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.
