COVID-19 Financial Services update: perfection by control

May 4, 2020 | Amanda Plastina, Rebecca Jennings, Kenneth R. Rosenstein

Our prior Financial Services Updates have focused on proactive and defensive measures that both lenders and borrowers can take in light of the economic hardships brought on by the COVID-19 pandemic. This week we focus on a practical consideration that borrowers are encountering in connection with financing transactions: the inability to deliver original share certificates on closing, and the implications this has on borrower’s counsel to provide a perfection by control opinion to the lender.

What is a Perfection by Control Opinion?

Often in secured financings, a borrower (among others) will pledge the equity interests it owns to the lender as a form of collateral. Ontario’s Personal Property Security Act (the “PPSA”) requires that security interests be perfected in order for a lender to obtain priority over other creditors in respect of any such interest, and a security interest in pledged equity may be perfected by registration or by control pursuant to the Securities Transfer Act, 2006 (the “STA”). From a lender’s perspective, perfection of its security interest in pledged equity by control provides stronger perfection then by registration given that a security interest perfected by control will prevail over other interests, including a prior security interest perfected by registration. Typically, control in certificated securities is obtained through (1) the delivery of the original share certificate, and (2) the share certificate being endorsed to the lender or in blank, often through a share transfer power.

In connection with the delivery of the original share certificate and share transfer power, borrower’s counsel provides the lender an opinion that the security interest in the shares has been perfected by way of control. The typical language for a perfection by control opinion is as follows:

By virtue of the Lender having acquired possession of the share certificates endorsed in blank by an effective endorsement within the meaning of the STA, the security interest of the Lender in the Certificated Pledged Securities has been perfected by control. By virtue of such control, such security interest has priority over any other security interest in the Certificated Pledged Securities to which the PPSA applies.

Practical Alternatives to Implement During COVID-19

During the COVID-19 pandemic, a frequent issue that borrowers have encountered is the inability to access and deliver the original share certificates to the lender at the time of closing. There are two common solutions in adapting to the current environment:

  1. in respect of any original share certificate(s) located in the borrower’s minute book that is stored with borrower’s counsel, borrower’s counsel can acknowledge that they are holding the original share certificate(s) as agent for the lender, agree to only take instructions in regards to the original share certificate(s) from the lender or one of its agents, and undertake to deliver the original share certificate(s) to the lender as soon as practically possible; or
  2. in respect of any original share certificate(s) currently pledged to an existing lender, the existing lender can take the same steps as outlined above as well as also acknowledging to the new lender that it no longer has any security interest in the original share certificate(s).

The above alternatives fall within the parameters of the delivery of security requirements under Section 68 of the STA and should therefore provide the necessary comfort to borrower’s counsel to allow them to provide the perfection by control opinion.

If you have any additional questions or would like more information, please feel free to contact any member of the Miller Thomson Financial Services Group.

Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.


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