportunity.

4. Restricting the Powers of Directors:

o Scenario: Shareholders in a close corporation agree to limit the board of

directors' powers by requiring that any decision to take out a loan must first
be approved by all shareholders.
 o What happens: The agreement restricts the board’s powers, but since it was
agreed upon in writing, it is valid. The board cannot take out loans without
first consulting the shareholders.

Possible Teacher Questions and Suggested Answers:

1. Can shareholder agreements made before incorporation survive the formation

of the corporation?

o Answer: Yes, agreements made among shareholders before the formation of

a close corporation survive incorporation as long as they are not inconsistent
with the AOI.

2. Can shareholders agree to vote their shares together?

o Answer: Yes, shareholders can enter into a written and signed agreement to
vote their shares in a specific manner, allowing them to exercise joint voting
power.

3. Can an agreement between shareholders be invalidated because it resembles a

partnership?

o Answer: No, the law does not invalidate shareholder agreements even if they
resemble a partnership. The corporation remains distinct from a partnership,
and the agreement is enforceable as long as it aligns with the AOI.

4. What are the fiduciary duties of shareholders who are actively involved in the
management of a close corporation?

o Answer: Shareholders who actively manage the corporation owe fiduciary

duties to each other and the corporation. These duties include acting in good
faith, with loyalty, and in the best interest of the corporation.

5. Can shareholders limit the powers of the board of directors in a close

corporation?

o Answer: Yes, shareholders can enter into written agreements that restrict or
alter the powers of the board of directors, allowing shareholders to take a
more active role in managing the corporation.

Conclusion:
Section 99 emphasizes the flexibility and informal nature of close corporations by allowing
shareholders to enter into binding agreements that tailor the corporation’s governance to
their specific needs. These agreements enable shareholders to maintain control over
voting, management, and share transfers while respecting the corporation’s formal
structure. The section also ensures that shareholders who take on management roles are
held to high fiduciary standards, ensuring fairness and ethical conduct.

Section 100: When Board Meeting is Unnecessary or Improperly Held

Section 100 of the Revised Corporation Code (RCC) addresses the validity of board
meetings, particularly those that may occur without proper notice to directors. In certain
circumstances, actions taken in these meetings can still be deemed valid under specific
conditions. This provision aims to ensure that corporate governance remains functional
even when procedural formalities are not strictly adhered to, which is particularly relevant
for close corporations.

Key Points:

1. Validity of Meetings Without Notice:

o A board meeting can be considered valid even if it occurs without notice, as

long as it does not violate the corporation's by-laws and certain conditions
are met.

2. Conditions for Validity: The following conditions must be satisfied for a meeting
without notice to be valid:

a. Written Consent from All Directors:

o If all directors provide written consent before or after the meeting, the lack
of notice is acceptable.

o Example: If the directors agree on a decision via email before a scheduled

meeting, their subsequent actions in that meeting are valid even if they did
not receive a formal notice.

b. Shareholder Knowledge:

o If all shareholders have actual or implied knowledge of the actions taken

during the meeting and do not promptly object in writing, the meeting is
considered valid.
 o Example: If a major decision is discussed at a board meeting and
shareholders are aware but do not object, the actions taken at that meeting
are ratified.

c. Accustomed Informal Action:

o If the directors are accustomed to taking informal actions with the express or
implied approval of all shareholders, the meeting may be valid despite a lack
of notice.

o Example: In a small family-run corporation where directors often discuss

matters informally without a formal meeting agenda, their actions may still
be valid.

d. Express or Implied Knowledge of Directors:

o If all directors have express or implied knowledge of the actions being taken
and none object in writing, the meeting is valid.

o Example: If a director knows a meeting is occurring and the topics being

discussed but chooses not to object, they implicitly consent to the
proceedings.

3. Ratification of Actions:

o Any action taken at a meeting held without proper notice is deemed ratified
by a director who fails to attend unless that director promptly files a written
objection with the corporate secretary after gaining knowledge of the action.

o Example: If a director was unaware of a meeting but later learns about a

decision made during that meeting and does not file an objection, they
eBectively ratify the action taken.

Additional Insights:

1. Flexibility in Corporate Governance:

o This section reflects the need for flexibility in corporate governance,

especially in smaller corporations or close corporations where informal
communication is common. The RCC recognizes that strict adherence to
notice requirements may not always be practical or necessary, provided
there is transparency and accountability among directors and shareholders.
 2. Importance of Written Objections:

o The requirement for written objections serves to create a formal record of

dissent, ensuring that directors can formally express their disagreement with
board actions. This helps maintain accountability and provides a mechanism
for directors to protect their interests.

