In a company, the representation of ownership is through shares or participation. In the case of joint-stock and simplified joint-stock companies, their capital is represented in shares. Therefore, whoever holds the quality of owner of those shares will be called a shareholder. Joint-stock and simplified joint-stock companies are two types recognized by the Companies Law. The former is a type of company that has existed in our legislation since 1999, while the simplified joint-stock company are relatively new, with just one year of existence. However, both maintain legal treatment.
Free transferability is one of the shares’ main characteristics and, therefore, simplified joint-stock companies. According to the law and doctrine, this right is considered fundamental for the shareholder. However, there are limitations on exercising this right, either by law, bylaws, and/or by contract.
This article aims to provide different alternatives to our client-readers when discussing the freedom to transfer shares and, therefore, ownership of the business. In many cases, our clients seek to restrict this right to avoid a change in administrative and capital control, maintain the relationship with current shareholders, ensure compliance with personal obligations, or maintain a certain number of shareholders, among other reasons.
The general regime for the transfer of shares.
The Companies Law, in article 207, establishes “the fundamental rights of the shareholder, of which he cannot be deprived: […] 8. To freely negotiate his shares”. Therefore, the general rule for simplified joint-stock companies is that the shareholder can freely dispose of his shares, as and when he deems fit, without any restrictions. The same is stated in doctrine 65 issued by the Superintendency of Companies, Securities, and Insurance, which mentions that “in the bylaws […] it is not admissible to stipulate a limitation on the right to negotiate the shares, not even as a waiver freely.”
That is why the transfer process is intentionally fast and straightforward. It consists of a share transfer letter signed by the transferor and the transferee and notified to the administration of the simplified joint-stock company so that it registers the act in the share and shareholder book. It is worth noting that the administration’s duty is limited only to registration, not to approve or review the act. Even in Article 189 of the Companies Law, the legislator is categorical in prohibiting the creation of additional formalities through the company’s bylaws as a form of restriction on the free transfer of shares. However, it should be mentioned that this limitation refers to formalities and requirements not indicated in the Law.
The right to free transferability ceased to be absolute through the reform of the Companies Law in 2020. Before the reform, Article 191 established “the right to freely negotiate shares does not admit limitations.” However, currently, the same article shows:
Art. 191.- The right to freely negotiate shares does not admit limitations in the bylaws. Agreements between shareholders that establish conditions for negotiating shares or are entered into for any other lawful purpose shall be valid. Shareholders’ agreements of joint-stock companies shall be governed, insofar as they do not contradict this section, by the provisions for shareholders’ agreements of simplified joint-stock companies.
Therefore, in the case of joint-stock companies, the only permitted limitation will be contractual and not bylaws. However, in the case of simplified joint-stock companies (SAS), it is possible to have statutory and contractual restrictions on the transfer of shares.
Statutory restriction on the transfer of shares in a SAS
There are two types of statutory limitations, which vary according to their effects. For didactic purposes, I have decided to call them absolute and relative. The fundamental rule is the one found in the unnumbered article within the section of simplified joint-stock companies (SAS) in the Companies Law that mentions:
Art. […].- The bylaws may provide for the prohibition of trading in shares issued by the company or any of its classes, provided that the validity of the restriction does not exceed ten [10] years, counted from the corresponding issuance. This period may only be extended for additional periods not exceeding ten [10] years by unanimous will of all the shareholders. The back of the share certificates must refer to the restriction in this article.
This means the law establishes the following requirements to restrict the right to free transfer by bylaws: first, a maximum restriction period of 10 years. Second, applicable from the issuance of the share, and third, that the restriction be expressly mentioned on the back of the share certificate to prevent the certificate from being freely traded due to lack of knowledge. This is an absolute limitation since it is an express prohibition in the company’s bylaws. Any subsequent modification or elimination will require the unanimous agreement of the shareholders through a Shareholders’ Meeting. Consequently, in this case, there are three filters for the right to free transfer: 1. the bylaws, 2. the unanimous support of the shareholders to reform a provision that regulates everyone and therefore changes the relationship of present and future shareholders, and 3. the registration of the reform in the Registry of Companies of the Superintendence of Companies, Securities, and Insurance. Only after this process can the interested shareholder proceed with the transfer of shares. Therefore, I consider this limitation absolute due to the difficulty and complexity of exercising the right to free transfer.
