In this article, we will discuss one of the types of collateral that can be used for securing credit – the pledge of equity interests in commercial companies.

This type of pledge holds significant economic importance, particularly in the context of financing. Equity interests, especially shares, are valuable assets within a business's portfolio and are highly suitable as collateral, provided they hold substantial economic value. This value is even more critical when shares are traded on organised markets, such as stock exchanges. The combination of economic value and liquidity allows these assets to be easily converted into cash, fulfilling the creditors’ needs when used as financing collateral, ensuring the repayment of debts.

In practice, it is common for a company to offer its equity interests, either in its own business or in another company it has a stake in, as collateral in commercial transactions. The proposal to pledge equity interests must be made explicitly, as this protects the interests of creditors in the banking and commercial sectors. Such agreements should always be documented in writing and require the explicit consent of the shareholders, unless the company's articles of association or other corporate documents grant specific individuals the authority to execute the pledge.

To establish a pledge of equity interests, in addition to the transfer of the title, an agreement between the parties is required. This agreement should clearly outline the type of equity interests, the term, the financing amount, and the coverage of the pledged asset, among other details. The effects of the pledge begin from the date of the registration request with the issuer, assuming there is a prior agreement in place.

Regarding the social rights attached to equity interests, such as those associated with shares or quotas, it is advisable to establish criteria for the use or exercise of these rights. The obligations towards the company arising from these rights remain unchanged, and the shareholder remains responsible for fulfilling them.

For example, the right to vote generally rests with the shareholder or holder of the equity interest. However, in certain cases, by agreement, this responsibility may be transferred to the creditor (such as a bank), the holder of the pledged right, allowing them to replace the equity holder and exercise the voting rights.

If the terms for exercising the voting right have not been agreed upon, the principle of good faith applies, considering the purpose of the contract. This principle aims to give the creditor a privileged position or control over the asset of the debtor (or a third party), allowing the creditor to be preferentially satisfied from the proceeds of the asset's sale. This, in turn, increases the likelihood that the proposed collateral will be attractive to the creditor, which may facilitate the approval of the credit request. The creditor’s primary concern is the consistency and value of the equity interest as a tradable asset.

It’s important to note that creating a pledge of equity interests does not make the creditor a shareholder. Instead, it provides the creditor with an additional tool to protect their position and the economic value of the asset they will rely on to satisfy their claim if the debtor defaults. This should be the prevailing perspective, as well as the limits on the creditor’s exercise of voting rights under the pledge.

Additionally, even if the matters discussed at the general meeting do not concern the creditor’s specific interests, the creditor must act according to the instructions of the shareholder, meaning the creditor should vote in accordance with the shareholder’s direction.

If the shareholder exercises the voting rights, they must always prioritize the creditor’s interest in maintaining the integrity of the guarantee. The shareholder should refrain from any actions that could decrease the value of the collateral, as such actions could lead the creditor to demand immediate fulfillment of the secured obligation, potentially resulting in legal and financial consequences.

In conclusion, the pledge of equity interests is a common form of collateral that companies or shareholders can offer when seeking financing, especially when banks require collateral. After the bank's assessment, considering the factors outlined above, the proposed pledge of equity interests may be approved and used as collateral for financing.

Once the debt is settled, the pledge is discharged, and the creditor will release the equity interests, returning them free from any encumbrances.

 

Stélio Tauzene
Credit Operations and Legal Departmant Manager

FNB Mozambique