Maximizing Protection for Lenders of an Equity Interest Pledge
When a lender is taking a pledge of equity as collateral security for a loan, it is important for lenders and their counsel to do their due diligence by reviewing the governing documents of the issuer. Lenders should require that the issuer opt in to Article 8 prior to the closing of the loan by amending its operating agreement or partnership agreement. In addition to opting in, lenders should also require that any equity interest be certificated thereby affording the lender additional protections under Article 9 of the UCC. By requiring the opt in, lenders are afforded the protections of a “protected purchaser” under the UCC. Also, by requiring that the equity interests be certificated, lenders can perfect their security interest by taking possession and control which grants them far greater protections under the UCC than simply filing a UCC-1finanicng statement to cover a security interest in a general intangible.
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