Drafting a share pledge agreement

Drafting a share pledge agreement

In Belgian financing transactions, share pledges are commonly used security instruments. They allow a creditor to obtain an effective enforcement mechanism over the equity of a company, while enabling the business to continue its operations in the ordinary course until a default occurs. This article provides an overview of the relevant elements to consider.

A. Legal framework in Belgium 

Belgian share pledges over shares are primarily governed by the Financial Collateral Law of 15 December 2004, the Belgian Companies and Associations Code and general Belgian contract law.

In group structures, corporate benefit must be carefully assessed, especially where a subsidiary pledge shares to secure parent debt.

B. Key elements

1. Creation and scope of the pledge: A share pledge agreement should define the scope of the security interest being granted. It must identify the pledged shares with precision, including the possibility on future shares, as well as all related rights attached thereto. Second, the secured obligations must be described. In practice, the pledge typically secures all present and future obligations of the debtor towards the secured creditor under the relevant finance documents. Third, the ranking of the pledge should be specified, for example by confirming that it constitutes a first-ranking pledge over the shares. It is advisable to expressly extend the pledge to all ancillary rights attached to the shares (e.g. including dividends)

2. Perfection: Under Belgian law, a pledge over registered shares is perfected by recording the pledge in the shareholders’ register of the relevant company, in accordance with the Belgian Companies and Associations Code. Often the agreement already foresees the precise wording to be recorded in the shareholders' register and a proxy to register the pledge. An express acknowledgement of the pledge by the company whose shares are pledged strengthens the enforceability of the security and reduces the risk of disputes regarding the validity or opposability of the pledge.

3. Representations and warranties: The pledgor typically represents and warrants, inter alia, that it is the sole legal and beneficial owner of the pledged shares, free from any prior pledges, liens, encumbrances or other third-party rights, that the shares have been validly issued and are fully paid up, that no transfer restrictions exist that would prevent or limit the creation or enforcement of the pledge (unless otherwise disclosed), and that all necessary corporate authorisations have been obtained to enter into the pledge agreement and to grant the security interest contemplated therein.

4. The allocation of voting and dividend rights : Prior to the occurrence of an enforcement event, the pledgor typically retains the right to exercise all voting rights attached to the pledged shares, provided that such exercise does not adversely affect the interests of the pledgee or the value of the security. Similarly, dividends and other distributions declared on the pledged shares continue to be paid to the pledgor in the ordinary course. This position changes upon the occurrence of an enforcement event. At that point, the pledgee may become entitled to exercise the voting rights attached to the pledged shares. Any dividends or other distributions declared on the pledged shares will then be applied towards the discharge of the secured obligations rather than being paid to the pledgor. Getting this balance right is relevant. Overly broad provisions in favour of the pledgee risk an unintended premature loss of control by the pledgor, while insufficiently protective language may leave the pledgee exposed when it matters most.

5. Enforcement: One of the key advantages of the Financial Collateral Law of 15 December 2004 is the flexibility it offers in relation to enforcement, allowing the pledgee, upon the occurrence of a default, to realise the pledged shares without the need for prior judicial authorisation. This means that the pledgee may proceed to sell the shares, whether by way of a private or public sale, in a swift and efficient manner. As an alternative to a sale, the pledgee may also appropriate the pledged shares at their fair market value, provided that the pledge agreement permits such appropriation and that a clear valuation mechanism has been agreed upon. In practice, the pledge agreement typically sets out the method for determining fair market value, including the appointment of an independent expert, the applicable valuation methodology and the relevant timelines. Structuring these provisions with sufficient precision at the drafting stage is essential, as any ambiguity risks giving rise to disputes at the very moment when swift enforcement is most needed.

6. Continuing security and preservation: The pledge will typically constitute a continuing security and shall remain in full force and effect until all secured obligations have been irrevocably and unconditionally discharged in full. Any amendment, supplement, restatement or novation of the underlying finance documents may generally not result in the release of the security. Any assignment or transfer of the secured claims by the pledgee automatically transfers the benefit of the pledge to the assignee or transferee, without the need for any further formality or consent.

At act legal Belgium, we assist both lenders and borrowers in structuring, negotiating and enforcing Belgian share pledges in compliance with the Financial Collateral Law of 15 December 2004 and the applicable corporate law framework.