The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. (n)
Stock corp- Must be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. Note: Metro Manila shall be considered a city of municipality. (Section 51) (UP-Elective Class Reviewer at 45)
(j) Distribution of assets in case of dissolution
(Section 94)
Sec. 94. Rules of distribution
In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a plan of distribution adopted pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. (n)
Stock Corp- Assets are distributed to the stockholders of the corporation after claims of the creditors are satisfied.
11.2 Additional material: SEC Opinion letter, dated
February 24, 2003 to Ms. Benedicta Bello re
Conversion of non-stock educational institution into
a stock corporation.
SEC Opinion dated February 24, 2003
Firstly, the conversion of a non-stock educational institution into a stock corporation is not legally feasible. Pursuant to Section 87 of the Corporation Code, no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or officers. Thus, the Commission has previously ruled that a non-stock corporation cannot be converted in to a stock corporation by a mere amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under any of the methods specified under Titled XIV of
the Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves.
Secondly, in the event of dissolution of a non-stock corporation such as your school, its assets shall be distributed in accordance with the rules as provided for under Sections 94 and 95 of the Corporation Code. Unless, it is so provided in the Articles of Incorporation or By- Laws, the members are not entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter.
12. CLOSE CORPORATIONS
Jack’s Lecture
This is a new title, made in recognition of the fact that the overwhelming majority of the corporations are family corps. In many family corporations here, the set-up is such that the husband is the president, the wife is the treasurer, but it is the wife who is actually running the corp. The husband is just the nominal figurehead. Ex. Tesoro Handicraft. A close corp. Has a technical meaning in the law. For it to be a close corp., the articles must provide that it cannot have more than 20 stockholders. There should be restrictions on the transfer of the shares, like usually it will be provided that if a stockholder wants to sell his share, he must first offer it to the other stockholders. Only if they are not willing to buy can he offer it to an outsider. Or it may also provide that if no stockholder is willing to buy the shares, then he must offer it to the corporation before offering to an outsider.
The corporation shall not be listed in any stock exchange. The law says that the mere fact that a corp. is controlled by another corp. does not make it a close corp. The articles must contain the features mentioned in the law. But corps. engaged in mining, oil companies, stock exchanges, banks, insurance companies, public utilities, schools, and corps. vested with public interest are not allowed to be close corps. Because they're engaged in lines of business vested with public interest and so they should be subject to regulation and close scrutiny. The law says the articles may provide for classification of shares and qualifications for owning them. For example, you have three brothers who form a close corp. So they may provide:
a) we will classify these shares into class a, class b, class c. Only the members of the family of the first brother can own class a shares. Only members of 2nd brother can own class b shares, and class c shares can be owned only by members of the 3rd brother;
b) we will have nine (9) directors, and 3 will be elected by holders of class a shares;
c) can provide for a greater quorum or voting requirements. It can be provided that you will need three fourths (3/4) majority to approve any action by the board, any action by the stockholder. Why? Because each group would want to be protected for otherwise if the two groups combine they can get anything approved, like there would be two thirds. And so the third group would want to be protected;
d) the articles may provide that if it's the stockholders and not the board who will manage the affairs and that there is no need for formal meetings, if the stockholders will be the directors, then they will be subject to the same liabilities as directors. For restrictions for the transfer of shares to be binding on third parties, they have to appear in the articles of incorporation, in the by-laws, and must be printed at the back of the stock certificate. So you can just put there for example, subject to the restrictions in article 10 of the articles of incorporation. It is up to the prospective buyer to look into the articles to find out what are those restrictions. The laws says that the stockholders may enter into pre-incorporation agreement before they incorporate, and that pre-incorporation agreement will remain binding even after they have incorporated because that agreement will lay down the modus vivendi after they have incorporated. Example, it could be agreed that each family will have 3 directors, the president can come from one family, the general manager from another family, the treasurer from the 3rd family, and then every year they will rotate the position. They may also agree on how the shares will be voted. Like 3 directors may be elected only by class a shares, 3 by class b, and 3 by class c shares. And unless the by-laws provide otherwise, action of the directors without need of a meeting will be valid if all the directors sign a written consent. Or if the stockholders have actual or implied knowledge but do not object in writing. Or if the directors are used to taking informal action, or the directors all have express or implied knowledge of the action taken and none of them objects. The law says that in close corps., there is right of pre-emption to call issuances of shares even if the shares have been issued for property or payment for past services or payment to convert debt to equity. When you have these close corporations with everybody having a veto power, like you are required 3/4 majority a the quorum of the board, 3/4 majority for quorum in a stockholders meeting, you could be paralyzed by inaction. And so the law provides for remedies for that. The SEC can arbitrate. It can cancel or alter any provision in the articles or by-law. They can cancel for example the greater quorum requirement. Or they may alter, prohibit or cancel any resolution or action of the corporation, directors, stockholders, or officers. They may direct or prohibit the action taken by any one of those mentioned . Or it may require the purchase of the shares of any stockholder by the corporation or by other stockholders even if there are no retained earnings. In fact usually in a corporation like this, it's advisable that you put a buy-out provision. You anticipate. Everybody has a right to veto. You''ll be paralyzed inaction, and such is intolerable, then you'll have to put there a buy-out provision, that in case you have this
continuing deadlock then a stockholder can demand to buy out the shares of another stockholder. And you can put there a formula on what would be the valuation, like regarding the book value of something. Suppose they cannot agree who will buy whom, they can provide that the one who's willing to pay the higher price will be the one who will prevail. Or dissolving the corporation, that will be an extreme case; granting other reliefs as the circumstances may warrant, or appointing a provisional director. The law says that the provisional director is supposed to be an impartial person, an outsider who is not a stockholder or a creditor. He will have the rights of a duly elected director. He can vote. He's the tiebreaker.