3. Implied Ratification:

o The concept of implied ratification is crucial, as it encourages directors to

be proactive about their attendance and engagement in board matters. If
directors do not voice their objections, they risk losing the ability to contest
actions taken in their absence.

4. Corporate Culture and Governance:

o The ability to operate informally can foster a corporate culture where

directors feel comfortable communicating and making decisions without the
constraints of formal meetings. However, it is essential for all parties to
remain aware of their responsibilities and the importance of documenting
key decisions.

Examples:

1. Meeting Without Notice:

o Scenario: The board of directors holds a meeting to discuss a new business

strategy without formally notifying all members. After the meeting, all
directors provide written consent to the decisions made.

o Outcome: The decisions made during this meeting are valid because all
directors signed a consent form.

2. Shareholder Awareness:

o Scenario: A close corporation holds a meeting to approve a merger. All

shareholders are present and actively participate in the discussions, and
none object after the meeting.

o Outcome: The actions taken during the meeting are ratified because all
shareholders had knowledge of the proceedings and did not raise objections.

3. Informal Board Culture:

 o Scenario: In a small tech startup, directors often meet for lunch to discuss
company matters informally. During one lunch, they decide to allocate more
funds to a new project without a formal meeting.

o Outcome: If shareholders are aware and do not object, the decisions made
are valid even without a formal meeting notice.

4. Director Fails to Object:

o Scenario: Director A misses a meeting where key changes to the company’s

structure are discussed. After learning about the changes, Director A does
not file any written objections.

o Outcome: Director A’s failure to object means that the actions taken during
the meeting are considered ratified.

Possible Teacher Questions and Suggested Answers:

1. What conditions must be met for a board meeting held without notice to be
valid?

o Answer: The conditions include: (1) written consent from all directors, (2)
knowledge of the actions by all shareholders with no prompt objection, (3)
directors are accustomed to informal action with shareholder approval, and
(4) all directors have knowledge of the actions and do not object in writing.

2. What happens if a director fails to attend a meeting without notice?

o Answer: If a director fails to attend a meeting and does not file a written
objection after learning about the actions taken, their absence is treated as
implied ratification of those actions.

3. Can shareholders object to actions taken at a meeting held without proper

notice?

o Answer: Yes, shareholders can object to actions taken at a meeting held

without proper notice, but they must do so promptly and in writing to ensure
their objections are considered valid.

4. What is meant by “implied ratification”?

 o Answer: Implied ratification refers to the acceptance of actions taken during
a meeting by a director who did not attend, based on their failure to object in
writing after learning about the actions.

5. How does this section ensure flexibility in corporate governance?

o Answer: This section allows board meetings to be valid even without formal
notice, as long as certain conditions are met. This flexibility is particularly
beneficial for close corporations that may rely on informal decision-making
processes.

Conclusion:

Section 100 provides important guidance on the validity of board meetings, especially
those that occur without proper notice. By establishing clear conditions under which such
meetings can be deemed valid, this provision promotes a more flexible approach to
corporate governance while still protecting the rights and interests of shareholders and
directors. It emphasizes the importance of communication, consent, and accountability in
the decision-making processes of corporations.

Section 101: Pre-emptive Right in Close Corporations

The pre-emptive right is an essential protection for shareholders in a close corporation,

ensuring that their ownership percentage in the company is not diluted when new shares
are issued. It allows existing shareholders to purchase newly issued shares before they are
oBered to others, maintaining their proportionate ownership in the company.

Key Points:

1. Pre-emptive Right:

o Shareholders in a close corporation have the pre-emptive right to purchase

any newly issued shares of the corporation, including treasury shares (shares
previously issued and then repurchased by the corporation). This right
applies to shares issued in exchange for money, property, personal services,
or debt.

2. Protection Against Dilution:

o The primary purpose of the pre-emptive right is to protect shareholders from

dilution of their ownership interest. If new shares are issued and a
 shareholder does not exercise their pre-emptive right, their percentage of
ownership in the corporation will decrease.

o Example: If Pedro owns 1,000 shares out of 10,000 total shares in ABC Corp,
he holds a 10% interest. If ABC Corp issues another 10,000 shares, Pedro
has the right to purchase additional shares to maintain his 10% ownership,
preventing dilution.

