Continuing from the previous section, according to Article 163 of the Company Act: "The transfer of company shares, unless otherwise provided by this Act, shall not be prohibited or restricted by the articles of incorporation. However, shares cannot be transferred before the company's registration." This reflects the "principle of freedom of transfer of shares" in company law, meaning that shareholders of a limited company can freely sell or transfer their shares. Therefore, unless specifically allowed by the Company Act or Securities and Exchange Act, the transfer can only be restricted through the "articles of incorporation." Generally, shareholders cannot be prohibited from selling or transferring their shares.

(Recap of Article 163 – The Principle of Freedom of Transfer)

At this point, many people might have the question: What about "contracts"? Can we prohibit shareholders from selling their shares through a contract?
 

Judicial Practice in Taiwan

Referring back to the regulations, according to Article 163 of the Company Act: "The transfer of company shares, unless otherwise provided by this Act, shall not be prohibited or restricted by the articles of incorporation. However, shares cannot be transferred before the company's registration." From a literal interpretation, it can be understood that shares cannot be restricted from being sold by the "articles of incorporation." However, there is no explicit prohibition on restrictions through "contracts." The relevant views from Taiwanese courts are summarized as follows:

Taiwan High Court Kaohsiung Branch, Civil Judgment No. 101 (74th year) Shang Zi No. 74

"The transfer of shares refers to the legal act of transferring the ownership of shares, where the transferee acquires the shares and thus the shareholder rights. From an economic perspective, this is one of the methods for shareholders to recover their investments. It cannot be prohibited or restricted by the articles of incorporation, as explicitly stated in Article 163, Paragraph 1 of the Company Act. The purpose is to prevent the majority from using the articles of incorporation to prohibit or restrict share transfers. However, if parties privately agree to prohibit or restrict the transfer of shares through a contract, it is distinct from being forced by the articles of incorporation. Based on the principle of autonomy in private law, the agreement is valid (referencing the Supreme Court 99th Year Civil Judgment No. 1677). Therefore, the legal relationship concerning restrictions on the free transfer of shares through the articles of incorporation exists between the company and the shareholders (i.e., the group and its members). In contrast, if the agreement is made through a contract, the legal relationship exists between individual parties. Even though these parties may simultaneously hold the identities of both a company and a shareholder, this does not affect the validity of the agreement made in their capacity as private legal persons. Thus, if the company and shareholders make an agreement in their capacity as private parties, it cannot be deemed invalid due to a violation of Article 163, Paragraph 1 of the Company Act."

Taiwan High Court, Civil Judgment No. 100 (913th year), Shang Yi No. 913

"Although Article 163, Paragraph 1 of the Company Act clearly states that 'the transfer of company shares shall not be prohibited or restricted by the articles of incorporation. However, shares cannot be transferred before the company’s registration,' it is evident from the wording that the prohibition or restriction applies specifically to the articles of incorporation of the company regarding the transfer of shares. In this case, the agreement in question (Article 1) stipulates: 'If I leave the company before completing three years of service, I will unconditionally return all employee bonuses and shares received from the company during my employment,' which limits the employee bonuses and shares to be returned to the company if the employee leaves before three years of service. Although this clause restricts the transfer, it is based on a 'contract' between the parties, which is different from a restriction by the articles of incorporation. Therefore, the agreement in Article 1 of the agreement does not conflict with the mandatory provision of Article 163, Paragraph 1 of the Company Act. Based on the principle of contract freedom, this agreement is naturally valid."

