USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
5.7 Rules Governing the Priority of Competing Security Interests The UCC of the applicable jurisdiction governs the relative priority of security interests held by different creditors in the same assets of a grantor and is subject to the following rules: • A perfected security interest has priority over a conflicting unperfected security interest. • Conflicting perfected security interests rank in pri- ority according to the time of filing or perfection. • Conflicting unperfected security interests rank in priority according to the time at which the security interest attached or became effective. In addition, the UCC allows certain categories of col- lateral to be perfected by multiple methods, with pri- ority determined based on the “preferred” method, regardless of the above rules. With respect to invest- ment property, securities accounts and certificated securities, perfection via “control” or possession has priority over perfection via filing a UCC-1 financing statement. Further, the UCC contains an exception for purchase money security interests under which a secured creditor with a purchase money security interest can obtain priority ahead of an earlier UCC- 1 financing statement with respect to the purchased asset(s). Lenders and borrowers are allowed to agree to modify the priority rules set out in the UCC and other relevant laws, by contract. The parties can also accomplish different lien priorities structurally. Arrangements for lien subordination ordinarily provide that: • junior creditors are subject to a “standstill” period prior to exercising enforcement rights or remedies with respect to shared collateral; • payments from the proceeds of shared collat- eral received by junior creditors in violation of the agreement will be held in trust and turned over to senior creditors; and • certain specified amendments to both senior and junior priority loan documents will be subject to agreed limitations.
vent after giving effect to such guaranty. Customary limits contained in guaranties are designed to prevent the guarantor from being rendered insolvent. In addi- tion, loan market participants often require borrowers and their subsidiaries to provide certifications as to their solvency at the time the loan and the guaranties thereof are made. 5.4 Restrictions on the Target There are no US rules generally prohibiting a target company from guaranteeing or granting a security interest in its assets to provide credit support for a financing used to acquire its or any of its parent enti- ties’ shares. However, guaranties and security inter- ests provided by a target company are subject to the rules on fraudulent conveyance and, in certain cases, may be subject to regulatory schemes that make such a guaranty and/or security interest impracticable even if legal. Subject to such limitations, lenders will typi- cally require guaranties and security interests to be provided by the target company – along with delivery of any certificated securities of the target company – as a condition to the closing of an acquisition financ- ing subject to any limits that “Sungard” provisions impose. 5.5 Other Restrictions Anti-assignment provisions in commercial contracts pose difficult issues for lenders in secured financings. A statutory override of anti-assignment provisions in contracts is generally available under the UCC but, if the restricted collateral is critical to the collateral package, lenders are likely to require such third party to consent to the pledge as a condition to the loan to prevent future enforcement uncertainties. 5.6 Release of Typical Forms of Security US loan documentation typically allows releases of the lenders’ security interest in collateral in connection with dispositions of such collateral which are permit- ted under the loan documentation. The release of all or substantially all of the collateral typically requires the consent of all lenders or, in some cases, a super majority thereof.
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