Q: 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 pledge agreement?

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 Act 13 and the PPSA.14

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”.15  Having control of a “certificated security” provides the highest level of protection against other PPSA claims to that category of assets.16

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.17 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.