Restrictions On Share Transfer Of Limited Liability Companies

Share transfer contributes significantly to reducing transaction costs,optimizing the capital structure,and enhancing the circulation of wealth.Also,it serves as an important access for shareholders to withdraw from the company.In order to protect the personal combination of shareholders and promote the circulation of share,the Company Law(2013 Amendment)established a dual-restriction rule on Limited Liability Company(LLC)share transfer:the proposed transfer of share by a shareholder to any non-shareholder party shall be subject to the consent of more than half of the other shareholders,and the other shareholders have the preemptive right under the same conditions.In 2017,the "Provisions of the Supreme People's Court on Several Issues concerning the Application of the Company Law of the People's Republic of China(?)" was released,increasing the clarity of the consent rule and preemptive right in respect of share transfer.However,the new amendment has failed to bridge the gap between the law and actual practice,and the inherent defects and drawbacks of the dual-restriction rule still exists.Neither legislation nor judicial interpretation offers guidance for the practical operation of share transfer but creates several barriers.This paper aims to reconstruct the legal restrictions on LLC share transfer in China and to offer rational proposals for the overall framework in this area so as to provide a model for share transfer which could save transaction costs,meet the diversified needs of business,and achieve efficiency and fairness at the same time.The restriction rules on share transfer require that both personal combination of LLC and free circulation of share should be guaranteed.The corporate contract theory,the organizational transaction theory,and the joint-conduct theory provide different perspectives for comprehending the legal basis of restrictions on share transfer.Currently,problems within the restriction rules of share transfer appear to be very serious,causes of which result from different aspects:partially attributed to the defects of the overall design of the rule,for example,the overlap of the consent rule and the preemptive right makes the former a dead letter,and exercising the preemptive right is not bound by the consent rule as a prerequisite,which goes against the law;also partially attributed to the inherent drawbacks of the rule,such as the unclarity of the notification of share transfer,the unclear validity of "more than half consent",the lack of rules on share purchase for dissenting shareholders,the absence of remedies for the remaining shareholders,the ambiguity of the criteria on "same conditions",and the right of rescission for shareholders taking share transfer,etc.Such defects within the rules stand against the logic of business,increase the transaction costs of share transfer,and hinder transaction efficiency,which is inconsistent with basic legal principles.This paper also reviews the legislative model of restrictions on share transfer in other countries and regions,including the mandatory rules adopted in France and Taiwan,the default rules adopted in Japan,and the authorized model in Germany,the United Kingdom,and the United States,which entitles the company to design regulations on share transfer.Under the single-restriction mode of consent rule,the maintenance of personal combination is achieved through the process of requiring consents,and the circulation of share is realized by the non-consensual share purchase arrangement;the need of protecting LLC personal combination and ensuring share transferability could also be met by the rule of preemptive right.The company law can provide two or more simple rules for companies to choose to apply,without any needs to design complicated and cumbersome multiple restriction rules.Based on the legal and trial practice of share transfer in China,the application of enabling rules on share transfer restriction is not only in line with the developmental trend of company law,reduces share transaction costs,but also helps reduce disputes over the validity of the articles of incorporation and save judicial resources.Out of consideration for reducing the cost of rule-making,rule-review and rule-operation,the content design of the enabling rule is based on disassembling the original dual-restriction of the consent rule and the preemptive right,improving the consent rule by defining notification methods,notification content,the validity of consent,and arranging post processing for unsuccessful purchase of share transfer,and meanwhile,improving the rule of preemptive rights by introducing price evaluation mechanisms,and restricting the right of rescission of the shareholders who take share transfer.In this way,a legislative model with multiple enabling rules would come into form ultimately.