Research On The Restriction On Equity Transfer By Articles Of Association Of A Company

Free transfer of shares is a fundamental principle which is generally followed by modern company laws.However,for limited liability companies,their characters based on shareholders determine the need to reasonably limit equity transfer.In 1993,China’s first Corporation Law’s Article 35 did statutory restrictions one quity transfer.It belongs to a peremptory norm.In 2005,the newly revised Corporation Law increased the content of associations.“If articles of association of a company stipulate otherwise on equity transfer,such stipulations shall prevail.” It makes equity transfer change from the past mandatory legal norms into arbitrary norms.It is more flexible and more in accordance with the company’s own interests.However,there is no uniform standard of the full extent that articles of association’s “otherwise provisions”can be carried out.It needs to be clarified whether equity transfer restrictions can be absolute and what legal consequences of in violations of the law.Based on this problem,this paper studies the restriction of equity transfer from two perspectives of theory and practice.This paper analyzes its effectiveness,clarifying the boundary of autonomy,determining legal consequences and finding out the balance between the company’s characters based on shareholders and the free transfer of equity.The main body of the paper includes three parts.The first part mainly studies the legislation that restricts equity transfer.Itdoes a vertical comparison of evolution of China’s Company Law and a horizontal comparison of relevant provisions of foreign legislation,which clarifies the legislative nature of restrictions on equity transfer.That is,authorized legal norms.Legal authorized articles of association can make different regulations from provisions of previous three articles,including restrictions one quity transfer between shareholders;changing procedures and agreement proportion of shareholders’ external equity transfer;or regulating other restrictions on external equity transfer;changing relevant provisions of the pre-emptive right.In priority rules of application of the law,the company’s articles of association should be placed in priority to the status of judgement.In addition,this paper analyzes the theoretical basis of the legal regulation from aspects of the company’s characters based on shareholders and the autonomy of articles of association.It clarifies the legitimacy of restrictions on equity transfer.The second part mainly studies the main type of equity transfer.From restrictions on internal equity transfer and external transfer and revision of articles of association to change restrictions on equity transfer,those specific judicial practices are utilized to analyze its application and effectiveness.Firstly,the internal equity transfer,articles of association can specify the same or even higher restrictions as external equity transfer,as long as it is not conflict with mandatory provisions of the law and it is approved by shareholders.There are primarily two types.One is shareholders’ compulsory equity transfer when they leave the company.It should take consideration of three elements.It should consider whether shareholders know and voluntarily accept compulsory terms.It should consider whether the premise of compulsory equity transfer due to shareholders’ leaving or dismissal is caused by the company’s improper or fault and whether the price of transfer is reasonable.This situation is generally accompanied by restrictions on the price of equity transfer.It can’t simply declare related invalid terms because that agreed price is lower than the market value.The other is the prohibition of equity transfer.It needs to be carried out within a reasonable period of time or it needs to provide dissenting shareholders with effective relief.Secondly,there are two circumstances for equity transfer.One is prohibiting equity transfer or in the disguise form.It is similar to internal equitytransfer.On the premise of in no violations of the law and all shareholders agreeing on it,it should respect their will to perform autonomy.However,it must be based on the premise that shareholders’ equity is maintained and shareholders can enjoy other smooth alternative mechanisms.The other is that shareholders choose to reduce or completely exclude restrictions on equity transfer according to their own reality,which should be effective.Thirdly,the paper analyzes the effectiveness of the unique way of modifying articles of association.It mainly explores differences and connections between the initial articles of association and the revision of articles of association.Revision procedures are commonly agreed by all shareholders in the preliminary regulation.If articles of association are revised by proper procedures and its contents are lawful,then the revised articles of association should be binding on all shareholders of the company.However,taking into account the particularity of shareholders’ equity,it is suggested that more strict procedures should be specified in the initial regulation than other ordinary modifications.Besides,the reasons for revision should be based on the necessary reality,reasonable and significant reasons and for the interests of the company as a whole.If dissenting shareholders confirm that in the revision of articles of association there are revoked or invalid reasons violating their interests like force or fraud,they can ask for judicial relief.The third part examines the effectiveness of restrictions on equity transfer.Firstly,it summarizes the boundary of the effective restriction.Its contents can not violate mandatory norms of laws.It should be based on the company’s actual situation,under the agreement of shareholders and for a reasonable purpose.At the same time,in practice it can make equity circulation.If contents of articles of association are judged to be invalid,default rules of the Company Law shall be applied.Invalid agreements based on this invalid provision shall be invalid.Secondly,it respectively explores on the effectiveness of equity transfer in violation of articles of association,from the equity transfer contract and behavior.The actual intention of parties to the equity transfer contract should be a valid contract,if it does not violate relevant laws and administrative regulations’ prohibited provisions.However,the actual delivery of equity should be in accordance with relevant provisions of articles of association.Thecompany can refuse to register for the third party on the grounds of in violation of articles of association.Other shareholders can request exercise of the pre-emptive right,which should pay attention to the application of the term and equal conditions.If the contract can’t be fulfilled and the assignee can’t be t obtain equity,the assignee can pursue the transferor’s liability for breach of contract based on the law.