Share Pledge Agreements

Your share pledge agreement should name you as the pledgor and name the pledgee with whom you're making the deal. It identifies which shares you're talking about, and states that you're putting them up as collateral. A good pledge agreement also covers what happens if the stock is reclassified or changed, and what options the pledgee has if the pledge becomes unenforceable. Both you and the pledgee sign once you're satisfied with the terms.

When you make a pledge agreement, you can't put up shares that have already been pledged to another lender or have any sort of lien or encumbrance on them. They have to be debt-free. Likewise, you can't sign the agreement, then turn around and pledge the shares to someone else. Signing the pledge doesn't affect any voting rights the stock gives you unless you actually default and have to give up the shares.

If you pay off your debt, you're done: The pledgee gives up any claim to the shares you pledged and the agreement becomes void. If you default, the lender has the right to sell the shares to recover the money you didn't pay back. He can do this either as an outright sale, or set up an auction. If the note requires you pay off any remaining debt after the sale, insist on terms requiring the pledgee auction them off so that it brings in the most money. If they have to be sold, it should be at full market value.

Review the agreement carefully before you sign. If you and the lender go to court, what you thought the agreement meant is irrelevant -- what counts is what the written word says. Some share pledge agreements allow the pledgee to accelerate the loan, requiring you to pay off the entire debt immediately. This can happen if you default on even one payment, or certain other trigger events, such as you filing bankruptcy to wipe out your debts.