Q_iconDuring incorporation, we were asked to “decide on restrictions on transfer of shares”. What does “restriction on transfer of shares” refer to? Would it be better to place a restriction on transfer of our company’s shares?

A_dark_iconIt is possible to set whether the approval of the company is necessary when shares are being transferred. It is recommended that a restriction is in-place when it comes to share transfers.

★ Explanation ★

In principle, it is possible for the stocks of a stock company can be freely transferred to a third-party individual. However, if the company’s shares end up transferring too frequently, they may end up being held by a third-party that the company itself is not familiar with, which can cause the management of shares to become difficult.

To address this, the company may stipulate in its articles of incorporation that the approval of the company is required when transferring the company’s stocks (Companies Act, Article 107 (1); quoted below).

Companies Act

(Special Provisions on Features of Shares)

Article 107 (1) A Stock Company may determine the matters listed in the following items as the features of all shares it issues:

(i) that the approval of such Stock Company is required for the acquisition of such shares by transfer;

(ii) that shareholders may demand, that such Stock Company acquire such shares held by such shareholders;

(iii) the such Stock Company may acquire such shares on condition of certain grounds arising.

(Omitted below.)

Source: Japanese Law Translation Database System

transfer-of-sharesWith the restriction on transfer of shares is indicated in the articles of incorporation, a stock company can regulate to some degree the movement of its shares, making management easier.

If no restriction(s) on the transfer of shares is (are) placed, it will be necessary to form a board of directors, and assign a corporate auditor (kansayaku). At least three directors and one corporate auditor is needed.

A company that stipulated its restrictions on the transfer of shares in their articles of incorporation would need only at least one director. They too can form a board of directors and elect a corporate auditor.

There are practically no disadvantages to setting restrictions on the transfer of shares, and it is common for newly incorporated companies to include in their articles of incorporation such restrictions.