Published — June 01, 2022
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Read also: How to register your corporation with the SEC
-
Close corporations are often run by family members wherein the management of the corporation is purposely restricted within the family or a small circle of trusted individuals.
-
Close corporations are not listed in any stock exchange, neither can they make any public offerings.
-
The issued stocks of close corporations are subjected to restrictions on the transfer of shares.
Aside from Stock, Non-Stock, Special, One- Person, and Foreign Corporation, an incorporator may also set-up a Close Corporation. What is a close corporation? How is it different from a stock corporation?
Under the Revised Corporation Code:
A close corporation is one whose articles of incorporation provides that:
- 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);
- all the issued stock of all classes shall be subject to one or more specified restrictions on transfer; and
- the corporation shall not list in any stock exchange or make any public offering of its stocks of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation.
Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions, and corporations declared to be vested with public interest.
The main difference between a close corporation and other corporations is the identity of stock ownership and active management, that is, all or most of the stockholders of a close corporation are active in the corporate business either as directors, officers, or other key men in management. Close corporations are often run by family members wherein the management of the corporation is purposely restricted within the family or a small circle of trusted individuals. While stockholders of a regular stock corporation separately leave the management duties to its board of directors, the stockholders of a close corporation also act as the board of directors since they themselves manage the close corporation. Thus, there exists a common identity between the stockholders and the corporate manager in a close corporation.
Validity of Restrictions on Transfer of Shares
Restrictions on the right to transfer shares must appear in the articles of incorporation, in the bylaws, as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser in good faith.
If upon the expiration of the period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell their shares to any third person.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
All rights reserved.
SUBSCRIBE NOW FOR MORE LEGAL UPDATES!
[email-subscribers-form id=”4″]