A common method to secure financing in commercial transactions is to pledge shares as collateral. In simple terms, collateral is any valuable asset that a lender can accept for a borrowing request. An ‘asset’ can include but not be limited to, financial instruments, immovable property and intellectual property. If the borrower defaults, the lender will be able to seize the collateral. In the case of Cyprus Companies, they step in financing transactions as borrowers or guarantors. The shares of Cyprus companies can be pledged as collateral to support a financing request.
Lenders take a Cyprus law pledge over the shares in a Cyprus company as security. A pledge is a possessory security for the benefit of the creditor until the fulfilment of all obligations of the debtor. For the pledging of shares, a share pledge agreement needs to be introduced which shall govern and regulate the terms of the pledge. It is important to note that pledged shares cannot be transferred. By virtue of the Cyprus Contract Law, Cap. 149 Section 138, a notice of the pledge must be delivered to the company by the pledgee together with a certified copy of the share pledge agreement and the original share certificate of the pledged shares will be kept by the pledgee. In the process of pledging, the shareholders pledging their shares , do not lose their ownership of the shares, they remain the registered owner and still receive the benefits of their ownership subject to the terms of the agreement to be reached with the pledgee. These benefits include receiving dividends and exercising voting rights. The pledgees will hold proprietary rights in the shares and their proprietary rights will only terminate in case the obligations are discharged by the debtor. In 2019, clarifications were provided on the position under Cyprus Companies Law (Cap.113), stating that there is no requirement for a share pledge in a Cyprus company to be registered with the Registrar of Companies. One of the key aspects of a share pledge agreement is incorporating a clause explicitly referring to out of court enforcement.
Out of Court Enforcement
The agreement shall ensure that the pledgee can achieve an effective out of court enforcement of the pledge in case there is failure by the pledgor to meet their obligations. This way the intervention of the Court, which can be lengthy and costly can be avoided. The share pledge agreement regulates that the pledgee shall have in his possession certain ancillary documents with the creation of the share pledge. In case of default, the pledgee shall sign and date those in order to enforce the provisions of the share pledge agreement. For instance, an instrument of transfer of shares shall be drafted along with the delivery of the share certificate as described above.
In case of default
Subject to the terms of the share pledge agreement, the pledgee has the authority to transfer the shares in their own name in case the pledgor fails to meet their pre-agreed obligations. It is important to note that pledged shares should be fully paid up and no other charges should be registered against them.
All in all, a share pledge agreement is of great importance in financing transactions and can confer significant protection due to its ability to allow the enforcement of the security without additional legal actions taken against the defaulting party. The underlying reason that a company or individual chooses share pledging could be to acquire financing or to meet financial objectives. Particular attention must be paid at the governing laws, being the Cyprus Contract Law (Cap.149) and the Cyprus Companies Law (Cap 113) as if the formalities of the law are not satisfied, the share pledge agreement could be rendered void.
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide as to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Antrea Kinni, Associate, Limassol Office, Tel 0035725363685 or email email@example.com