The establishment of a pledge on shares does not (cannot) concern, only, the persons directly involved (: lender, debtor, shareholder/ pledger) but also, in particular, the SA itself. The regulations of the law on SAs (art. 54 n. 4548/2018) are intertwined with those of the Civil Code and do not only concern us lawyers. The relevant contract as well as the statutes of the SA must take into account the individual, often of decisive importance and value, “details” and limit them from the start…
Regulation
The possibility of setting up a pledge and usufruct on shares is expressly regulated in article 54 §1 of Law 4548/2018. This is a regulation that corresponds in terms of its content to article 30a of the previous law 2190/1920. It is harmonized with articles 1177 and 1245 of the Civil Code (see in this regard Explanatory Report of law 4548/2018 on art. 54).
Furthermore, article 54 regulates the possibilities surrounding the exercise of the right to vote in cases of pledge (§2). Also, the corresponding exercise of other, non-property rights (§3).
With reference to the property rights, for which there is no relevant mention in the regulation in question: these are determined by the law of pledge (see in this regard Explanatory Report of law 4548/2018 on art. 54).
Pledge
Concept & Content
The pledge constitutes, according to the law, a “limited right in rem” to another’s right or foreign movable asset for the security claim. The specific security is achieved through the preferential satisfaction of the lender when the liquidation (usually through auction) of the object under the pledge (: movable asset or right) takes place.
The asset on which the pledge is established must be foreign (belonging to someone else)- but in particular amenable to disposal by its owner; therefore, it is not possible to pledge an archaeological object or a share whose transfer is prohibited. It must also be individually determined; therefore, it is not possible to set up a pledge on a group of material things (e.g. on shares – unidentifiable/as a whole).
The validity of the pledge depends on the validity of the secured claim. The latter is required to be monetary or denominated in money. Also, definite or at least, definable. It is possible, finally, that one person is the debtor of the secured claim and another is the one who grants the pledge.
Setting up the Pledge
A condition for the formation of the pledge is (art. 1211 of the Civil Code): (a) The ownership of the pledgee (the one who provides the pledge) over the object or right on which the pledge is created. (b) The agreement between the mortgagor and the lender to create the pledge. (c) Compliance with the necessary constituent form (: notarized document or private document of a certain date). (d) The delivery of the material thing by the principal/ mortgagor to the creditor (or third party – art. 1212 Civil Code).
Regarding, in particular, the creation of a pledge on a share, its many functions must be taken into account . The share denotes the title in which it is incorporated—it therefore falls within the meaning of the “material thing”. However, it simultaneously enshrines the shareholder right; therefore, it also falls under the concept of a “right”. The general provisions of the Civil Code on the one hand regarding the pledged material thing and on the other hand the pledged right are applied to the creation of a pledge on a share. Subject, of course, to the absence of a more specific provision.
The method of setting up a pledge on shares differs according to their individual distinctions (: nominal, immaterial and anonymous).
With regard to registered shares: For the creation of a pledge on registered shares, the provisions for the pledge of rights and also for the pledge of material things are applied. In order to set up a pledge, a written agreement of the parties is required (with a notarized document or a private document of a certain date); in addition, delivery of the title to the pledged creditor (or a third party). Finally, registration of the pledge in the shareholders’ book is required to “legalize” the pledge and the related rights vis-à-vis the SA.
Regarding intangible shares: The creation of a lien on intangible shares constitutes the creation of a lien on a right. Special arrangements apply – the further investigation of which is beyond the scope of the present article.
Regarding anonymous shares: Given the abolition of anonymous shares (as of 1.1.2020), the specific case is already of historical value only. In the event of the pledging of anonymous shares, the provisions on the pledge of movable property were applied (: art. 1244, sec. a’ of the Civil Code).
Exercise of Voting Rights While there is a Pledge on Shares
One of the most important questions in case of pledging of shares is related to the exercise of voting rights. Who is entitled to exercise the right to vote at the General Assembly: the pledged lender or the pledged /owner of the shares?
In the case of a pledge on shares, the pledger has the right during the pledge (unless otherwise specified) to participate in the General Assemblies (1247 Civil Code) and to vote in them.
