- 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 interest to all of the futures contracts "carried in the futures account".
The Investment Property Amendments also contain special rules for the attachment of security interests to investment property acquired by securities intermediaries, brokers, etc. who have extended credit to a person in order to enable the person to obtain the investment property (or more likely, an interest therein through the securities intermediary, broker, etc.). These rules provide that "automatic" attachment of a security interest occurs in favour of the intermediary, broker, etc. extending credit. The implication here is that a security interest would arise without the party extending credit requiring the debtor to enter into a security agreement, but in the writer's opinion, it would be unusual if the party extending credit didn't get at least a simple grant of security interest (in writing) from the debtor.
- The rules for perfection of a security interest in collateral - other than a security or other investment property - remain the same. These are, in essence, possession of the collateral and registration of a financing statement in the Personal Property Registry. (There are several other less frequently encountered modes of perfection, in particular, situations where a security interest is "born" in a state of perfection or is "automatically" perfected upon the occurrence of some specified event). Specifically, the new rules pertaining to investment property are:
(a) a security interest in investment property may be perfected by taking control of same;
(b) a security interest in a certificated security may be perfected by taking delivery thereof as per the requirements for "delivery" of a certificated security in Section 68 of the MSTA;
(c) when a secured party has perfected its security interest in a securities account, such perfection also constitutes "automatic" perfection for all of the security entitlements "carried" in the securities account, and when a secured party has perfected its security interest in a futures account, such perfection also constitutes "automatic" perfection for all of the futures contracts "carried" in the futures account; and
(d) security interests granted to:
(i) persons providing certificated securities or other financial assets "represented by writings";
(ii) brokers or securities intermediaries in investment property; and
(iii) futures intermediaries in futures contracts or futures accounts;
in each case, where the provider, broker, securities intermediary or futures intermediary hasn't been paid, are "automatically" perfected upon the attachment of the security interest.
- Security interests in investment property may also be perfected by registration - although NOT by possession, but as will be noted below with respect to "priorities", perfection by control (and delivery as per Section 68 of the MSTA for certificated securities) is usually going to put the secured party in a better position than if the secured party had perfected by registration.
4. Priority and super priority rules
- The rules for determining the priority of security interests in collateral other than investment property remain unchanged, with some new rules being added for investment property. Section 35 of the MPPSA (as amended) remains the "core" source of priority determination rules and continues to be what amounts to a "residual" source of rules in the sense that a priority dispute will be determined by specific/particular priority rules set forth elsewhere in the MPPSA (as amended) if such non-Section 35 rules exist, but if no such non-Section 35 rule exists for a particular priority dispute, then "residually", one must look to (ie., "fall back on") Section 35 to determine the issue.
- The main new investment property priority rules are as follows:
(a) a security interest in investment property which has been perfected by control will have priority over any security interest in the same collateral where the other security interest has been perfected in a manner other than by control;
(b) where two or more security interests have been taken in the same investment property, all of which security interests which have been perfected by control, priority (generally) is to be established by the order (ie., the timing) in which the secured parties took control or took the steps or certain of the steps required in order to achieve control;
(c) security interests held by securities intermediaries or by futures intermediaries in security entitlements or security accounts (or, as the case may be, in futures contracts or futures accounts) where the arrangement is maintained by the securities intermediary (or as the case may be, by the futures intermediary) will have priority over any other security interests held in the same collateral (presumably on the policy basis that such intermediaries have extended value (like a secured party holding a purchase money security interest) which enables the debtor/investor to acquire the collateral or rights in the collateral; and
(d) generally, a purchaser (i.e., not a secured party) of investment property will be able to acquire its interest free of any prior (including previously perfected) security interest in the property, where the purchaser gives value, does not know that its acquisition would constitute a default under secured party's security agreement, and the purchase takes control of the investment property – although if the prior secured party has itself in control, the purchaser will not acquire free of the secured party’s security interest.