Taiwan High Court, Civil Judgment No. 97 (61st year), Chong Shang Zi No. 61

"A limited company is established to gather the funds of the majority for large-scale business operations. Therefore, shares, which represent shareholder rights, should be freely transferable to allow shareholders to recover their investments according to their own judgment about the company's operations, thereby avoiding potential losses. Hence, Article 163, Paragraph 1 of the Company Act explicitly states that the transfer of company shares cannot be prohibited or restricted by the articles of incorporation, in order to prevent the majority shareholders from using the articles of incorporation to prohibit or restrict the transfer of shares. However, if shareholders privately agree through a written contract to reasonably prohibit or restrict the transfer of shares, it differs from restrictions imposed through the articles of incorporation. Based on the principle of autonomy in private law, the agreement between the parties is valid. Furthermore, referring to Articles 11, Paragraphs 1 and 2 of the Mergers and Acquisitions Act, in the case of company mergers, restrictions imposed by other laws or necessary restrictions based on shareholder identity, business competition, or the overall business development can be reasonably imposed through written agreements between shareholders or between the company and shareholders. Therefore, the Company Act's provisions only prohibit or restrict the transfer of shares through the articles of incorporation and do not extend to written agreements between shareholders."

Taiwan High Court Taichung Branch, Civil Judgment No. 96 (270th year), Shang Zi No. 270

"According to Article 163, Paragraph 1 of the Company Act, 'the transfer of company shares shall not be prohibited or restricted by the articles of incorporation. However, shares cannot be transferred before the company's registration,' the provision is clear. From this, it is understood that the Company Act explicitly prohibits the restriction or prohibition of share transfers in the articles of incorporation of a limited company. In this case, the Share Subscription Agreement, Article 1, Paragraph 3, stipulates: 'If Party B (the appellant) leaves the company within three years after the subscription, Party B agrees unconditionally to allow Party A (the defendant company) to arrange for the shares to be purchased by a specific person, with the purchase price based on Party B’s subscription price at the time of the capital increase.' Although this clause restricts the transferee and price of the new shares in the capital increase, it is a restriction based on a 'contract' between the parties and differs from the restriction imposed by the articles of incorporation. Therefore, the agreement in Article 1, Paragraph 3 of the Share Subscription Agreement does not conflict with the mandatory provisions of Article 163, Paragraph 1 of the Company Act. Based on the principle of contract freedom, the agreement should be recognized as valid. The appellant’s argument that this clause violates the principle of the free transfer of shares under Article 163, Paragraph 1 of the Company Act is not accepted."

Taiwan High Court, Civil Judgment No. 95 (498th year), Chong Shang Zi No. 498

"Moreover, although Article 163, Paragraph 1 of the Company Act clearly states that 'the transfer of company shares shall not be prohibited or restricted by the articles of incorporation,' the legislative intent behind this is to protect shareholders' ability to recover their capital. In this case, according to the Investment Agreement, Article 3, Paragraph 2, it is stipulated that the appellant may transfer their shares in Liwei Company if the company does not achieve a monthly revenue of 15 million NTD for more than a year or does not go public (over-the-counter) before, but only with prior written consent from the board of directors. The appellant can thus transfer their shares and recover their capital. The Company Act does not prohibit or restrict special agreements between the company and shareholders regarding this. Therefore, in special circumstances, the company may agree with shareholders to restrict the free transfer of shares under certain conditions in order to stabilize the company’s equity and ensure its financial health. This is within the scope of private law autonomy and freedom of contract, and does not appear to be prohibited by law."

In summary, most of the judicial interpretations in Taiwan suggest that the principle of free transfer of shares under Article 163 of the Company Act prohibits restricting transfers through the articles of incorporation. However, if shareholders agree to restrict the transfer of shares through a "contract," this is allowed based on the principles of "literal interpretation," "private law autonomy," and "freedom of contract."

In other words, if a company's management wants to restrict the rights of new shareholders to sell their shares, this can be done through a shareholders' agreement, where the rights to freely transfer shares are controlled by contract. The details and structure of the shareholders' agreement, such as the duration of restrictions, rights of first refusal for other shareholders, overall conditions, and pricing, must be planned on a case-by-case basis. If you would like to understand how to design relevant terms in a shareholders' agreement, feel free to consult with our law firm's lawyers!

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