Regulations on share transfer restriction clauses: legal provisions and important notes for enterprises

In the operation of a joint-stock company, shareholders’ rights to transfer shares are not always unrestricted. Share transfer restriction clauses are established to balance the interests of shareholders, protect the interests of the company, and ensure compliance with legal regulations. The following article will help you gain a clear understanding of the concept, scope of application, legal provisions, and common issues relating to share transfer restriction clauses.

I. Current situation relating to share transfer restriction clauses

In practice, the transfer of shares in joint-stock companies in Vietnam often encounters numerous challenges due to the existence of share transfer restriction clauses. Many companies apply such clauses in order to:

• Protect the interests of founding shareholders and strategic shareholders;
• Prevent shares from being transferred to undesirable persons;
• Maintain stability in the shareholder structure and the company’s development orientation.

However, several issues still remain, including:

• Some companies have not clearly stipulated share transfer restriction clauses in the Charter or shareholders’ agreements;
• Shareholders sometimes do not fully understand their rights and obligations relating to the transfer of shares;
• The enforcement of share transfer restriction clauses has not been implemented consistently, leading to disputes and litigation among shareholders.

II. Concept of share transfer restriction clauses

1. What is a share transfer restriction clause?

A share transfer restriction clause is a provision in the company’s Charter that limits or imposes conditions on the transfer of shares by shareholders, thereby controlling changes in the company’s shareholder structure.

Pursuant to Clause 1, Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may be freely transferred, except in the following cases:

• The company’s Charter provides otherwise; or
• The law imposes restrictions.

A typical case is prescribed in Clause 3, Article 120 of the Law on Enterprise 2020 (as amended and supplemented in 2025), under which, within 03 years from the date of establishment of the company, ordinary shares owned by founding shareholders may only be transferred to persons who are not founding shareholders upon approval by the General Meeting of Shareholders.

Thus, a share transfer restriction clause is an exception to the principle of free transferability, established either under the company’s Charter or by law in order to control the transfer of shares within the enterprise.

2. Do share transfer restriction clauses apply to all types of shares?

Share transfer restriction clauses do not apply to all types of shares, but depend on the type of shares and applicable legal regulations. Under Clause 1, Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), ordinary shares are freely transferable, unless otherwise provided in the company’s Charter.

However, the law also prescribes specific restrictions in certain cases, notably for shares owned by founding shareholders. Pursuant to Clause 3, Article 120 of the Law on Enterprise 2020 (as amended and supplemented in 2025), within 03 years from the company’s establishment date, ordinary shares owned by founding shareholders may only be transferred to persons who are not founding shareholders upon approval by the General Meeting of Shareholders. For preference shares, transferability depends on the type of preference shares and the provisions of the company’s Charter pursuant to Articles 116 - 118 of the Law on Enterprise 2020 (as amended and supplemented in 2025).

3. What is the purpose of establishing share transfer restriction clauses?

The establishment of share transfer restriction clauses aims to control the transfer of share ownership and ensure stability in the company’s operations. Specifically, the primary purposes include:

• Controlling the shareholder structure: Restricting the free transfer of shares to undesirable persons, consistent with the principle allowing restrictions under the company’s Charter pursuant to Clause 1, Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025);
• Ensuring stability in corporate governance: Preventing major fluctuations in ownership rights, particularly during the company’s early stages of operation;
• Protecting the interests of existing shareholders: Allowing shareholders to have pre-emptive rights to acquire shares before they are transferred to outsiders or to control the admission of new shareholders;
• Limiting risks of hostile takeovers and internal disputes: Preventing external parties from acquiring shares to dominate the company;
• Ensuring compliance with founding shareholders’ commitments: Especially during the first 03 years, when founding shareholders’ shares are subject to transfer restrictions under Clause 3, Article 120 of the Law on Enterprise 2020 (as amended and supplemented in 2025).

III. Legal regulations relating to share transfer restriction clauses

1. In what cases is the transfer of shares restricted?

Under the Law on Enterprise 2020 (as amended and supplemented in 2025), shareholders’ rights to transfer shares are not always unrestricted. Specifically:

- Shares owned by founding shareholders: Clause 3, Article 120 provides that within 03 years from the company’s establishment date, founding shareholders may only freely transfer shares to other founding shareholders. Transfers to persons who are not founding shareholders may only be made upon approval by the General Meeting of Shareholders. It ensures stability in the shareholder structure during the company’s initial stage of operation.

- Voting preference shares: Clause 3, Article 116 clearly stipulates that shareholders owning voting preference shares may not transfer such shares to other persons, except in the following cases, such as transfer under a court judgment or decision or lawful inheritance. It maintains the control rights of founding shareholders or authorized organizations.

- Restrictions under the company’s Charter: Pursuant to Clause 1, Article 127, if the company’s Charter imposes transfer restrictions, such restrictions are only enforceable if clearly stated on the share certificates corresponding to such shares. Restrictions on share transfers are intended to protect existing shareholders’ interests, maintain company stability, and ensure compliance with regulations concerning founding shareholders, voting preference shares, and the company’s Charter.

2. What conditions must a share transfer restriction clause satisfy in order to have legal validity?

For a share transfer restriction clause to be legally enforceable, the Law on Enterprise 2020 (as amended and supplemented in 2025) requires the following conditions:

- It must be clearly stipulated in the company’s Charter: Under Clause 1, Article 127, the company’s Charter must clearly specify any restrictions on share transfers. If such restrictions are only orally agreed upon or are not recorded in the Charter, they shall not have legal validity.

- It must apply specifically to the relevant shares stated on the share certificates: Clause 1, Article 127 also provides that transfer restrictions are only enforceable if they are clearly stated on the corresponding share certificates.

