Facts

Nonparty A Company, established by X1 as a family company owned by X1 and X2 through X5 (Plaintiffs, High Court Appellants, Supreme Court Appellants), became encumbered to Y Company (Defendant, High Court Appellee, Supreme Court Appellee) in the amount of Y30 million, the cost of acquiring pulpwood from it, but, when the note securing repayment of that amount was about to become due, a lack of funds made the repayment situation difficult. At that point, X1, the representative director of A Company, and directors X2 and X3, arranged to have the due date of the above note deferred and at the same time delivered to Y Company the shares of A Company owned by X1 through X5 as security. X1 et al. believed that upon delivering the share certificates, forwarding of the pulpwood was forwarded and A Company, unable to meet its obligations, went into bankruptcy. X1 through X5 then demanded that Y Company return those stock certificates of A Company belonging to X1 through X5 that it had taken as security, saying that the provisions of the Articles of Incorporation of A Company, required, ,in principal, the consent of the board of directors to all transfers of shares and that no such consent ws taken in this case.

Both the court of first instance and the court of second instance dismissed the claim of X1 et al., holding that while conveyance of shares as security violated restricted on the transfer of shares and was therefore null as regards the company, as between the parties it could only be understood as effective. X1 through X5 appealed to the Supreme Court, reasoning as follows. The regulations of Commercial Code Art. 204, Para. 1 do not provide for relative nullity and, must be interpreted as permitting stipulations of overall prohibition such as the prohibition on possession of the shares and their transfer as between parties. Therefore, the delivery of shares as security in the instant case can only be null and void.

Gist

Appeal dismissed.

"While the provisions of Commercial Code Art. 204, Para. 1 regarding the transfer of shares stipulate that provisions in the Articles of Incorporation requiring, in principle, the consent of the Board of Directors will not be disturbed and limits on the transferability of shares are permissible, the legislative purpose of this section is understood to be to prevent persons undesirable to the company from becoming shareholders. Considering the purpose of the above transfer limitation and bearing in mind that shares are essentially supposed to be freely transferable, it is only reasonable to understand the transfer of shares in this case without the consent of the board of directors reacquired by the Articles of Incorporation as effective as between the parties since said transfer does not have any effect as regards the company." "In the same manner as is related above, regarding the offer of shares as security, since we are to understand the Commercial Code Art. 204, Para. 1 as controlling the transferability of shares, even where the Articles of Incorporation provide for a limitation on the transferability of shares and the shares have been offered as security without board of director consent to that offer, as between the parties it must be said that an effective transfer of the rights of those shares has taken place."

(translation by Vicki L. Beyer)

Temple University Japan