Share Transfers in Japan: Generally Free, but What are the Exceptions?

Japanese Attorney at Law - Bengoshi L.L.

28 May 2025 • 8 min read

The ability to freely transfer shares is a cornerstone of modern corporate finance and shareholder liquidity in a Kabushiki Kaisha (K.K.), Japan's predominant corporate form. This principle not only allows investors to realize the value of their holdings and manage their portfolios but also facilitates capital raising for companies by making their shares more attractive. The Japanese Companies Act (Kaisha-hō), in Article 127, explicitly upholds the principle of free transferability of shares. However, this freedom is not absolute and is subject to several important exceptions established by the Act itself, by the company's articles of incorporation, or by contractual agreement. Understanding these exceptions is critical for investors, companies, and legal practitioners navigating share transactions and corporate structuring in Japan.

The Principle of Free Transferability of Shares

The default rule under the Japanese Companies Act is that shares in a K.K. are freely transferable. This means that a shareholder can, in principle, sell or otherwise transfer their shares to any third party without needing the consent of the company or other shareholders. This principle is vital for several reasons:

Shareholder Liquidity and Capital Recovery: It provides shareholders with a mechanism to convert their shares into cash, allowing them to recover their initial investment and any accrued capital gains.
Encouraging Investment: The prospect of being able to easily sell shares makes investing in a company more attractive, thereby aiding companies in raising capital.
Market Efficiency: For publicly traded companies, free transferability is essential for the efficient functioning of securities markets and price discovery.

While the detailed mechanics of share transfers (e.g., for companies that issue share certificates versus those that do not, and the specific procedures under the book-entry transfer system for listed shares) are topics for separate discussions, the underlying legal assumption is this freedom of alienation. However, significant exceptions temper this general rule.

Exception 1: Transfer Restrictions by the Articles of Incorporation (Teikan ni yoru Jōto Seigen) – Transfer-Restricted Shares (Jōto Seigen Kabushiki)

The most significant and commonly encountered exception to free transferability arises from provisions within a company's articles of incorporation (teikan). The Companies Act allows a K.K. to stipulate in its articles that the company's approval is required for the acquisition of its shares by transfer (Article 107, paragraph 1, item 1, for companies with only one class of shares; Article 108, paragraph 1, item 4, for specific classes of shares). Shares subject to such a provision are known as "transfer-restricted shares" (jōto seigen kabushiki).

Purpose and Prevalence

The primary purpose of imposing transfer restrictions is to allow the company, and by extension its existing shareholders, to maintain control over its ownership composition. This is particularly crucial for:

Non-Public Companies (Hikōkai Kaisha): As discussed previously, a non-public company is, by definition, a company where all shares are transfer-restricted. This structure is favored by closely-held businesses, family companies, and joint ventures where shareholders wish to prevent shares from falling into the hands of undesirable third parties or competitors, thereby preserving the "closed" nature of the company.
Maintaining Stability and Management Philosophy: In some cases, even if not all shares are restricted, certain classes of shares might be, to ensure that key strategic shareholdings remain within a trusted group.

Procedures for Transferring Restricted Shares

When shares are subject to transfer restrictions, a shareholder wishing to transfer them (or a prospective transferee) must navigate a specific approval process:

