- Effective June 12, 2008, The Manitoba Personal Property Security Act (the "MPPSA") was altered by certain amendments (the "Investment Property Amendments") which, to a substantial extent, modify Manitoba's rules regarding the taking, perfecting and realization of security interests in most types of personal property usually thought of as investments. That is, such things as stocks, bonds and other investments in businesses and business ventures, as well as rights and interests in or derived from same.
- The Investment Property Amendments are contained in Part 7 of the new Manitoba Securities Transfer Act (the "MSTA"), the MSTA having been enacted to alter theManitoba rules dealing generally with purchases and sales of investments. The Investment Property Amendments borrow heavily and incorporate definitions and concepts from the MSTA, so in order to understand the Investment Property Amendments, it is necessary to review and understand substantial portions of the MSTA.
- Both the MSTA and the Investment Property Amendments:
(a) reflect the modern reality of the existence of "intermediaries" in the investments marketplace, that is, that, at least for publically traded investments, most investors do not hold their investments directly from the issuers thereof, but rather hold interests (or undivided interests) in investments which are in turn acquired by one or more intermediaries from the original issuers (intermediaries being typically banks, trust companies, brokers, investment dealers, etc.);
(b) bringManitoba's rules for dealings (including secured transactions) with investments substantially in line with the similar rules enacted in theU.S.and in (now) most Canadian provinces;
(c) reflect the fact that, although sometimes (although less and less frequently), one's investments may be represented by a tangible (ie., paper) certificate, in essence, all investments covered by the MSTA and the Investment Property Amendments comprise one or more (typically a "bundle") of intangible rights and interests. An investor may own 1,000 common type shares in ABC Widgets Ltd. which are represented by a share certificate, but the share certificate itself (a mere piece of paper) has no inherent value, rather, it is the rights to receive dividends and/or capital, to vote in the operation of the business being carried on by the issuing corporation etc. to which the investor is entitled by virtue of owning the shares that constitute the real value of the share certificate. Even in the case of futures contracts, while the underlying subject matter of this type of arrangement may well be - and frequently is - some tangible goods/commodities, most futures contracts investors never intend to acquire, keep and then physically dispose of the underlying goods/commodities, rather, it is the (possible and hoped for) gain in a futures transaction which an investor values.
- The MPPSA definition and concept of collateral which is "intangible" continues to exist, but with intangible personal property which falls within the category of "investment property" (as defined in the Investment Property Amendments) now being excluded from the formally defined category of "intangible" personal property. Some investments may not in fact fall within the definition of "investment property" under the Investment Property Amendments, and in any such case, it is likely that such investment would fall within the MPPSA’s definition and category of "intangible" personal property.
2. Some new concepts
- The key to understanding the Investment Property Amendments and how they operate is to comprehend the meanings of a number of new definitions and concepts which have been introduced by the Investment Property Amendments. In particular, note the following:
(a) "investment property" is defined in the MPPSA (as amended) as a "security", or, a "security entitlement", or, a "securities account", or, a "futures contract", or, a "futures account";
(b) each of the aforementioned components of the definition of "investment property" is further defined, either in the MPPSA (as amended) or in the MSTA. Note in particular:
(i) a "security" is defined to mean what we normally consider as an investment issued by an entity directly to the holder thereof, including debt type obligations and equity/participation shares or interests, whether represented by a (paper) certificate or merely recorded in the holder's name in the issuer's records;
(ii) a "securities account" is defined to mean an arrangement in which one or more investments are placed for the benefit of an investor by someone else who, as or as part of their regular business, establishes and maintains "securities accounts". The person who establishes and maintains such an account is called (and defined as) a "securities intermediary". Typically securities intermediaries are brokers, banks and trust companies.
