Analysis of Compulsory Transfer of Shares (Equity) – Comparison of Company Laws of Taiwan and the People’s Republic of China (Taiwan)

Emily Chueh

Article 163 of the Company Law of Taiwan provides: “Unless as otherwise provided for in this Law, assignment/transfer of shares of a company shall not be prohibited or restricted by any provision in the Articles of Incorporation.”  Basically, a company limited by shares may freely transfer shares.  The provisions of the Company Law which may prohibit or restrict the shareholders of a company limited by shares from freely transferring their shares include: (1) restrictions on preferred shareholders: e.g., Article 157, Paragraph 1, Subparagraph 7 and Paragraph 3 of the Company Law provides that except for a publicly  company, a company limited by shares may restrict preferred shareholders from share transfer under its articles of incorporation.2. Under Article 167-3 of the Company Law, a company transferring its shares to its employees may restrict them from transferring shares for a maximum two years.  In addition, Article 356-1 of the Company Law provides that a closed company limited by shares may restrict the transfer of shares in its articles of incorporation.  The question is whether a company may impose a restriction compelling its shareholders to transfer their shares under certain conditions.  For example, is a shareholder who is no longer the company’s employee required to transfer his/her shares to other shareholders?  Or when a shareholder is deceased, can the company buy back the shares of the original shareholder, whose heir may not inherit the shares?  Since most of the companies in Taiwan are companies limited by shares, the focus of the following discussions in this essay is on companies limited by shares.

In the 98-Shang-Yi-276 Decision of the Taiwan High Court, WaveFar Technology Co., Ltd. (hereinafter, the “WaveFar Co.”) and an employee entered into an employee share subscription agreement, which stipulates that the employee shall subscribe to 100,000 shares of WaveFar Co. for NT$12 per share with the share certificates placed under the custody of designated personnel of WaveFar Co. for a term of three years.  If an employee leaves the company in the course of employment, the shares will be purchased by the company at par value at the time of departure plus interest.  Later, the employee left the company and requested WaveFar Co. to buy back his shares pursuant to the agreement.  The company asserted that the true purpose of the original agreement was to provide incentives to retain its employees.  To prevent the employee from profiting from the company’s shares after his resignation, the employee was required not to resign in three years, and it was not true that the purpose was to grant any right of claim to the employee.  In addition, the original agreement that the company shall buy back the shares if the employee leaves the company is invalid for its violation of Article 167-1 of the Company Law, which stipulates that a company limited by shares shall not buy back its own shares.  Therefore, WaveFar Co. rejected the employee’s request.

According to the court, Article 167-1 of the Company Law as amended provides: “Unless as otherwise provided for under the law, a company may, upon adoption of a resolution by a majority voting of the directors present at a meeting of its board of directors attended by two-thirds of the directors of the company, buy back its shares in a number not exceeding 5% of the total number of its outstanding shares; and the total amount of the price for buying back such shares shall not exceed the sum of the amount of its reserved surplus earnings plus the amount of the realized capital reserve.”  After the above provision was added to the Company Law, a company actively buying back common shares only needs to obtain a special resolution adopted in its internal board meeting within the statutory amount and may do so at any time, depending on its needs.  This is not prohibited under objective law and order.  Therefore, the court held that even though the company entered into an agreement with its shareholders on buying back their shares without a special resolution adopted in its board meeting, this did not violate compulsory or prohibitive legal requirements, and it is not true that delivery could not objectively be made under such buyback agreement.  Therefore, when both parties entered into the share subscription agreement at issue, even though the board of directors had failed to adopt a special resolution on such buyback, it was still permissible to subsequently adopt a resolution to recognize the buyback in order to perform the buyback obligation under the share subscription agreement at issue.  Therefore, the share buyback agreement between WaveFar Co. and its employee was not invalid for violating any compulsory or prohibitive legal requirement.  Since the board of directors of WaveFar Co. adopted a resolution to decline the purchase of the employee’s shares, the court ruled that the company shall be liable for damages for nonperformance.

In view of the facts associated such case and the opinions of the court, since Article 167-1 of the Company Law provides that a company limited by shares may buy back its own shares as long as such shares do not exceed 5% of the total outstanding shares.  If the company can agree with its employees that their shares should be compulsorily transferred to the company upon their resignation (i.e., the company’s buyback of its own shares) pursuant to such requirement, such agreement does not violate any compulsory or prohibitive provision under laws and regulations and should be valid.  If the employees refuse to transfer, the company can claim damages against the employees based on such agreement.

Similarly, if a company agrees with its employees that their shares should be compulsorily transferred to another shareholder, such agreement does not violate any compulsory or prohibitive legal requirement and is not legally prohibited.  A company can also issue preferred shares to its employees pursuant to Article 157, Paragraph 1, Subparagraph 8 of the Company Law and agree with them that the company can buy back the employees’ preferred shares in accordance with Article 158 upon their resignation.

