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Security by pledge of shares – practical considerations

These FAQs consider the procedure and requirements in terms of Maltese company law concerning the pledging of shares in a company incorporated under the Companies Act (Chapter 386 of the Laws of Malta).

What is a pledge?

Pledge is a contract by and between (i) a debtor (or a third party for the debtor), known as the pledgor, and (ii) a creditor, known as the pledgee, which is created as security in favour of the pledgee for an obligation of the pledgor.

A pledge may be taken over things that are movable by nature and movable by operation of law (such as shares), as well as debts and other rights relating to movables, and it grants the creditor the right to obtain payment out of the thing pledged with privilege over other creditors.

How is a pledge of shares regulated under Maltese law?

While the general elements of the notion of pledge emanate from the provisions of the Civil Code (Chapter 16 of the Laws of Malta), the regulation of the pledging of shares is largely based on the provisions of the Companies Act, as supplemented, in certain specified circumstances, by the provisions of the Financial Collateral Arrangements Regulations 2004.

Can shares in a Maltese company always be pledged?

A distinction must be drawn between public and private companies.

The Companies Act specifically provides that securities (such as shares) may, unless otherwise provided in the Memorandum & Articles of Association (the “M&As”) or under the condition of issue of the securities, be pledged by their holder, provided however, that in the case of a private company, securities may not be pledged unless the M&As specifically so provide.

Therefore, there is the automatic presumption that shares in a public company may be pledged, while shares in a private company may not be pledged – in each case, unless the Memorandum or Articles of Association expressly state otherwise.

The implication of this is that upon a proposed pledge of shares, a private company would need to procure an amendment to its M&As if no provision as to a pledge over shares exists, whereas no such requirement to amend the M&As applies to a public company (unless the latter’s M&As expressly disallow a pledge of shares, which, in practice, is very rare). In such instances, it is relevant to note that before a pledge of shares can be registered with the Malta Business Registry (the “MBR”), the latter would first need to receive the amended M&As, which must be submitted to the MBR within 14 days of the extraordinary resolution approving the changes thereto.

How is a pledge of shares constituted?

A pledge of shares is constituted by virtue of a private agreement in writing entered into by and between the pledgor and pledgee, regulating the pledge of shares by the pledgor in favour of the pledgee.

The pledge agreement is typically also entered into by the company whose securities are being pledged, and this in view of the requirement emanating from the Companies Act that the company must be notified in writing of the pledge.

In addition, the company must record the existence of the pledge in its register of members, and within 14 days of the effective date of the pledge, notice of the pledge is to be submitted to the MBR by the pledgor or the pledgee, by virtue of a statutory Form T(2).

When does a pledge of shares become effective?

A pledge of shares becomes effective between the parties upon the entry into the pledge agreement by and between the pledgor and the pledgee (and the company, as applicable), subject to the completion of all conditions precedent as would be further stipulated in the pledge agreement.

In relation to third parties, however, a pledge of shares only becomes effective upon the registration of the relevant statutory notice on the online portal of the MBR. The only exception is with respect to shares that are listed on, or maintained in a register held by, a Maltese regulated market, in which case a pledge of shares in any such company shall become effective in relation to third parties from the date of delivery of the signed pledge agreement to the Maltese regulated market.

Can shares subject to a pledge be transferred or otherwise assigned?

A distinction is once again drawn between shares that are listed on, or maintained in a register held by, a Maltese regulated market, and shares that are not so listed or maintained.

In the former case, a transfer or assignment of pledged shares is always null and void. On the other hand, a transfer or other assignment of pledged shares the latter of which are not listed on a Maltese regulated market, is possible provided any such transfer or assignment is made with the consent of the pledgee and the shares transferred remain subject to the pledge.

How can a pledge of shares be terminated?

This requires the termination of the existing pledge agreement by virtue of a further private agreement, to be entered into by and between the pledgor and pledgee (and typically also the company whose securities have been pledged) regulating the termination of the pledge of shares by the pledgor in favour of the pledgee.

As with a pledge of shares, the company must furthermore record the termination of the pledge in its register of members, and within 14 days of the effective date of the termination, notice of such termination is to be submitted by the pledgee to the MBR, by virtue of a statutory Form T(3).

For assistance in connection with security by pledge of shares, please contact Dr. Sarah Grima on sarah.grima@fenechlaw.com

©Fenech & Fenech Advocates 2022

Disclaimer │ The information provided on this Update does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only.  This Update may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.

Share transfers under Maltese law – corporate considerations

These FAQs consider the procedure and requirements in terms of Maltese company law concerning the transfer of shares in a company incorporated under the Companies Act.

