How can I legitimately transfer my share?

Regulation of Share Transfer

How can I legitimately transfer my share?
This question is often asked by founder of a company (shareholders) after the second or third year of the incorporation. Their reasons for selling the shares may vary. Some want to abandon their current business and to move on to the next business, or there are people who want to invite new partners to have a co-ownership.

In either case, the first place you need to look at when you want to transfer your shares is your Articles of Incorporation or the corporate registry, then 99.9% of you may find a statement such as above.

The general procedures of Share Transfer

So, as it is stipulated in the Articles of Incorporation, the first step for share transferring is to get an legitimate approval.
The following is the general overview of the procedures:

The order of (iii) above and (ii) above can be interchangeable. However, since there is a possibility that the resolution of approving the transfer may be rejected, people tend to have an agreement first with the provision such as “the transferor shall obtain the approval of the target company for the transfer of the shares by the transfer date.”

The approving authority for the transfer resolution:

Once such request of share transfer are applied from a shareholder, the company need to find out where the “appropriate authority” that can make a legitimate resolution. This information is also given in the Articles of Incorporation or corporate registry, and supposed to be one of the following in general:

Approving Authorities

(1) General meeting of shareholders
This approving authority is often selected when establishing a Japanese subsidiary or when many of shareholders are living abroad, where it is  considered risky to give too much authority to the local nominated directors.

(2) Board of directors
This approving authority is often selected when the costs of holding a general meeting of shareholders would be relatively high or when it is difficult to coordinate dates with shareholders.

(3) Representative Director
Although it is not prohibited by law, it is considered that giving such authority to the representative director would be contrary to the original purpose of the transfer restriction system which is to give existing shareholders a opportunity to examine the candidates of their new co-owners.

(4) The Company
This means that it shall be as per the principle. So, if the Company has the board of directors, then the resolution must be made at the meeting of the board of directors, while if the Company does not have a board of directors, then it must be approved at a general meeting of shareholders. However, to avoid confusion, it would be advisable to state the specific approval authority in the Articles of Incorporation, from the beginning.

Deemed Approval Resolution

Addition to the statement of above, there is a case where the proviso is subsequently stated as follows:

“Regarding any transfer of shares among the shareholders of the Company, it shall be deemed to be approved by the legitimate authority.“ 

Example 1: Share Transfer from shareholder Mr. A to shareholder Ms. B
＝An approval resolution not required

Example 2: Share Transfer from shareholder Mr. A to third party Ms. C
＝An approval resolution required

Pros and Cons of the proviso.

Pros: There is no need to hold any meeting, so it may save time and money.
Cons: There is a risk that the ownership ratio among shareholders may be changed without notices.

Example:  
Current ownership ratio: Shareholders A 50% B10% C10% D10% E10%.
Shareholders B ~ E colluded and transferred their shares to B without noticing A.
 ↓ 
 ↓
Ownership ratio after the share transfer:  A50% B50%  
=A can no longer pass a resolution at shareholders meeting without B’s agreement.

Limits of Restrictions:

While the transfer of shares can be restricted by the Articles of Incorporation, stating provisions as follows is not be allowed.

I. Provision to prohibit the transfer of shares.
The principle of freedom of share transfer is mandated by law. Thus, the transfer itself cannot be prohibited.

II. Imposing restrictions on specific shareholders.
For example, it is not possible to have a provision that “only share transfers made by Japanese resident shareholders are deemed to be approved by the approval authority”. Because such provision violates the “principle of equality of shareholders,” which states that shareholders should be treated equally in Companies Act (Article 109, Paragraph 1)  .

Conclusion

Since this provision is almost certain to be attached to newly established companies, a Japanese specialists who assist you to prepared the Article of Incorporation, tend to skip the detail explanation of this clause.

However, when it comes to the stage where shares are eventually transferred, this provision will be deeply affective to you. Therefore, it is highly advisable to carefully consider and decide to whom you wish to give the authority to approve share transfers and apply the decision to the Articles of Incorporation from the stages of incorporation.

MK@ 03/31/2022