Pledge on shares – what to check in case of due diligence: the pledge registry or the share register of the company?
After some delay, the new Pledge Act finally came into force on 1 January 2018. This new legal framework introduced the ‘registered pledge’. This kind of pledge becomes valid and opposable without requiring a dispossession. This implies that the pledgor can remain in possession of the pledged goods. To make this pledge opposable to third parties, it needs to be registered in the ‘national pledge registry’ that has been set up for that purpose (https://pangafin.belgium.be/#?lang=NL). The pledge registry is publicly accessible: any person who holds a Belgian electronic identity card is able to conduct searches in the pledge registry. Every consultation requires the payment of a search fee per result, that will be charged before making the possible results available, even if the outcome is negative. In addition, the system will keep track of the identity of the person who performed the searches for a period of 6 months. This enables the pledgors to check who accessed their data.
Before the new Pledge Act came into force, the pledging of shares was regulated by the Act on Financial Securities of 15 December 2004 (hereinafter referred to as ‘AFS’). The pledging of shares under the AFS is validly performed by concluding a pledge agreement and becomes opposable to third parties if the pledgor actually disposes itself of the pledged shares. Such a dispossession is usually performed by registering the pledge in the share register of the company.
The coming into force of the new Pledge Act led to a strained relationship between the AFS and the Pledge Act. Indeed, the current article 7 § 1 AFS provides that the Pledge Act does not apply to any pledge on financial instruments, except for some articles of the Pledge Act, set out in § 2, that explicitly shall apply. The Pledge Act itself, which applies on tangible and intangible moveable properties, does not explicitly exclude shares (or financial instrument in general). This unclear, conflicting situation between the application of the AFS and/or the Pledge Act in the case of the pledge on shares is therefore a subject of discussion within the legal doctrine. A number of authors argue that a registered pledge can be established on shares, with registration in the pledge registry in application of the Pledge Act, while others defend the view that shares can only be pledged under the coverage of the AFS. We support this last opinion.
To exclude any dispute about the validity of a pledge on shares in the current state of the legislation, it is advisable to register the pledge in any case in the share register of the company. This also currently seems to be the common practice. If the pledge should only be registered in the pledge registry, there is indeed the risk that this pledge will not be opposable to third parties.
The lack of clarity addressed above, indicates that it is highly recommendable to perform a double check in the context of a due diligence: by consulting first of all – as usual – the share register, and next – for the sake of completeness – the pledge registry. A search through the pledge registry will always be based on the data of the pledgor (such as his name/the company’s registration number), and can afterwards be refined on the basis of the encumbered goods. It is impossible to perform a search that is only based on a description of the encumbered goods
This recommendation will prove particularly useful when shares held in one or more companies are part of a business that is pledged by the parent company. The business can, as a de facto universality, be pledged in its entirety. In this case, only one right of pledge will be created instead of individual rights of pledge on the distinct parts of the business.
Before the Pledge Act came into force, the floating charge on a business could only be granted to the benefit of an authorized bank or financial institution, through registration in a special register of the mortgage office. Under the Pledge Act, any creditor may nowadays create a floating charge on a business, that will become opposable to third parties after registration in the pledge registry.
When pledging a business, the shares of the subsidiary/subsidiaries are part of the de facto universality formed by the parent company’s business, and, as such, these shares are also part of the registered pledge on this universality. This pledge can only be detected by consulting the pledge registry by using the name of the pledgor, in this particular case the parent company. In case of a due diligence, it is therefore useful to not only run a search by entering the company name that is subject to the due diligence, but also by using the name of the parent company that might have pledged its shares in this company, as part of its business.
Naomi Glibert, intui attorneys
Act of 11 July 2013 amending the Civil Code with respect to securities on movable properties, Belgian Official Gazette of 2 August 2013.