How is a transfer of shares regulated under Maltese law?

The procedure by which shares in a Maltese company can be transferred is effectively governed by the Companies Act (Chapter 386 of the Laws of Malta), which lays out the general legal requirements for the validity of a share transfer in terms of Maltese company law, and the Memorandum and Articles of Association (the “M&As”) of a company, which regulate the more specific and practical company procedures to be followed in order to effect a transfer of shares therein.

How is a transfer of shares validly constituted?

For a transfer of shares to be valid under Maltese law, it must be constituted by virtue of an instrument of transfer. The instrument of transfer is effectively an agreement in writing entered into by and between the transferor (the existing shareholder) and the transferee (the person to whom the shares are being transferred), regulating the transfer of the shares by the transferor in favour of the transferee.

The instrument of transfer (or an authentic copy of same) must then be delivered to the company in which the shares are being transferred, which company must accordingly record the share transfer in its register of members.

It is relevant to note that for the purposes of the Companies Act, the transferor shall be deemed to remain a holder of the shares until such time as the name of the transferee is entered in the register of members, and therefore, the updating of the register of members is essential for a person to be recognised as a shareholder in terms of Maltese company law.

Moreover, in the event that the transfer of shares brings about a change in the beneficial ownership of the company, such change must also be recorded in the company’s register of beneficial owners.

Within 2 months after the date on which a transfer of shares is registered with the company, the company shall also deliver the certificates of the shares transferred to the person/s entitled thereto (unless the conditions of issue of the shares otherwise provide).

What documentation is required to be submitted to the Malta Business Registry (the “MBR”) for the purposes of a share transfer?
  1. Statutory Form T (notice of transfer of shares); and
  2. Statutory Form BO(2) (notice of change of beneficial ownership)
  3. Supporting due diligence documentation pertaining to the new shareholder (in the event that the shares are not transferred to an existing shareholder), which varies according to the type and nationality of the new shareholder.

It is relevant to note that prior to MBR submission, the above-listed documents together with any and all applicable tax documentation will be required to be submitted to the International Corporate and Tax Unit as a first step.

Are there any restrictions on a transfer of shares?

While the right to transfer shares is a basic right of any shareholder, the M&As may, and in certain cases must, restrict to some extent, the right to transfer shares. More specifically, the Companies Act provides that for a company to qualify as a private company, the M&As must effectively contain some form of restrictions.

On the other hand, the law is silent with respect to the transfer of shares in public companies and it is therefore up to the shareholders of such companies to determine whether or not to include any transfer restrictions in the M&As.

One of the most common clauses restricting the transferability of shares is what is known as the “pre-emption clause”, which imposes an obligation upon any member wishing to transfer his shares, to first offer his shares to the other members of the company at a price determined in accordance with the M&As, before seeking to offer such shares to a buyer of his choice.

Other such restrictions may be included in the form of drag-along and/or tag-along provisions, the respective purpose of which is to protect the minority and the majority shareholder. By virtue of tag-along provisions, the majority shareholder is obliged to include the minority shareholder in negotiations for the sale of the company’s shares, entitling the minority shareholder to “tag along” in the transaction and thereby also sell its shares in the company upon the proposed sale of the majority shareholder’s shares. On the other hand, drag-along provisions entitle the majority shareholder to “drag” a minority shareholder into the sale of the company upon the proposed sale of the majority shareholder’s shares, thereby obliging the minority shareholder to also sell its shares in such instance.

Any such M&As clauses which, in some way, restrict the right to transfer of shares should effectively set out the procedure to be followed for the transfer of the shares in question to be validly effected.

Can a company refuse to register a transfer of shares?

As a general rule, a company has a right to refuse to register a transfer of shares and, in such case, it has 2 months after the date on which the transfer was lodged to send a notice of refusal to the transferee.

The only exception is with respect to a transfer of shares in a public company that is the result of a judicial sale. In such case, the transfer of shares cannot be refused and this notwithstanding the regulations contained in the Model Articles of Association found in Part I of the First Schedule of the Companies Act, or anything contained in the M&As of any such public company.

For assistance in connection with share transfers, please contact Dr. Sarah Grima on sarah.grima@fenechlaw.com

©Fenech & Fenech Advocates 2022

Disclaimer │ The information provided on this Update does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only.  This Update may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.

Increases in Share Capital – A General Overview

Author: Sarah Grima, Senior Associate – Corporate & Commercial Department

These FAQs consider the procedure and requirements in terms of the Companies Act (Chapter 386 of the Laws of Malta) concerning increases in company share capital.

How is an increase in company share capital regulated under Maltese law?

