Articles of association of a j. s. a.: how to restrict share transfers, exclude inheritance and guard against enforcement against a shareholder

Founders often choose a simple joint-stock company because they want to work with shares: to issue them to an investor, set some aside for the team and still keep track of who the shareholders are. If the articles of association say nothing, a shareholder may sell shares to anyone, an heir will inherit them and an enforcement officer may realise them. For all three situations the Commercial Code gives a j. s. a. specific tools, but they have to be set up in the articles of association, ideally on formation.

Restricting or excluding transferability

The basis is a simple rule:

The articles of association may restrict or exclude the transferability of the company’s shares or of certain classes of the company’s shares.

— Section 220k(1) of Act No. 513/1991 Coll. (unofficial English translation)

A restriction therefore need not apply to all shares. The founders’ and the team’s shares may be tied up while the investor’s shares are more freely transferable. A transfer contrary to a restriction or exclusion is void (Section 220k(3)), and the exclusion or restriction of transferability is entered in the Commercial Register (Section 13(g) of Act No. 29/2026 Coll.). A later change to these rules requires the consent of a two-thirds majority of the votes of the shareholders holding the shares concerned (Section 220k(2)).

Transfer with the company’s consent

The most common form of restriction is the company’s consent to a transfer. The articles of association must then specify the grounds on which the company may or must refuse consent, or must grant it, and the time limit for deciding. Consent is decided on by the board of directors unless the articles of association designate another body; where they entrust it to the general meeting, no grounds need be stated (Sections 220m(1) and (2)). The company’s silence has a statutory consequence:

If the competent body of the company does not decide on a shareholder’s request for consent within the time limit laid down by the articles of association, or does not notify the shareholder of its decision, consent shall be deemed to have been granted.

— Section 220m(3) of Act No. 513/1991 Coll. (unofficial English translation)

Refusing consent is not without consequences either. Where the duty to refuse consent did not arise from the articles of association or from the Act, the shareholder may, within one month of the notification, require the company to buy their shares (Section 220m(4)). If the company refused consent contrary to the Act or to the articles of association, the shareholder may, within one year, seek a court decision substituting for the company’s declaration of intent (Section 220m(5)). The articles of association should therefore frame the grounds for refusal so that they match what the founders want to protect themselves against, for example a competitor coming in.

Complete exclusion and the four-year safeguard

Transferability may be excluded altogether, yet the Act will not leave a shareholder imprisoned in the company for good. On the expiry of four years from payment of the issue price, a shareholder acquires the right to require the company to buy the shares; the articles of association may shorten that period and the right is not subject to limitation (Section 220l).

On a buy-back the company pays a reasonable price. The details of how it is determined and the conditions of the buy-back are to be regulated in the articles of association (Sections 220n(1) and (2)). A buy-back also has statutory limits: it cannot be carried out if equity would fall below the registered capital together with the reserve fund and other funds that may not be used for payments to shareholders, if the company is in crisis or insolvent or would become so, or if not a single shareholder would remain (Section 220o(1)). For a loss-making startup a buy-back may be impossible for a long time, which must be borne in mind when structuring relations with the founders and with the team.

Inheritance, bankruptcy and enforcement

The third group of tools protects the company against someone becoming a shareholder whom the shareholders did not choose:

The articles of association may exclude the inheritance of shares or of certain classes of shares, save in the case of a company with a sole shareholder. Where inheritance is excluded, on the death of a shareholder that shareholder’s shares pass to the company.

— Section 220q(1) of Act No. 513/1991 Coll. (unofficial English translation)

Where the transferability of shares is excluded or made subject to the company’s consent, the shares also pass to the company on a declaration of bankruptcy over the shareholder’s assets or on service on the company of an enforcement order affecting such shares (Section 220q(2)). In both cases the company becomes obliged to pay the reasonable value of the shares (Section 220q(3)), which must be budgeted for just as a buy-back must. How the inheritance of shares proceeds where the articles of association have not excluded it is examined in the article on when a shareholder dies.

The connection with the shareholders’ agreement

A restriction on transferability also feeds through to the rights the shareholders agree between themselves. The creation of a contractual pledge, a right of pre-emption, a right to join a transfer and a right to require a transfer of shares requires the conditions of transferability to be satisfied; where the company granted consent already on the creation of the right, no further consent is needed on its exercise (Sections 220p(1) and (2)). The articles of association and the shareholders’ agreement should therefore be prepared together; how to structure registered rights is described in the article on tag-along and drag-along in a j. s. a..

How to proceed

Before drafting the articles of association, settle which shares are to remain within a narrow circle, who is to decide on consent, in which cases you want to exclude inheritance, and how the price on a buy-back will be determined. The arrangement of transferability, inheritance and buy-back forms part of the articles of association, which we prepare as part of our formation of a simple joint-stock company service. Share transfers themselves, including the company’s consent and registration at the central securities depository, are covered by our share transfers service.