Pledging of Shares

In Maltese corporate law, the notion of pledging over shares refers to the conferring upon the pledgee (the creditor) the right to obtain payment out of the shares with privilege over other creditors. Therefore, this gives rise to a situation whereby the debt due to the pledgee constitutes a privileged debt over the pledged shares.

The Companies Act differentiates between the pledging of shares occurring in a public company and the pledging of shares occurring in a private company.  While, in the former, shares may be pledged unless the contrary is provided in the Memorandum and Articles (M&As) of the Company or under the terms of issue of shares, in the latter case, shares may not be pledged unless the M&As specifically cater for this possibility.  

The pledge is not regarded as effective until the Malta Business Registry (‘MBR’) registers the relevant notice.  In this regard, a notification must be provided to the MBR within 14 days by means of the statutory form. Then, the company whose shares have been pledged should record said pledge within its register of members.

Furthermore, the pledge agreement may specify who is empowered to exercise rights belonging to the shareholder during the duration of the pledge, including variables such as voting rights and payment of dividends. If, however, the pledge does not specify matters of this nature, the following avenues may be taken:

• The pledgor (the debtor) exercises all rights pertaining to the shareholder until default occurs in relation to the agreement of pledge or until the pledgee would have enforced his security;
• Unless the pledgor and the pledgee have otherwise agreed in the pledge agreement, dividends or interests payments which would be due on securities pledged shall be paid by the company to the pledgee who shall appropriate such amounts received to the interest which would be due on the debt secured by the pledge and to the capital, in instances where there is an excess.

Where the termination of the pledge is desired, the pledgee would need to deliver a notice to the effect of such to the MBR within 14 days from the termination. Notification to this effect should be made to the company and the regulated market, where applicable. Where consent is granted, the transfer or assignment will be valid but the shares remain subject to the pledge.

In the event of default of the pledge agreement, the creditor may opt to either dispose or appropriate the shares. Moreover, the creditor has the right to apply for a judicial sale of the shares. In all cases however, the creditor is required to notify the pledgor prior to this through a judicial act.

The Act therefore allows that shares pledged be disposed of or appropriated, in contrast to the position under the Civil Code. This means that, while the point of departure is that the creditor retains the right afforded to him under the Civil Code to apply for the judicial sale of the shares, he is entitled to either trigger the appropriation of the shares or else to opt to dispose of them.

The value of the shares may be established by means of an agreement between the pledgor and the pledgee, provided that this is done after notice of default would have been given. Where an agreement is not reached, a certified public accountant or an auditor would be appointed by the Court to do so on the application of the pledgee.  

Where shares are quoted on the stock exchange, the following considerations would need to be borne in mind:

• Notification to the recognised investment exchange, by means of a certified true copy of the pledge agreement which must be notified to the exchange within 14 days, together with the relevant notice to the company;
• Any transfer of shares would be null and void, even if there is the consent of the creditor pledgee;
• In relation to the enforcement of the pledge, where there is default under the pledge agreement and upon notice being granted by judicial act to the pledgor, the Maltese regulated market and the company, the pledgor would be required to sell the securities through a person duly licensed under the Investment Services Act.

 Moreover, prior to exercising the right to dispose of or appropriate the shares, the pledgee may be required to offer the shares to the other shareholder of the company as follows:

• Where the M&As of the company lay down pre-emption rights relating to share transfers, this would mean that the shares are to be offered by the creditor pledgee in accordance with those rights;
• Where the above is not the case, the shares must be offered by the pledgee to all the other shareholders of the company in proportion to their holdings;
• Where the pledging of shares occurs in connection with a public company, the pledged shares must be offered to the company’s shareholders on a pre-emptive basis only if the M&As of said company provide for pre-emption rights.

The pledging of shares acts, therefore, as an effective safeguard and remedy to the creditor pledgee in securing payment and safeguarding rights. This mechanism evinces Malta’s pursuit of continuous excellence in the financial services and corporate fields, offering businesses the opportunity to continue growing and maintain liquidity, while protecting their assets.

Author: Karl Cauchi

For information or assistance with corporate law matters, please contact us at info@gtg.com.mt