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Introduction By taking a mortgage over shares (often referred to as a share charge) as part of the overall security package for corporate debt, a lender has, in an enforcement scenario, the option to sell the assets of the company that are charged under the general security arrangements or, pursuant to the share charge, can sell the company itself if 100% of the entire share capital of the company is so charged. This is particularly advantageous in circumstances where, fo...
Introduction
By taking a mortgage over shares (often referred to as a share charge) as part of the overall security package for corporate debt, a lender has, in an enforcement scenario, the option to sell the assets of the company that are charged under the general security arrangements or, pursuant to the share charge, can sell the company itself if 100% of the entire share capital of the company is so charged. This is particularly advantageous in circumstances where, for example, the company is not trading and is simply holding certain assets, for example, a property or a number of properties. Another example of this mechanism being useful is where, in an enforcement scenario, the sale of the assets of the company would raise data protection concerns, for example, in the sale of a pharmacy business, the transfer of a book of client names could give rise to data protection issues.
In short, a situation where a bank enforces under a share charge, it has the ability to sell the company “lock stock and barrel” and this can prove a simple route for the bank to realise the value comprised in its security.
There are two main types of fixed charge over shares, a legal mortgage and an equitable mortgage. An equitable mortgage does not transfer legal ownership and as such does not require the Bank to be registered in the company’s share register as owner of the shares or pay stamp duty on the transfer. The most common type of charge over shares is an equitable mortgage. In fact, lenders will rarely take a legal mortgage over shares as to do so would transfer the legal ownership of the shares to the Bank which could place obligations on the Bank as a shareholder and would also raise stamp duty obligations in respect of the transfer.
Amendment to Memorandum and Articles of Association
It is necessary, when acting for a lender, to ensure that the discretion of the directors of the company to refuse to register a share transfer (contained in Model Regulation 3, Table A, Part II of the Companies Acts, 1963) is limited/removed from the company’s Articles of Association. If necessary, an amendment to the Articles may be required.
Stop Notices
While it is prudent to serve a notice on the relevant company secretary of the company on which shares are charged in order to put them on notice of the fact that the shares have been charged, this is not always necessarily required. In most cases, this notice (known as a “Stop Notice”) is not affected.
Stop Notices can be less important in private limited companies where the company secretary, the directors and the shareholders are often one and the same individuals. The logistics involved in serving a Stop Notice are often seen as a deterrent when considering whether they should be served.
Stop Notices are more relevant in large private or public companies. Stop Notices are served by filing a Notice As To Stock and Affidavit in the Central Office of the High Court in duplicate, where the duplicate Notice is authenticated by the Central Office. The Stop Notice is then served on the company secretary and the effect of the Stop Notice is to put the company on formal notice that, if it is presented with a purported share transfer of shares that are the subject matter of a Stop Notice, the directors should not register such transfer given the existence of the bank’s interest over such shares.
What to be aware of
In taking a charge over shares, banks need to ensure that the relevant company’s constitution allows the bank to enforce its charge from a practical perspective.
For more information on this article or a related matter contact Feilim O'Caoimh or Elizabeth McCann in the Commerical Unit at McDowell Purcell.
Feilim O’Caoimh, Partner and Head of the Commerical Unit Remember that this article is for information purposes only and does not constitute legal advice. Case law is fact specific and readers should understand that similar outcomes cannot be assumed. Specific advice should always be taken in given situations.