Close Corporation

A close or closely held corporation is a corporation whose shares of stock are held by one shareholder or a closely-knit group of shareholders.

Most states impose various statutory requirements on such corporations. The applicable provisions for close corporations under Delaware General Corporation Law can be found at 8 Del. C. §§ 341-356.

Generally, the statutory requirements provide for one or more of the following restrictions:

1. Limits on the number of shareholders;
2. Stock transfer restrictions;
3. The stock cannot be offered to the public or listed on a national securities exchange;
4. Intention to form a close corporation stated in the articles of incorporation.

In the absence of a specific statute, all states have some provision designed to meet the distinctive needs of close corporations.

The judicial system has also recognized the particular characteristics and needs that justify treating close corporations differently from that of publicly held corporations.

SHAREHOLDER RIGHTS

Shareholders in a close corporation have a fiduciary relationship to each other. The relationship between shareholders in a close corporation is similar to the relationship between partners in a partnership. A number of states, including Delaware, acknowledge this unique quality by allowing shareholders to arrange their relationships in a manner that would only be appropriate between partners. 8 Del. C. § 354.

Shareholders of close corporations are generally involved in actively managing the business and often serve as directors of the corporation. As such, management and ownership positions in a close corporation are frequently held by the same person or persons.

Unlike general corporations where management of the business operations of the corporation is reserved for the board of directors or the officers, shareholders in close corporations may enter into agreements that give them authority to run the company. 8 Del. C. §§ 350,351. With regard to shareholders participating in management of the corporation, a question of liability may arise. When shareholders act in their individual capacities rather than as officers of the corporation they may be held individually liable. 1A W. Fletcher Cyclopedia Corporations § 70.10.

VALUE OF STOCK IN A CLOSE CORPORATION

One of the unique characteristics of a close corporation is that its stock is not available for public sale or traded on a national securities exchange.

Nevertheless, shares of stock in a close corporation may be considered “securities” and therefore transactions involving such stock have been held subject to certain provisions of federal securities law.

Since there is no regular trading market for shares of stock in a close corporation, one must generally look to the particular facts and circumstances of each case in order to determine the value of a shareholder’s stock. It has been suggested that the value to be placed on specific shares of stock would be equal to the amount that could be realized if the shares were sold on the open market.