A New Year’s resolution for security over Scottish shares

It is the gift that keeps giving – taking security over shares in Scottish companies. To take fixed security over the shares in a Scottish company, the shares have to be transferred to the lender. This causes a variety of unwelcome issues.

What are the consequences of Companies House showing the lender as the sole shareholder? Does the Scottish company become a subsidiary of the lender? Could the Pensions Regulator issue a contribution notice to the lender in respect of the Scottish company's pension liabilities? Environmental and offshore decommissioning liabilities anyone? What if the company is a Financial Conduct Authority (FCA)-regulated entity (or the parent of such an entity), is FCA consent required to the transfer of the shares (1) in security and (2) when the security is released?

All of this paints a fairly challenging picture for lenders looking at taking security over shares in Scottish companies. The persons with significant control (PSC) regime (Part 21A of the Companies Act 2006) made the position worse by requiring anyone who holds 25 per cent or more of the shares in a UK company to be named as a person with significant control in respect of that company.

The final nail in the coffin came in the shape of the National Security and Investment Act 2021 which copied the approach taken in the PSC regime. Acquiring more than 25 per cent of the shares in a company to which the 2021 Act applies triggers mandatory notification. Companies incorporated elsewhere in the UK do not face the same challenges. Fixed security can be created over their shares by way of a charge that does not require the shares to be transferred to the lender.

However, the cavalry is coming. A Bill is working its way through the Scottish parliament that, with a little help from the UK government, will allow lenders to take fixed security (in the form of a statutory pledge) over shares in Scottish companies without those shares having to be transferred to the lender.

The Bill in question is the Moveable Transactions (Scotland) Bill. The Stage 1 Committee Report on this Bill can be found here. The Stage 1 Debate on the Bill took place on Wednesday 13 December. The issue of taking security over shares was raised. At the moment, the Bill does not cover shares. This is due to a concern on the part of the Scottish government that it does not have the necessary legislative powers to implement this reform. This issue can be fixed by way of the UK government granting an order under Section 104 of the Scotland Act 1998.

Discussions are ongoing between the Scottish and UK governments regarding this order. Both the report and the debate stressed the importance of securing this order and implementing this change in the law. The goal is in sight, but pressure must be maintained on both governments to deliver this critical change in the law. Maybe then we will get the gift we actually want.

More information on Moveable Transactions on Shepherd + Wedderburn's website here.