Legal opinion on pledging of shares A/c. Company 1.

Mr. Z

Address….

Dear Sirs,

RE:     Legal opinion on pledging of shares A/c. Company 1.

We refer to your letter on the above subject.

We have perused the contents of your letter. We understand that Bank 1 has requested to comply with the following issues while creating the pledge over shares of BANK 2:

1.      Since the shares to be pledged are sponsor shares, an undated declaration to be taken from the sponsors to be addressed to SEC and to the Banks (in case there is a restriction in the Memorandum and Articles of Association of COMPANY 1)

2.      To create a mechanism so that any future bonus and right shares come under the pledge of the pledges.

Legal opinion has been sought regarding the above-mentioned issues.

OUR OPINION:

The shares that are to be pledged in favour of the syndicated lenders are the sponsor shares of BANK 2 (the “Bank”).

Article 51 of the Articles of Association of the Bank states:

Subject to the restrictions of Article 9, shares held by the Sponsors from Group A shall not be transferred to any person other than the Sponsors without consent in writing from other sponsors. However, no such prior consent shall be necessary in case of transfer to husband, wife, son, daughter, father, mother, brother, sister, grandson and granddaughter.

Again Article 52 of the Articles of Association states:

In the event of transfer of shares by the Sponsors as stated herein, the other Sponsors shall have option to purchase the shares of the transferor either in proportion to their existing shareholding or in numbers to be agreed by and between themselves at book value to be determined by the Auditors of the Company or at the price offered by the buyer, whichever price higher, provided the transferor shall have the right to sell the shares to the buyer offering highest price. If none of the Sponsors are interested to purchase the shares as aforesaid, the shares may be transferred to persons other than Sponsors.

As such, as per the Articles of Association of the Bank, the sponsors cannot transfer their shares without prior permission of the other sponsors. In the event of transfer of shares by the sponsors, the other Sponsors shall have the option to purchase the said shares and if none of the Sponsors are interested to purchase the shares as aforesaid, the shares may be transferred to persons other than Sponsors.

In view of the above, before pledging of the shares of the sponsors, a letter of renunciation and no objection is required to be obtained from such other sponsors wherein they will renounce their right to subscribe the shares to be pledged and provide no objection as to selling/transferring of the shares in question to parties other than sponsors.

As regards, the bonus shares and rights share, please note that the dematerialized shares even after being pledged remain in the account of the pledgor. As such, the pledgor receives all benefits (e.g. dividends and bonus issues) relating to the said shares. In this regard, an undertaking may be obtained from the pledgor to the effect that in future whenever any right share or bonus share is issued with regard to the shares pledged with the pledgees, the pledgor shall also pledge the said right or bonus shares to the pledge within a certain period of the same being issued.

If you have any further inquiries please do not hesitate to contact us.

Thanking you.

Yours Faithfully,

………………….

For: “The Lawyers & Jurists”