Share Pledge, Share Charge or Title Transfer: Who Owns the Shares During a Stock Loan?

A share pledge loan raises cash against shares the borrower keeps, but the security document decides what “keeps” means. It settles who holds legal title, who votes and receives dividends, whether the lender may sell or lend the shares, and what is left if the lender fails.

This note compares four structures: a pledge, a share charge, a title transfer and, for US securities accounts, a control agreement. Public disclosure is covered separately in share pledge disclosure rules by market.

What is the difference between a share pledge, a share charge and title transfer?

European law draws the basic line. The Financial Collateral Directive defines a security arrangement as one where ownership “remains with the collateral provider when the security right is established”. Under a title transfer arrangement, the provider “transfers full ownership” to the collateral taker.

A pledge and a charge both sit on the security side. The UK’s Financial Collateral Arrangements (No. 2) Regulations 2003 list “a pledge”, “a mortgage” and “a fixed charge” as forms of “security interest”, a term that expressly excludes title transfer.

In the UK, if the security includes an agreed power of appropriation, using it extinguishes the borrower’s “equity of redemption” and vests “all legal and beneficial interest” in the lender (regulation 17).

Title transfer is different in kind. The UK definition has the borrower transfer “legal and beneficial ownership” and the lender return “equivalent financial collateral” once the debt is discharged. Under the Directive, that means shares of the same issuer and class, not necessarily the originals.

Both regimes have limits: the UK regulations need both parties to be “non-natural persons”, and the Directive’s list of eligible parties does not include private individuals. A shareholder borrowing in their own name falls outside both, so the general law decides.

Where does a US account control agreement fit?

Where US-listed shares sit in a securities account, a lender can perfect its security interest by “control” (UCC 9-314). It gets control when the intermediary agrees, with the borrower’s consent, to follow its entitlement orders “without further consent by the entitlement holder” (UCC 8-106(d)(2)). That is the account control agreement.

The borrower stays the entitlement holder and may keep trading and instruction rights (8-106(f)). These are uniform texts, and each state enacts its own version (Cornell LII).

Who keeps the votes and dividends under each structure?

Under security the borrower is still the owner, so votes and dividends stay with it unless the documents move them (see dividends and corporate actions). Swiss law, for example, provides that pledged shares are represented at general meetings “by the shareholder rather than the pledgee” (Civil Code Article 905).

For a US account, the intermediary must exercise rights “if directed to do so by an entitlement holder” and is answerable to it for distributions it receives (UCC 8-506, 8-505). A lender with control that receives cash from the collateral must apply it to the debt “unless remitted to the debtor” (9-207(c)).

Title transfer reverses the starting point. In the Calloway case, the lender had the right “to vote Mr. Calloway’s shares and to receive any dividends paid on those shares”. Under any title transfer, whatever passes back to the borrower is a matter of contract.

Can the lender sell, lend or rehypothecate pledged shares?

Not before default under plain security, unless the agreement says so. Under the Directive, a lender has a “right of use” “if and to the extent that the terms” provide for one (Article 5). The UK rule then lets it deal with the shares “as if it were the owner” (regulation 16).

Once the right is used, the lender owes “equivalent collateral” instead of holding the borrower’s own shares (Article 5(2)). In the EU, a counterparty may re-use collateral only after warning the provider in writing of the risks, including those “in the event of the default of the receiving counterparty”.

It also needs the provider’s “prior express consent” (Securities Financing Transactions Regulation, Article 15).

US law starts from the other end. Under the uniform text, a secured party with control “may create a security interest in the collateral”, in effect a repledge, unless the agreement varies it (UCC 9-207(c)(3), 1-302). Sale is an after-default remedy, and it must be commercially reasonable (9-610).

Does the lender hedge with the borrower’s shares?

A lender that may use the shares can also hedge with them, for example by selling them. In Calloway, the borrower had given that right “without requirement of notice to or consent of the Client”, and the lender sold the 990 IBM shares before it had funded the loan.

The clause covered the right to “assign, transfer, pledge, repledge, hypothecate, rehypothecate, lend, encumber, short sell, and/or sell outright”, and closing waited for the “establishment of [Derivium’s] hedging transactions”. That is the wording to look for in any share pledge loan agreement.

What happens to pledged shares if the lender fails?

With security and no re-use, the shares remain the borrower’s property, subject to the lender’s security for the debt. Where a custodian holds them, US law keeps them from the custodian’s creditors: they “are not property of the securities intermediary” (UCC 8-503(a)).

That protection has a limit. If an intermediary is short of a security, a creditor of the intermediary that has control can rank ahead of account holders (UCC 8-511(b)), which is one reason re-use further up the custody chain matters.

After title transfer, or once a right of use is exercised, the borrower holds only a claim for equivalent shares. A close-out netting clause can then set that claim against the loan, leaving the borrower a creditor for any balance. Article 7 of the Directive protects such clauses in insolvency, though resolution powers can restrict them (Article 1(6)).

Client-asset rules reflect this. MiFID II bars investment firms from title transfer arrangements with retail clients (Article 16(10)), and most of the FCA’s custody rules do not apply to an asset held under one (CASS 6.1.6R).

Can a title-transfer stock loan be taxed as a sale in the US?

It can. In 2001 a taxpayer transferred 990 IBM shares to Derivium Capital for a non-recourse “loan” of 90 percent of their value, and Derivium sold them. The Tax Court held that he “sold his IBM stock” (135 T.C. 26 (2010)), and the Eleventh Circuit affirmed in 2012 under a “benefits and burdens” test.

The court contrasted the lender’s “completely unfettered use of the collateral” with a normal lender, which “holds the collateral in the event of nonpayment or default”. The non-recourse term, it said, “merely bolsters the conclusion”; how recourse itself is structured is covered in non-recourse stock loans.

The Ninth Circuit reached the same result in Sollberger (2012), where floating-rate notes were transferred and promptly sold. It also refused the safe harbour in section 1058 of the Internal Revenue Code, which requires that the agreement “not reduce the risk of loss or opportunity for gain of the transferor”.

A pledge that leaves ownership with the borrower is a different structure; the general position is in The Tax Treatment of a Securities-Backed Loan.

What should a borrower ask a lender before signing?

Six questions cover the clauses that matter:

• i
  Structure. Is this a pledge or charge, or a transfer of title, and which law governs it?
• ii
  Right of use. May the lender use, lend, rehypothecate or sell the shares before default, and with what consent each time?
• iii
  Hedging. How will the lender hedge, and may the hedge use the borrower’s shares?
• iv
  Custody. Where will the shares be held, in whose name, and in a segregated account?
• v
  Votes and dividends. Who instructs the votes, and do dividends pass through or reduce the loan?
• vi
  Failure and netting. If the lender fails, does repayment recover the same shares or only a claim for equivalent ones, and how is that claim netted?

Enforcement terms are covered in margin call mechanics and document layout in how a stock loan term sheet is laid out. Market detail is on the United Kingdom and Switzerland stock loan pages.