What is a share pledge agreement.

Last updated on June 26th, 2023 at 03:19 pm

Under Cyprus law, a pledge of shares refers to the granting of a security interest in shares of a company as collateral for a debt or other obligation. It involves the transfer of legal title of the shares to the creditor (pledgee) while the economic ownership and voting rights generally remain with the pledgor (debtor).

The pledge of shares is governed by the Cyprus Companies Law, Cap. 113, and the provisions related to charges and securities. The process typically involves the following steps:

  1. Pledge Agreement: The pledgor and the pledgee enter into a written agreement known as a pledge agreement. This agreement sets out the terms and conditions of the pledge, including the identification of the shares being pledged, the obligations secured by the pledge, and the rights and remedies of both parties.
  2. Notification to the Company: The pledgor must notify the company whose shares are being pledged about the creation of the pledge. The company then makes a note of the pledge in its register of members.
  3. Transfer of Legal Title: To create a valid pledge, the legal title to the shares is transferred to the pledgee or a third-party custodian appointed by the pledgee. This transfer is usually done by executing a share transfer form in favor of the pledgee.
  4. Retention of Economic Ownership and Voting Rights: While the legal title is transferred, the pledgor generally retains the economic ownership and voting rights attached to the pledged shares. However, the parties may agree on specific restrictions or conditions regarding the exercise of these rights.
  5. Enforcement: If the pledgor defaults on the obligations secured by the pledge, the pledgee has the right to enforce the pledge. The enforcement methods may include sale of the pledged shares, transfer of the shares to the pledgee, or exercising voting rights to protect the pledgee’s interests.

It’s important to note that the specifics of the pledge of shares may vary depending on the terms agreed upon by the parties involved and any additional provisions included in the pledge agreement. Consulting with a legal professional familiar with Cyprus law is recommended to ensure compliance with all relevant requirements and regulations.