Is a contrary agreement possible?
According to the law on SAs (art. 54 §2 paragraph a’): “If nothing else has been agreed upon, in the case of…a pledge on shares, the right to vote in the general assemblies is exercised by…the pledger ” (art. 54§ 2 section a’). However, it is important to note that “the articles of association may prohibit a contrary agreement” (section b).
It is therefore possible for:
(a) The right to participate and vote in the General assembly to be exercised by the pledger /owner of the shares (: either in the absence of a special agreement between the pledger /owner of the shares and the pledged lender or in the presence of a corresponding provision in their agreement).
(b) The right to participate and vote in the General Assembly to be exercised by the pledged creditor: It is possible, provided that they have a relevant agreement with the pledgor / owner of the shares as well as the absence of a relevant statutory prohibition (although an extra-corporate voting agreement between a pledged creditor is always possible and pledgee /owner of the pledge). The specific agreement, however, can take place either simultaneously with the conclusion of the pledge agreement or later. It is not required to be submitted to a specific press or publicity. However, especially for registered shares, the pledged creditor becomes legal against the SA, as long as the agreement in question is notified to it and the corresponding entry in the shareholders’ book takes place.
The agreement, however, which results in the recognition of the right of the secured creditor to participate and vote in the General Assembly, introduces an exception to the principle of the indivisibility of the share. And this, because it leads to the division of most of the rights that derive from the shareholding relationship.
Exercise of Other Non-Property Rights
Property and non-property (management) rights derive from the shareholding relationship.
Among the management rights of the shareholder are those of participation and voting in the General Assembly. They are entitled, in the context of these, to be informed about corporate affairs and to control the management of the SA. Minority rights, according to the law, constitute its minimum guarantee.
The person who has the right to vote (art. 54 §§2 & 3) – in this case the secured creditor or the one holding the pledge – is, respectively, entitled to exercise the non-property, shareholder rights (see Explanatory Report n. 4548/2018 on of Article 54, where the following are listed indicatively: the right to appear at the General Assembly, to receive information and to cancel a General Assembly decision).
Increase in share capital
A question arises regarding the extension of the pledge to the new shares in the event of an increase in the share capital. The answer to this question is given by theory and jurisprudence (see 1188/2012 Supreme Court, NOMOS Legal Database), depending on the type of each increase:
Upon a nominal increase, the pledge on the shares automatically applies to the new shares as well. The latter, moreover, are granted without compensation to the shareholders: the increase in question does not constitute an increase in the SA’s corporate assets but an accounting readjustment of its existing share capital.
Upon an actual increase, there is an inflow of new assets into the SA (as opposed to the nominal equivalent). Intertwined with the actual increase is the exercise of the shareholders’ right of pre-emption: the pledging shareholder is the one, and only they, who is entitled to exercise the right of pre-emption. Therefore, if the pledging shareholder exercises the preemptive right, the pledge extends and occupies (also) the new shares. However, a necessary condition is the relevant agreement in the context of the pledge agreement.
The pledge on the shares issued following a real or accounting increase is acquired from the time of delivery to the lender of the new shares (: analogous application of art. 1252, sec. b` Civil Code).
Obligations & Liability of the Pledgee
The right to vote in the General Assembly is not exercised without restrictions when it’s the one holding it is the secured creditor. The latter must not abuse it. They must also take into account the reasonable interests of the pledgor and the bare owner as well as the purpose of setting up the pledge (281 & 288 Civil Code).
In case of violation of the specific obligations of the pledged creditor, it is possible to establish (intra-contractual and/or tortious) liability against them.
The establishment of a pledge on shares is not only an important security of the pledged lender. It represents, potentially, a drastic intervention (with multiple/extremely significant consequences) in the life and balances of the SA as well as in the property of the pledged shareholder. It is necessary, therefore, to take the necessary provisions both in the context of statutory regulations and when delimiting and drawing up the pledge agreement.
The consequences, otherwise, can be potentially disastrous. Correspondingly, of course, in the case of the creation of a usufruct on shares. But about this see our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 2nd, 2022).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.