In joint ventures (JVs), restrictions on the transfer of shares are a common provision in joint-venture agreements (JVAs). These agreements, executed among shareholders to establish and govern the JV, typically prohibit shareholders from transferring their shares without the consent of other shareholders. This restriction reflects the collaborative nature of JVs, where all shareholders are expected to actively participate in the joint business. An unapproved share transfer could disrupt the JV’s operations, which is why JVAs often include such restrictions.
However, does this contractual restriction ensure that share transfers will never occur without consent? The answer is no, as legal provisions under the Japanese Company Act must also be considered.
Share Transfer Rights Under Japanese Company Law
General Right to Transfer Shares
Under the Japanese Company Act, shareholders have a fundamental right to freely transfer their shares. This ensures that shareholders can recover their investment by selling their shares when needed.
Restriction of Share Transfers in Articles of Incorporation
Japanese law permits companies to impose restrictions on share transfers by including such provisions in their Articles of Incorporation. This is particularly common in family-owned or closely-held corporations that prefer to avoid introducing third-party shareholders without approval.
However, this restriction is not absolute. The law imposes specific conditions to balance the company’s interests with the shareholder’s right to recover their investment:
1. Obligation to Consent or Purchase:
If a shareholder requests to transfer shares and the company refuses consent, the company must:
– Purchase the shares itself, or
– Designate a third party to purchase the shares.
2. Distributable Amount Requirement:
The company can only purchase the shares if it has sufficient distributable amount. Distributable amount is originally determined based on its retained earnings amount. While the company may increase its distributable amount by taking capital reduction procedures but it takes certain time to protect its creditors. If it lacks distributable amount or cash and cannot find a third party to purchase the shares, the company has no choice but to allow the transfer.
3. Court-Determined Share Price:
If the shareholder and the company (or the designated purchaser) cannot agree on the share price, the matter may be referred to a court. The court will determine the fair price, and the company or third party may be required to purchase the shares at a price higher than expected.
Addressing Risks in Advance
To mitigate the risks associated with share transfer disputes, the following measures can be considered:
1. Penalty for Unauthorized Transfers
The JVA can include a clause imposing penalty charges on shareholders who transfer shares without the required consent. This serves as a deterrent.
2. Pre-Determined Purchase Price
In order to address uncertainty in respect of the court-determined share price, the JVA can specify a purchase price formula or valuation method for shares if the company or a designated third party needs to purchase them. However, it is important to note:
– The court may not always uphold the pre-determined price, as provisions in the Japanese Company Act are generally compulsory and cannot be overridden by private agreements.
– If challenged, the court may determine the price based on its assessment of fairness, which may not align with the price set in the JVA.
Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.