Over the next few weeks, we will go in depth into a few certifications contained in most perfection certificates in the context of a post-M&A or leveraged finance acquisition debtor.
A perfection certificate is the first step in any secured lending transaction and a time consuming task for debtors (and their counsel) to complete. Lenders and their counsel rely on the information contained in a perfection certificate to determine what steps they need to take in order to perfect (i.e., render effective against third parties) a creditor’s security interest and whether there are any pre-existing creditors that need to be dealt with. The perfection certificate also serves as a good starting point for the disclosure that a debtor is typically required to provide to creditors in the governing credit and security documentation.
In this Part I of our series on perfection certificates, we consider the share purchase transaction/ amalgamation/ name change certification.
Perfection certification: the debtor has not been known by any other name in the past 5 years
Under the Personal Property Security Act (Ontario) (the OPPSA), and the personal property security acts of most other jurisdictions in Canada, other than Quebec, a creditor can maintain priority through continuous perfection. Section 21 of the OPPSA states:
If a security interest is originally perfected in any way permitted under [the OPPSA] and is again perfected in some way under [the OPPSA] without an intermediate period when it was unperfected, the security interest shall be deemed to be perfected continuously for the purposes of [the OPPSA].
The basic premise of continuous perfection is that a creditor can maintain perfection (and its priority ranking) in a situation where its registration would otherwise be deemed invalid, if such creditor meets the prescribed requirements set out in the OPPSA.
In the following hypothetical, you represent a lender, Creditor A, against the borrower, the Debtor; Creditor B is a prior lender.
Consider the scenario where Company X recently completed a share purchase transaction whereby it acquired all of the issued and outstanding shares of Target Y. Following the acquisition, Company X and Target Y amalgamated to form the Debtor. The Debtor then seeks financing from Creditor A; such financing will be secured. For the purposes of this hypothetical, the only prior names of the Debtor are “Company X” and “Target Y”.
Creditor A registers a financing statement against the Debtor and does not conduct searches against “Company X” or “Target Y”. If Creditor B registered against “Target Y”, and then subsequently learns that Target Y changed its name (to “Debtor”), Creditor B can register a financing change statement within the prescribed period and maintain its priority in time as of the date of its initial registration against Target Y. If Creditor B meets the debtor name change requirements under the OPPSA, Creditor B can displace Creditor A’s priority, notwithstanding Creditor A registered against the current name of the Debtor before Creditor B.
In order to avoid this situation, Creditor A will typically perform PPSA searches against all prior names of the Debtor (often limiting the timeframe to the last five-ten years). In order to obtain the correct list of names, Creditor A will ask the Debtor to provide the names and constating documents for all prior names used, as well as for any predecessor corporations that may have amalgamated to form the Debtor. This information will be listed in the perfection certificate under a prior names certification. If properly disclosed, this certification will capture the names of all amalgamating entities and any entities acquired pursuant to share purchase transactions during the specified period.
By searching against prior names, Creditor A can avoid the situation whereby its priority is superseded by a prior ranking creditor registered against a prior name of the Debtor who registers a financing change statement within the prescribed period correcting to the current Debtor name.