The Pledging of Shares Under the Maltese Companies Act
One of the most common security mechanisms used in corporate financing transactions is the pledge of shares. In loan facilities, for instance, creditors such as banks or financial institutions often rely on this type of security. Rather than relying solely on a borrower’s contractual obligation of repayment, creditors aim to reduce their risk by taking security over the borrower’s assets.
A pledge may be constituted over things that are movable by nature and movable by operation of law (such as shares), as well as debts and other rights relating to movables. In essence, the pledge gives the creditor (the pledgee) a privileged right to recover payment of the debt from the pledged asset over other creditors. This special privilege is granted by virtue of Article 2009(a) if the Civil Code (Chapter 16 of the Laws of Malta).
A pledge allows the creditor to take possession (a right of retention) of the debtor’s shares as security until the obligation is fulfilled, meaning the debt owed has been repaid in full and final settlement.
While pledges in Malta are generally regulated by the Civil Code, the pledge of shares is specifically governed by Article 122 of the Companies Act (Chapter 386 of the Laws of Malta). In some cases, the Financial Collateral Arrangements Regulations, 2004 may also apply.
Distinction Between Public and Private Companies
Importantly, Maltese law draws a distinction between pledging of shares in public and private companies.
For public companies, there is a presumption that shares may be pledged. Conversely, in private companies, a pledge of shares is only possible if the company’s memorandum and articles of association (“M&As”) expressly allow it. If the M&As do not authorise pledging of shares, they must be amended and an updated version must be submitted to and registered with the Malta Business Registry (“MBR”) before a pledge can be validly created.
Therefore, if a transaction contemplates a pledge of shares in a private company, the first step is to verify whether the company’s M&As permits it.
Constitution of a Pledge of Shares
A pledge of shares is constituted by means of a written agreement, (the “Pledge Agreement”) entered into by three parties:
- The pledgor: the shareholder granting the pledge (who may be the debtor or a third-party guarantor);
- The pledgee: the creditor in whose favour the pledge is created; and
- The company whose shares are subject to the pledge.
The inclusion of the company is essential not only because shares represent ownership in the company, and therefore the Pledge Agreement has important implications for both the parties involved and the company itself, but also because the Companies Act specifically requires the company to be notified of the pledge in writing within 14 days of the granting of the pledge.
For the pledge to be effective against third parties, a statutory notice of the pledge (Form T(2)) together with a document indicating the details of the Pledge Agreement must be delivered to the MBR by either the pledgor or the pledgee within 14 days of the granting of the pledge. The requirement to file a document detailing the particulars of the Pledge Agreement is a recent addition introduced by Act No. XVIII of 2025.
The Form T(2) includes particulars of the pledgor and pledgee, as well as details of the pledged shares, such as their class/type, number, and nominal value. The company must also record the pledge in its register of members.
In certain cases, the Pledge Agreement may also require the company to include in the share certificates a note indicating that the shares are subject to the pledge and to deliver those share certificates to the pledgee.
Transfer and Assignment of Shares
While a pledge of shares is in place, the pledgor cannot transfer or assign the pledged shares, whether for consideration or gratuitously, without the prior consent of the pledgee. Any transfer or assignment made without such consent is null and void.
It is important to note that even when transfers are permitted, the shares shall remain subject to the pledge.
Enforcement of Pledge in an Event of Default
If the pledgor defaults (an “Event of Default”), the pledgee has several enforcement remedies at their disposal.
In the Event of Default under the Pledge Agreement, the pledgee shall be entitled to either
- dispose of the shares which are pledged in his favour; or
- appropriate and acquire the shares himself, in settlement of the debt due to him or of part thereof.
Before exercising these enforcement rights, the pledgee must notify both the pledgor and the company by means of a judicial act that there has been an Event of Default. Alternatively, the pledgee may apply to the court for a judicial sale of the pledged shares.
The value of the pledged shares may be agreed upon by the pledgor and pledgee after the pledgee has issued a notice of an Event of Default to the pledgor. Any prior valuation agreement is invalid. If the parties cannot agree, the fair value of the shares, whether for sale or appropriation, shall be determined by a certified public accountant (or by one appointed by the Court upon the pledgee’s request).
The pledgee must always bear in mind that the value of shares is subject to fluctuation. If the shares decrease in value, the pledgee bears the loss, as the ultimate purpose of the pledge is to secure the full repayment of the debt.
Furthermore, when exercising his rights, the pledgee must consider the provisions of the company’s M&As. These may include pre-emption rights in favour of existing shareholders that apply to share transfers. If such rights exist, the pledgee must first offer the pledged shares to those shareholders at the price determined as described above.
In all cases, the pledgee may only sell or appropriate as many shares as are necessary to cover the debt owed. Any remaining shares must be released back to the pledgor.
Exercise of Rights Attached to Shares
The Pledge Agreement may specify who is entitled to exercise the rights attached to the pledged shares, such as voting rights and the right to receive dividends and interest payments.
In the absence of such clauses, the pledgor continues to exercise these rights while the pledge is in force. However, in the event of default, or if the pledgee decides to enforce the pledge, all rights attached to the pledged shares that belong to the pledgor shall immediately become exercisable by the pledgee upon the pledgee notifying the pledgor and the company by judicial act.
In addition, unless the parties have agreed otherwise in the Pledge Agreement and notified the company, any dividends or interest payments due on the pledged shares must be paid by the company directly to the pledgee. The pledgee must then apply these payments first towards interest due on the secured debt, and then towards reducing the capital balance.
Termination of Pledge
A pledge of shares is terminated through a private agreement entered into between the same parties who constituted the pledge. Notice of termination must then be filed with the MBR within 14 days of the effective date by submitting of a statutory Form T(3). The company must also be notified in writing within the same timeframe and must update its register of members to reflect the termination of the pledge.
Conclusion
The pledge of shares under Maltese law offers creditors a reliable form of security, provided the required formalities are observed. Particular attention must be paid to the company’s M&As, especially in the case of private companies, as well as to the registration requirements with the MBR.
When properly implemented, a pledge of shares not only protects the creditor’s interests in the event of default, but also maintains a balance between the rights and obligations of all parties, including those of the debtor.
How Can AE Help
AE Legal provides tailored guidance on the creation and registration of share pledges under Maltese law. Our team advises on ensuring company M&As permit the pledge, preparing and filing the necessary documentation with the MBR, and assisting with enforcement or termination procedures where required.
