A pledge creates a possessory security interest in the shares for the benefit of the creditor until outstanding obligations are fulfilled by the debtor. A pledge over shares in a Cyprus company is a common form of security granted as collateral in commercial transactions.
Given the formalities prescribed by law and the importance of the pledge agreement regulating the pledge, lenders should ensure that pledge agreements and deliverables are in compliance with formalities and procedures specified under law to ensure the enforceability of the taking of pledge over shares in a Cyprus company.
Creation of a pledge over shares
Under Cyprus law, a pledge agreement must comply with certain formalities to be valid and enforceable. These include:
- Execution formalities – a pledge must be made in writing, signed by the pledgor and signed in the presence of two witnesses with contractual capacity
- Delivery of notice of pledge – a notice of pledge together with a certified copy of the pledge agreement must be delivered to the company whose shares are being pledged
- Memorandum of pledge – a memorandum of the pledge must be entered in the register of members of the company whose shares are being pledged
- Certificate of pledge – a certificate must be delivered to the pledgee that a memorandum of pledge has been entered in the register of members of the company whose shares are being pledged, evidencing the pledge.
The pledge agreement
The pledge agreement governs the pledge and sets out the requirements under the pledge, its deliverables and the enforcement mechanics in an event of default.
A pledge of shares under Cyprus law is a possessory security and grants to the pledgee (the lender) possession. The lender retains possession of the pledged property (the share certificates) until the obligations of the borrower under the pledge agreement have been fulfilled.
The pledge agreement must provide that the following documents be deposited with the pledgee by the pledgor:
(a) the share certificates representing the pledged shares
(b) undated blank instruments of transfer of the shares being pledged (executed by the pledgor)
(c) a letter of authority and undertaking executed by the directors and secretary of the company in which the shares are being pledged
(d) a resolution of the directors of the company in which the shares are being pledged acknowledging the Pledge Agreement and approving the transfer of the shares to the pledgee in the event of event of default; and
(e) duly signed waiver of pre-emption rights signed by the other shareholders in the company.
Amendments to Articles
A lender must ensure it has immediate and unhindered access to enforce a pledge and sell the pledged shares in the event of borrower default. At a minimum, a lender should determine whether there are provisions in the articles of the company (e.g. pre-emption rights or special transfer processes) which may need to be amended to ensure that the lender’s enforcement mechanism under the pledge is effective.
A pledge over shares in a Cyprus company can be enforced out of court. In the event of default it is usual practice is that, on providing reasonable notice to the pledgor, the pledge is enforced.
Enforcement of the pledge takes place through implementation of the documents delivered under the pledge, without the need for judicial enforcement.
There is no statutory requirement under Cyprus law for the sale of the shares unless otherwise stipulated in the pledge agreement. In the case where the pledgee does proceed with selling the shares, the pledgee is under certain duties at common law, including to act in good faith, act with a reasonable care and skill and obtain the best price reasonably obtainable for the shares at their sale.