5. Rights and obligations of a secured party in possession of secured collateral
- Some rules have been added to those now existing in this area which deal specifically with investment property, namely:
(a) unless otherwise agreed in the security agreement, a secured party may hold any proceeds it receives as additional collateral, must apply monies received from the collateral on account of the secured debt or remit same to the debtor, and, the secured party may itself grant a security interest in the collateral to the secured party's own creditor; and
(b) a secured party has the right to "sell, transfer, use or otherwise deal with the collateral" to the extent and in the manner permitted by the terms of the security agreement. Presumably, this would enable a secured party to liquidate and/or replace pledged investment property where the secured party was of the view that such action was needed in order to preserve the value of the collateral pledged.
6. Transitional rules
- Section 74.1 provides:
(a) Section 74.1(1) - if an action has been commenced prior to the coming into force of the Investment Property Amendments, such action is governed by the "old" rules; (presumably), this means that the underlying dispute and the resolution thereof is governed/determined by the MPPSA as it existed prior to its amendment by the Investment Property Amendments.
(b) Sections 74.1(2), 74.1(3) and 74.1(4) - regarding a security interest in a security which was perfected immediately before the Investment Property Amendments came into force:
(i) the security interest remains perfected without further action having to be taken if (A) the security interest in the security was in fact perfected at the time of the coming into force of the Investment Property Amendments (presumably, meaning perfected under the "old" rules), and (B) the action which was taken by the secured party to perfect under the "old" rules would have perfected the security interest under the "new" rules (ie., registration in the Personal Property Registry or by the secured party taking possession of a certificated security pursuant to a security agreement);
(ii) if the security interest in the security was perfected under the "old" rules at the time of the coming into effect of the Investment Property Amendments, but the action which was taken by the secured party to so perfect under the "old" rules would not have been sufficient to perfect the security interest in the security under the "new" rules, then:
(A) the security interest remains perfected (under the "new" rules) for four months; and
(B) after four months, the security interest becomes unperfected UNLESS prior to the end of such four month period, the secured party takes the proper action required to perfect the security interest in the security under the "new" rules.
NOTE: It is difficult for the writer to visualize a situation where a secured party has perfected a security interest in a security under the "old" rules, but the action so taken by the secured party to so perfect would not constitute perfection under the "new" rules. Registration in the Personal Property Registry would perfect a security interest under both the "old" rules and the "new" rules whether the security was certificated in registered form, certificated in bearer form or an uncertificated security; possession of a certificated security (whether in registered form or bearer form) would perfect a security interest under the "old" rules, and although "possession" of a certificated security perfected the secured party's security interest in a certificated security under the "old" rules and "possession" has ceased to be a method of perfecting a security in a certificated security under the "new" rules, the "new" rules also specify that a security interest in a certificated security may be perfected by the secured party taking delivery, and Section 68(1) provides, in effect, that "delivery" of a certificated security occurs when the secured party "acquires possession of the security certificate".
AND NOTE: There does not appear to be any "transitional" type rule dealing with where a secured party has, prior to the "new" rules coming into effect, taken and perfected a security interest in what the Investment Property Amendments refer to as "investment property" other than securities. What then as to a security interest taken before the coming into effect of the "new" rules in collateral which consists of investments held by one or more "intermediaries," futures contracts, etc.? In such a case, the secured party will most likely have perfected (under the "old" rules) by registration, because the collateral held by the debtor/investor would have been categorized as "intangible" personal property under the MPPSA (before the coming into force of the Investment Property Amendments). If indeed registration has been made, some secured parties out of an abundance of caution may wish to "upgrade" the nature of their perfection by taking "control" of the investment property - although technically speaking, it appears that this would not be necessary.
7. Conflicts of law
- the above-described rules are applicable ifManitoba law applies.
- but how do you know ifManitobalaw applies, in particular, when, as is often the case with investment property, the parties and/or the collateral have "connections" to multiple jurisdictions? TheManitobaanswers to this question are found in the conflict of laws or choice of laws rules set forth in Sections 5 to 8.1, both inclusive, of the MPPSA (as amended).
- by and large, the existing choice of law determination rules continue applicable for types of collateral other than investment property.