(iii) A "security entitlement" is defined to mean the rights and interests which an investor has as against a securities intermediary as recorded in the securities intermediary's records pertaining to one or more investments (and perhaps other assets of value which are not strictly investments) maintained by the security intermediary in a securities account established for the investor. Such investor is defined as an "entitlement holder";
(iv) A futures contract is defined as an arrangement whereby an investor has the right to deal with (to buy, to sell or to have an option to buy or to sell) something of value in the future on specified terms (obviously in particular specifying the "price" or consideration involved/to be involved), where such arrangement is traded on or is subject to the rules of a futures exchange, is standardized (presumably pursuant to the rules or requirements of such futures exchange), and, where the investor's rights and interests under the contract are "carried on the books of a futures intermediary". "Futures intermediary" is defined to be either a party dealing in futures who is permitted to trade, either as principal or as agent, under the securities or commodities futures laws of Canada, or, is a clearing house recognized or otherwise regulated by Canadian authority;
(v) A “futures account” is defined to mean an arrangement in which one or more futures contracts are maintained by a futures intermediary for the benefit of an investor.
(c) the MPPSA (as amended) defines "control" by reference to its definition in the MSTA. "Control" describes the dominion over an investment which is granted to or taken by someone acquiring ownership of such investment, or, in the context of a secured transaction, the dominion which is granted to or taken by a secured party in an investment who acquires such dominion by virtue of acquiring a security interest in such investment. In this regard, note:
(i) different rules for how to obtain control of an investment apply depending on what type of investment property one is dealing with. The methods of obtaining control range from the simple act of a secured party obtaining physical possession of a certificated security in bearer form from or under the authority of the debtor/owner of the security, to more complex arrangements existing between the secured party, the issuer of a security (or an "intermediary") and the debtor/owner of the investment, such arrangements typically involving the secured party having an overriding right to liquidate (or redeem) the investment, but with the debtor retaining, to a greater or lesser degree, the ability to exercise the rights which normally attach to ownership of the investment;
(ii) the arrangements just referred to will be most typically utilized for investments which are not certificated securities. Although not specifically defined as such in the legislation, such arrangements have become known as "control agreements". These agreements have been previously utilized in situations where an investor owns a "pool" of investments which are held for the investor by a broker, dealer or other person (who under the new legislation would now be called an "intermediary"). In connection with a "pooling" arrangement, the investor wishes to grant security in its "pool" of investments, but at the same time wishes to continue to be able to (i) utilize the intermediary's judgement and advice in selecting and modifying investments in the "pool" from time to time, and (ii) have the intermediary acquire new investments to be added to the "pool", often with the intermediary extending credit, in whole or in part, to the investor to finance new acquisitions, and, (iii) itself buy and sell investments in the "pool", as well as exercise other rights attaching to the investments such as obtaining or dealing in options to acquire investments or further investments, redeem investments and exercise voting rights. What is key here and what will make for interesting and perhaps creative drafting by counsel are "control agreement" provisions which balance the rights and obligations of each of the secured party, the investor/debtor and the intermediary, bearing in mind each of their sometimes conflicting interests;
(d) The MSTA makes it clear that:
(i) even though a control agreement permits the investor/debtor to retain certain rights to deal with the pledged collateral - thus taking away somewhat from the secured party's primary rights to sell or redeem the collateral - the secured party will nevertheless be deemed to remain "in control" of the pledged collateral;
(ii) the issuer of an uncertificated security or a securities or futures intermediary will not be entitled to enter into a control agreement with a secured party unless the investor/debtor specifically consents to same. Thus secured parties will need to ensure that such consent has been issued;
(iii) even if the owner of an investment and its secured party agree upon the need for a control agreement to be entered into with the relevant intermediary or uncertificated security issuer, the intermediary or the issuer will not be obliged to enter into a control agreement unless it consents to do so. Thus, where a proposed debtor suggests pledging investment property (involving an intermediary or the issuer of an uncertificated security) to its proposed secured party/creditor, the secured party/creditor should not waste too much time on the matter without first ascertaining whether or not the intermediary or issuer is prepared to enter into a reasonable control agreement;
(iv) where an intermediary or the issuer of an uncertificated security has entered into a control agreement, it is not either entitled or obliged to provide details of same to third parties unless the investor/debtor has authorized the intermediary or issuer to do so. Thus, it will be necessary for investor/debtors to ensure that their securities issuers or intermediaries are authorized (and indeed required) to provide at least some information to at least certain enquiring third parties regarding particulars of any existing control agreements. Otherwise new potential creditor/secured parties to whom the debtor may wish to pledge the remaining equity in its investment(s) will be unable to obtain needed information pertaining to any existing control agreement arrangements;
(v) as just noted, it may be appropriate (and commercially reasonable) for an investor holding one or more uncertificated securities and/or a "pool" of investments through an intermediary to be able to grant security in its investments to more than one creditor/secured party at the same time. This would be the situation where there is or it is anticipated that there will be sufficient equity/value in the investor's investments to secure credit extended from two - or perhaps even more - creditors. In any such case, in addition to each creditor/secured party having its own control agreement pertaining to its security, it would probably be appropriate for all of the creditor/secured parties (along with the investor/owner) to enter into an intercreditor agreement, or perhaps, one "master" control agreement involving all of the interested secured creditors. Such arrangements would be intended to provide at least some assurance to each of the creditors that its (security) interest in the collateral would be protected and maintained. These would no doubt deal with the situation where it became necessary for the pledged collateral to be liquidated for the benefit of all of the creditors involved.
