November 2023
Pei-Ching Ji and Julian Lai
A closed company limited by shares may impose share transfer restrictions in its articles of incorporation to prevent the dispersion of family-held shares. However, when family members inherit shares, if the heirs do not meet the conditions stipulated in the articles of incorporation, such as not obtaining the consent of a certain proportion of shareholders to become a company shareholder or other shareholders having exercised a right of first refusal stipulated in the articles of incorporation, the issue arises as to whether the share transfer restrictions stipulated in the articles of incorporation of a closed company limited by shares violate mandatory inheritance provisions and are therefore invalid.
In this regard, this Firm has compiled opinions of the Ministry of Economic Affairs and scholars,[1] but at that time, there were no court judgments on this matter. Recently, the Supreme Court clearly pointed out, in its 112-Tai-Shang-1512 Civil Decision, that if the articles of incorporation of a closed company limited by shares provide that, in the event of a shareholder’s death leading to inheritance or bequest, a specific shareholder may, with the consent of all preferred shareholders, purchase the deceased shareholder’s shares at the market price, such provisions on share transfer restrictions in the articles of incorporation are aimed at maintaining the closed nature of the company, align with the Company Act, do not violate public order or good social morals, and should be considered valid. The following is a brief introduction to the facts of the case and the opinions of the original trial court and the Supreme Court:
1. Facts of this case
The facts of this case are as provided follows: Mr. Lin, not a party to this litigation, and five defendants established Company, a close company limited by shares, on June 15, 2017 (hereinafter, “Company A”), and convened a preferred shareholders’ meeting on February 26, 2018 to add Article 7-1 to the articles of incorporation as follows: “In the event of inheritance or bequest due to the death of a shareholder of the Company, a specific shareholder may, with the consent of all preferred shareholders, purchase the deceased shareholder’s shares at the market price. The market price specified in the preceding paragraph shall be the net asset value per share in the company’s most recent financial report.” Subsequently, shareholders Mr. Lin and Ms. Lin-Shi of Company A passed away in 2018 and 2019, respectively, leaving behind their shares in Company A. In January 2021, Company A notified their heirs (i.e., the plaintiffs) that the company would handle these shares in accordance with Article 7-1 of the articles of incorporation. Company A then convened a shareholders’ meeting to pass a resolution designating shareholder Mr. Lin O-Yuan to purchase the said shares. Mr. Lin O-Yuan notified the plaintiffs on March 17 and August 17 of the same year, and enclosed checks for the purchase price, which the plaintiffs received. On March 19 of the same year, Company A notified the plaintiffs that the said shares had been registered in the name of Mr. Lin O-Yuan. The plaintiffs filed a lawsuit claiming that Article 7-1 of Company A’s articles of incorporation violated the inheritance provisions of the Civil Code and should be considered invalid, and requesting the return of these shares.
2. Opinion of the High Court
The High Court held: “Since the articles of incorporation of a close company stipulated restrictions on the transfer of shares, whether the deceased participated in the incorporation of the company or acquired shares in accordance with the articles of incorporation, the deceased voluntarily becomes a shareholder who has accepted the restrictions of the articles of incorporation out of his/her own free will. The obligations stipulated in the company’s articles of incorporation, binding upon the deceased, should be inherited and continue to bind upon his/her inheritor. A closed company is characterized by excluding the principle of free transfer of shares and limiting the transfer of shares as well as the number of shareholders in order to maintain its closed nature, which create a corporate structure suitable for the business model of a start-up company, and facilitating family business in planning for succession and ensuring control rights. When a shareholder of a close company is deceased, due to the consideration that the close company has special regulations to maintain its closed nature, the articles of incorporation should be allowed to set reasonable restrictions on the transfer of shares in order to maintain such a regulatory purpose and consider the rights of the inheritor. According to the above explanation, the Article 7-1 amendment, which restricts the transfer of shares in the case of inheritance or bequest, to the articles of incorporation of Company A on February 26, 2018 does not violate the provisions of the Civil Code on inheritance and is therefore valid” (the 111-Zhong-Shang-204 Civil Decision of the Taichung Branch of the Taiwan High Court).
3. Opinion of the Supreme Court (upholding the original decision)
The Supreme Court held: “The Company Act, which was amended and promulgated on July 1, 2015, added relevant provisions on close companies. In addition, based on the fact that the most prominent feature of a closed company is to restrict share transfers to maintain its closed nature, Paragraph 1 of Article 356-5 provides that a company’s share transfer restrictions shall be specified in its articles of incorporation. Therefore, if the share transfer restrictions in the articles of incorporation of a closed company do not violate mandatory provisions or public order and good social morals, they should be considered valid. Company A is a closed company. On February 26, 2018, it convened a preferred shareholders’ meeting and added Article 7-1 to the articles of incorporation, which stipulates that in the event of inheritance or bequest of the company’s shareholder, the designated shareholder may, with the consent of all preferred shareholders, purchase the shares of the deceased shareholder at the current market price. According to the above explanation, the share transfer restrictions aim to maintain its closed nature, which is in line with the relevant provisions of the Company Act, does not violate public order and good social morals, and should be considered valid” (the 112-Tai-Shang-1512 Civil Decision of the Supreme Court).
In conclusion, the Supreme Court has clearly stated that the share transfer restrictions stipulated in the articles of incorporation of a close company limited by shares are, in principle, not invalid for violating the provisions of inheritance. It is noteworthy that this opinion makes a close company limited by shares more suitable for family inheritance and management planning.”
[1] Please refer to a focused article published by Lee, Tsai & Partners in November 2022 and titled The Connections Between the Transfer Restrictions of Close Companies Limited by Shares and the Inheritance, Compulsory Enforcement, and the Distribution of the Marital Property (Taiwan) (last visited on October 26, 2023).
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