A pledge is a security right intended to ensure the fulfillment of a claim held by a lender (creditor) against a borrower (debtor). A pledge grants the pledgee the highest legal security for a claim. Other preferential rights, such as company mortgages or tax claims by the state, are subordinated to the pledge. However, for the pledgee to enjoy the security right, the pledge must meet the legal formal requirements to be valid. The pledge must achieve protection against third parties (known as perfection).
Perfection of Pledges over Shares
There are three ways to achieve perfection when pledging shares:
Delivery (tradition): The share certificate must be handed over to the pledgee to achieve protection against third parties.
Notification (denuntiation): Protection is achieved by notifying the person who holds the share certificate that it has been pledged.
Registration in the share ledger: If there is no physical share certificate, protection is obtained by registering the pledge directly in the company's share ledger.
Generally, a lender with a pledge as security enjoys relatively strong protection against credit losses. However, a pledgee relying on denuntiation is at greater risk compared to one who holds possession of the pledged asset, as they must trust that the holder does not dispose of the asset. If the pledge is properly registered and thereby prevents the sale of the shares or the issuance of a new share certificate, a registration in the share ledger should constitute sufficient protection.