Pledging Shares in a Panamanian company
Edgar Young, PhD., Partner / Attorney-at-Law
Pacifica Legal
Can You Secure a Loan with Shares in a Panamanian Company?
Yes. Under Panamanian law, both individuals and legal entities—whether local or foreign—can own and pledge shares in Panamanian corporate entities as collateral.
Movable assets located in Panama that can be possessed and transferred are eligible for pledging under Panamanian law as security for a principal obligation.
Can a Pledge of Shares in a Panamanian Company Be Governed by Foreign Laws?
A share pledge agreement involving a Panamanian company can be governed by foreign laws, and Panamanian courts will enforce its terms unless they contradict public policy (orden público). However, for practical reasons, it is strongly recommended to apply Panamanian law to the pledge agreement. Doing so helps avoid potential enforcement challenges or the need for exequatur procedures, which can be complex and time-consuming.
What Are the Key Requirements for a Share Pledge in Panama?
To be legally valid, a pledge over shares must meet the following requirements:
Written Agreement: The pledge must be documented in writing.
Delivery of Share Certificates: The physical share certificate must be handed over to the pledgee or an agreed third-party custodian.
Valuation Method: The contract must outline how the value of the shares will be determined to ensure fair valuation against the secured obligation. If no method is specified, Article 821 of the Panamanian Commercial Code states that the valuation will be conducted by two experts appointed by each party, with a third expert resolving any disputes. If experts are not appointed, a judicial authority will determine the value.
What are the requirements of the pledge shares to take effect against third parties?
For a pledge to be enforceable against third parties, the agreement must be notarized. While it can be executed as either a notarial instrument (escritura pública) or a private document, it will only be enforceable against third parties if it has a "date certain," as defined by the Panamanian Code of Civil Procedure. The most straightforward way to achieve this is by having the parties’ signatures acknowledged by a Panamanian notary and two witnesses.
Delivery and Endorsement of Share Certificates
Delivery. The delivery of the pledged shares to the creditor or a designated third-party custodian is a fundamental requirement for the pledge’s validity. If the pledge involves nominative shares or other registered instruments (títulos nominativos), delivery is satisfied by transferring possession of these documents to the pledgee or a depositary.
Endorsement of Shares. Although endorsing nominative share certificates is not legally required to perfect a share pledge, it has become a well-established commercial practice in Panama. Under Panamanian law, commercial customs can serve as a source of legal precedent.
Is Registration in the Panamanian Public Registry Mandatory?
No. A pledge of shares can remain a private agreement without being registered in the Panamanian Public Registry. However, it is highly advisable to annotate the pledge in the company’s share registry for added legal certainty. Further notarization of the company share registry, reflecting the pledge annotation, is also recommended.all members must act independently in the best interest of the company, there are classifications that distinguish members based on their relationship with the organization:
How Is a Pledge of Shares Enforced in Panama?
The enforcement of a share pledge is based on the principle that the creditor has the right to recover their debt from the value of the pledged shares, with priority over other creditors. This means that upon default, the pledged shares must be sold to satisfy the outstanding obligation.
Under Panamanian law, creditors cannot simply appropriate pledged shares. Instead, the primary legal remedy is a judicial auction (juicio ejecutivo prendario), which ensures that the shares are sold at fair market value, protecting both the creditor and the debtor.
However, Panamanian law also allows parties to agree on a special mechanism for selling the pledged shares. According to Article 820 of the Panamanian Commercial Code, if no special method is agreed upon, the creditor or depositary may sell the pledged assets after providing written notice to the owner at least 30 days in advance and conducting a valuation in accordance with Article 821.
Article 821 further establishes that the parties should agree in the pledge contract on a method to determine the value of the pledged shares to ensure a fair market valuation. If no method is specified, the valuation will be conducted by two experts—one appointed by each party—or a third expert chosen by these two in case of a dispute. If the parties do not appoint experts, a judicial authority will determine the value.
It is important to note that Article 822 explicitly prohibits any clause that allows the creditor to take ownership of the pledged shares without following the required enforcement procedures. Any such clause would be deemed null and void.