3. Application of Pre-emptive Right:

o The right applies to all new shares issued by the corporation, not just shares
issued in exchange for money. It can include shares issued in exchange for
property, services, or as a means to settle debts.

4. Purpose of Pre-emptive Right:

o The main goal of the pre-emptive right is to allow shareholders to maintain

their level of control and influence within the corporation. Without this right,
a shareholder’s influence could be diluted by the issuance of new shares to
others.

Insights and Scenarios:

1. Scenario: Shareholder Exercises Pre-emptive Right:

o Situation: ABC Corp decides to issue 5,000 new shares to raise additional
capital. Pedro currently owns 10% of the shares. According to his pre-
emptive right, Pedro can purchase 10% of the new shares (500 shares) to
maintain his 10% ownership.

o Outcome: Pedro exercises his pre-emptive right and buys 500 shares. His
ownership remains 10% after the issuance.

2. Scenario: Shareholder Declines Pre-emptive Right:

o Situation: Same scenario as above, but Pedro declines to exercise his pre-
emptive right and does not buy the 500 new shares.

o Outcome: As a result, Pedro’s ownership is diluted. If he previously owned

1,000 out of 10,000 shares (10%), he now owns 1,000 out of 15,000 shares
(6.67%), reducing his percentage of ownership.

3. Wrongful Denial of Pre-emptive Rights:

 o Situation: ABC Corp issues new shares but fails to oBer them to Pedro, an
existing shareholder, in violation of his pre-emptive right.

o Outcome: Pedro can contest this issuance because the corporation violated
his pre-emptive right by not giving him the first option to purchase the newly
issued shares.

4. Pre-emptive Right Exclusion in AOI:

o Situation: The Articles of Incorporation (AOI) of ABC Corp specifically

exclude the pre-emptive right for newly issued shares.

o Outcome: In this case, Pedro does not have the pre-emptive right because
the AOI excludes it. The corporation can issue new shares without oBering
them to him first.

Teacher Questions and Suggested Answers:

1. What is the pre-emptive right, and why is it important in close corporations?

o Answer: The pre-emptive right allows existing shareholders to purchase

newly issued shares before they are oBered to outsiders, helping them
maintain their ownership percentage and control in the corporation. It is
essential in close corporations where ownership concentration and control
are critical.

2. Does the pre-emptive right apply to treasury shares?

o Answer: Yes, in close corporations, the pre-emptive right applies to all

shares, including treasury shares.

3. Can the Articles of Incorporation limit or exclude pre-emptive rights?

o Answer: Yes, the Articles of Incorporation (AOI) can expressly exclude or limit
pre-emptive rights. If the AOI includes such a provision, shareholders do not
have pre-emptive rights.

4. What happens if a shareholder declines to exercise their pre-emptive right?

o Answer: If a shareholder declines to exercise their pre-emptive right, their

percentage of ownership in the corporation will be diluted, meaning their
influence and control in the company will decrease.

5. What is the main purpose of the pre-emptive right in close corporations?

 o Answer: The primary purpose is to ensure that shareholders maintain their
level of ownership and control in the corporation, protecting them from
dilution when new shares are issued.

Section 102: Amendment of the Articles of Incorporation

The Articles of Incorporation (AOI) of a close corporation can be amended, but certain rules
apply.

Key Points:

1. Amendment Requirements:

o To amend the AOI in a close corporation, at least two-thirds (2/3) of the

outstanding capital stock must approve the amendment.

o This ensures that any significant changes to the corporation's foundation

receive a strong majority vote.

2. Scope of Amendments:

o Amendments can include adding, deleting, or modifying provisions in the

AOI, such as changing the corporation's name, purpose, or share structure.

3. Examples of Amendments:

o Example 1: If the shareholders of ABC Corp want to amend the AOI to

increase the number of authorized shares, they must obtain approval from at
least two-thirds of the outstanding capital stock.

o Example 2: If the corporation wants to remove a provision that grants

shareholders pre-emptive rights, they can do so by amending the AOI, again
requiring a two-thirds vote.

Teacher Questions and Suggested Answers:

1. How can the Articles of Incorporation be amended in a close corporation?

o Answer: The Articles of Incorporation can be amended with the approval of

two-thirds (2/3) of the outstanding capital stock.

