- 1 Principle of Freedom of Transfer of Shares
- 2 Request for transfer of shareholder registry
- 3 Request for approval of transfer of shares in a private company (company with restrictions on transfer of shares)
- 4 Approval of transfer of shares in a private company
- 5 Purchase by a stock company or designated purchaser
- 6 Acquisition of shares by the company and regulation of financial resources
- 7 Acquisition of shares by agreement between shareholders and company
- 8 Acquisition of shares from all shareholders
- 9 Acquisition of shares from certain shareholders
In principle, shares in a stock company are freely transferable. In the case of a company issuing share certificates, shares are transferred by delivery of share certificates. In a company issuing share certificates, the delivery of share certificates is a prerequisite for the transfer to be effective, so a share transfer without the delivery of share certificates in a company issuing share certificates is void. If the transferor of shares has not received a share certificate, he or she must request the company to issue a share certificate and then transfer the shares after receiving the share certificate. In contrast, in the case of a company that does not issue share certificates, it is not necessary to issue share certificates in order to transfer shares, and the transfer takes effect by agreement between the parties. Whether or not a company is a share certificate issuing company does not depend on whether or not share certificates are actually issued, but rather on whether or not the articles of incorporation state that the company is a share certificate issuing company.
When shares are transferred to either a company that does not issue share certificates or a company that does issue share certificates, it is necessary to request the company to register the transferee as a shareholder in its shareholder registry. The transferee of the shares cannot claim to have acquired the shares (rights as a shareholder) against the company unless the shareholder register has been reregistered.
A company whose shares are restricted in transfer is called a privately held company. Restriction on transfer of shares means that shares cannot be transferred without the approval of the board of directors or the general meeting of shareholders. The existence of transfer restrictions is disclosed by stipulations in the articles of incorporation and by entry in the commercial register. When transferring shares in a company with restrictions on the transfer of shares, the shareholder transferring the shares or the transferee of the shares submits a written request to the company for approval of the transfer of shares stating the number of shares to be transferred, the name of the transferee, and that the company or designated buyer should acquire the shares if the transfer approval request is not approved (Companies Act Articles 136 and 137). If a request for approval of transfer of shares is made in a company with a board of directors, the company may pass a resolution at a meeting of the board of directors on whether or not to approve the transfer (Article 139 of the Companies Act). If a company without a board of directors requests approval for the transfer of shares, the company may pass a resolution to approve or disapprove the transfer at a general meeting of shareholders.
After the general meeting of shareholders or the board of directors decides whether or not to approve the transfer of shares, the company must notify the person who made the request for approval of the transfer of shares of the details of the decision. If the company fails to give notice of its decision to approve or disapprove the transfer of shares within two weeks from the date of the request, the company is deemed to have decided to approve the transfer of shares.
If the company approves the share transfer, the company rewrites its shareholder register and the transferee of the shares is entered as a shareholder in the shareholder register. In many M&A cases, the basic agreement for the transfer of shares will state that approval of the transfer of shares is a condition for closing. Generally, it is expected that prior approval for the transfer will be obtained from the company at the time of signing the share transfer agreement. At the closing stage, in exchange for payment of the price, the seller (transferor) will receive a request for approval of the transfer of shares prepared by the seller, a copy of the minutes of the company’s resolution approving the transfer, and a certificate of the company’s seal impression.
Purchase by a stock company or designated purchaser
If a stock company does not approve a request for approval of transfer and the person who made the request for approval of transfer has requested that the company or a designated purchaser purchase the shares, the company must decide by resolution of a general shareholders meeting whether the company will purchase the shares or designate a designated purchaser (Article 140, Paragraphs 1 and 2 of the Companies Act). If the company purchases restricted stock, a resolution of the general meeting of shareholders is required. In principle, a resolution of a general meeting of shareholders is also required when designating a designated purchaser, but in a company with a board of directors, a resolution of the board of directors is sufficient (Article 140, Paragraph 4 of the Companies Act). The company or the designated purchaser notifies the person who requested approval of the transfer that it will purchase the shares in question. At that time, the company or designated purchaser must deposit an amount equal to the number of shares requested for approval of transfer multiplied by the net asset value per share (Article 141(2) and 142(2) of the Companies Act). The person who made the request for approval of transfer must also deposit the shares (Article 141(3) and 142(3) of the Companies Act). The transfer price of the shares is determined through discussions between the company or the designated purchaser and the person who has requested approval for the transfer of shares. If, however, no agreement can be reached, a request is made to the court, which determines the purchase price. If the company or the designated purchaser fails to notify the person who made the request for approval of transfer of such shares within the notice period specified in the Companies Act (in the case of purchase by the company, within 40 days in principle from the time of notification of non-approval of transfer of shares; in the case of purchase by the designated purchaser, within 10 days in principle from the time of notification of non-approval of transfer of shares), the company shall be deemed to have decided to approve the request for approval of the transfer of shares if it has not given notice of its intention to purchase the shares.
If a company acquires shares in response to a shareholder’s request for approval of a share transfer, the acquisition must be made within the distributable surplus of the company (Article 461, Paragraph 1, Item 1 of the Companies Act). If the company has no distributable financial resources, the company cannot purchase the shares, and the company must designate a designated purchaser. If the designated purchaser purchases the shares, the financial resources restriction does not apply, and the designated purchaser can purchase the shares even if the company has no distributable assets.
When a company acquires shares from shareholders by agreement with them, the provisions of Article 156 of the Companies Act (acquisition of shares by agreement with shareholders) apply.
When a company acquires shares from all shareholders who have made an offer under certain conditions, the resolution of the shareholders meeting must specify (i) the number of shares to be acquired, (ii) the details and total amount of money, etc. to be delivered in exchange for the acquisition of shares, and (iii) the period during which the shares may be acquired. If the company gives notice to a shareholder of its intention to acquire shares from the shareholder based on a resolution of the shareholders’ meeting, and the shareholder applies for the transfer in response, a transfer of shares is effected between the company and the shareholder. However, if the number of applications exceeds the total number of shares to be acquired, the shares will be divided among the shareholders.
If a company wishes to acquire shares only from a specific shareholder, a so-called “mini takeover bid” procedure is used, unless otherwise provided for in the articles of incorporation (Article 160 of the Companies Act and following). If a company intends to acquire shares from only certain shareholders, the company is required to notify the other shareholders that their shares may also be subject to purchase as an agenda item at a shareholders’ meeting (Article 160, paragraphs 2 and 3 of the Companies Act). The company passes a resolution at the shareholders’ meeting to purchase the shares of the shareholder who originally proposed the purchase and the shares of the shareholder who requested that his or her shares also be subject to the purchase. If the resolution of the shareholders’ meeting is approved, the company may purchase the shares held by a particular shareholder or shareholders who have requested that their shares be purchased.
Our firm also prepares and reviews share transfer agreements for restricted shares and reviews the minutes of shareholders’ meetings and board of directors’ meetings. Please feel free to contact us if you need assistance.