With respect to scenarios involving the death of employees, the Company Law only specifically stipulates that the death of a shareholder may serve as a cause of the withdrawal of shares for unlimited companies (compare Article 66, Paragraph 1 of the Company Law) and does not have relevant provisions on companies limited by shares.  In reference to the Fa-Lu-1000024324 Circular from the Ministry of Economic Affairs, “the death of a company’s shareholders is the beginning of succession, and, therefore, all property rights and obligations should basically be assumed by their successors, and the effect of property transfer is not preconditioned by the succession formalities.”  In reference to the above circular, the shares of deceased shareholders should be inherited by their heirs.  An court decision also pointed out that “the equity of a company limited by shares is a property right by nature and is not a right proprietary to the shareholders per se, as clearly indicated by the fact that there is no provision in the chapter for companies limited by shares under the Company Law concerning the cause of statutory withdrawal of shares due to the death of a shareholder of an unlimited company under Article 66, Paragraph 1 of the same law.  Therefore, the equity of a company limited by shares can certainly be treated as an object of inheritance and can certainly be inherited by an heir upon commencement of inheritance with no need to wait for the inheritor’s inheritance registration.”  」

However, can a company limited by shares agree with its shareholders that the company have the right to buy back their shares after the death of the shareholders?  To wit, does the company have the right to reject a shareholder’s heir as a shareholder?  Although there is currently no identical case for reference, still the above practical opinion shows that since a company may buy back its shares within 5% of its outstanding shares through a board resolution, and the agreement on such buyback does not violate any compulsory legal requirement, this practice does not seem unacceptable.  In addition, based on the current framework under Articles 157 and 158 of the current Company Law, a company may issue preferred shares with special rights and obligations after including such provision in its articles of incorporation and buy back the shares of such shareholders under specific circumstances covered by an existing agreement with the shareholders (including the bankruptcy or death of the shareholders).  The benefit of issuing preferred shares is that the company may be free from the restriction that the number of common shares bought back by the company should not exceed 5% of its total outstanding shares under Article 167-1 of the Company Law.

With respect to mainland China, Article 126 of the Company Law of the People’s Republic of China provides that each of the shares of a company limited by shares shall have the same rights, which means that the same shares should have the same rights.  Article 131 of the same law provides: “The State Council may separately impose provisions on shares other than the types stipulated by this Law which are issued by a company.”  However, pursuant to the Guiding Opinions of the State Council on the Pilot Program of Preferred Shares, which was separately promulgated by the State Council, the preferred shares announced by the State Council are limited to preferred shares whose holders enjoy priority in the distribution of profits and residual property and whose voting rights are restricted, and a company cannot set up preferred shares with other conditions in its articles of incorporation on its own.  In addition, only a listed company or a unlisted public company may issue preferred shares.[1] In other words, a company limited by shares set up in China is not allowed to issue preferred shares with buyback conditions.  A company may only buy back its shares within the scope of transferring shares to its own employees in accordance with Article 142 of the Company Law of the People’s Republic of China.  However, such buyback requires a resolution to be adopted by votes representing the majority of the voting rights of the shareholders attending the shareholders’ meeting (see Article 103, Paragraph 2 of the same law) and the scope of buyback shall not exceed 5% of the total outstanding voting shares of the company.

According to the author’s observation of the practices in China, investors often set up limited companies to preserve their personal nature.  Since Article 71, Paragraph 4 of the Company Law of the People’s Republic of China allows separate agreement on the transfer of a company’s shares in the company’s articles of incorporation, the validity of the requirement that if a limited company has agreed with its shareholders that their shares shall be compulsorily transferred upon their death or resignation has been recognized by many courts.

For example, in the (2015)-Wei-Shang-Zhong-358 Decision rendered by the Weihai Intermediate People’s Court, Article 10 of the Articles of Incorporation of Weihai New Orient Watch Co., Ltd. (hereinafter, “Weihai Co.”) provides: “Shareholders who leave the company for any reason shall transfer all of their capital contribution to the other shareholders or qualified incumbent employees of the company via the company in one month.” If the transfer cannot be made in time, such shareholders will no longer participate in the company’s profit distribution and such distribution will be transferred to a personal reserve by the finance department of the company.  If qualified shareholders and personnel do not accept the transfer, the other shareholders shall purchase the shares.  The above requirements do not apply to shareholders who leave the company because they have reached the age of retirement.  Zhenbo Guo, an employee of Weihai Co., left the company in March 2011, and Weihai Co. also provided RMB 35,000 to him as the payment for his withdrawal of shares.  However, Zhenbo Guo refused to transfer such shares to shareholders designated by the company.  Therefore, Weihai Co. filed a complaint to confirm that Zhenbo Guo did not have the qualifications for a shareholder and to compel Zhenbo Guo to accommodate the amendment registration of the capital contribution.

In this case, the Weihai Intermediate People’s Court affirmed the opinions of the people’s court in the Huancui District of Weihai City by concluding that the articles of incorporation should be lawful and effective for not violating any prohibitive legal requirement.  Since Zhenbo Guo received the payment for his withdrawal of shares from Weihai Co., he should be deemed to have agreed to the withdrawal of shares, and a decision was rendered exclusively in favor of Weihai Co.


For both companies limited by shares incorporated under the Company Law of the Republic of China in Taiwan and companies limited by shares or limited companies incorporated under the Company Law of the People’s Republic of China, laws, regulations and practical decisions basically allow, in a spirit of corporate autonomy, companies to compel their shareholders to transfer shares (equity) under special circumstances through a proper design in their articles of incorporation.  It should be noted, however, that since articles of incorporation represent the highest level of intention of the shareholders, whether existing provisions of the articles of incorporation may bind shareholders who join at a later time may be controversial. It is proposed that when conducting capital injection or dealing with other people who become the company’s shareholders via share transfer, a company should allow new shareholders to review the articles of incorporation and cause them to sign an agreement on their acceptance of the articles of incorporation in order to avoid disputes.

[1] Under Article 2 of the Measures for the Administration of Unlisted Public Companies formulated by the China Securities Regulatory Commission, an unlisted public company is a company whose stock is not listed but whose stock is issued or transferred to specific targets to the extent that the cumulative number of shareholders is over 200 people or that the stock becomes openly transferrable.