2. Can the pre-emptive right be removed through an amendment to the AOI?

 o Answer: Yes, the pre-emptive right can be removed by amending the AOI,
provided that the amendment receives approval from two-thirds of the
outstanding capital stock.

3. Why is the two-thirds vote requirement significant?

o Answer: The two-thirds vote ensures that any substantial changes to the
corporation’s structure, governance, or key rights have broad support from
the shareholders, preventing decisions from being made by a small group.

Conclusion:

Section 101 protects shareholders in a close corporation by granting them pre-emptive

rights, allowing them to maintain their ownership percentage and control in the company
when new shares are issued. Meanwhile, Section 102 outlines the procedure for amending
the AOI, requiring a two-thirds vote of the outstanding capital stock to make any significant
changes to the corporation’s foundational document.

These sections emphasize the importance of shareholder rights and maintaining a

balanced structure of ownership and control, especially in close corporations where the
dynamics between shareholders are crucial to the corporation’s operations.

Section 103: Deadlocks in Close Corporations

A deadlock occurs when the shareholders or directors of a close corporation cannot reach
a consensus on crucial decisions required to manage the business and aBairs of the
corporation. This can prevent the corporation from conducting its business properly and
may require external intervention to resolve the situation.

Key Points:

1. Deadlock Definition:

o A deadlock happens when:

a. The directors or shareholders are so divided on key management

decisions that the corporation’s business cannot move forward.

b. The votes required for corporate actions cannot be obtained, resulting in a

standstill that halts the corporation's business operations.
Example: If a sale of property requires the approval of 75% of the shareholders but only
51% approve, the corporation is unable to move forward with the sale. This inability to
gather suBicient votes constitutes a deadlock.

2. How to Resolve Deadlocks:

o If a deadlock occurs, any shareholder may petition the Securities and

Exchange Commission (SEC) for arbitration. The SEC has several options to
resolve the deadlock and can take drastic measures if necessary. This
provides a formal way to break the stalemate and continue the corporation’s
business.

Actions the SEC Can Take to Resolve a Deadlock:

1. Cancel or Alter Provisions of the AOI or By-laws:

o The SEC can cancel or change provisions in the Articles of Incorporation

(AOI), by-laws, or shareholder agreements if they are contributing to the
deadlock.

o Example: If the AOI of ABC Corporation requires 75% approval to sell

corporate assets but the shareholders can only gather 51%, the SEC can step
in and cancel or amend the 75% requirement, allowing the sale to proceed
with a majority vote.

2. Cancel or Alter Corporate Acts:

o The SEC may cancel or change any corporate resolution or act made by the
board, shareholders, or oBicers.

o Example: If the board of directors passed a resolution to sell company

assets but a significant number of shareholders object, the SEC can nullify
the resolution if it's contributing to a deadlock.

3. Prohibit or Direct Actions:

o The SEC can stop or require any act by the board of directors, shareholders,
or oBicers that is contributing to the deadlock.

o Example: If directors want to sell corporate property but shareholders

strongly disagree, the SEC can prevent the sale or, alternatively, compel it if
necessary for the corporation’s well-being.

4. Order the Purchase of Shares:

 o The SEC may require the corporation to buy out dissenting shareholders at
fair value, even if the corporation lacks unrestricted retained earnings.

o Example: If a shareholder opposes the sale of corporate assets, the SEC can
order the corporation to buy out that shareholder’s shares, thereby
eliminating their opposition.

5. Appoint a Provisional Director:

o The SEC can appoint a provisional director, an impartial person who is

neither a shareholder nor creditor of the corporation, to manage the
corporation and resolve the deadlock.

o Example: If the directors cannot agree on the sale of assets, the SEC might
appoint a provisional director to make unbiased decisions on behalf of the
corporation until the deadlock is resolved.

6. Order the Dissolution of the Corporation:

o If all other options fail and the deadlock cannot be broken, the SEC can order
the dissolution of the corporation.

o Example: If the shareholders and directors are so divided that the business
cannot function, the SEC can dissolve the corporation and distribute its
assets among shareholders.

7. Grant Other Relief:

o The SEC can take any other actions deemed necessary to resolve the
deadlock, depending on the circumstances of the case.

Additional Insights and Examples:

1. Scenario: A Disagreement Over the Sale of Corporate Property:

o Situation: The AOI of a close corporation requires a 75% shareholder

approval to sell corporate property. However, only 60% of the shareholders
approve the sale, leading to a deadlock.

o Resolution: A shareholder petitions the SEC. The SEC may cancel or amend
the 75% requirement in the AOI, allowing the sale to proceed with the 60%
approval.

