In commercial life, the shares of joint-stock companies are often subject to various legal transactions. One of these transactions is the pledge of shares. The pledge of shares is an important financial security used by shareholders of joint-stock companies to meet their financial needs. The establishment of a pledge on shares in joint-stock companies is subject to various legal regulations and procedures that must be carefully followed. This article will examine how the pledge of shares is carried out, the issues to consider during this process, and why the application of a pledge on shares is strategically important for both companies and shareholders.

A pledge is the process of pledging the company’s shares as collateral for a debt. This means that the shares owned by the company are shown as security under certain conditions by the debtor to ensure payment to the creditor. The pledge provides the creditor with the ability to convert the shares into money and collect the debt in case the debtor fails to pay. Especially in meeting financing needs, such securities play a significant role, and the pledge of shares in joint-stock companies is a critical tool for the company’s ability to operate smoothly.

1. Whether the Share is Represented by a Certificate

For the pledge of shares in joint-stock companies to be valid, it is important to consider whether the shares are represented by certificates. Whether the company issues share certificates or not directly affects how the pledge will be made. A share certificate is a valuable document issued to represent the company’s capital, and these certificates play an important role in the process of pledging shares

If the company has not issued share certificates, i.e., the shares are not represented by certificates, a written pledge agreement must be made between the parties for the pledge to be valid. In this case, the pledge of shares will only be valid with this agreement. However, if the shares are represented by certificates, the pledge transactions will vary depending on the type of certificate.

2. Pledge Transactions for Bearer Share Certificates

Companies can issue share certificates as bearer shares. The pledge of bearer share certificates is made by transferring the physical possession (i.e., the ownership) of the certificates to the pledgee. A written pledge agreement is required for this process, and the pledge is completed upon delivery of the certificates to the creditor. Additionally, it is beneficial for the pledgee to notify the Central Securities Depository to ensure the validity of the pledge and protect the creditor's rights against third parties.

In practice, if it is indicated by written declarations between the parties that the bearer share certificates are pledged, it can be noted on the certificate. This eliminates the good faith of third parties trying to take over the certificate from the pledged creditor. This situation ensures the identification of the pledge’s existence and prevents third parties from transacting with the pledged certificate.

3. Pledge Transactions for Registered Share Certificates

The pledge of registered share certificates follows a more complex process. For the pledge of registered share certificates, a written pledge agreement must be signed, and a pledge endorsement (endorsement of the certificate) must be made. The endorsement of the certificate is the process of creating a pledge right on the certificate. Then, the delivery of the registered share certificates (i.e., the transfer of possession) constitutes the establishment of the pledge right.

Registered share certificates are valuable documents representing the shares of joint-stock companies. However, there is no legal clarification regarding whether the pledge right on bare shares or registered share certificates must be recorded in the share register. This creates a certain level of uncertainty. However, recording the pledge right in the share register may facilitate the enforcement of the pledge against both the company and third parties. This registration may provide a stronger guarantee in practice.

4. Pledging Temporary Certificates and Share Certificates

Temporary certificates are issued to represent shares until the actual share certificates are issued. The provisions related to registered share certificates also apply to temporary certificates. Therefore, the pledge transactions on temporary certificates are made through a written pledge agreement and pledge endorsement, just like with registered share certificates. An interesting point is that even though temporary certificates are a provisional document, the legal validity of the pledge transactions made on them is subject to the same procedures as those of pledged share certificates.

5. Conclusion

The pledge of shares in joint-stock companies is an important tool for companies and shareholders to meet their financing needs. The pledge provides security to the creditor in case the debtor fails to pay and is a critical tool for debt collection. However, for a valid pledge to be established on shares in joint-stock companies, attention must be paid to whether the shares are represented by certificates, the type of certificate, and the pledge procedures.

In particular, pledge transactions on bearer and registered share certificates are subject to specific procedures and legal regulations. The most important issues that parties must consider to ensure the validity and effectiveness of the pledge transactions are the preparation of a written pledge agreement, delivery of the certificates, notification to the Central Securities Depository, and recording the pledge right in the share register. Paying attention to these issues ensures that pledge transactions on the shares of joint-stock companies are carried out safely and effectively.