How to realize over-the-counter stock pledge rights

Over-the-counter stock pledge refers to a transaction where a fundraiser pledges the stocks it holds to obtain funds from eligible financial investors such as banks, trusts, insurance companies and fund subsidiaries, other than securities companies and their asset management plans, and agrees to repay funds for release of the pledge in the future.

Funds supervision and risk control with respect to over-the-counter stock pledges are flexible. The Notice of Relevant Matters Concerning Over-The-Counter Equity Pledge Transactions of Securities Companies issued by Securities Association of China in 2018 provides that securities companies shall not provide third parties such as banks, trusts and other institutions or individuals with third-party intermediary services such as marking to market and closing position through financing secured by over-the-counter stock pledges. With this prohibition of intermediary services, the rights of over-the-counter stock pledges are more difficult to realize.

The ways to realize the rights of over-the-counter pledged stocks consist of non-judicial disposal and judicial disposal. According to article 19 of the Implementation Rules for the Securities Pledge Registration Business of China Securities Depository and Clearing Corporation Limited, there are two non-judicial disposal methods for over-the-counter stock pledges.

First, the parties to the pledge apply to China Securities Depository and Clearing Corporation Limited for changing the registration status of the securities pledge from “non-sellable pledge registration” to “sellable pledge registration” according to the provisions of the pledge contract submitted during registration of the securities pledge, or the separate pledge securities disposal agreement, and pay the pledgee first with the proceeds from the sale of pledged securities.

Second, the parties to the pledge apply to China Securities Depository and Clearing Corporation Limited for compensating the pledgee by transfer of pledged securities to the pledgee according to the provisions of the pledge securities disposal agreement.

There are three types of judicial disposal of over-the-counter stock pledges in judicial practice, i.e., litigation, arbitration and application for execution notarization. If any of the above-mentioned judicial disposal methods is adopted, it is generally necessary to take preservation measures at the same time to seal up and freeze the fund and securities accounts corresponding to the stocks of the listed company.

With respect to unrestricted tradable shares, the court, in addition to entrusting the securities company to conduct centralized competitive bidding in the secondary market and gradual reduction of shareholdings, also transfers the pledged stocks to the execution applicant, and then hands them over to the securities company for sale.

The risk of restriction on disposal proportion of pledged stocks

The Several Provisions on Reduction of Shareholdings by Shareholders, Directors, Supervisors and Officers of Listed Companies provides corresponding restrictions on reduction of shareholdings by shareholders, directors, supervisors and officers of listed companies. The total number of shareholdings reduced by a pledgor in a company for a period of time shall not exceed a specific proportion of the total number of shares of the company.

Meanwhile, the pledgor shall fulfil the requirements on corresponding announcements and disclosures. Therefore, when the over-the-counter stock pledge rights are realized, the statutory announcement requirements and restrictions on sale will affect the pledgor in selling a large number of stocks in a short period of time, and even hinder the realization of the pledge.

We suggest distinguishing the restrictions on the proportion of shareholding reduction with respect to centralized competitive bidding, block trade and transfer by agreement, to choose a favourable way for shareholding reduction for the pledgor in the pledge securities disposal agreement.