On the other hand, there is a relative limitation, and this is because there is no express statutory prohibition but rather partially restricts the right to the sole approval resolution of the Shareholders’ Meeting. This is recognized in the unnumbered article of the Companies Law that orders:
Art. […].- The bylaws may subject any negotiation of shares or any class thereof to prior authorization by the assembly or some prior agreement or condition. If such provision has not been expressly agreed upon, it shall be understood that the shares are freely transferable.
Therefore, the interested shareholder in exercising their right should only request authorization from the Shareholders’ Meeting, which does not require the unanimous agreement of the shareholders but a simple majority vote. Although this limitation is also statutory, it is much more flexible than the absolute limit. Since the approval or not of the transfer of shares is left to the discretion and will of the Shareholders’ Meeting. In this case, no bylaw amendment is required. The decision of the Shareholders’ Meeting is sufficient for the shareholder to exercise their right to sell.
Restriction on the free transfer of shares by contract.
Another way to restrict the free transfer of shares is by contract between shareholders, which affects the signatories. Therefore, it does not limit the rights of third parties or shareholders of the same simplified joint-stock company. However, this restriction will be allowed if the bylaws establish it as a possibility. In the aforementioned unnumbered article, the Companies Law shows that “the bylaws may subject any negotiation of shares or any class thereof (…) to some type of prior agreement or condition.”
However, it may also have effects on third parties, provided that they have been made aware by the administration of the simplified joint-stock company of the provisions outlined in the unnamed article mentioned below:
Art. […]. Shareholders’ agreements regarding the purchase or sale of shares, preference to acquire them or to increase the share capital, restrictions on their transfer, (…), must be complied with by the company when they have been deposited in the offices where the administration of the simplified joint-stock company operates. Otherwise, despite their validity between the parties, such agreements will become unenforceable against the simplified joint-stock company. Shareholders’ agreements may not have a term exceeding ten [10] years, which may be extended by unanimous agreement of its subscribers for periods that do not exceed the same time frame. (…) The chairman of the assembly or the collegiate deliberation body of the company shall not count the vote cast in contravention of a shareholders’ agreement duly deposited. Under the conditions in the agreement, shareholders may promote, before the Civil Judge of the registered office of the simplified joint-stock company, the specific performance of the obligations agreed upon in the agreements.
Therefore, for the contractual restriction to be valid, the contract must be made known to the administration of the simplified joint-stock company. Otherwise, without notification, the agreement will only affect the subscribers. This means that if a shareholder notifies the administration of a transfer of shares, which does not have a known contractual restriction for the administration, the latter may proceed with the registration in the book of shares and shareholders, granting rights to the assignee. However, the law also gives the affected shareholder the right to resort to ordinary justice for breach of contract against the assignor.
On the other hand, in the same article, the law establishes as a restriction on the right of an internal configuration of the contract a maximum term for the limitation on the right of free transfer, corresponding to 10 years, but subject to extension. This express provision allows us to assume that any provision restricting the transfer of shares that exceeds 10 years will be null and void.
In conclusion, in Ecuador, the right to free transfer of shares is fundamental but not absolute since there are legal, statutory and contractual limitations. This seems reasonable to provide alternatives to company shareholders when configuring their bylaws or regulating their relationships.
Bibliography
Ecuador. Ley de Compañías. Registro Oficial 312, 5 de noviembre de 1999.
–––. Ley de Modernización a la Ley de Compañías. Registro Oficial 347, Tercer Suplemento, 10 de diciembre de 2020.
–––. Superintendencia de Compañías, Valores y Seguros. Doctrina 65. Registro Autentico, 29 de agosto de 1997.
Reyes Villamizar, Francisco. Derecho Societario. Bogotá: Editorial Temis S.A., 2014
