Wednesday, August 8, 2012

Share Pledges - Part 1

This article considers which shares can be pledged under Omani law, the process of registering a share pledge, dealing with pledged shares, how to release a share pledge, and finally how a share pledge can be enforced.

Which Shares Can be Pledged?

The shares in a joint stock company may be pledged under the Omani Law of Commerce. It is not possible to pledge shares in a limited liability company or partnership as such shares may not be represented by negotiable instruments and are more akin to a “participating interest” than shares.Shares in an open joint stock company must to be registered on the Muscat Securities Market (MSM) by the Muscat Clearing & Depository SAOC (Muscat Depository) and shares in a closed joint stock company need to be registered before such shares can be transferred or pledged.

Process of Registering a Share Pledge

The registration requirements for a share pledge are controlled by the Muscat Depository and, currently, the entity receiving the share pledge (the lender or the pledgee) has to register and open an account initially with the Muscat Depository by providing copies, suitably authenticated, of its corporate documents, a letter requesting the opening of an account and the completed application form. It will then receive a depository number from the Muscat Depository.

The share pledge is usually registered in a standard lien form in Arabic. The standard lien only provides details of the following:

  • • the pledgor (the entity granting the share pledge);
  • • the pledgee;
  • • the name of the company whose shares are being pledged and the number of shares; and
  • • whether cash profit (cash dividends) and free shares (stock dividends) are pledged or not.
Other conditions can be inserted in to the final clause (Clause 3: Other Conditions). We would recommend that various additional terms are included in the share pledge including a description of the obligations secured by the share pledge.

The share pledge needs to be executed by the pledgor and the pledgee and, if a party is a foreign entity, the execution of the share pledge needs to be suitably authenticated. Then, the share pledge itself can be registered by lodging it with the Muscat Depository together with the various documents including a list of authorised signatories and the commercial registration papers of the pledgor and the pledgee. Again, if a party is a foreign entity any corporate documents will need to be suitably authenticated.

The share pledge will take effect from the date it is registered by the Muscat Depository and they will issue a Statement of Account for the pledgor, showing the pledged shares. Prior to the registration of the share pledge, the share pledge will take effect as a private contract between the parties only.

Next month, Part II of this article will discuss certain key aspects of Omani share pledges, such as how they may be dealt with, released, and enforced.