Unregistered Transfer of Company Shares and Rights of Third Parties: Boundaries of Invalidity and Its Effects

Document Type : Research Paper

Authors

1 Assistant Professor, Department of Law, Faculty of Humanities, Damghan University- Damghan-Iran

2 Assistant Professor of Private Law, Faculty of Law, Political Science and History, Yazd University, Yazd – Iran

Abstract

Introduction
Shares of joint-stock companies are among the assets that have attracted significant public attention for trading in recent years. The principle of free transferability of shares in joint-stock companies is a key factor in this regard. However, when an individual seeks to acquire shares from another party, concerns arise regarding the transferor's ownership and its continuity until the transfer is completed. Subsequent transfers of the same shares also present challenges.
According to Article 40 of the Amended Bill of the Commercial Code (1969), the transfer of registered shares that are not recorded in the company's share registry is invalid against the company and third parties.
The primary objectives of this study are to analyze the rationale behind share registration, examine the legal consequences of non-registration, and delineate the rights between transferees and third parties in cases of conflict.
Additionally, the article addresses questions such as the legal status of the first transferee (where the formalities of Article 40 were not observed) compared to a second transferee (where the transfer formalities were properly followed).
Methods
This research adopts an analytical-descriptive approach, utilizing library-based resources including laws, judicial rulings, and legal scholarship. By examining the legal foundations of share registration and analyzing statutory provisions such as Article 40 of the Amended Commercial Code and Article 754 of the New Commercial Bill, the authors elucidate the effects of unregistered share transfers.
Results
If a share transfer is not recorded in the company's share registry, the contract between the transferor and transferee remains valid but cannot be enforced against the company or third parties. Consequently, the transferee's recourse is to compel the transferor to register the transfer in the company's share registry.

Non-enforceability Against the Company:

This is absolute - the transfer only becomes enforceable upon registration.
The company's awareness of the transfer does not affect this principle.


Non-enforceability Against Third Parties:

This is conditional, depending on:




a) The third party's lack of knowledge of the transfer
b) The third party's beneficial interest in maintaining the transferor's ownership


If third parties are aware of the transfer, it remains enforceable against them even if unregistered.


Conflict in Multiple Transfers:

If the transferor first transfers shares to Transferee A (unregistered) and then to Transferee B (registered):




a) If Transferee B knew of the first transfer, the second transfer is voidable and subject to ratification or rejection by Transferee A.
b) If Transferee B was unaware, the first transfer is unenforceable against them. Transferee B is recognized as the rightful owner, while Transferee A can only seek compensation from the transferor.


Encumbrances or Attachment Before Registration:

If shares are pledged or attached by a third party before registration, the rights of bona fide third parties prevail over those of the transferee.




Although security interests are not recorded in the share registry, third parties relying on the registry's information are protected. Thus, any claim for compulsory registration must respect these third-party rights.

Conclusions
Registration of share transfers in the company's registry is a legal necessity to prevent future disputes. Failure to register exposes the transferee to significant risks, including loss of ownership or conflicts with third-party rights. Proposed amendments to Article 40 should:

Clarify the definition of non-registration
Define the rights of the first transferee in cases of multiple transfers
Strengthen protections for bona fide third parties with precise conditions

This study demonstrates that the share registration system benefits not only the company but all stakeholders, and that adherence to registration formalities reduces legal complexities.

Keywords

Main Subjects

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