How share pledges work in NVR

A pledge is a security right intended to secure the fulfillment of a claim that the lender (the pledgee) has against the borrower (the pledgor). A pledge gives the pledgee the strongest form of legal security for a claim. Other priority rights therefore rank below a pledge, including floating charges over business assets and the state’s claims for taxes. However, for the pledgee to benefit from this security right, the pledge must meet the statutory formal requirements for validity. The pledge must have proprietary (in rem) effect.

Proprietary protection when pledging shares

To obtain proprietary protection when pledging shares, there are three different approaches. The first is delivery (tradition), which means that a share certificate must be handed over to the party who is to have control over the pledged asset in order to obtain proprietary protection. The second is notification (denuntiation), which means that proprietary protection is obtained by notifying the person who holds the share certificates that the shares have been pledged. The third method is registration in the share ledger, which is used when no physical share certificate exists.

In general, a lender who provides funds secured by a pledge enjoys relatively strong protection against credit losses. A pledgee relying on notification, however, faces greater risk than a pledgee with possession, since the former must rely on the holder of the physical asset not selling or otherwise disposing of it. If the pledge is correctly registered and thereby prevents the shares from being sold or a new share certificate from being issued, a registered pledge – i.e. one recorded in the share ledger – should constitute adequate protection.

Pledging shares in the NVR online share ledger

To pledge a share, a shareholding, or part of a shareholding, the pledge is recorded in NVR as a new event labeled “pledge,” including information about the pledgee. Once registered, the shareholding is locked and cannot be transferred to another party unless the pledge is deregistered. In this way, the company avoids mistakenly transferring pledged shares, while the pledgee can also ensure that the pledge is correctly recorded in the share ledger.