We generally expect to see the following suite of deliverables required to be provided to the chargee pursuant to the terms of the relevant security document or credit agreement:
an executed but undated share transfer instrument in respect of the charged shares (Shares);
the original share certificate(s) in respect of the Shares;
executed irrevocable proxies in respect of the Shares enabling the chargee (among other things) to attend shareholders’ meetings and to exercise voting powers attached to the Shares;
undated letter of resignation signed by each director and officer of the charged company;
executed authorisation letter from each director and officer of the charged company to date the resignation letter upon enforcement;
board and/or shareholder resolutions (as applicable) of the charged company acknowledging the transfer of shares to the chargee and to do all things necessary to enable such transfer upon enforcement;
board and/or shareholder resolutions (as applicable) amending the constitutional documents of the charged company as required by the chargee;
where the charged company is a Bermuda company that is not (i) listed on an appointed stock exchange or (ii) classified under the Investment Funds Act 2006 and the chargee is not a licensed bank or other licensed lending institution in a jurisdiction approved by the Bermuda Monetary Authority, acknowledgement from the Bermuda Monetary Authority approving the proposed transfer of Shares upon enforcement; and
acknowledgement from the charged company’s registered agent of the granting of the security and its undertaking that it would register the share transfer upon enforcement.
While these are generally accepted market standard security deliverables, it is reasonable to expect that not all deliverables are feasible where, for instance, the chargor is only a minority shareholder of the charged company. Given that the purpose of holding onto security deliverables is to assist the chargee upon enforcement of the security, the unavailability of a full set of deliverables is not satisfactory. The chargee should be advised on the legal and commercial implications, a few examples of which are illustrated below.
If the proxies to exercise powers of shareholders are not obtained, there would be little purpose for the chargee or its nominee to attend a meeting of shareholders of the charged company without a substantial proportion of the voting rights. Not having the controlling vote could even result in a risk for the chargee whereby the rights in respect of the Shares are adversely affected as a result of a decision of the majority shareholders.
If existing transfer restrictions are not removed from the constitutional documents prior to security being granted over the Shares, the chargee may be prevented from realising the market value of the Shares upon enforcement. In addition, any transfer restrictions affecting the Shares imposed by the majority shareholders after the security is granted but before enforcement could prevent the chargee from liquidating the Shares or any assets related to the Shares. Where the Shares constitute minority shareholding only, the likelihood of the charged company agreeing to revise its constitutional documents is low as the majority shareholders have no reason to make such revisions solely for the benefit of a minority shareholder, especially where there are shareholder protection provisions already in place.
It would be unlikely for the board of directors to agree to resign as a result of a change in a minority stake, and aside from the risks of transfer restrictions mentioned above, not being able to control the board of directors of the charged company would run the risk of having the minority shareholding being further diluted upon new share issuance or the board of directors refusing to honour the share transfer instrument. A dilution in share ownership may in turn have a negative effect on the monetary value of the Shares given that the Shares will represent a smaller percentage of ownership of the charged company.
While the risks associated with enforcement of a charge over the minority shares of a company may be mitigated by a review of the constitutional documents of the charged company, obtaining specific undertakings from the board or majority shareholders or relying on certain covenants embedded in the security document itself, the chargee must consider the legal and practical difficulties that it may face upon enforcement if the full set of deliverables are not available.