2. Scenario: Board of Directors Cannot Agree on Corporate Strategy:

 o Situation: The board of directors is evenly split on a crucial strategic
decision, and no decision can be made to move the company forward.

o Resolution: A shareholder petitions the SEC. The SEC could appoint a

provisional director to break the tie and guide the corporation out of the
deadlock.

3. Scenario: Dispute Over Voting Rights:

o Situation: Shareholders are in a deadlock over voting rights regarding a

merger decision. The AOI requires a supermajority, but only a simple majority
is in favor.

o Resolution: The SEC may decide to alter the voting requirement in the AOI or
require the dissenting shareholders’ shares to be bought out to break the
deadlock.

Questions Teachers Might Ask:

1. What is a deadlock in a close corporation?

o Answer: A deadlock occurs when the shareholders or directors are so

divided on key management decisions that the corporation’s business
cannot proceed, or when the votes required for corporate actions cannot be
obtained.

2. What can the SEC do to resolve a deadlock?

o Answer: The SEC has several options, including canceling or altering

provisions of the AOI or by-laws, canceling or altering corporate acts,
directing or prohibiting certain actions, ordering the purchase of shares,
appointing a provisional director, ordering the dissolution of the corporation,
and granting other relief as necessary.

3. Can the SEC dissolve a corporation if a deadlock occurs?

o Answer: Yes, the SEC can order the dissolution of a corporation if the
deadlock cannot be resolved and the business cannot be conducted
properly.

4. What is the role of a provisional director in breaking a deadlock?

 o Answer: A provisional director is an impartial individual, neither a
shareholder nor a creditor, appointed by the SEC to help manage the
corporation and resolve the deadlock by making decisions when the
shareholders or directors cannot agree.

5. Can the SEC order the buyout of dissenting shareholders?

o Answer: Yes, the SEC can require the corporation to buy out dissenting
shareholders at fair value, even if the corporation lacks unrestricted retained
earnings.

Scenarios for Discussion: Who is Right and Who is Wrong?

1. Scenario: Majority Shareholders vs. Minority Shareholders:

o Situation: The majority shareholders (60%) want to sell a corporate property,

but the AOI requires a 75% approval. The minority shareholders (40%) refuse,
leading to a deadlock.

o Who is right?: Both parties are following the AOI. However, the majority
shareholders can petition the SEC to alter the 75% requirement in the AOI to
allow the sale with a majority vote.

2. Scenario: Provisional Director’s Role:

o Situation: A provisional director is appointed by the SEC to break a deadlock.

The provisional director decides to sell company assets despite opposition
from 40% of the shareholders.

o Who is right?: The provisional director’s decision is valid as long as they act
within the authority granted by the SEC. The shareholders must respect the
SEC's resolution of the deadlock.

Conclusion:

Section 103 of the Revised Corporation Code provides mechanisms to address deadlocks
in close corporations. The SEC plays a crucial role in resolving disputes that prevent the
corporation from functioning. By allowing the SEC to arbitrate and take actions such as
altering provisions in the AOI, appointing provisional directors, or even dissolving the
corporation, Section 103 ensures that close corporations can continue to operate despite
internal conflicts.
Section 104: Withdrawal of Shareholders or Dissolution of a Close Corporation

Section 104 of the Revised Corporation Code of the Philippines addresses two scenarios:
(1) when a shareholder wishes to withdraw from a corporation, and (2) when the
dissolution of the corporation is sought due to misconduct by the directors or oBicers. This
section safeguards shareholders' rights, particularly in close corporations, where
relationships are more personal and the structure is less formal.

Key Points:

1. Withdrawal of a Shareholder:

o A shareholder may choose to withdraw from the corporation for any reason
(personal, professional, or due to dissatisfaction).

o The withdrawing shareholder has the right to compel the corporation to buy
their shares at fair value, which cannot be less than the par value or the
issued value of the shares.

o This ensures that the shareholder’s investment is returned fairly, protecting

them from being forced to sell at an undervalued price.

Example: Maria holds 1,000 shares in ABC Corporation. She wants to withdraw from the
corporation due to personal reasons. She can request that the corporation buy her shares
at their fair value. If the issued value of her shares was ₱100 per share, she must receive at
least that amount, regardless of the current market fluctuations.

