Tuesday, September 11, 2012

Share Pledges- Part II

In last month’s Client Alert, we discussed which kinds of shares can be pledged in Oman and the process for registering a share pledge in the Sultanate. This month, we conclude our introduction to share pledges by discussing how they are treated, released and enforced in Oman.
Dealing with pledged shares

Once the share pledge is registered, Muscat Depository treats such shares as blocked and will not allow the shares to be dealt with. For example, in practice it is not possible to sell shares which have been pledged. But it is possible, with the express written consent of the first pledgee, for a second priority pledge to be granted over the same shares.

In addition, Muscat Depository will contact the share pledgee each time a cash profit or free shares are issued, if such future profits are included in the share pledge, to obtain their instructions on how to deal with such cash profit or free shares.

Release of a share pledge

A share pledge can be released by the pledgee submitting a release letter allowing Muscat Depository to release the security. Again, such a release letter would need to be suitably authenticated if the pledgee is a foreign entity.

Enforcement of a share pledge

The enforcement process for a share pledge is set out in Articles 225-227 of the Omani Law of Commerce. Essentially the shares secured under the share pledge will, on a default, have to be enforced in the Omani courts pursuant to a judicially conducted process. The pledgee is required to serve formal notice requiring payment of the debt on the pledgor (and the borrower, if a different entity). Three days after service of such a notice, the pledgee may apply to the Omani courts for an order for the sale of all or part of the pledged shares. Once the default has been established, the Omani courts may then order the sale of some or all of the shares.

The court should order the sale of shares traded on the MSM through the brokerage system. The broker will auction the shares in accordance with the Omani Capital Markets Law and Regulations. The broker, after deducting commission, will remit the sales proceeds to the Omani court. The Omani court would then remit the amount of the sales proceeds, up to the value of the secured obligations (as determined by the Omani court) to the pledgee. Any surplus funds would be retained by the Omani court and returned to the pledgor.

The Omani Law of Commerce does allows the court, after the date a debt has fallen due, to vest charged assets up to the value of the secured obligations in the hands of the pledgee, however this is subject to the prior sanction of the court.

Approval requirements for certain percentages of share ownership

Please note that under Omani law, there are various notification and/or approval requirements which have to be met before certain percentage of shares can be held in an Omani joint stock company. In some cases, these requirements apply to both foreign and Omani entities. For example, if the security was over 10% or more of the voting shares of a licensed Omani bank, then any party seeking to buy the shares through the court auction or the pledgee (if it is seeking to have the shares transferred directly to it) would need to have obtained the prior approval of the Central Bank of Oman.