Shares as Security for Loan

Equities as collateral for the loan

One shareholder granted a lender a mortgage on 'shares' he owned in another company in order to secure his loans. Two loans had also been granted to the company by the shareholder. As the lender tried to enforce his security, he argued that the shareholder loans were bonds and therefore part of the security for his loan.

Mortgage - assumption of security over shares

Our wisdom is that the provision of collateral for the redemption of a liability by pledging shares governed by British legislation is quite common in some developing countries, particularly in Russia, and we have seen this tool used in a number of operations in developing countries with cross-border components in which we were part of.

The promise is and remains a little-used security tool in developed countries, largely replaced by more complex security techniques such as (general) fees and mortgage and certain kinds of quasi-security. The promise, however, has a relatively greater importance in the newly industrialising countries as a means of ensuring security, and it is perhaps the very "physical" character of the creation and perfection of the promise, combined with its simpleness and transparence - including the pledger's ownership of an item of property physically - that explains its relatively widespread use in these newly industrialising countries.

According to British legislation, a lien is practically the supply of goods by one of the parties (the pledgee) to the lender (the pledgee) as security, but with goods owned by the pledgeor that remain with the same. Specifically, this paper focuses on the pledging of shares as security for a loan or deferral of a purchase price (e.g., a purchase of shares), while bearing in mind that all available assets (including certificates of ownership, physical or intangible) may be pawned.

In addition, the supply of the relevant assets can be real or constructional - e.g. the transfer of keys to a storage facility containing the pawned goods. We say that in practise the collateral is seldom used as a security tool in developed countries, but it can be important in specific operations or in different jurisdiction (especially newly industrialising countries).

According to the England and Wales Convention, the British and Wales laws allow the lender (or pledgee) to dispose of the pawned property if the pawner is in default of settlement, provided the pawner informs the pawner in good faith. Since the period of cancellation depends on the conditions at the respective point in due course, it is recommended that the pawner and the pawn creditor conclude a Pfandbrief or a protocol on deposits in which the pawn creditor's right to the objects of the Pfandbrief and, in particular, the period of cancellation to be observed by the pawn creditor are specified.

Similarly, a shareholder mortgage contract is usually concluded between the recorded proprietor of the pawned shares (the pawner) and the natural or juridical person in whose favor the mortgage is carried out (the pledgee) within the framework of a pledging of shares. As a rule, it provides that the pawn creditor shall be provided with certain documentation intended to improve the security provided by the pawn as follows at the same times as this contract is signed:

dated unsecured certificate of assignment of the shares properly subscribed by the pawn creditor in favor of the pawn creditor; an irrevocable agent and officer in relation to the pawned shares of the pawn creditor; and undated, subscribed resignations of the corporate secretary officer and each principal officer; a mandate and obligation of the corporate secretary officer and each principal officer officer officer.

It should require the lienor to ensure that, immediately upon receiving a notification from the lienor of the lien, the corporation enters in its list of members a Pfandbrief against the pawned shares, accompanied by a notarised copy of the said deed.

The present notice is effective as protection in the case of unauthorised or fraudulent performance of the unsecured certificate of assignment of the Collateralised Shares as the Corporate Secretary has knowledge of the Collateral Arrangement and should be in receipt of such documents. To guarantee the enforcement and lawfulness of the security provided under the shareholding contract, it may be necessary in certain legal systems to have the security interest provided under the shareholding contract registered with the registry administrator of undertakings or similar undertakings within a specified timeframe after the security interest has arisen.

Otherwise, the security against a receiver, trustee or corporate creditor may lapse. Conditions under which a pawn may be cancelled should be expressly specified in the shareholder attachment arrangement and should normally comprise the following: on the day on which the pawner fulfils the collateralised commitments in accordance with the shareholder attachment arrangement; on the day on which the reciprocal letter of intent of the contracting partners to cancel the shareholder attachment arrangement is performed and supplied by all contracting partners; in the case of execution of the liens by the pawn holder in the case of the pawner's delay in payment in accordance with the shareholder attachment arrangement.

Upon discharge of the pawn, the pawn creditor will surrender the stock certificates of the pawned shares and any other document made available to the pawn creditor under the stock pledging contract and will export and file (or cause to be executed and filed) any document or instrument necessary to discharge the security interest in favor of the pawn creditor associated with the pawned shares.

Every entry of the security interest resulting from the pledging to the registry administrator of undertakings or similar undertakings is normally deleted by the submission of a corresponding declaration of revocation. A corresponding communication must also be addressed to the Undersecretary of the Corporation in order to cancel the record of pledging the shares deposited in the Commercial Registry.

If the pledger is in arrears under and in accordance with the duration of the stock lien contract, the conditions of that contract generally require the pledger to be able to enforce his security by assigning the pawned shares to his own name. Said assignment shall be effected by dated evidence of the original deed of assignment filed with the pawn creditor and thus transferred of the pawned shares either in the name of the pawn creditor or in the name of a third person named by the pawn creditor.

As a result, the Corporate Secretary will be notified, who will enter this assignment in the Companies Registry, annul the existing Certificate (s) and deliver new Certificate (s) in accordance with the pawn creditor's directions. If the pledger is in default under the stock lien contract, there is generally no legal obligation in CIS to publicly sell the pawned stock.

Such a request can, however, be specified in the pledging of shares arrangement. If, in such a situation, the pawn creditor resells and disposes of the pawned shares, he is normally under a public legal duty to obtain a fair going market value for the shares. Also, it is important that the pawn creditor ensures that: the bylaws of the corporation whose shares are to be mortgaged permit the grant of such a security and there are no special limitations; all appropriate permits of the corporation and decisions of the management have been obtained; the mortgaged shares are fully deposited at the date of acceptance of the security.

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