Modern economic societies involve transactions and financing by Corporations and consequently securities are often required by the creditors for such transactions. One form of a security is a pledge over shares in a company, which by its nature is a possessory security interest and thus involves the delivery of possession, actual or constructive. In simple words, a pledge is a method of security in order to assure the repayment of a debt or the performance of an act under a contract.
The taking of such security over the shares in a company is commonly in the form of a share pledge agreement executed between the registered owner of the pledged shares (the “Pledgor”) and the individual or legal entity in whose favour the pledge is executed (the “Pledgee”). In order to ensure the enforceability and legality of such security, the pledge must be perfected.
As it has been mentioned above, the taking of such security over the shares in a company, is usually in the form of a share pledge agreement which provides that certain documentation is delivered and/or provided to the Pledgee by the Pledgor concurrently with the execution of the share pledge agreement. The following documentation must be granted by the Pledgor to the Pledgee:
1. The original share certificates representing the pledged shares.
2. Undated blank instruments of transfer of shares duly executed by the Pledgor.
3. An irrevocable proxy and power of attorney in respect of the pledged shares from the Pledgor.
4. Undated and signed letters of resignation from each of the directors and secretary of the company.
5. A certified copy of a resolution of the board of directors of the company approving the pledge of the shares under the share pledge agreement and the transfer of such shares.
6. A letter of authority and undertaking from each of the directors and the secretary of the company.
In Cyprus, a pledge of shares in a company, is governed by the Contract Law (Cap. 149) and Companies Law (Cap. 113). When a Cyprus company is pledging shares, the prerequisites of Article 138(1) of Contract Law, Cap. 149, must be met for such a pledge to be valid. According to Article 138(1), the pledge must be:
- made in writing
- signed by the Pledgor, and
- signed in the presence of two witnesses each having contractual capacity
Furthermore, in order for the pledge of shares to be enforceable the requirements of Article 138(2) of Contract Law, Cap. 149 must be satisfied. A notice of the pledge together with the certified copy of the deed of pledge needs to be given by the Pledgee to the company whose shares are being pledged. The company will cause a memorandum of pledge to be made in its register of members against the pledged shares and subsequently the company will need to deliver to the Pledgee a certificate that such memorandum was made in the form of the certificate and procure that the provisions of Article 132(2) are fully complied with regard to the share pledge agreement.
Additionally, pursuant to the last reform of the Companies Law, Cap. 113 and Article 90(2)(a) of the same Law, it is not compulsory for the pledge of shares to be registered with the Registrar of Companies in Cyprus - as it was required before. Nevertheless, if a Pledgor decides to proceed to such a registration, Article 90 of the Companies Law, becomes binding and the pledges must be registered with the Registrar of Companies in Cyprus in compliance with the procedure described in the aforementioned Article. As to the time limit, the pledge of shares needs to be registered within 21 calendar days of the creation of the security interest if the necessary documentation is in Cyprus. On the other hand, if the necessary documentation is not in Cyprus, the deadline is extended to 42 calendar days of the creation of the security interest.
Enforcement of a pledge of shares
The share pledge agreement usually provides the circumstances in which the pledge and the security created thereunder become enforceable. In most of the cases, these circumstances are described as an “event of default”, that is to say the occurrence and continuation of a breach of an obligation under the contract.
Enforcement under pledge is effected through implementation of the documents, which were mentioned above, delivered under the pledge and particularly the instruments of transfer of shares and the share certificates. It is important to note that the enforcement of the pledge can be effected without reference to any other person or without the need for a Court Order.