A stock pledge agreement is a legal funding arrangement between a borrower and a lender wherein the lender pledges his stocks in order to avail a loan from the borrower. Under this stock pledge agreement the borrower assigns a clear interest of the lender in the shares being pledged and the previous shareholder agreement under which the borrower is the owner of shares is deemed to be cancelled in favor of the lender.
A well drafted pledge agreement should clearly define the terms and conditions of the loan being granted, the term for which the loan is granted, repayment plan and interest rates etc. Apart from this a pledge agreement would also contain the provisions to be taken in case any dispute between the lender and the borrower. While granting the loan against stocks the lender tries to hedge its risk against the uncertainty of the market and funding is done only up to a fixed percentage of the value of stocks.
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