Dividends & corporate actions.

In a Lombard loan the pledged shares remain the borrower’s property, so dividend income and the economic benefit of corporate actions — rights issues, splits, mergers, takeovers — generally flow to the borrower. A pledge is security for a loan, not a sale, so the entitlements that come with ownership are retained. What the loan documentation does is set out how each event is handled while the security is in place.

Dividends during the facility

Because the borrower keeps beneficial ownership of the pledged portfolio, dividends generally continue to be paid to the borrower for the life of the facility. In many arrangements the income simply flows through as it would if the shares were unpledged. The security agreement can, however, direct dividends to the loan account in defined circumstances — most commonly if a margin threshold is breached — so that income is applied to restoring the loan-to-value rather than released. Which of these applies is a structuring decision, agreed at the outset and written into the documentation, not something the lender determines later at will.

Voting rights

Voting rights follow ownership in the same way. In a standard pledge the borrower retains the right to vote the shares, subject to the terms of the specific facility. That matters to founders and controlling shareholders in particular, for whom the ability to keep voting a strategic holding is often the whole point of borrowing against it rather than selling. Where a lender requires any constraint on voting — for instance, to protect its security in a contested situation — it is defined in the agreement rather than assumed.

Splits, consolidations and scrip

Some corporate actions change the form of the shares without changing their underlying value. A stock split multiplies the number of shares and reduces the price proportionally; a consolidation, or reverse split, does the opposite; a scrip or stock dividend issues new shares in place of cash. In each case the pledge is drafted to follow the security through the event, so that the new or adjusted shares fall within the same charge. The loan-to-value is measured against the position as a whole, so a purely mechanical change of this kind does not, in itself, alter the coverage of the loan.

Rights issues

A rights issue is more consequential, because it asks the shareholder for money. The company offers existing holders the right to buy new shares, usually at a discount, in proportion to their holding. A pledged holder faces a genuine choice: take up the rights and invest further, sell the rights if they are tradeable, or let them lapse. Each path changes the collateral — taking up the rights adds shares, which can be coordinated so the new shares join the pledge, while letting them lapse can dilute the position’s value. Because the collateral and its value can shift, a rights issue is a point at which the facility is reviewed and the loan-to-value re-assessed. The documentation sets out how the decision is communicated and how any new shares are dealt with.

Mergers, takeovers and schemes

The most significant events are those that change what the collateral is. In a share-for-share merger, the pledged shares are exchanged for shares in the acquirer or a new entity; the pledge is structured to attach to whatever the holder receives, so the security survives the transaction in a new form. In a cash takeover, the pledged shares are bought for cash — and cash is not the collateral the facility was built on. A cash offer therefore tends to bring the facility to a head: the proceeds are typically applied to repay the loan, and the balance released to the borrower, so a takeover can prepay or collapse the facility. An offer that is part cash and part shares is handled as a combination of the two. Well-drafted pledge documentation anticipates each of these outcomes in advance, so that a corporate event does not become a dispute about who is entitled to what.

How the documentation handles it

The common thread is that institutional pledge documentation does not leave corporate actions to be improvised. It defines what happens to income, to voting, and to the security itself across the full range of events, so that the borrower knows in advance how a dividend, a rights issue, or an offer will be treated. That is part of what distinguishes a properly structured Lombard loan from an informal one, and it is why the structure, not just the headline terms, is what to examine. Where a position is a single large holding exposed to exactly these events, the point is sharper still — see borrowing against a concentrated position.