- Regarding the new rules for investment property, different choice of law rules apply, depending on the type or question of law involved, namely:
(a) a question pertaining to the validity of a security interest in investment property;
(b) a question pertaining to the perfection, the effect of perfection or non-perfection, and as to the priority of a security interest in investment property;
(c) a question pertaining to procedural issues involved in the enforcement of a security interest in investment property; and
(d) a question pertaining to substantive issues involved in the enforcement of a security interest in investment property.
- Issues/questions concerning procedural issues and enforcement of a security interest in investment property are determined, respectively, by the law of the jurisdiction in which the enforcement rights are being exercised, and the law of the jurisdiction which is the “proper law” of the contract (i.e., the security agreement). These choice of law rules are the same for issues/questions involving collateral other than investment property.
- Issues/questions involving validity, perfection, the effect of perfection or non-perfection and the priority of a security interest in investment property are determined on the basis of the type of investment property which is subject to the relevant security interest. In particular, and subject to a couple of significant exceptions referred to below, issues/questions concerning the validity, the perfection, the effect of perfection and non-perfection and the priority of a security interest in investment property are determined:
(a) where the investment property is a certificated security, by the law of the jurisdiction where the certificate is situated;
(b) where the investment property is an uncertificated security, by the law of the issuer’s jurisdiction;
(c) where the investment property is a security entitlement or a security account, by the law of the securities intermediaries’ jurisdiction; and
(d) where the investment property is a futures contract or a futures account, by the law of the futures intermediaries’ jurisdiction.
A significant exception to the foregoing choice of law rules is that the law of the debtor’s “location” or jurisdiction governs: (1) perfection of a security interest in investment property where the security interest has been perfected is perfected by registration, and (2) perfection of the security interest in investment property which is taken by a securities intermediary or a broker where the intermediary or broker relies on attachment of its security interest as also constituting perfection thereof, and (3) perfection of a security interest in a futures contract or futures account which is taken by a futures intermediary where the intermediary relies on attachment of its security interest as also constituting perfection thereof. These three exceptions to the general rule apply only to the issue or question of perfection, not with respect to any of validity, the effect of perfection or non-perfection or with respect to priority of a security interest. Because a prudent secured party would usually perfect by obtaining control, rather than by mere registration, the writer assumes that this exception to the general choice of law would not be applicable to most secured parties.
- Regarding the rules for determination of the “location” or jurisdiction of an issuer (Section 44(5) of the MSTA), the “location” or jurisdiction of a securities intermediary (Section 45(2) of the MSTA), the “location” or jurisdiction of a debtor (Section 7(1)) of the MPPSA (as amended)) and the “location” or jurisdiction of a futures intermediary (Section 7.1(4) of the MPPSA) as amended));
(a) in the case of a debtor, the rule is essentially unchanged by the Investment Property Amendments and refers to the debtor’s residence or place of business or executive office;
(b) generally for issuers, it's the law of the jurisdiction in which the issuer has its head or registered office, or, if permitted under the law of the issuer's incorporating jurisdiction, the law of another jurisdiction specified (presumably so specified for this purpose) as being the issuer's jurisdiction;
(c) generally for securities intermediaries, the debtor/entitlement holder and the securities intermediary have the right to contractually choose whether or not one or more (or all of the) rules of a particular jurisdiction's law apply;
(d) generally for futures intermediaries, the debtor/futures customer and the futures intermediary have the right to contractually choose whether or not one or more (or all of the) the rules of a particular jurisdiction's law applies;
(e) note that in each case, there is a “hierarchy” of choice of location or jurisdiction rules which apply in descending order. Note also that the operative word here is “generally”, because other (lower in the “hierarchy”) determination of location or jurisdiction rules may apply, depending on the circumstances.
- Sections 7.1(6) and 7.1(7) of the MPPSA (as amended) contain rules dealing with the situation where perfection has been properly effected in accordance with the MPPSA's choice of applicable law rules, but there is a subsequent underlying factual matters change which would result in a different jurisdiction's laws being applicable. In such cases, there is a "drop dead" deadline by which the secured party must re-perfect in the new/different jurisdiction in order to maintain its security interest's priority.