What is a Pledge of Shares?

A pledge of shares, also known as a share pledge, is a financial arrangement where shares are used as collateral to secure a loan. In this arrangement, the borrower pledges their shares to the lender through a share pledge agreement.

If the borrower defaults on the loan repayment, the lender has the right to sell the pledged shares to recover the outstanding loan amount.

How is a Pledge of Shares Regulated Under Ugandan Law?

The regulation of the pledging of shares in Uganda is primarily based on the provisions of the Companies Act, Cap. 106, and the Contracts Act, Cap. 284.

Can Shares in a Ugandan Company Always Be Pledged?

The Companies Act does not specifically mention the pledge of shares; however, it does address the creation of charges by a company.

Whether shares can be pledged depends on the company's Memorandum and Articles of Association (Memorats), which govern its operations. The Memorats may include provisions that either allow or prohibit the pledging of shares.

Therefore, the possibility of pledging shares is contingent upon the specific terms outlined in a company's Memorats.

How is a Pledge of Shares Constituted?

A pledge of shares is constituted through a share pledge agreement between the pledger (also known as the chargor) and the pledgee (also known as the chargee). The pledger commits the shares as collateral in favour of the pledgee. The company whose shares are being pledged must either be a party to the agreement or be notified of the pledge by the pledger.

The pledge must be registered as a charge with the company registry within 42 days from the execution of the share pledge agreement. This registration is conducted online through the Online Business Registration System (OBRS) managed by the Uganda Registration Services Bureau (URSB). Once registered, a certificate of registration is issued, and the pledge of shares is deemed a perfected security.

Additionally, the company must record the existence of the pledge as a charge in its register of charges.

Can Shares Subject to a Pledge Be Transferred or Otherwise Assigned?

A pledge of shares prevents the shareholder from transferring or otherwise assigning their shares, as the shares are offered as security for the loan upon signing the share pledge agreement. This is why a share pledge agreement is often accompanied by share transfer forms signed by the shareholder. Any transfer of these shares will be deemed null and void if the pledge was registered.

Since the transfer of these shares must be registered, the company registry is likely to query any attempt to transfer shares that are subject to a registered pledge. However, the pledgee may consent to the transfer or assignment of the pledged shares.

How Can a Pledge of Shares Be Terminated?

A pledge of shares is terminated when the debt for which the pledge was made is fully repaid. Alternatively, a new agreement may be entered into to terminate the share pledge agreement between the pledger and the pledgee.

The company must record the termination of the pledge in its register of charges. Additionally, the company must notify the company registry of the termination, which will then issue a memorandum of satisfaction to the company.

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