Take Care When Securing Shares

The recent Enviroco case before the Court of Appeal in England illustrates the unintended consequences that can result from incorporating statutory references into commercial contracts, and indeed from giving a certain type of security over shares.

The effect of the decision should be considered by:-

• groups of companies,
• parties to joint venture company arrangements,
• funders, their advisers and credit documentation teams,

particularly where it's proposed that the title to shares in a subsidiary will be being transferred as part of the security arrangements.

Summary

Enviroco (E) sought to rely on an indemnity given by Farstad (F) for the benefit of Asco UK and its Affiliates. In the indemnity agreement the term "Affiliates" incorporated the Companies Act definition of "subsidiary".