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19 May 2023
6 min read
An exempted company is the most common form of Cayman company and this client briefing seeks to address the issues involved when security is granted over shares in a Cayman exempted company.
For information relating to the enforcement of an equitable security over shares in a Cayman exempted company please see our briefing Enforcing security over shares of a Cayman company.
The ownership interests in an exempted company are registered (i.e. book entry) shares. Legal title to shares derives from entry in the register of members, and it is typical for a company’s constituent documents (i.e. the memorandum and articles of association) to provide that the company will not recognise any interest in shares other than the interest of the registered holder, whom it treats as the legal and beneficial owner.
There are two ways of taking security over shares of an exempted limited company, either a legal charge or an equitable charge.
In practice, the taking of security by way of an equitable charge over shares is the most commonly used method by a secured party. Accordingly, we have focused on this method in this client briefing while also providing a high-level summary of what is involved in a legal charge.
A legal charge over shares is created by the transfer of the shares into the name of the secured party, or its nominee, and the registration of that person as a holder of the charged shares in the register of members of the Cayman company. The secured party undertakes to re-transfer the shares on discharge of the secured obligations.
One of the key advantages of a legal charge is that it is a very secure and comprehensive form of security interest as it prevents the chargor from dealing with the shares while they are subject to the charge. In addition, if it becomes necessary to enforce the security, the secured party is already in control as the registered owner of the charged shares.
The disadvantages of a legal charge include that there may be tax, legal, regulatory and/or accounting implications for a secured party in taking legal title to the charged shares.
An equitable charge transfers only the beneficial interest in the charged shares to the secured party, with the legal title remaining with the chargor. The chargor remains entitled to all the benefits deriving from, and the rights attaching to, the charged shares subject to any contractual restrictions contained in the security document relating thereto.
The key advantage to this type of security as compared to a legal charge over the shares is that it avoids the issues described above in respect of the secured party becoming the registered holder of the shares at the outset.
There are disadvantages to the taking of an equitable charge and we will describe some of these below, as well as a number of steps which can be taken to help mitigate these.
The key disadvantages of an equitable charge are:
In order to mitigate these disadvantages, an equitable charge security package often incorporates the following:
This client briefing is intended to provide a general summary of the position in law as at the date shown above, and is not to be taken as specific legal advice applicable to particular issues or circumstances.
If you would like more information, please contact one of our banking and finance specialists as detailed on this page.
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
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