Pledging shares of a Cyprus Company (Share Pledge) is a very common practice to secure financial or commercial obligations. This article aims to explain what is a Pledge of shares in a Cyprus company, the process for establishing a share pledge, and its popularity as a security mechanism.
What is a Share Pledge Agreement?
A share pledge agreement is a legal contract under Cyprus law where the shareholder (the pledgor, legal owner of the shares) provides the pledgee (the secured party) with rights over shares in a Cyprus company as collateral for a debt or obligation.
This is very commonly used to secure obligations under a loan or other financing arrangement.
While ownership of the shares remains with the pledgor, the pledgee gains certain rights, such as the ability to sell the pledged shares if the pledgor defaults on the secured obligation.
Share Pledge agreement often provide for the different rights attaching to the pledged shares such as rights to dividends and voting, which are either retained by the pledgor or transferred to the pledgee depending on the terms of the agreement.
Share pledges are frequently used in cross-border financing and corporate restructuring transactions involving Cypriot companies.
How Does a Share Pledge Differ from Other Security Instruments?
Pledging shares is distinct from other forms of security, such as charges or mortgages, in several ways:
- Possession and Control:
- In a share pledge, possession over the shares (share certificates) is transferred to the pledgee.
- By contrast, in a charge, the shareholder retains ownership and control of the shares while granting the secured party a security interest.
- Registration
- A share pledge may not require registration with the Registrar of Companies in Cyprus to be valid, though the company must be notified for the pledge to be perfected.
- Enforcement Mechanisms:
- In the case of a share pledge, the pledgee can enforce their rights directly by selling the shares in the event of default. To this end, several auxiliary documents to facilitate enforcement are provided with the signing of the Share Pledge.
- Other forms of security may involve more complex enforcement procedures.
Why are Share Pledges so widely used?
Share pledges are a widely used security mechanism in Cyprus due to several factors:
- Direct and Efficient Enforcement:
In the event of default and subject to the specific terms of the Pledge Agreement, the pledgee can exercise their rights directly by transferring or selling the pledged shares.
- Cross-Border Transactions
Cyprus’s legal framework, based on English common law principles, makes it a preferred jurisdiction for share pledges in international financing arrangements. - Flexibility in Structuring Rights
Share pledges allow for tailored arrangements regarding dividend and voting rights during the pledge period, accommodating the needs of both the pledgor and the pledgee.
Conclusion
Pledging shares in a Cyprus company is an effective and efficient way to secure obligations in financial and commercial transactions. With its straightforward creation process, enforceability, and adaptability, a share pledge remains a popular choice in both domestic and international transactions involving Companies established in Cyprus.
Should you wish to find out more information, contact us at info@paraschou.com.cy.
