Analysis of whether equity pledge is good or bad

Equity pledge is a method commonly used by listed companies for corporate financing. Many investors do not understand what equity pledge is, so today The editor will lead you to analyze whether equity pledge is good or bad? Let’s take a look below!

What is equity pledge?

Equity pledge is a kind of rights pledge, which means that the pledgor and the pledgee agree to set restrictive property rights on the shares of the listed company held by the pledgor (transfer their equity A pledge established as the subject matter of a pledge). When the debtor is unable to perform the relevant debts after maturity, the creditor can receive compensation based on the discount of the shares as agreed, or can choose to sell the shares directly to receive cash compensation.

For example:

Suppose shareholder A is short of money and needs funds urgently, he can choose to pledge his shares to B, and then B will follow Calculate the funds based on the share ratio, lend the money to shareholder A, and shareholder A needs to return the funds to B after maturity. When shareholder A cannot repay the money, B can choose to sell the stocks pledged by A and exchange them for cash to pay off the debt.

Is equity pledge good or bad?

Pros:

1. If the purpose of the company's equity pledge is to obtain a sum of cash to develop the company's main business or develop the company's new projects, the funds If acquisition can promote the company's business development, guide it to actively carry out new projects, and promote the company's development, then equity pledge is beneficial.

2. If the pledged shares are circulating shares, the number of circulating shares in the market will be reduced. When investor demand remains unchanged, there may be a situation in which supply exceeds demand, which will promote the stock price to rise. If it rises, then it is a good thing.

Disadvantages:

1. A high degree of pledge may cause the company to be unable to repay, so it may choose to borrow money, funds will flow out of the stock market, and the stock price may fall in a short period of time, then that is Negative.

2. If the purpose of the equity pledge is to solve the company's financial problems or just to pay employees' wages, then it will be negative and will be beneficial to the later increase in the stock price.

In fact, it is impossible to specifically comment on the quality of equity pledge. It must be based on the facts. Because equity pledge is a relatively common financing method, it can only be judged based on the purpose and reason of the pledge. However, it needs to be reminded that when the market changes drastically, equity pledges may face the risk of being unable to compensate the principal.

1. Is equity pledge good or bad?

In fact, whether stock pledge is good or bad depends on the actual use of the funds obtained by the pledge. The company needs to rely on pledged loans to maintain itself due to lack of money, which is a negative; but if it is to increase the company's liquidity and develop new products or lines, it can inject vitality into the development of the enterprise, which is a good thing.

2. Relevant legal provisions

China's "Company Law" lacks provisions for equity pledges. What truly established China's pledge guarantee system was the "Security Law on Equity Pledge" that was implemented on October 1, 1995, which includes content on equity pledges. The Civil Code (effective from January 1, 2021) stipulates that "shares and stocks that are transferable in accordance with the law" can be pledged. Transferable equity can be pledged. In addition, on May 28, 1997, the Ministry of Foreign Trade and Economic Cooperation and the State Administration for Industry and Commerce jointly issued the "Several Provisions on Changes in the Equity Interests of Investors in Foreign-Invested Enterprises", which stipulates that investors in foreign-invested enterprises "have to change their equity through other investors". Agree to pledge its equity to creditors" is specifically confirmed. According to the provisions of the Civil Code, if stocks that are legally transferable are pledged, the pledger and the pledgee shall enter into a written contract and register the pledge with the securities registration agency. The pledge contract shall take effect from the date of registration. If the shares of a limited liability company are pledged, the relevant provisions of the Company Law on share transfer shall apply. The pledge contract shall take effect from the date when the shares are pledged and recorded in the shareholder register. According to the provisions of the Civil Code, if equity is pledged, the parties shall enter into a written contract. If the equity registered by the securities registration and clearing agency is pledged, the pledge right is established when the securities registration and clearing agency handles the pledge registration; if other equity is pledged, the pledge right is established when the industrial and commercial administration handles the pledge registration. The provisions on the equity registration procedures for unlisted joint stock companies and limited liability companies are inconsistent with the Civil Code.

According to the "Several Provisions on Changes in Equity of Investors in Foreign-Invested Enterprises", changes in the equity of corporate investors must be approved by the approval authority and registered by the registration authority. Equity changes without the approval of the approval authority are invalid. Those who fail to register with the registration authority may be punished by the industrial and commercial administration authorities in accordance with the "Company Registration Management Regulations". In summary, it can be seen that the equity pledge of listed joint-stock companies should be registered with the securities registration agency, the equity pledge of unlisted domestic joint-stock companies and limited liability companies should be registered with the industrial and commercial administration authorities, and the pledge registration of foreign-invested enterprises Equity pledges must be approved by the approval authorities and registered with the industrial and commercial administration authorities.

1. Is equity pledge good or bad?

Pledge is a type of security right. The biggest difference between a mortgage and a pledge is that a mortgage does not transfer the collateral, while a pledge must transfer possession of the pledged property, otherwise it is not a pledge but a mortgage. The second big difference is that a pledge cannot pledge real estate (such as real estate), because the transfer of real estate is not possession but registration. The largest shareholder's equity pledge means that the largest controlling shareholder of a listed company uses the stocks (equity) he holds as collateral to apply for a loan from a bank or provide guarantee for a third party's loan.

Article 440 of the Civil Code stipulates: Fund shares and equity that can be transferred can be pledged.

Article 443, Paragraph 1, of the Civil Code stipulates: If fund shares or equity are pledged, the right to pledge shall be established when the pledge is registered.

Generally speaking, equity pledge is not necessarily bad. It is a neutral term. For example, when a company needs cash, it can borrow stocks as collateral from a bank and use the loaned money to complete the project, which may be beneficial in itself. But usually when such news is announced, it will cause stocks to fall in the short term, so some people also classify it as bad news!

2. Conditions for equity pledge

1. Limited company Conditions for equity pledge

The equity pledge of a limited company must meet the following conditions:

(1) Pledge of equity to other shareholders in the same company as creditors is not subject to restrictions.

(2) The pledge of equity to creditors other than shareholders of the same company must be approved by more than half of the other shareholders, and the consent must be in writing, that is, in the form of a resolution of the shareholders' meeting. If more than half of the shareholders do not agree and do not purchase the pledged equity, it will be deemed to have agreed to the pledge. In this case, a shareholders' meeting resolution must also be made, and the time limit for other shareholders to exercise their purchase rights should be clearly defined in the shareholders' meeting. If the time limit expires and they expressly refuse to purchase or remain silent, it will be deemed that they have agreed to pledge.

2. Conditions for equity pledge of joint-stock companies

The equity pledge of joint-stock companies must meet the following conditions:

(1) The shares of the company held by the promoters, No pledge shall be made within one year from the date of establishment of the company.

(2) Shares issued before the company’s public issuance of shares shall not be pledged within one year from the date the company’s shares are listed and traded on the stock exchange.

(3) The company’s shares held by the company’s directors, supervisors, and senior managers shall not be pledged within one year from the date of listing and trading of the company’s stocks, and shall not be pledged within six months after leaving the company.