Concept. Convergence of ownership and management. Superiority of contractual intent on proprietary matters pursued in juridical vehicle. (CLV)
The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
Rationale. Implementing vehicle of contractual understanding on sharing of control, risks and benefits in the business enterprise. (CLV) (It‟s like an incorporated
partnership)
Jack Tip: Provide for a buy-out provision with valuation.
12.1 What are the requirements for the formation of a
close corporation? (Section 96)
Sec. 96. Definition and applicability of Title
A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) 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); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock 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 within the meaning of this Code.
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 in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.
Requirements for close corporations:
(1) The AoI must state that the number of stockholders shall not exceed 20;
(2) The AoI must contain restriction on the transfer of issued stock (which must appear in the AoI, By-laws and Certificate of Stock)
o Restriction on the transfer must not be more onerous than granting the existing SH or corporation the option to purchase shares;
(3) The stocks cannot be listed in the stock exchange nor publicly offered.
The corporation is not a close corporation even if the shares belong to less than twenty if not all the requisites are present. The three requisites must concur. (JRS at 318)
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation. (UP Class Notes at 46)
12.2 What entities may not be organized as a close
corporation? (Section 96)
The following cannot be a close corporation: (1) Mining companies; (2) Oil companies; (3) Stock exchanges; (4) Banks; (5) Insurance companies; (6) Public Utility; (7) Educational institutions;
(8) Other corporation declared to be vested with public interest.
12.3 Distinguish a close corporation from a regular
corporation as to:
Close Corporation Regular Corporation
Management AoI of close corporation may provide that the business of the corporation shall be managed
by the SHs rather than by a
board of directors; unless the context clearly requires otherwise.
The SHs shall be deemed to be directors for the purpose of applying the provisions of the Code.
BoD
SHs are separate and distinct from directors
There can be classification of directors into one or more classes.
The AoI may provide that all officers of employees shall be elected by the SHs
There are no classification of BoD.
There are no classification of BoD.
Meetings No meeting of stockholders
need be called to elect directors; unless the by-laws provide otherwise, any action by the director of the close corporation without a meeting shall nevertheless be deemed valid if :
1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing
The directors or trustees shall not act individually nor separately but as a body in a lawful meeting.
See Sections 50,51
Voting The AoI may provide for a
classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock.
No share may be deprived of voting rights, except preferred and redeemable shares. There shall always be a class/series of shares which have COMPLETE VOTING
AoI may provide for greater voting requirements in meetings of SHs or directors than those provided by the Code.
RIGHTS
Each share shall be EQUAL in all respects to every share unless otherwise prvided by AoI
Quorum AoI may provide for a greater quorum requirement in meetings than those provided in the Code.
For BoD, the AoI or By-laws can provide for a greater majority in quorum.
For stockholders, the AoI can provide for a different percentage in quorum. See Section 52
Board Authority
AoI may provide for a classification of directors into one or more classes, each of whom may be voted for an elected solely by a particular class of stock, business of corporation maybe managed by the SHs rather than the BoD.
There are no classification of BoD.
See Section 23,24
Restrictions on
transfer of
shares
AOI may provide for a classification of shares or rights and the qualifications for owning or holding the same and restriction on their transfers as they may be stated therein; restrictions must appear in the AOI and the by-laws as well as the certificates of stock, otherwise, the same shall not be binding on a purchaser in good faith; restrictions shall not be more onerous than granting the existing SHS or the corporation the option to purchase the shares of the transferring SH with such reasonable terms, conditions, or period stated. At the end of the period, without the SH or corporation exercising the option to purchase, the transferring SH may sell his shares to pay third persons
Pre-emptive right
Extends to all stocks to be issued, including re-issuance of treasury shares, whether for money, property, or personal services, or in payment of corporate debts, unless the AOI otherwise provides
Limitations on the exercise of the pre-emptive right: 1. Such pre-emptive right shall not extend to shares to be issued on compliance with laws requiring stock offerings or minimum stock ownership by the public.
2. Shall not extend to shares to be issued in good faith with the SHs approval in exchange or in payment of previously contracted debt. 3. Shall not take effect if denied in the AoI or amendment thereto. See Section 39 Resolution of deadlocks Withdrawal right Arbitration
When, as a result of such deadlock the business and the affairs of the corporation can no longer be conducted to the advantage of the SHs generally, the SEC, upon written petition of any SH, shall have the power to arbitrate the dispute. (Other
remedies: appointment of a provisional director by the SEC, the SEC can compel the purchase or sale of shares, SEC can dissolve the corporation, SEC can cancel or alter any provision in the AOI or by-laws; SEC can cancel, alter, or enjoin or prohibit any act or acts or resolution of the BOD, SHs, or officers)
See Section 104
Appraisal right