LEGAL GUIDE
Written by attorney Gregg R. Zegarelli | Aug 26, 2011

Pennsylvania Statutory Close Corporations

What is a Pennsylvania Statutory Close Corporation? In short, it is a special type of business corporation that has certain informal “small company" protections built in. Sometimes, the special provisions of the law for statutory close corporations can actually make business processes less intuitive and more complicated, so be careful.

Title 15, Chapter 23 of the Pennsylvania Business Corporation Law ("BCL") regulates statutory close corporations. Any business corporation, other than a management corporation, may elect statutory close corporation. "Closely-held corporations" are defined as: 1) 30 or less shareholders; or 2) "statutory close corporations." § 1103. Thus, all statutory close corporations are "closely-held" regardless of their number of shareholders, but not all "closely-held corporations" are statutory close corporations.

CREATION

A statutory close corporation is formed in accordance with the rules relating to domestic business corporations except that the articles must contain: 1) a heading stating the name of the corporation and that it is a statutory close corporation; and; 2) that neither the corporation or any shareholder shall make an offering of any shares of any class that would constitute a "public offering" within the meeting of the Securities Act of 1933. § 2302.

TRANSFER RESTRICTIONS

This is the most important provision: built in buy-sell terms:

  1. Share Transfer Restrictions. Unless otherwise provided in the articles or a bylaw adopted the shareholders, no interest in shares may be transferred, by the operation of law or otherwise, whether voluntary or involuntary, unless the transfer is: 1) to the corporation or any other shareholders of the same class; 2) to members of the immediate family of the shareholder; 3) approved by unanimous vote of the holders of the most junior shares of the corporation having voting rights for the election of directors; 4) to a receiver in bankruptcy or similar proceeding by or against the shareholder; 5) a result of merger, consolidation or share-exchange that becomes effective pursuant to § 2336 (relating to fundamental changes) or a share-exchange of existing shares for other shares of a different class or series in the corporation; 6) a pledge of collateral that does not grant the pledgee any voting rights possessed by the pledgor; 7) made after termination of close corporation status; or 8) made through the following procedure:

The proposed transferee must: i) be eligible to become qualified shareholders pursuant to any federal or state tax statute and the transferee agrees in writing not to take any action which would terminate the election; ii) the transferee is eligible to be a shareholder under any provision of the articles; and iii) the transferee agrees to purchase the shares for cash. The offering shareholder must deliver a written notice of the offer to the corporation stating the number and kind of shares, the offering price, and other terms of the offer and the name and address of the transferee. The notice is deemed to constitute an offer by the shareholder to sell the shares first to the corporation on the terms of the offer to the third party. Following there is a logistic for purchase options. The corporation has a right of first refusal. The holders of any class of voting shares shall have a preemptive right to subscribe for or purchase any voting shares unless otherwise provided in the articles or a bylaw adopted by the shareholder.

MANAGEMENT

  1. Shareholders. The articles or bylaws adopted by the shareholders may provide that the business of the corporation shall be managed under the direction of the shareholders rather than under the direction of the Board of Directors. So long as such provision is in effect; a) no meeting of the shareholders needs to be called to elect directors; b) unless the context clearly requires otherwise, the shareholders of the corporation shall be deemed to be directors for purpose of applying BCL provisions relating to close corporation; 3) the shareholders of the corporation shall be subject to all liabilities imposed and shall enjoy all rights and immunities conferred on directors.2. Operating as a Partnership. A written agreement among the shareholders or any provision of the articles or bylaws, which relates to any phase of the affairs of such corporation including, but not limited to, management of the business or payment of dividends or other division of profits or the election of directors or officers of the employment of shareholders by the corporation, shall not be invalid on the ground that it is an attempt by the parties to the agreement or by the shareholders of the corporation to treat the corporation as if it were a partnership. This section does not prevent "piercing the corporate veil" if the circumstances would justify imposing personal liability on the shareholders where the corporation not a statutory close corporation. It merely prevents court from "piercing the corporate veil" because it has utilized some or all of the organic flexibility. § 2335 Committee Comments.

CONCLUSION

In a nutshell, statutory close corporations allow shareholders to: 1) expand the number of shareholders without BCL limitation; 2) obtain automatic share transfer restrictions and first refusals; 3) limit the discretion of directors, if any; 4) manage the corporation themselves, with corporate indemnification; 5) to provide for conditional dissolution. 6) obtain automatic supermajority votes on issues which affect fundamental rights, and; 7) operate generally as a partnership.

IMPORTANT NOTICE: Articles are for general information only. Laws vary in jurisdictions. You should not rely upon this information for your particular situation. The law in this document may not be current, and jurisdictions vary. Always consult an attorney for your particular situation.

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