So what's different in Scotland? A number of things:
- No equitable security: as I said in our summary on the Scots law of assignation, Scotland does not recognise the concept of equitable security interests so it is not possible to constitute a fixed security interest in Scottish shares unless and until such time as the shares are transferred to the person entitled to the security (or its nominee). The Scottish subsidiary's statutory books must be updated to reflect that transfer. Until that formal transfer has taken place, there is no security interest whatsoever in those Scottish shares.
- Completed stock transfer forms: On any deal involving a Scottish share security, the stock transfer form which is delivered alongside the Scottish share pledge to effect delivery of the transferred shares to the creditor should contain the transferee's details (i.e. it should not be left blank) and it should be dated and delivered to the company secretary of the company whose shares are being pledged. On receipt, the company secretary should provide the creditor with a share certificate.
- No second priority interest: as the shares must be transferred in order to complete the security interest, it is not possible to take a second ranking or supplemental share pledge in Scotland. Instead, if a creditor wants to rely on something other than a floating charge, the creditor must rely on an assignation of the reversionary interest in the relevant shares until such time as the parent company is in a position to grant first ranking security in the shares to that creditor.
- PSC considerations: As the shares require to be transferred in order to complete the security interest, the subsidiary whose shares are pledged should update its PSC register to include the chargor or ultimate beneficial owner as normal and the creditor as someone entitled to control the company.
What if the creditor does not want to take ownership of the shares?
This is a common issue on deals involving Scottish share security. Lenders are often uncomfortable with accepting a transfer of charged shares for a variety of reasons, most commonly for accounting purposes and out of concern the company might be treated as a subsidiary of the lender (note, there are statutory provisions which exclude any such company as a subsidiary of the lender for accounting purposes), whilst others do not want to be involved in passing shareholder resolutions pending any enforcement triggers and do not want to be involved in any PSC requirements in connection with that company.
These lenders typically adopt the English law approach and choose to hold signed (but otherwise blank) stock transfer forms and original share certificates in the name of the chargor. Whilst that does not create a security interest as a matter of Scots law, if that is the preferred approach it is vital in those circumstances that the share pledge is drafted so as to give the chargee an express right to complete their title to the pledged shares at any time rather than only after the occurrence of an Event of Default or other enforcement trigger to ensure the chargee has the ability to complete title before the chargor enters or is close to some form of insolvency process. It is important that this provision is included regardless of the agreed enforcement triggers in any wider transaction documentation, including any "lead" English law governed debenture or other security document.
For completeness, the issue of voting rights is generally dealt with in the same way as in England: i.e. the voting rights are typically contracted back to the chargor pending any enforcement trigger.
An alternative, but far less common, approach is for the lender to include within its share pledge a short form asset specific floating charge. We have seen that on some complex financings involving multiple lenders who do not benefit from shared security with the floating charge acting as a protective measure to provide any purported subordinated creditor from completing a share pledge ahead of the senior creditor.
