Cyprus companies are frequently parties to financing transactions either as borrowers or guarantors. For this reason, it is often the case that the shares in the share capital of such Cyprus companies are being placed as security to secure the loan obligations.
Shares in Cyprus companies can be encumbered either by a charge or a pledge. For the reasons we set out below, the customary and best practice for lenders is to take a Cyprus law pledge over the shares in a Cyprus company.
Pledged shares cannot be transferred
The “pledge” is under Cyprus law, a possessory type of security i.e., a security under which the pledgee takes possession of the pledged assets. In this respect, specifically in relation to a pledge of shares, the Cyprus Contract Law, Cap. 149, requires, among others, that the original share certificate representing the pledged shares be delivered by the pledgor to the pledgee. The pledgor remains the registered holder of the pledged shares, and the pledgee acquires a “special interest” in the pledged shares until the outstanding obligations are discharged by the debtor.
Therefore, and it is established law that, for so long as the shares are pledged i.e., the pledge is not released, the pledged shares cannot be transferred by the pledgor to any other person.
This provides the lender with the protection in the sense that, as long as the share pledge is in force, the lender can be certain that the pledged shares cannot at law be transferred.
Out of court enforcement
Importantly, a Cyprus law share pledge can be enforced in an out of court process. No court order is needed.
In practice, this is achieved, following the occurrence of an event of default, by the pledgee dating and putting into effect certain ancillary documents that are delivered to it by the pledgor at the time that the share pledge is created. These documents include an undated and made in blank, instrument of transfer of shares which is signed by the pledgor, and which the pledgee may fill in and date, to have the pledged shares transferred to it, or to its nominee, or to a purchaser.
Furthermore, it is customary that the pledgor also delivers to the pledgee from the outset when the share pledge agreement is signed, a power of attorney authorising the pledgee upon default to exercise the voting rights of the pledged shares, and undated resignations of the directors and officers of the company that the pledgee may elect to put into effect if they fail to cooperate to register the transfer of the pledged shares.
No registration with the Registrar of Companies
It is not required under Cyprus law, that a share pledge over the shares in a Cyprus company (either it being given by a Cyprus pledgor or by a foreign pledgor), be registered with the Registrar of Companies.
Attention must be given to the validity requirements
The share pledge agreement must be drafted correctly, to produce a valid and enforceable security and by observing the validity requirements prescribed by the law.
Attention, therefore, and extra care should be given to the following requirements provided by the Cyprus Contract Law, Cap.149, which must be met in order for a share pledge agreement to be valid and enforceable:
- the original share certificate representing the pledged shares must be delivered to the pledgee;
- the share pledge agreement must be in writing and signed in the presence of two witnesses;
- notice of pledge accompanied by a certified copy of the share pledge agreement, should be given to the company;
- a memorandum of the pledge should be made in the register of members of the company; and
- a certificate of the memorandum of the pledge should be issued by the secretary of the company and delivered to the pledgee.
If any of the above requirements are not met, the share pledge agreement will be invalid and as a result, void and unenforceable. Accordingly, it is advisable for lenders to consult with a Cyprus lawyer when they are putting share pledge agreements into place over shares in Cyprus companies.
LLPO Law Firm has a team of experienced lawyers, ready to provide solutions and assist in drafting share pledge agreements or other security documents, issuing legal opinions in financing transactions and to advise on related Cyprus law matters.