The concept of an "estoppel letter" (also sometimes
referred to as an "acknowledgement", "waiver"
or a "collateral narrowing letter") in respect of
personal property security registrations can be quite puzzling to
US clients, as it is a much more common practice to obtain these in
Canada than in the United States. However, purchasers in an M&A
transaction often rely on estoppel letters for comfort that they
are purchasing a target company's assets free of any liens.
What is an estoppel letter? An estoppel letter is an
acknowledgment obtained from a prior secured party (identified
through personal property security searches – effectively
the equivalent of UCC searches in the United States) to the effect
that a registration only perfects a security interest against
specific collateral and that the registration will only be used in
the future to perfect a security interest against such specific
collateral.
Why are estoppel letters necessary? Estoppel letters provide
comfort to a person filing a subsequent registration about the
actual scope of a security interest in the case where an existing
registration is overly broad. Estoppel letters are especially
common in Ontario where registrations do not require that a
specific collateral description be included, but rather, only
require that the secured party select the very broad categories of
collateral being charged, such as Inventory, Accounts, Equipment,
Consumer Goods and Other. A collateral description, if included,
has the effect of narrowing the collateral types selected and as a
result, it is quite common that no specific collateral description
to be included. As a result, in Ontario secured parties often only
select collateral types in a registration and do not list the
specific collateral (such as leased office equipment or motor
vehicles, etc.) that the registration relates to, prompting the
need to obtain an estoppel letter. The good news is that most
secured parties are quite familiar with the requirement for
estoppel letters and have their own forms which they readily
provide upon request.
In practice, the requirement for estoppel letters comes up in
both secured financings (where the new lender will typically want
comfort that it has first priority security) and (as mentioned
above) in the context of a share or asset sale, where the purchaser
will want comfort that it is acquiring the shares or assets, as
applicable, free of any liens.
Want to learn more about what to think about when considering
the purchase of a Canadian target? Check out our publication, Doing Business in Canada 2012.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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