Pledging of securities accounts: an expected and welcome reform for the Private Equity transactions06/10/2021
The ordinance n°2021-1192 of 15th September 2021, which was issued in accordance with the authorisation given in the Loi Pacte of 22th May 2021, has simplified and consolidated the law on securities. The aim of such law is to provide greater legal certainty and to make French law more attractive.
In effect from 1st January2022, this act will offer more flexibility in most of private equity transactions, such as in the pledge of securities accounts (Nantissement de comptes-titres).
In this respect, the pledge of securities accounts, codified in Article L. 211-20 of the Monetary and Financial Code (Code monétaire et financier) has been a major reform of security law to the extent that it is nowadays essential to almost every private equity transactions. The securities of the target company are in fact systematically pledged as collateral for the credit granted by a lender in the acquisition of the said company.
When shares are held in pure registered form, i.e. registered in the company’s securities register, there was an obligation under pre-reform law to open a special bank account (“compte fruits et produits“) so that dividends could be included in the pledge. In private equity transactions precisely, target companies are usually unlisted companies, issuing pure registered shares.
As a reminder, such an obligation is not necessary for shares issued in bearer form, which are registered in the accounts of an authorised financial intermediary. For instance, this is the case in listed companies.
For a long time, the question was raised whether it was legally possible to make an exception to the obligation to open a special account as mentioned above, when the pledged shares are held in pure registered form.
In this context, there were significant difficulties when the settlor was a foreign national. Opening such an account with a bank required the latter to comply with stringent anti-money laundering measures, even though they had very few specific business interests with the settlor. This adds to the already existing legal risk in case of enforcement of the pledge by the creditor, as the security creates obligations and, to such an extent, liability for the account-holding bank.
Lenders frequently require the grantor to obtain certain undertakings from the account-holding bank. For instance, it is required to produce a certificate if the lender sends a notice of freezing when a circumstance affecting the settlor occurs and to which the credit institution is a third party. In many cases, this was a hindrance for these foreign entities, especially in their private equity transactions in France.
As a result, the doctrine and practitioners have strongly argued in favour of amending Article L. 211-20 of the Monetary and Financial Code to clarify these provisions.
The new securities account pledge regime resulting from the much-awaited ordinance of 15th December 2021 now expressly provides for the parties the possibility to exclude formally benefits from the base for the securities account pledges.
Furthermore, the requirements for opening a compte fruits et produits have been clarified and simplified:
- this special account can now be opened at any time from the declaration of pledge until the date on which the security can be realised; and
- it is no longer mandatory to open such an account. However, if the special bank account is not opened, the benefits (including dividends) will be excluded from the pledge basis.
While the aim is to provide more flexibility in the pledging of securities accounts, credit institutions are still free not to accept the exclusion of benefits from the pledge basis. Moreover, it is not certain that these measures offer answers to the issues encountered by settlors and especially foreign settlors, even if the contractual restrictions usually imposed by lenders on the distribution of dividends by the company should, in practice, be able to satisfy them.
By the UGGC Avocats Banking & Finance team