2. Compelling the Dissolution of the Corporation:

o Any shareholder can also petition for the dissolution of the corporation if
there are illegal, fraudulent, dishonest, oppressive, or unfairly prejudicial
acts by the directors or oBicers.

o This provision protects minority shareholders or those who feel that the
actions of the directors or oBicers are harmful to the corporation or the
shareholders' interests.

o Misconduct like embezzlement, failure to act in the corporation’s best

interest, or abusing power for personal gain are grounds for seeking
dissolution.

Example: If the board of directors of XYZ Corporation engages in fraudulent activity (e.g.,
embezzling corporate funds or approving deals that personally benefit them), a
shareholder can file a petition for the dissolution of the corporation with the SEC, citing
that the directors' actions are oppressive and against the corporation’s interests.

Insights and Analysis:

1. Withdrawal Rights:

The withdrawal provision allows flexibility and fairness for shareholders in close
corporations. Unlike larger corporations, where share transfers are easier and there is
usually a market for buying or selling shares, close corporations have fewer shareholders,
often family or friends, making it more complicated for one to exit. This provision provides
an orderly exit for shareholders while ensuring they are fairly compensated.

2. Dissolution of the Corporation:

The second part of Section 104 provides a mechanism to protect shareholders from
directors or oBicers who misuse their authority. In close corporations, the shareholders
usually play a more active role in decision-making, and conflicts can arise. If directors
engage in oppressive or fraudulent behavior, the shareholders need legal remedies to
protect themselves and the corporation. Dissolution can be a last-resort measure to
prevent further harm or to break deadlocks that significantly impair the corporation's
business.

Questions Teachers Might Ask:

1. What rights does a shareholder have if they wish to withdraw from a close
corporation?

o Answer: A shareholder can compel the corporation to buy their shares at fair
value, not less than the par or issued value.

2. Under what conditions can a shareholder compel the dissolution of a

corporation?

o Answer: A shareholder can request the dissolution of the corporation if the

directors or oBicers engage in illegal, fraudulent, dishonest, oppressive, or
unfairly prejudicial acts towards the corporation or its shareholders.

3. What is the purpose of the withdrawal and dissolution provisions in Section

104?
 o Answer: These provisions protect shareholders by ensuring they can exit the
corporation fairly and have a legal remedy if the corporation's management
engages in harmful or oppressive actions.

4. What is the diFerence between a shareholder's right to withdraw and the right
to compel dissolution?

o Answer: The right to withdraw allows a shareholder to exit the corporation by

selling their shares at fair value, while the right to compel dissolution is
available when the corporation’s management engages in wrongful acts that
harm the corporation or shareholders.

Scenarios for Discussion:

1. Scenario: Oppressive Acts by Directors

• Situation: The directors of ABC Corporation, a close corporation, regularly approve

transactions that favor their personal businesses. One shareholder, Jane, feels that
these actions are unfairly prejudicial to the corporation’s interests.

• Who is right?: Jane can petition for the dissolution of the corporation on the
grounds of oppressive and prejudicial acts by the directors. The directors' actions
violate their fiduciary duty to act in the best interest of the corporation and its
shareholders.

2. Scenario: Shareholder Withdrawal and Fair Value

• Situation: Pedro, a shareholder of XYZ Corporation, decides to withdraw from the

corporation. However, the corporation oBers to buy his shares at a lower value than
the par value, claiming the company is facing financial challenges.

• Who is right?: Pedro is right to demand at least the par or issued value for his
shares. Under Section 104, the corporation is obligated to buy the shares at fair
value, which cannot be lower than the issued value, regardless of the corporation's
financial situation.

3. Scenario: Fraudulent Behavior of OFicers

• Situation: The oBicers of DEF Corporation, a close corporation, are found to be

involved in illegal financial transactions that benefit them personally but harm the
corporation's standing.
 • Who is right?: Any shareholder can petition the SEC for the dissolution of the
corporation. The illegal actions of the oBicers are grounds for dissolution, as they
are fraudulent and harmful to the corporation and its shareholders.

Conclusion:

Section 104 is designed to balance the interests of shareholders in a close corporation by

providing fair exit strategies and legal remedies in cases of misconduct. It ensures that
shareholders have rights to protect their investments and prevents directors or oBicers
from exploiting their positions. This section is vital for maintaining trust and fairness in the
management of close corporations.