Background
In structuring the project finance of e.g. an onshore windfarm, it is usual for lenders to expect the benefit of a full suite of security from the company developing the project.
This will include fixed security over the windfarm site (and relevant site access), fixed security over the key contractual rights relating to the development of the windfarm, as well as a floating charge over all of the assets of the relevant project company.
Additionally, lenders will expect to benefit from fixed security over the shares in the project company – this is a key part of the lender security package in a limited recourse financing structure, allowing lenders the ability to take “control” of the project company in an enforcement scenario.
However, where the project company is incorporated in Scotland, the process of taking share security can be burdensome (when compared, for example, with the equivalent process in England).
Given the number of additional perfection requirements (and outcomes) relating to such security, this has led to a degree of anxiety around taking perfected security over shares in Scotland. Certainly, this type of security presents various issues which require due consideration by both lenders and developers.
Current considerations relating to Scottish security over shares include:
Title Transfer – Perfected Scots law share security requires a full transfer of legal title to the shares to the relevant lender (or its agent/trustee/nominee). Perfection requires the preparation, execution and dating of a stock transfer form, the issue of a share certificate in the name of the lender and the Register of Members of the project company being updated to list the lender as the holder of the shares. Some lenders would prefer not to/cannot take legal title to shares and there can be concerns surrounding potential liabilities relating to share ownership. This position differs from many other jurisdictions, such as England, where fixed share security can be taken without a full transfer of title to the shares to the lender.
PSC Register – As a result of the transfer of title to the shares to the lender, the lender will also be required to be listed on the Persons with Significant Control (PSC) Register of the project company. While maintaining a PSC Register is an obligation placed on the project company itself, a lender listed on a PSC register does have ongoing obligations to provide information, and failure to comply with these obligations can be a criminal offence.
NSI Regime – Since the start of 2022, the National Security and Investment Act 2021 (the NSIA) introduced a new statutory regime for government scrutiny and intervention in certain transactions to protect national security (the NSI Regime). As well as applying to acquisitions/disposals of shares in certain companies involved in the energy sector (“energy” being one of the 17 sectors listed in the NSIA), the NSI Regime can also potentially become relevant to a transfer of shares in implementation of a Scots law shares pledge. Lenders taking a perfected Scots law share pledge over a project company developing/operating an onshore wind farm will need to consider whether the transfer of shares would be caught by the NSI Regime and whether clearance needs to be sought from the Secretary of State in advance of the share security being perfected.
Given the relative complexity surrounding the taking of perfected fixed security over Scottish shares, there is a view that the position in Scotland has become too cumbersome and that the law needs to be updated.
These Scottish-specific complexities need to be considered in the context of the latest AR6 CfD auction results (which include 990MW of onshore wind, the vast majority of which is in Scotland). The results reinforce the commitment of the UK Government to clean energy and a significant number of those projects will require third-party finance in the form of project finance – so where do we go from here to help those projects reach financial close?
The good news is that there is cause for optimism in the form of new legislation which should help to address a number of the current challenges surrounding Scots Law shares pledges.
The Moveable Transactions (Scotland) Act 2023 – a potential solution?
In 2023, the Scottish Parliament passed the Moveable Transactions (Scotland) Act 2023 (the Act). The Act will implement widespread reforms to Scots law relating to the transfer of rights and security over moveable property.
One of these reforms is the introduction of a new form of security which can be granted over moveable property in Scotland – the statutory pledge. The Act would allow a statutory pledge over shares to be created by registration of the security document in a new Register of Statutory Pledges, rather than requiring the transfer of legal title to the shares.
This new non-possessory method of taking fixed security over shares in a Scottish company alleviates many of the issues with the current law:
Title to shares and registration – A lender won't be required to be listed in the Register of Members of the company over which it is taking share security and, as such, will not need to be listed in the Register of Persons with Significant Control.
Reduced documentation – Under the new system, the statutory pledge will be simply signed and registered in the Register of Statutory Pledges and at Companies House. The process will involve fewer ancillary documents being prepared and signed – there will be no need for a stock transfer form to be signed (nor a share certificate), and the relevant project company will not have to make any updates to its statutory registers (as legal ownership of the shares will remain with the shareholder).
NSI Regime – the NSI Regime will not be relevant in the context of Scots law share security, which is documented using the new statutory pledge, as there is no transfer of the shares which could be caught by the regime. Lenders will no longer have to spend time considering (or seeking legal advice on) the question of whether or not the transfer of shares to the lender triggers the NSI Regime.
What comes next?
Registers of Scotland is currently in the process of setting up the new Register of Statutory Pledges and the hope is that this will become live at some point in 2025.
Once in action, the Act will make the process of taking security over shares in a Scottish company more straightforward and less time consuming.
Whereas lenders may previously have had to give additional consideration to the issues involved in taking Scots law share security, these reforms will hopefully be a welcome change, which brings the position in Scotland more closely in line with the position in other jurisdictions, such as England.
At a time when the onshore wind sector in the UK has been bolstered with a number of positive announcements from the newly elected Labour Government (whose manifesto included an ambitious target to double onshore wind by 2030), these legislative changes are very welcome and timely.
The reforms proposed by the Act should encourage lenders that Scotland is a good place to transact, accelerate development where third-party debt is needed and help the sector move one step closer to achieving the ambitious targets set by Government.