Can I secure a vendor take-back loan with a pledge of the buyer’s shares?

A seller who finances part of the price can ask the buyer for more than a promise to pay. One request is a pledge of shares: either the shares of the company being sold, if the buyer is purchasing a company, or shares in the buyer’s own acquisition company. Whether the buyer will grant it is a negotiation. What follows describes how Ontario’s statute treats the pledge, and each province runs its own regime.

Shares are a different kind of collateral

Ontario’s Personal Property Security Act defines “investment property” as a security, whether certificated or uncertificated, a security entitlement, a securities account, a futures contract or a futures account. Whether particular shares count as securities, and what the corporation’s articles, by-laws or a shareholder agreement say about transferring them, are questions for the lawyer who drafts the pledge.

Registration, control and ranking

Under the Act, a security interest in investment property may be perfected by control, as that term is defined in s.1(2). It is perfected by control from the time the secured party obtains control. Section 30.1(2) says that, between conflicting security interests in the same investment property, a secured party with control has priority over one that does not have control. A secured party with control may also deal with the collateral as the security agreement provides. If a bank also asks for the same shares, ask who will hold control and how the two of you will rank.

What a pledge does not give you

A pledge secures your claim against the shares, so its value depends on what the company is worth when the buyer defaults. It does not give you a claim on the company’s equipment or inventory. BDC describes a financing structure that may combine the buyer’s own investment, a business loan and seller financing, and says it assesses the complete structure, so ask any lender involved whether it has a view on a seller holding a pledge of the shares. Raise it early. Our answer on securing a vendor take-back covers the other options.