A Stock Pledge Agreement documents the pledge of a fixed number of shares of common stock by a shareholder as security for payment of a promissory note. It is important for every stock pledge agreement to contain the following provisions to ensure legal sufficiency:

Recitals. Here the agreement should recite the purpose and general outline of the agreement. It is customary to include the total dollar amount to be advanced, the number of stocks pledged, and the date of the agreement. It may also be important to include how each part will derive “direct and indirect benefits” from the agreement.

The Pledge. It is most critical to define the security interest at issues, namely, the amount and type of shares of stock of the company, owned by the Pledgors, which shall be placed in the name of the Pledgee, represented by the certificates identified in an addendum to the agreement. The stock pledge agreement must also address who shall receive the proceeds of any and all of the foregoing Pledged Collateral. To minimize liability, it is also advisable, from the Pledgor’s point of view, to include the following disclaimer: “The Pledgee hereby expressly confirms and agrees that notwithstanding the pledge of the pledged shares, the pledgee shall have no recourse to or against any pledgor other that as to the pledged shares, and that no pledgor shall be personally liable to the pledgee for any obligation of the company to the pledgee, other than as to the pledged shares.” It may be wise to put said disclaimer in bold.

Representations and Warranties. The Pledgor should promise that he or she owns the shares at issue, and is the legal, record, and beneficial owner of the pledged collateral, clear of any lien, security interest, restriction, option or other charge or encumbrance except for the security interest created by the Stock Pledge Agreement. The Pledgor should also warrant that he or she has made the necessary inquiries of the Company and believes in good faith that the Company fully intends to fulfill its obligations in accordance with the terms of the Transaction Documents.

Voting Rights. The agreement should read that so long as no Event of Default has occurred, then each pledgor shall be entitled to (1) exercise or refrain from exercising any and all voting rights, and (2) receive and retain any and all cash dividends an interest paid in respect of the Pledged Collateral. After the occurrence of any Event of Default, all rights of any and all Pledgors to vote and receive dividends shall be vested in the Pledgee.

Further provisions defining the “Event of Default”, explaining the remedies available upon a default, and addressing boilerplate contract law issues such as governing law, notice, waivers, severability, and indemnity should also be included. For more information, or to view and download actual Stock Pledge Agreements, visit the Agreements section of www.RealDealDocs.com.

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