- It must not violate the law or shareholders’ rights: Restriction clauses must not infringe upon the fundamental rights of ordinary shareholders under Article 115 (e.g. voting rights or pre-emptive rights to purchase newly issued shares).

- It must be applied fairly or to a clearly defined group of shareholders: Restriction clauses may apply to all shareholders or only certain groups of shareholders, provided that such application is stipulated in the Charter and does not violate legal provisions relating to founding shareholders or preference shares.

3. Do share transfer restrictions apply to both ordinary shares and preference shares?

Under the Law on Enterprise 2020 (as amended and supplemented in 2025), restrictions on share transfers may apply to both ordinary shares and preference shares; however, the extent and manner of application differ depending on the type of shares.

- Ordinary shares may be subject to transfer restrictions in certain cases:

• Founding shareholders are not permitted to freely transfer shares to external parties within 03 years from the date the company is granted the Enterprise Registration Certificate, unless approved by the General Meeting of Shareholders (Article 120).

- Preference shares may also be subject to transfer restrictions, such as:

• Voting preference shares: Only organizations authorized by the Government and founding shareholders are entitled to hold such shares; they may not be freely transferred except through inheritance or under a court decision (Article 116).
• Dividend preference shares or redeemable preference shares: The law permits restrictions depending on the company’s Charter. Although these shares generally do not carry voting rights, transfer restrictions are less common but may still be provided in the Charter.

- General principle: All transfer restrictions, whether relating to ordinary shares or preference shares, must be clearly stated in the company’s Charter and/or on the relevant share certificates in order to be legally enforceable.

IV. Questions relating to share transfer restriction clauses

1. Must share transfer restriction clauses be recorded in the company charter?

Pursuant to Clause 1, Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may be freely transferred except where the company charter provides restrictions. Furthermore, such restrictions are only enforceable if clearly stated on the share certificates corresponding to those shares.

Accordingly, share transfer restriction clauses must be stipulated in the company charter (and reflected on the share certificates) to be legally effective.

2. In what circumstances may share transfer restriction clauses be declared invalid?

• Contrary to law: If the restriction unlawfully deprives shareholders of their freedom to transfer shares in violation of Clause 1, Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025) or other mandatory legal provisions, it may be declared invalid.
• Not properly recorded in the charter or share certificates: Under Clause 1, Article 127, transfer restrictions are only enforceable if stipulated in the company charter and clearly stated on the share certificates; otherwise, they have no legal effect.
• Violation of validity conditions for civil transactions: Pursuant to Article 117 of the Civil Code 2015, a civil transaction is invalid where:
  + A party lacks civil act capacity;
  + The contents or purposes violate prohibitory provisions of law;
  + The form fails to comply with legal requirements.
• Infringement upon lawful rights and interests of shareholders.

3. Can shareholders request the removal or amendment of share transfer restriction clauses?

Shareholders may request the removal or amendment of share transfer restriction clauses, but such requests must be carried out through the company’s decision-making mechanism and in compliance with legal provisions. Specifically:

• Through the General Meeting of Shareholders: Since transfer restriction clauses are usually stipulated in the company charter, their amendment or removal must be approved by the General Meeting of Shareholders pursuant to Article 138 of the Law on Enterprise 2020 (as amended and supplemented in 2025) regarding the authority to amend and supplement the charter.
• Shareholders have the right to propose amendments: Under Article 115 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shareholders or groups of shareholders meeting the required ownership threshold may propose issues to be included in the meeting agenda for consideration of amendments to such clauses.
• Requesting court invalidation where contrary to law: If the restriction clause violates legal provisions or infringes shareholders’ rights, shareholders may request the Court to declare it invalid under the Civil Code 2015.

4. Are shares subject to distraint also subject to transfer restrictions?

Pursuant to Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), shares may only be transferred where shareholders possess lawful disposal rights. Once shares are subject to distraint, such rights are restricted, and shareholders may no longer freely transfer them. In such cases:

• Shareholders may not unilaterally transfer distrained shares;
• Transfers may only be conducted upon approval by the competent authority or after the distraint has been resolved.

Accordingly, shares subject to distraint are restricted from transfer because shareholders no longer possess full disposal rights over such assets under enterprise law.

5. If a shareholder transfers shares in violation of a restriction clause, is the transaction legally valid?

Pursuant to Clause 1, Article 127 of the Law on Enterprise 2020 (as amended and supplemented in 2025), transfer restrictions are lawful if stipulated in the company charter and clearly stated on the share certificates. Accordingly, shareholders must comply with such conditions when transferring shares.

If shareholders nevertheless proceed with a transfer in violation of such restrictions:

• The transaction may be refused registration in the shareholder register;
• The transferee may not be recognized as a shareholder under Clause 6, Article 127 of the Law on Enterprise 2020;
• The transaction may be declared invalid if it violates the validity conditions for civil transactions under Article 117 of the Civil Code 2015.

Accordingly, transfers conducted in violation of lawful transfer restriction clauses may not be recognized and may be declared invalid due to failure to satisfy legal requirements.

V. Why should you seek legal advice from NPLaw regarding share transfer restriction clauses?

Where issues arise relating to share transfer restriction clauses, legal consultation is essential to ensure compliance with the law and minimize risks of transaction invalidity. NPLaw assists enterprises in identifying and properly applying the provisions of the Law on Enterprise 2020 (as amended and supplemented in 2025).

In addition, NPLaw provides support in reviewing company charters and share transfer agreements, assessing the legality of restriction clauses, and advising on solutions when disputes arise or transactions face risks of invalidity. Furthermore, lawyers may represent clients in working with relevant parties or competent authorities in order to protect the rights and interests of shareholders and enterprises.

The above information is provided for reference purposes only. Should clients require detailed advice for specific cases, please contact NPLaw Firm for immediate consultation.