Can the Shares of a Cayman Islands Company be Pledged as Security?
It is not possible to "pledge" registered shares under Cayman Islands law because title to the shares cannot be transferred by physical delivery. Any grant of security over registered shares that is called a "pledge" will typically be either:
- a legal mortgage or
- an equitable mortgage/share charge, depending on its terms.
If the security purports to be something else, the chances are that it will be entirely ineffective.
The legal mortgage is granted by execution of a mortgage agreement between the borrower/mortgagor and the secured lender/creditor. The terms of the legal mortgage will vary, but essentially it requires transfer of legal title in the shares to the secured lender/creditor, subject to a requirement to re-transfer the shares upon satisfaction of the underlying secured obligations. The legal mortgage is perfected by a transfer of the shares into the name of the secured lender/creditor. The transfer occurs when the company's shareholder register is updated. The Cayman company's articles of association will often give its directors discretion over the registration of transfers.
Accordingly, the secured lender/creditor should require, before entering into the transaction being secured, either:
- removal of the discretion by amendment of the articles of association, or
- evidence of approval of the transfer.
If the security purports to be something else, the chances are that it will be entirely ineffective.
The most common way to take security over the shares of a Cayman company is by way of equitable mortgage or share charge. An equitable mortgage/share charge can be created by a transfer of shares that is not registered by entering the secured lender/creditor in the company's shareholder register as holder of the shares (i.e. the executed instrument of transfer and share certificate (if any) are delivered to the secured lender/creditor by way of security). There are also certain additional mechanisms (e.g. power of attorney) put into place to perfect the security.
In addition to the security documentation involved with the above, there would need to be written board resolutions of the Cayman company to approve, among other things, the registration of the share transfer (that might happen if the lender has to enforce share charge).
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