The procedure by which the share capital in respect of a Maltese-registered company can be increased is effectively governed by the Companies Act (Chapter 386 of the Laws of Malta) as supplemented by the Memorandum and Articles of Association (the “M&As”) of a company.

Who is empowered to authorise an increase in the share capital of a company?

In terms of the Companies Act, an increase in company share capital requires approval by means of an ordinary resolution of the shareholders unless the M&As of a company stipulate any higher percentage than that required for an ordinary resolution (e.g. an extraordinary resolution).

In addition, provided the M&As expressly permit, the general meeting may give authority by ordinary resolution, to the Board of Directors, to issue shares up to a maximum specified amount, which authorisation shall be valid for 5 years, renewable for further periods of 5 years each.

Where a company has more than one class of shares, the shareholders’ resolution governing the increase in the issued share capital or the directors’ authorisation to issue shares, shall be subject to a separate vote for each class of shareholders whose rights are affected by that resolution or authorisation, and the same majorities shall apply for each class.

Is it necessary to amend the M&As upon an increase to the company’s share capital?

This depends on whether it is the authorised or solely the issued share capital that is being increased.

An increase in the authorised share capital of a company necessarily requires an amendment to the share capital clause of the Memorandum. On the other hand, no such requirement extends to an increase in the issued share capital by itself.

It is worthy to note that since shares can only be issued up to the amount stated in the authorised share capital clause, unless the amount of the company’s authorised share capital at the time of the share issue sufficiently caters for the amount of new shares proposed to be issued, the authorised share capital would necessarily need to be increased to allow for new shares to be issued, which would in turn necessitate an amendment to the Memorandum of the Company.

Against what consideration may new shares be issued, and how are such new shares allotted?

The consideration for the acquisition of shares upon a new share issue must consist of assets capable of economic assessment, and it is against a consideration in cash or in kind that newly issued shares can be allotted.

In the case of an allotment in cash, a bank slip must be provided evidencing (i) the deposit of the total amount by which the issued share capital of the company is to be increased, (ii) the date of receipt of the funds and (iii) the details of the company qua receiver of the funds.

In the case of an allotment in kind, a report on the consideration is required to be drawn up by an expert who is independent of the company and approved by the Registrar (e.g. an auditor / audit firm holding a local warrant) before the new shares are issued.

In addition, some form of documentation evidencing the title of the allottee to the allotment is also required, together with any contract of sale or services rendered in respect of which the allotment in kind is being made (e.g. a contribution agreement).

How does the law distinguish between public and private companies with respect to the issue and allotment of new shares?

Upon an allotment, shares shall be paid up to at least 25% of their nominal value in the case of a public company, and at least 20% of their nominal value in the case of a private company.

Moreover, in the event that shares of a public company are proposed to be allotted for a consideration in cash, such shares shall be offered to shareholders on a pre-emptive basis in proportion to the share capital held by them, provided however, that shares in any company, whether public or private, shall not be offered on a pre-emptive basis to the company itself, notwithstanding any other provision of the Companies Act empowering a company to hold its own shares.

What documentation is required to be submitted to the Malta Business Registry (the “MBR”) for the purposes of a share capital increase?

Subject to their prior submission to the International Corporate and Tax Unit, the following documents are to be submitted to the MBR:

  1. Ordinary resolution of the shareholders (unless the M&As require any higher percentage);
  2. Statutory Form H (notice of return of allotments);
  3. Statutory Form BO(2) (notice of change of beneficial ownership);
  4. Bank slip, in the case of an allotment in cash;
  5. Expert’s report, in the case of allotment in kind;
  6. Contract in writing or a document constituting the title of the allottee to the allotment, in the case of allotment in kind;
  7. If the transferee is a new shareholder, supporting due diligence documentation pertaining to such person (which varies according to whether the new shareholder is a natural or legal person and whether of EU or non-EU nationality).

Moreover, where a new issue of shares necessitates an increase to the authorised share capital, an extraordinary resolution of the shareholders authorising a change to the Memorandum of the Company and a revised set of M&As would need to be submitted to the MBR as a first step.

Besides the documentation to be submitted to the MBR, what other steps / documents are required to be completed by a company upon the issue and allotment of new shares?
  1. The register of members is to be updated to reflect the issue of the new shares;
  2. A new share certificate is to be issued in the name of the person holding the newly issued shares;
  3. If applicable, the register of beneficial owners is to be updated to reflect any changes to the company’s beneficial ownership as a result of the share issue.

For assistance in connection with share capital increases, please contact Dr. Sarah Grima on sarah.grima@fenechlaw.com

©Fenech & Fenech Advocates 2022

Disclaimer │ The information provided on this Update does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only.  This Update may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.