Pledging a securities account is a much more dynamic form of security than it might seem. Unlike a guarantee covering a single, specific asset, the collateral can and will change throughout the life of the loan it is securing. This adaptability is one of its major advantages, but it requires a thorough understanding of the mechanisms involved. For an overview of this collateral, the complete guide to securities account pledging provides an essential basis. This article focuses specifically on the management and evolution of the pledged portfolio, a central aspect for both the settlor and the creditor.
Pledging as an open-ended universality
The fundamental feature of a securities account pledge is its legal nature. It does not relate to a fixed list of financial securities identified one by one, but to the account itself, understood as a whole. This whole, or "universality" in legal terms, has an existence of its own, distinct from the elements that make it up at a given moment.
Concept of universality
The pledged securities account should be thought of as a receptacle. At the time the pledge is created, this receptacle contains a certain number of securities. However, the collateral does not relate so much to these initial securities as to the overall contents of the receptacle. Article L. 211-20 of the French Monetary and Financial Code organises this mechanism by providing that the basis of the pledge includes the financial securities initially included in the account, as well as those that are substituted for them or that complete them. This approach gives the collateral permanence despite the rotation of the underlying assets. In other words, the content of the portfolio may change, but the collateral remains attached to the account.
The importance of plan flexibility
This concept of universality offers incomparable flexibility compared with more traditional securities. A traditional pledge on tangible assets or even a pledge on individual securities would require new formalities each time the basis of the pledge changed. Managing a portfolio of shares, which by its very nature is fluid, would then become extremely cumbersome. The legislator's intention in creating this system was precisely to provide economic players with an effective tool adapted to the reality of the financial markets. For a company director or investor, this means being able to continue to actively manage their portfolio without weakening the guarantee granted to the creditor. It's a win-win situation, provided that the rules of the game are clearly established and respected.
Automatic changes to the basis of pledge
Even before considering active portfolio management, the collateral base evolves almost organically, without any particular intervention by the account holder. These automatic mechanisms help to preserve and sometimes increase the value of the collateral for the creditor.
Integration of fruit and products
The financial securities held in the pledge account are likely to generate income. This may be "income", such as dividends paid on shares or interest coupons on bonds. They may also be "proceeds", such as sums received from the redemption of a bond that has reached maturity. Unless the parties agree otherwise, the law provides that these sums are automatically included in the pledge. In practical terms, they must be paid into a dedicated cash account, often called a "fruits and proceeds account", which is itself an integral part of the collateral. This automatic inclusion ensures that the total value of the security is not reduced by the distribution of income that would otherwise fall outside its scope.
Real subrogation: a key mechanism
Subrogation in rem is a legal concept that may seem abstract, but its effects are very concrete. It means that a new asset replaces an old asset, acquiring all its qualities and charges. In the context of securities account pledging, this mechanism is essential. If the pledged securities are the subject of a capital transaction beyond the control of the holder, the new securities received in exchange will automatically be included in the pledge. This is the case when :
- A reverse stock split or reverse stock split: the new shares replace the old ones.
- A merger-takeover: the shares of the absorbing company received in exchange for the shares of the absorbed company (which were pledged) form part of the tax base.
- An allocation of bonus shares: these shares are considered to be ancillary to the existing shares and are therefore pledged.
However, there are limits to this principle. Subrogation can only operate if the assets received in exchange are themselves financial securities that can be registered in an account. If a merger results in the allocation of shares in a limited liability company, which are not financial securities within the meaning of the pledge, the mechanism will not work. Similarly, case law has ruled out subrogation in complex cases such as "coup d'accordéon" operations (reduction of capital to zero followed by an increase), where the new shares are not considered to be a simple replacement for the old ones.
Voluntary management of the pledged portfolio
Over and above automatic changes, the great strength of a securities account pledge is that it allows the pledgor to manage its portfolio. This right generally needs to be set out in a written agreement with the creditor to define the room for manoeuvre and protect the interests of both parties.
Buying and selling transactions
If authorised to do so, the settlor may arbitrate within his portfolio. He may sell one line of securities to acquire another that he considers more promising. The sine qua non condition is that the proceeds of the sale are allocated to the pledged account. The funds from the sale are transferred to the cash account, and the new securities purchased with these funds are then recorded in the securities account. They are then instantly included in the collateral value. This fluidity means that the pledgor is not penalised by the creation of the collateral, while retaining the possibility of seeking to optimise the performance of its assets.
The addition of complementary assets
It is entirely possible to increase the value of the collateral along the way. The settlor may decide to pay new securities or cash into the pledged account. This may be done voluntarily or as a result of a contractual obligation, in particular via a "watering clause". This clause stipulates that if the value of the pledged portfolio falls below a certain threshold (in relation to the amount of the secured debt), the pledgor must contribute additional assets to reconstitute the level of security. From a legal point of view, one of the major contributions of the law is to provide for retroactivity. Article L. 211-20 of the French Monetary and Financial Code states that these additional assets "shall be deemed to have been delivered on the date of the initial pledge declaration". This legal fiction provides vital protection for the creditor: it prevents the contribution of new assets from being called into question if it takes place during a suspect period prior to any insolvency proceedings against the pledgor. The introduction of these mechanisms must be considered from the outset, when defining initial formalities for pledging a securities account.
Exercising voting rights
Unless otherwise stipulated, the account holder, who remains the owner of the securities, retains the voting rights attached to them. This is an important point, as this right can be strategic. However, the creditor may wish to control this exercise. The pledge agreement may, for example, stipulate that the pledgor must not vote on resolutions that could depreciate the value of the shares (for example, a substantial change in the company's objects that increases the risk). Failure to comply with this type of undertaking could be considered a fault and result in the forfeiture of the secured loan.
The pledge certificate: a monitoring tool
With an evolving collateral base, how can creditors know the exact composition of their collateral at any given time? The law provides a simple and effective monitoring tool: the pledge certificate. This is an essential tool, particularly for preparing procedures for realising collateral in the event of non-compliance with obligations, where the composition of the account is a determining factor.
Content and issue of the certificate
At the request of the pledgee, the account keeper (the bank, investment firm or the issuer itself in the case of pure registered securities) must issue a pledge certificate. This document is not a mere formality. It constitutes an official inventory, as at the date of issue, of all the assets included in the pledge: the list of financial securities (type, number) and the balance of the sums in the associated cash account. If the securities are registered in a shared electronic record-keeping system (DEEP), it is the manager of this system who provides the certificate. This "snapshot" of the collateral enables the creditor to check that the value of his collateral is being maintained and to have irrefutable proof of its composition if necessary.
Managing a pledged securities account is a balancing act between the management freedom of the owner of the assets and the security of the creditor. The legal mechanisms offer great flexibility, but their practical implementation requires a precisely drafted pledge agreement. For an analysis of your project and a legal advice to optimise the management of your securities and financial guaranteesIn such cases, the assistance of a lawyer is an essential precaution.
Sources
- Monetary and Financial Code (in particular article L. 211-20)
- Civil Code (provisions relating to security law)
- Commercial Code (provisions relating to insolvency proceedings)
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