September-20-2017 in Banking & Financial Services

Lenders on Acquisition Finance Facilities and more generally Capex Facilities to trading SMEs tend to take security over shares in obligor companies. In the first of a two-part series focusing on taking security over shares in private companies, we outline some of the key reasons a lender takes this form of security. We will also explore some of the issues that lenders should be aware of when seeking share security from private companies.

Why take Security over Shares in a Limited Company?


1.    Control of Ownership

By taking a charge over 100% of the shares in a company from the shareholders, the lender ensures that there will be no change of control within the company. The shareholder who has granted the charge is bound by the provisions of the negative pledge clause within the charge, to obtain the lender’s consent for the alienation of any of the charged shares.

It is important when a lender is considering taking share security that the share register is checked to ascertain a full and accurate picture of the company’s ownership.  The lender should aim to capture 100% of all classes of shares.

The importance of this diligence is brought into focus by the following example:  A company with an issued share capital of 100 Ordinary Shares and 1 C Share. The shareholder offering the share charge owns all 100 Ordinary Shares while another party owns the C Share. The C Shareholder could be what has colloquially become known as a “Golden Share” and hold voting control of the board. If this share is not captured it will significantly impact upon the value of the security from an enforcement perspective.


2.    Advantages on Enforcement of holding Share Security

An all assets debenture affords a lender on enforcement the ability to appoint a receiver and sell the assets of the company. Share security provides the additional entitlement to take over control of the company, trade and or sell as a going concern. In order to achieve this, 100% of the share-holding in a company should be captured by the security where possible. Taking a security over less than 100% is fraught with challenges in relation to control of the board of directors. This may have the knock on effect that certain vital ancillaries will not be delivered as referred to above.   


Taking Security over Shares – Issues to be aware of


1.    Constitutional Restrictions

Since the enactment of the Companies Act 2014, no specific power needs to be expressly included in the constitution of private companies limited by shares to authorise the granting of security. However it is quite common for a constitution of a company to include a regulation granting powers to directors of the company to decline the registration of the transfer of shares of the company on a transfer to a new shareholder. Given that in order to enforce its share security the lender would have to have a stock transfer form registered, it should insist on the company’s constitution being amended prior to taking the security.


2.    Risks with taking share security in an unlimited company

The risk associated with taking security over the shares of an unlimited company is on enforcement the lender becomes the de-facto owner of the share and as such can become liable to the creditors of the company.      



Conclusion

Share security is a valuable addition to the Lender comprehensive security suite. The next article in this series will focus on the importance of ancillary requirements to be delivered with the share charge to facilitate effective enforcement.


For further information, please contact Michael Hanley at Hayes solicitors.

 

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