The use of project finance structures in Scotland, (often seen in renewable energy projects like onshore wind farms), involves a myriad of security requirements, some of which can be perceived as challenging by lenders. Typically, lenders expect a comprehensive security package, including fixed security over the wind farm site (and site access) and key contracts, as well as a floating charge over the project company’s assets. Additionally, fixed security over the shares of the project company is expected, allowing lenders to gain control of the project company in an enforcement scenario.
However, the process of taking security over Scottish shares is often seen as burdensome compared to England, primarily due to security perfection requirements (the absence of which would mean there is no security). The current process requires:
transferring full legal title of the shares to the lender, via signed and dated stock transfer form;
issuing a dated share certificate in the lender’s name, and
- updating the company’s Register of Members to list the lender as holder of the shares.
This process can raise concerns, particularly among lenders who may be reluctant to assume legal title, due to potential liability ramifications associated with share ownership.
Taking a shares pledge over Scottish shares also has other implications. The lender is likely to be registered on the relevant Scottish company’s Persons with Significant (PSC) Control Register. Registration triggers ongoing compliance obligations and non-compliance can result in criminal penalties. Also, in 2022 the National Security and Investment Act (NSIA) introduced a new regime for government scrutiny and intervention in transactions in certain sectors (including energy) involving share acquisitions/disposals. Due to the legislative language (which inadvertently catches share pledges because of the transfer of ownership), lenders must assess if the security falls within the NSIA framework. If it does, advance clearance from the Secretary of State is required prior to security perfection.
Such Scottish-specific intricacies have led some to argue that Scottish share security is too cumbersome and requires reform. The concern is heightened with the latest AR6 Contracts for Difference auction results (which include 990MW of onshore wind, the vast majority being located in Scotland). A significant number of those projects will require third-party finance in the form of project finance.
Fortunately, recent legislation provides cause for optimism. The Moveable Transactions (Scotland) Act 2023 (intended to “go live” in the Spring), will reform Scots law relating to the transfer of rights and security over moveable property. By introducing the ‘statutory pledge’, the Act will (assuming the arrival of a UK government order that will supplement the Act), permit a new method of securing rights over shares without the need to transfer legal title. Instead, share security can be established via registration in a new Register of Statutory Pledges.
These reforms will remove a number of the current concerns, significantly reduce the perceived barriers for lenders and provide a streamlined process for securing shares in Scotland.
By simplifying the legal framework, the new statutory pledge is expected to:
facilitate financing of renewable energy projects, encouraging development in line with the UK Government's clean energy commitments; and
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 generation targets set by government.
Clare Foster is a confirmed speaker at All-Energy 25, the UK’s largest renewable and low-carbon energy exhibition and conference, taking place in Glasgow on 14-15 May.
Visit our All-Energy hub here.