If the LLC interest is an uncertificated security, the lender will need to obtain “control” by obtaining an agreement from the LLC issuer to take instructions only from the lender regarding the LLC interest. If the security is certificated, a lender can perfect the security interest by taking possession with an effective endorsement (similar to taking possession of a stock certificate with a signed stock power). Therefore, if the certificate of organization or the operating agreement of an LLC so states, the lender is faced with the task of perfecting a security interest in a UCC-defined security. Under Article 8 – an Article of the UCC that lenders and their counsel seldom visit – an interest in a limited liability company (or a partnership, for that matter) is a security if “… its terms expressly provide that it is a security governed by this Article (Article 8). It is possible, however, for an LLC interest to be a “security” for UCC purposes. Under most circumstances, an LLC interest is a “general intangible,” and the lender will perfect its security interest by filing an initial UCC financing statement in the state where the pledgor is “located,” which for an individual pledgor is the state of his/her principal residence and for a “registered organization” pledgor (corporation, LLC or limited partnership) is the state in which it was formed. Changes to the operating agreement under which the LLC interest is issued could change the process for maintaining perfection of a security interest in the LLC interest.Īrticle 9 of the UCC separates personal property into “types.” Perfection of a security interest in different types of collateral requires different actions.The LLC interest could be either “certificated” or “uncertificated”.The LLC interest could be deemed to be either a “security” or a “general intangible” for UCC purposes.Various factors complicate the process, including: Perfecting a security interest in an LLC ownership interest is not simple. LLC’s have become the business vehicle of choice. Larger companies often start new ventures by forming one-member (100% parent owned) LLC’s to isolate other businesses from potential liability of the newly-commenced business. This business form (first adopted in Missouri in 1993) gives owners multiple benefits, including limited personal liability, pass-through taxation and flexibility in establishing rules for governance, capital contributions, allocations of losses and profits and distributions. Many organizations do business as limited liability companies. So long as the lender retains possession, it has a perfected, first-priority security interest in the pledged stock.
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When the borrower is a corporation, the standard approach under the Uniform Commercial Code calls for the lender to perfect its security interest by obtaining physical possession of the certificates representing the stock, along with a “stock power” (separate endorsement by the owner that would allow the lender to transfer the stock to any purchaser in foreclosure). Many loans to small (and not-so-small) businesses include the requirement that the owners pledge to the lender their ownership interests in the prospective borrower.
Environmental Permitting and Compliance – Manufacturing and Industrial Operations.
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