A security agreement over shares is a legal document that outlines the terms and conditions of a loan secured by company stocks or shares. Usually, a security agreement is necessary when a company seeks to secure a loan or credit from a financial institution or individual.
The security agreement over shares operates as a form of collateral to the lender. In essence, it means that the lender has a security interest in the shares or stocks of the company, and if the borrower defaults in paying back the loan, the lender can sell the shares to recover the value of the loan.
A security agreement over shares is commonly used in mergers and acquisitions, where one company acquires another company. In most cases, the acquiring company may require the acquired company to secure a loan with shares or stocks. This provides the acquiring company with an added layer of protection in case the acquired company fails to meet its financial obligations.
When drafting a security agreement over shares, there are certain key elements that must be included. These elements include:
1. Identification of shares: The agreement must clearly identify the shares or stocks that are to be used as collateral for the loan. This includes the number of shares and the class of shares.
2. Description of the loan: The agreement must state the amount of the loan and the terms of the loan, including the interest rate, repayment schedule and any penalties.
3. Representations and warranties: The borrower must represent and warrant that it owns the shares or stocks outright and that there are no liens, encumbrances or other claims on the shares.
4. Security interest: The agreement must establish the security interest of the lender in the shares or stocks. This means that the lender has the right to sell the shares if the borrower fails to meet the terms of the loan.
5. Governing law: The agreement must specify which state laws govern the agreement.
In conclusion, a security agreement over shares is a valuable tool for companies seeking to secure loans or credit. It provides an added layer of protection for lenders and can help companies secure the funding they need to grow and expand. It is important to ensure that all the necessary elements are included when drafting a security agreement over shares to protect the interests of both parties.