Request for Approval to Transfer (Jōto Shōnin Seikyū): The transferring shareholder or the intended transferee must formally request the company's approval for the transfer (Articles 136, 137, and 138 of the Companies Act). The request must specify the number of shares to be transferred and the name of the proposed transferee.
Company's Approval Mechanism: The authority to approve or disapprove the transfer generally rests with the board of directors if the company has one, or with the shareholders' meeting if it does not (Article 139). The articles of incorporation can, however, stipulate a different approving body.
Deemed Approval: If the company fails to notify the requester of its decision (either approval or disapproval) within two weeks of the request (or a shorter period if stipulated in the articles of incorporation), the company is deemed to have approved the transfer (Article 145, item 1). This provision prevents companies from indefinitely stalling transfer requests.
Effect of Transfer Without Approval: If a transfer of restricted shares occurs without the company's approval, the prevailing view established by Japanese Supreme Court case law (e.g., Supreme Court judgment, June 15, 1973, Minshu Vol. 27, No. 6, p. 700) is that the transfer is valid between the transferring shareholder and the transferee (inter partes) but is not effective against the company (the "relative nullity theory" - sōtaiteki mukō setsu). This means the company is not obligated to recognize the transferee as a shareholder (e.g., for dividend payments or voting rights) unless and until approval is granted.
- An exception exists for one-person companies: if the sole shareholder transfers their shares, the transfer is generally considered effective against the company even without formal board approval, as the shareholder's intent to transfer is clear (Supreme Court judgment, March 30, 1993, Minshu Vol. 47, No. 4, p. 3439).

If the Company Does Not Approve the Transfer

If the company decides not to approve the requested transfer, the shareholder is not necessarily left without options. To ensure a degree of liquidity even for restricted shares:

Request for Designation of an Alternative Purchaser or Company Buyback: When requesting transfer approval, the shareholder (or transferee) can simultaneously request that, if the company disapproves the transfer, the company itself must either purchase the shares or designate another person (shitei kaitorinin) to purchase them (Article 138, paragraph 1, item (c); paragraph 2, item (c)). This is known as a kaitorisaki shitei seikyū.
Company's Obligation: Upon disapproval, if such a request has been made, the company is obligated to either purchase the shares itself (subject to rules on treasury stock acquisition, including financial resource limitations) or designate an alternative purchaser.
Price Determination: The purchase price for the shares is determined by agreement between the parties (the selling shareholder and the company/designated purchaser). If they cannot agree on a price, either party can petition the court to determine a fair price (Articles 140 to 144). The court will consider all relevant circumstances, including the company's asset condition at the time of the transfer approval request.

Perfection and the Shareholder Registry

Even if a transfer of restricted shares is approved, for the transferee to assert their rights as a shareholder against the company and third parties, their name and address must be recorded in the company's shareholder registry (kabunushi meibo). The approval for transfer is a prerequisite to demanding such a name change in the registry for transfer-restricted shares (Article 134).

Inheritance of Restricted Shares

It's important to note that restrictions on transfer requiring company approval generally apply to transfers by agreement (e.g., sale). Acquisition of shares through universal succession, such as inheritance or merger, does not require the company's approval (Article 134, item 4). However, to maintain control over its shareholder composition, a company whose shares are transfer-restricted can include a provision in its articles of incorporation allowing it to demand that heirs or other universal successors sell such shares back to the company (or a party designated by the company) (Articles 174 to 177). This provides a mechanism for the company to buy out inheritors it does not wish to have as shareholders, subject to paying a fair price.

Separate from restrictions imposed by the articles of incorporation, shareholders may themselves enter into agreements that limit the transferability of their shares. These are typically found in shareholder agreements (kabunushikan keiyaku).

Nature of Shareholder Agreements

Shareholder agreements are private contracts among some or all shareholders, or between shareholders and third parties. They can contain various provisions, including:

Requiring the consent of other contracting shareholders for a transfer.
Granting rights of first refusal (ROFR) or rights of first offer (ROFO) to other shareholders.
Tag-along rights (allowing minority shareholders to sell their shares on the same terms as a majority shareholder) or drag-along rights (allowing a majority shareholder to force minority shareholders to sell their shares in a company sale).
Buy-sell agreements triggered by certain events (e.g., death, disability, termination of employment).