(vi) if an investor obtains credit from its intermediary (as noted above, this would typically occur where an investor adds to its "pool" of investments held/maintained by a broker, dealer, bank, etc. on credit extended by the broker, dealer, bank etc.) and thereupon grants a security interest in the investor's "pool" of investments to its intermediary, the mere granting of the security interest "automatically" gives the intermediary control of the "pool" of investments. Other secured parties must both have the debtor enter into a security agreement and take the steps required in order to achieve control. Thus intermediaries who enable their customers to acquire investments utilizing the intermediaries’ credit are given a favoured position under the legislation in comparison with other secured parties. However, note that intermediaries in this position are no different from secured parties who obtain "purchase money security interests" who are already given a favoured position under the existing legislation.
3. Perfection and attachment
- These expressions are used in the legislation to describe the status of a security interest held by a secured party in relation to the secured party's right to enforce or realize upon its security interest in the collateral as against or in relation to :
(a) the debtor; and
(b) other persons having interests in the collateral, including, but not limited to, other secured parties.
Part - although not all - of the requirements to achieve "attachment" for a security interest have to do with establishing the security interest as being enforceable by the secured party against the debtor only. Part of one of the requirements for "attachment" and all of the requirements for "perfection" of a security interest have to do with the security interest being established as enforceable by the secured party against persons other than the debtor.
"Perfected" status for a security interest cannot be achieved unless all of the requirements for attachment have also been achieved. Having achieved "attached" status, in order to achieve perfected status, the secured party must, in most - although not all – cases, take one or more further steps or actions. When a security interest has achieved "perfected" status, it then gives the secured party the highest and best "bundle" of rights with respect to the collateral against not only the debtor, but also against other persons with interests in the collateral (as noted, most typically, but not exclusively, against other secured parties).
- The requirements for attachment remain essentially the same, namely that:
(a) value must have been provided to the debtor; and
(b) the debtor must have rights in the collateral (the Investment Property Amendments have added an alternative to this, namely that the debtor must be able to transfer rights in the collateral to the secured party); and
(c) the security interest must have become enforceable against third parties pursuant to the requirements contained in Section 10 of the MPPSA (as amended).
The Investment Property Amendments have altered Section 10 with respect to investment property - although the requirements of Section 10 remain unchanged for collateral other than investment property. The investment property changes are as follows:
(a) where the collateral is a certificated security in registered form, attachment will occur if the security certificate has been delivered to the secured party in accordance with the rules for "delivery", set forth in Section 68(1) of the MSTA; and
(b) where the collateral is investment property generally, attachment will occur when the secured party acquires control of the collateral.
Attachment also requires the entering into of a security agreement, and note that if the security agreement contains a proper description of the collateral (as specified in Section 10 (1)(d) of the MPPSA (as amended)), then the existence of such signed security agreement with such proper description will itself satisfy the requirements of Section 10 (1). The likely reason why a secured party would both want the debtor to enter into a security agreement with a proper description of the pledged collateral as well as wanting to obtain control of the pledged collateral would be because, in most instances, where a secured party has obtained control of investment property, that gives the secured party the highest and best perfection rights (as well as the achievement of “attachment”) for the secured party's security interest.
The Investment Property Amendments also specify that where a secured party's security interest attaches to a security account or to a futures account, same will also, respectively, constitute "automatic" attachment of the security interest to all of the security entitlements "carried in the security account", or, as the case may be, "automatic" attachment of the security...