Mr. Maximino T. Siapuatco

May 24, 1999 Mr. Maximino T. Siapuatco No. 2290 Robert St. Pasay City S i r : This refers to your letter dated May 16, 1999 requesting opinion on the queries therein relative to Peers Industrial, Inc. As stated, Peers Industrial Inc. is a family corporation with eight stockholders. It is neither listed in the stock exchange nor has it made any public offering of its shares. Article V of its By-laws contains the following provision: " No certificate may be sold, donated, and transferred unless all the stockholders have expressly waived their rights in writing to the acquisition, of any share through sales, donations, additional subscriptions or increase in the capital stock of the corporation ." However, its Articles of Incorporation do not provide for any similar restriction on transfer of stocks. Your queries are (1) whether or not the corporation described above is considered a " close corporation "; (2) whether or not under the situation a stockholder can exercise appraisal right other than those provided for in Sections 42 and 82 of the Corporation Code; (3) is a transfer restriction clause in the By-laws which is not provided for in the Articles of Incorporation enforceable; and (4) if invalid, what is the proper procedure to be followed in case a stockholder desires to transfer his stock to a third person? Section 96 of the Corporation Code defines a "close corporation" as follows: "SECTION 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 clauses, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of 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 be deemed not 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." (Emphasis supplied) It is clear from the above provision that for a corporation to be considered a " close corporation " the three elements mentioned therein must be specified in the articles of incorporation. Thus, when the articles of incorporation do not provide for the three requisites as aforestated, a corporation will not be classified as a close corporation as contemplated in the Corporation Code. Regarding the second query, please be advised that appraisal right is not an inherent right of a stockholder nor a matter of absolute right, otherwise, a stockholder can easily withdraw from the corporation at anytime he desires by returning his shares and getting back his capital. Such would constitute a violation of the trust fund doctrine. Appraisal right is allowed only under the instances provided in the Corporation Code, particularly Sections 42, 81 and 105 thereof, the exercise of which is subject to the conditions prescribed therein. As a remedy however in case appraisal right is not allowed, a stockholder may avail of Section 63 of the Corporation Code which allows transfer of ownership of shares. Relative to the third and fourth queries, please find enclosed herewith a xerox copy of a previous opinion of the Commission on a similar query addressed to Attys. Buenvenido I. Somera, Jr. and Cynthia D. Nuval-Ambrosio dated July 4, 1995 stating that " A restriction clause is not valid and enforceable if it absolutely prohibits the sale or transfer of stock without the consent of the Board of Directors and/or stockholders, as this would violate the general law on free alienability of shares of stock as personal property ". Accordingly, if the transfer restriction clause is unenforceable for being an absolute restriction, a stockholder may transfer his shares of stock by just following the procedure laid down under Section 63 of the Corporation Code, quoted in part hereunder: "SECTION 63. Certificate of stock and transfer of shares ....Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make transfer .No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred." (Emphasis supplied) Very truly yours, (SGD.) ROSALINDA U. CASIGURAN Associate Commissioner