A Study On Relevant Clauses Restricting Equity Transfer In Limited Liability Companies’ Articles Of Association And The Effects

Company Law stipulates in Article 71,paragraph 4 that “if the articles of association provide for the transfer of equity,the rules of the articles of association shall be followed.” Therefore,the company can restrict the transfer of equity through the articles of association(abbreviated as AOA).Despite of that,the relevant laws and regulations do not stipulate the extent to which the AOA can restrict the transfer of equity,which has caused many related disputes.The courts have not formed a unified judgment rule for this,and the parties are very dissatisfied that similar cases are not judged alike.The litigation process of some cases even has lasted more than ten years.In this context,clarifying the boundaries of AOA in terms of restricting the equity transfer,and uniting the judgment paths on the effect of restriction clauses in the AOA have theoretical and practical significance.Normally,there would be three practical ways in judicial practice,restricting equity transfer in the AOA: restricting the substantial right of equity transfers,stipulating prerequisite restrictions on equity transfers,and limiting equity transfer transaction prices.According to the time of setting of the AOA,it is divided into the original AOA and the amendment to the AOA.Through a categorical analysis of the above-mentioned restriction clauses in the AOA,this article sorts out the judgment logic of the relevant disputes,and summarizes relevant theoretical issues.First,the courts are not clear about the scope of restrictions on equity transfers“otherwise stipulated” in the Article 71 Article 4 of the Company Law.Theoretically,this part develops an opinion starting from the point: if the equity can be freely transferred,and its relationship with the restriction in the AOA.This article clarifies that the principle of equity transfer freedom is not a legally mandatory norm and the related theories of AOA restricting the transfer of equity.Statutory equity transfer rules can theoretically be excluded through company’s articles or be subject to more stringent restrictions,but they are not unlimited.The restrictions of AOA still need to be reviewed by the judiciary for reasonableness.Through the study on legal regulations of other countries and the application of the principle of distinction,this article clarifies that the transfer of equity disregarding of the AOA will lead to the transferee’s inability to obtain shareholder qualifications although the validity of the equity transfer contract will not be affected.Second,there is a theoretical misunderstanding in the interpretation of the effectiveness of the original AOA and the amendments to it.This article clarifies the misunderstanding through a thorough study of the company constitution contract theory,points out the limitations of applying the consensus mechanism to the constitution validity judgment,and opposes the point of view that “the original AOA can relax the judicial review requirements or directly recognize the validity without judicial review,while the newly-added clauses in terms of restricting equity transfer in the amendments to the AOA which is passed by majority of shareholders cannot bind on dissenting shareholders”.Ultimately,there is a central theme in this article that the effectiveness of the amendments to the AOA should be subject to substantive review by the court as the original articles of association.Based on judicial practice of China and in view of the relevant norms and doctrines of other countries on this subject,this article proposes to introduce the general standard to judge the effectiveness of the clauses restricting the equity transfer in the AOA,which is the clauses didn’t lead to unreasonable restriction or ban on liquidity of equity.This article also sum up three specific elements to help courts determine whether the clauses of AOA meet the aforementioned standards,including guaranteeing shareholders’ withdrawal rights,determining fair and reasonable equity transaction prices,and ensuring that the restrictions of AOA meet the principle of shareholder equality,so as to fill in the voids of relevant laws.