In the modern business environment, company operators face multiple challenges in raising funds and managing shareholders. Particularly when introducing new shareholders, operators often wish to restrict shareholders from freely transferring their shares to maintain company stability. However, does such a need comply with legal regulations? Does the Company Act allow for such restrictions? These questions not only concern business practices but also involve important principles of corporate governance and shareholder rights protection.

Principle of Free Transfer of Shares

Our firm's lawyers frequently encounter inquiries from business operators regarding whether they can request new shareholders recruited during a company's fundraising period not to sell their shares. From a legal perspective, this pertains to whether a corporation can prohibit shareholders from transferring or selling their shares. This issue involves Article 163 of the Company Act, as well as its systematic and literal interpretation.

According to Article 163 of the Company Act："Unless otherwise stipulated in this Act, the transfer of company shares may not be prohibited or restricted by the Articles of Incorporation. However, shares shall not be transferred prior to the completion of the company’s registration of incorporation." This provision establishes the "principle of free transfer of shares" under the Company Act, meaning shareholders of a corporation are generally free to sell or transfer their shares. It is not permissible to prohibit shareholders from selling or transferring shares in principle.

Legislative Purpose of Free Transfer of Shares

Why does Article 163 of the Company Act allow free transfer of shares? The legislative purposes can be roughly summarized into the following three points:

1. Nature of Capital Aggregation: A corporation is a "capital aggregation" entity with numerous shareholders, where individual shareholder qualifications are not emphasized. Consequently, share ownership, which represents shareholder rights, is non-personal and should be freely transferable.

2. Investment Recovery: Corporations do not have a "share withdrawal system," so shareholders primarily recover investments (or realize profits) by selling their shares.

3. Prevention of Damage: In corporations, "management rights" and "ownership" are separate. Management is entrusted to the board of directors, while ownership belongs to shareholders. According to current practices, shareholders are akin to creditors and cannot directly influence the company's operations. Therefore, when operations fall short of shareholder expectations, it is necessary to allow shareholders to recover investments to prevent further damage.

Exceptions to Free Transfer of Shares

Although Article 163 of the Company Act prohibits restricting shareholders' rights to freely sell shares, the law allows exceptions in the following scenarios:

1. Restrictions on Special Shares（Article 157, Paragraph 1, Subparagraph 7 of the Company Act）：

Article 157 provides for "special shares," allowing shareholders holding these shares to be subject to preferential or subordinated restrictions. Rights and obligations of special shares must be stipulated in the Articles of Incorporation. Investors acquiring special shares are informed of these rights and obligations, which may include transfer restrictions.

2. Transfer Restrictions on Founders Before Incorporatio（Proviso of Article 163）：

Before a company's registration and establishment, founders cannot transfer shares to avoid speculative activities and protect transaction security.

3. Transfer Restrictions on Directors and Supervisors（Articles 197 and 227)：

To prevent directors from significantly selling shares after election, Article 197 stipulates that if a director sells more than half of their shares held at the time of election, they will automatically lose their directorship. Supervisors are subject to the same provision under Article 227.

4. Restrictions on Employee Shares（Articles 167-1 and 267,Paragraph 6）：

Articles 167-1 and 267 allow companies to sell shares to employees to encourage long-term retention. Companies may restrict the transfer of such employee shares.

5. Closed Companies（Articles 356-1、and 356-5）：

Closed companies are a unique type under the Company Act, with shareholder numbers limited to 50. To maintain their "closed" nature, transfer restrictions are permissible.

6. Transfer Prohibition of Privately Placed Shares（Article 43-8 of the Securities and Exchange Act）：

Article 43-6 introduces "private placement" as an alternative to public offerings, simplifying fundraising procedures for companies. However, to prevent issuers from using dummy accounts or uninformed individuals to bypass public offering procedures, restrictions are imposed on the transferability of privately placed shares.

Startups may effectively utilize the special share system under Article 157 of the Company Act or opt to establish a "closed company" to flexible company structures. For assistance with designing relevant systems when setting up a company, feel free to consult our firm’s lawyers.

The six scenarios above illustrate exceptions to the principle of free transfer of shares under Article 163 of the Company Act. Beyond these legally established exceptions, can contractual agreements be used to restrict shareholder share transfers? Stay tuned for further discussion in the next installment.


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