Validity and Effect of Contractual Restrictions

Validity Inter Partes: Generally, such contractual restrictions are valid and enforceable between the parties to the agreement, based on the principle of freedom of contract.
Enforceability Against the Company and Third Parties: A key issue is whether these private contractual restrictions can bind the company itself or third-party transferees who are not privy to the agreement. Typically, a purely contractual restriction does not, by itself, make a transfer violating the agreement void as against the company or an innocent third-party purchaser without notice, unless the shares are also formally transfer-restricted in the company's articles of incorporation.
Public Policy and Reasonableness: Courts may scrutinize contractual restrictions, particularly those involving the company as a party or those that severely impede a shareholder's ability to recoup their investment, to ensure they are not contrary to public policy (Article 90 of the Civil Code) or an attempt to unlawfully circumvent the Companies Act's provisions (e.g., those governing transfer-restricted shares).
- For example, in the context of employee share ownership plans, Japanese courts have examined the validity of provisions requiring employees to sell their shares back to the company or a designated entity at a predetermined price (often the acquisition price) upon termination of employment. The Supreme Court, in decisions such as those of April 25, 1995 (Minshu Vol. 175, p. 91) and February 17, 2009 (Minshu Vol. 230, p. 117), has generally upheld such provisions if they are not deemed contrary to public policy, considering factors like the reasonableness of the buy-back price mechanism and whether shareholders had other means of recouping capital (e.g., through dividends). The reasonableness of the valuation method for the buy-back is a key consideration.
Remedies for Breach: A transfer of shares in breach of a valid shareholder agreement is generally still a valid transfer of title to the shares (especially to a bona fide purchaser without notice of the restriction). The primary remedy for the non-breaching parties to the agreement is a claim for damages against the breaching shareholder for breach of contract, or specific performance if stipulated and appropriate.

The Companies Act itself directly restricts or prohibits certain share transfers in specific circumstances, irrespective of provisions in the articles of incorporation or private agreements.

Specific Situations Mandated by Law

Transfer of Shares Prior to Issuance of Share Certificates (in a Share Certificate-Issuing Company): For companies that are designated as "share certificate-issuing companies" (kabuken hakkō kaisha), the Companies Act states that a transfer of shares effected before the issuance of a share certificate for those shares cannot be asserted against the company (Article 128, paragraph 2). This creates a practical limitation on transferability until certificates are issued.
Acquisition of Parent Company Shares by a Subsidiary: A subsidiary company is, as a general rule, prohibited from acquiring shares of its parent company (Article 135, paragraph 1). This prohibition indirectly restricts the ability of a parent company shareholder to transfer their shares to the subsidiary. The rationale behind this rule is to prevent a de facto reduction of the parent company's capital without following proper capital reduction procedures, and to avoid circular control issues and potential manipulation of voting rights. Exceptions to this prohibition are narrowly defined (e.g., in the course of a merger or acquisition of a business that holds parent company shares).
Transfer of Pre-emptive Rights to Shares in a Yet-to-be-Formed Company: During the incorporation process of a K.K., the rights of incorporators or subscribers to acquire shares upon fulfilling their payment obligations (kenri-kabu, or "rights shares") are generally not transferable to third parties before the company is formally established and the shares are fully paid up and issued (Article 35; Article 63, paragraph 2). This restriction aims to maintain stability and clarity in the company's formation process.

Conclusion

While the free transferability of shares is a fundamental principle underpinning the Kabushiki Kaisha in Japan, facilitating shareholder liquidity and corporate finance, it is not an unfettered right. The Japanese Companies Act provides a framework where this freedom can be significantly curtailed, most notably through provisions in the articles of incorporation creating transfer-restricted shares, which is a common feature of non-public companies. Additionally, private shareholder agreements can impose contractual limitations, and the Act itself dictates restrictions in specific scenarios.

These exceptions are not arbitrary; they reflect a balancing of interests—the shareholder's desire for liquidity, the company's need to control its ownership structure (particularly in closely-held contexts), the protection of creditors, and broader policy considerations such as preventing circular shareholdings. For businesses and investors dealing with Japanese shares, particularly in M&A, joint ventures, or investment in non-public K.K.s, a thorough due diligence of the articles of incorporation and any existing shareholder agreements is crucial to understand the applicable rules governing share transfers and to avoid unexpected impediments or legal challenges.