My Ontario corporate borrower holds certificates representing
units of a limited partnership ("LP") within its
corporate group. Can the bank take possession of those
certificates to perfect a pledge of the LP units granted under a
It depends upon whether the borrower's interest in the LP
would be classified as a "security", such that the unit
certificates would be classified as "certificated
securities" for purposes of both the Ontario Securities
Transfer Act1 and the PPSA.2
Under Section 12 of the STA, an interest in a partnership is not
a "security" unless (1) that interest is publicly
traded on a securities exchange or is a mutual fund security, or
(2) the originating documents establishing the partnership
expressly provide that the interest is a "security" for
purposes of the STA (also known as an opt-in provision).
Taking delivery and control of the unit certificates (together
with an endorsed stock transfer power of attorney) will perfect a
pledge in those certificates if they constitute "certificated
securities".3 Having control of a
"certificated security" provides the highest level of
protection against other PPSA claims to that category of
However, if the borrower's interest in the LP does not
meet the test of being classified as a "security", the
borrower's interest in the LP will be classified as an
"intangible" under the PPSA. In that situation, the
unit certificates would not be considered to be "certificated
securities". Thus, possession of those unit certificates
is largely irrelevant from a security perfection perspective. A
security interest in an "intangible" may only be
perfected by the registration of a financing
statement.5 So even if the bank has possession of
the unit certificates, you will still need to deal with any prior
registered secured creditors shown on the PPSA register and obtain
PPSA comfort letters or estoppel letters from them confirming that
their registrations do not cover or extend to the borrower's
interest in the LP.
Given the advantages associated with the characterization of an
LP interest as a "security", the bank could consider
requiring the borrower to arrange for the LP to amend its limited
partnership agreement to include an STA opt-in provision before the
pledge agreement is signed and before the unit certificates
(together with an executed stock transfer power of attorney) are
delivered to the bank.
1.Securities Transfer Act, 2006 S.O. 2006, c. 8
2.Personal Property Security Act, R.S.O. 1990,
c. P. 10, as amended [the "PPSA"]
3.Section 23(2) of the STA and Sections 1(2)
and 22.1(1) of the PPSA.
4.Section 30.1(2) of the PPSA.
5.Section 22 of the PPSA.
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