Reading through a shareholder agreement, I encountered the following section:

Encumbering shares

Subject to a special resolution of the shareholders to the contrary, no shareholder shall allow any shares held by it in the company to be encumbered.

The document includes a fairly comprehensive 'definitions' section, but "encumber" is not one of the terms defined. The only reference to the term is as part of the entry for "dispose", which states:

Dispose means to grant options or rights of pre-emption over, sell, transfer, assign, part with the benefit of, declare a trust of, encumber or deal with;

What actions actually encumber someone's shareholding? And is it correct that no special resolution is required to do any of "grant options or rights of pre-emption over, sell, transfer, assign, part with the benefit of, declare a trust of", since those are all listed separately from "encumber"?


Encumbering shares

In very simple terms it means you can't put the shares as collateral for a loan. An equivalent is when you buy a Mortgage, you keep your house as collateral with the Bank. Similarly one can keep shares as collateral. These are Encumbered as someone else has legal claim [lien] on the said shares. Investopedia has a good definition on this.

The reasons could be varying, but generally are used to stave off hostile take overs, or take overs without triggering specific take over clause.

| improve this answer | |
  • 2
    If I understand it correctly, if a broker allows someone to hold a "short" position in a stock, they may effectively "borrow" someone else's shares to cover the short position... if that's correct, would those "borrowed" shares count as being "encumbered"? – TripeHound Oct 18 '17 at 7:30
  • 2
    @TripeHound Technically yes. I think that is where they have explicitly call out in second "Dispose with means grant options ..." Plus short selling requires a specific listing on the exchange. Maybe the company has opted out of such arrangement with the Stock Exchange. – Dheer Oct 18 '17 at 8:39
  • 1
    You also can't evade any requirements on the sale of stock by entering into a contract that doesn't technically sell your stock but instead gives someone else the authority to tell you how to vote, when to sell the stock, and requires you to give them the proceeds. – David Schwartz Oct 18 '17 at 23:48

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.