Taking Security Over Publicly Traded Shares

Taking security over publicly traded shares can be a minefield for an unprepared lender. Lee Federman and Nik Colbridge discuss some key issues to consider.

Potential civil and criminal liability

A lender's ability to enforce its security over publicly traded shares can be affected if it holds inside information about the company that has issued those shares. At its simplest, inside information is information of a precise nature, which:

has not been made public; relates directly or indirectly to the shares or issuer of the shares; and if it were made public, would be likely to have a significant effect on the price of those shares. If, while a lender holds inside information, it has:

enforced its security over publicly traded shares; or (if the shares are dematerialised and held by an intermediary) directed the relevant intermediary to deal in the shares, the lender and/or its employees could potentially incur criminal liability under Part V of the Criminal Justice Act 1993 (CJA) and/or civil liability under the Market Abuse Regulation (MAR). Any determination as to liability is particularly strained where the lender has taken equitable security and enforcement includes a transfer of legal ownership to the lender.

For a lender familiar with the relatively straightforward process of taking security over privately held shares, the risks of dealing with publicly traded shares may not always be obvious. However, recognising and addressing the issues at an early stage (and before taking security over the shares) is essential. A lender does not want to find it cannot enforce its share security at the crucial time because it has unwittingly become privy to inside information, particularly as neither the CJA nor MAR necessarily requires prior knowledge, intent or recklessness by the alleged abuser.

One solution could be for the lender to build "automatic" enforcement triggers into the loan and security documents. This could enable the lender's employees to argue that they would have enforced the security even if they had not had the inside information (using the defence under section 53(1)(c) of the CJA). However, for this to work the practice of automatic sale would need to be consistent: if the lender has delayed enforcement, or opted not to enforce, the defence may well not be available. Also, there is no directly equivalent defence under the MAR, although it may be possible to argue that such an arrangement is "legitimate behaviour" under...