Securities account pledge

A securities account pledge is the security interest by which an account holder charges the financial securities held in the account as security for a debt. In an acquisition or refinancing, the borrowing holding company pledges the account in which the shares of its operating subsidiary are held. Enforcement transfers control of that subsidiary to the lender, or to the purchaser of the shares. Article L. 211-20 of the French Monetary and Financial Code sets the regime: a declaration signed by the account holder creates the pledge between the parties and as against the issuer and third parties. The pledged assets comprise the securities held on the date of the declaration, those substituted for them or added to them and, unless otherwise agreed, their fruits and proceeds. Securities credited later as security for the original claim are deemed delivered on the date of the original declaration. Successive pledges rank in the order of their declarations. The pledgee has a right of retention over the securities and cash in the account. It agrees with the account holder the conditions on which the holder may dispose of them. On default, the creditor serves formal notice and enforces the pledge eight days later, or after another agreed period. For unlisted securities, it chooses between a public sale, court-ordered transfer of ownership and the contractual appropriation provided for in articles 2347 and 2348 of the French Civil Code.

An acquisition holding company borrows €120m in unitranche to acquire 100% of a logistics company. It signs a pledge declaration over the securities account in which the target’s two million shares are held. The agreement lets it receive dividends as long as no event of default has been notified. If the holding company stops paying, the lender serves formal notice and, eight days later, applies for the transfer of the shares at the value set by an expert.

• Negotiate the right to receive dividends and exercise voting rights as long as no event of default has been notified.
• Have the contract list the transactions on the shares permitted without the lender’s consent, such as an intragroup merger or a capital increase.
• Check the enforcement period after formal notice: eight days by default, which the parties may change by agreement.
• Review the terms for appropriation of unlisted securities and how the expert is appointed.