Why "Record" Security Interests in Intellectual Property at the Canadian Intellectual Property Office?

Posted on December 22, 2011 by Charles Zienius

In Canada, security interests in intangible property collateral are perfected (or published, in the case of Québec) by making a registration under the personal property security legislation (“PPSL”) of the province where the debtor is deemed to be located at the time the security interest attaches. Intellectual property, such as trade-marks, patents, industrial designs, or copyrights, whether registered or unregistered, is not treated any differently than other types of intangible property collateral in that regard.

However, each of the federal Trade-marks Act, Patent Act, Industrial Design Act, and Copyright Act also provide for, or permit, the “recording” (i.e. registration) at the Canadian Intellectual Property Office (the “CIPO”) of assignments or transfers of the types of intellectual property to which those statutes apply. None of them refer specifically to security interests or perfection, and there is no jurisprudence regarding the legal effect of recording a security interest with CIPO. Nevertheless, it is conceivable that a court might someday conclude (contrary to the current generally accepted view) that the PPSL priority rules do not apply to intellectual property applications or registrations maintained at the CIPO as a result of paramount federal legislation, and according that priority disputes in respect of intellectual property collateral are to be determined under common law. The recording at the CIPO of a security interest in registered intellectual property might then enable a secured party to demonstrate that notice of its security interest was properly given to competing secured creditors. Moreover, even outside the context of a common law priority dispute, a recording at the CIPO might help avoid potential litigation risk by putting other interested parties on notice (to the extent such other parties reviewed the applicable CIPO records).

Therefore, where registered intellectual property constitutes a significant part of the collateral, secured parties often record at the CIPO their security interest against the property in question (in addition to making appropriate filings under applicable PPSL). The recording process essentially involves the payment to the CIPO of a prescribed fee, and the filing of a copy of an executed security agreement (identifying in sufficient detail (including reference to application numbers or, where applicable, registration numbers) the intellectual property against which the security is granted) by the CIPO in the appropriate records. Recording may only be done after the security agreement is effective, and for confidentiality reasons secured creditors often prefer to record only an abridged (but fully executed) version of their “main” security document.

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Interest Rate Hedging Agreements Linked to Credit Agreements

Posted on December 13, 2011 by Richard Borins

We often see banks requiring their borrowers to enter into interest rate hedge agreements in conjunction with their credit agreements.  There are a number of reasons why borrowers should take care to ensure that they have the related ISDA Agreements and Schedules considered by experienced counsel. Here are just two of those reasons. 

Linkage to the Credit Agreement

ISDA Agreements often include the termination of the Credit Agreement as either an Additional Termination Event or an Event of Default. The result of such an inclusion is that if the Credit Agreement is repaid early (whether upon a sale of the company or otherwise) then the borrower will be responsible for any out of the money payments that are owing at the time of the repayment. These out of the money payments could be significant and borrowers will need to become sufficiently versed in the nature of the ISDA Agreements and the related financial repercussions at the outset of the transaction to avoid surprises down the road.

Assignment by the Lender

For secured hedges, lenders will often include an Additional Termination Event should the lender assign its loan. That opens up the possibility that a lender would have the power to essentially unilaterally cause the termination of an ISDA Agreement by assigning its loan to a third party. If that termination occurs at a point when the borrower is in an out of the money position then it could be a very costly assignment to the borrower. One way to address this issue is to provide in the terms of the Credit Agreement a restriction on the lender’s ability to assign its loan (or its portion thereof for syndicated deals) where the result of such an assignment would be to permit the lender to terminate the related ISDA Agreement.

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Further Extension of Exemption from Rule 17g-5(a)(3) for Certain Non-U.S. Transactions

Posted on December 9, 2011 by Peter Milligan

On November 16, 2011, the Securities and Exchange Commission (“SEC”) issued an order extending the temporary exemption for rating agencies from the requirements for Rule 17g-5 for certain non-U.S. transactions for a further one-year period, expiring December 2, 2012.

By way of background, Rule 17g-5 is a series of rules designed to deal with conflicts of interest affecting credit rating agencies. A rating agency being hired by the issuer or arranger to determine a credit rating for a structured finance product is such a conflict of interest. It is also the normal, if not universal, circumstance for any issuance of a rated structured finance product. Given that there will be a conflict of interest, Rule 17g-5(a)(3) requires that the retained rating agency must provide to other rating agencies access to an internet website containing all the information provided to the retained rating agency in issuing its rating. It was thought that making the information supporting a credit rating available to other rating agencies would both keep the retained rating agency more diligent and encourage additional rating agencies to issue ratings on the structured finance product.

In the comment period before these new rules became effective on June 2, 2010, serious concerns arose about the extra-territorial affect of these provisions. Any rating agency active in the United States would apparently have to comply with these rules for all structured finance products which it rates whether or not there was any connection between the rated transaction and the United States. In effect, it would apply to all “Canadian” transactions because all rating agencies active in Canada are also active in the United Sates. In response to those concerns, the SEC exempted rating agencies from complying with 17g-5(a)(3) in respect of transactions where the issuer was not a U.S. person and where the rating agency had a reasonable basis to conclude that the structured finance product would not be offered and sold in the United States. The initial exemption order was available until December 2, 2010. It was later extended until December 2, 2011 and now, pursuant to this most recent order of the SEC, to December 2, 2012.

The most recent extension is also framed as a request for comment. While a frequent comment is that this exemption for non-U.S. transactions should be made permanent, apparently the SEC is seeking further comment on the issue.

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Proposed Financial System Review Act to Address Priority of Bank Act Security.

Posted on December 2, 2011 by Kashif Zaman

The Bank Act (Canada) (the “Act”) and a number of other federal statutes relating to financial institutions must, by law, be reviewed every five years. The most recent review process has culminated in Bill S-5 (the Bill) which is entitled the Financial System Review Act (the FSRA).The Bill had first reading in the Senate on November 23, 2011, and requires second and third readings in the Senate, first through third readings in the House of Commons and then Royal Assent before the FSRA can come into effect.

Bank Act Security and the Impact of Recent Judgments

Part VIII of the Act provides banks listed under Schedules I and II of the Act, and authorized foreign banks, the right to advance funds on the security of certain collateral listed in section 427 of the Act.

Last year the Supreme Court of Canada (SCC) issued two decisions in which it determined that an unperfected Personal Property Security Act (PPSA) security interest had priority over a subsequent but perfected security interest under section 427 of the Act. The result of these SCC decisions undermined the utility of the Act security and has resulted in its non-use by Canadian banks. 

Proposed Amendments

The Bill includes proposed amendments to the Act security regime addressing the priority of the Act security in light of these SCC decisions. In summary, the Act, when amended, will include a statement that security properly taken under the Act has priority over a PPSA security interest (or any other security interest) that was unperfected at the time the Act security was taken except if the relevant bank, when it acquires the Act security, has knowledge of such unperfected security interest. It remains to be seen whether Canadian banks are satisfied with the legal effect of such proposed amendments such that Act security will once again be used.

This entry is based on content from the Osler Update “Canadian Government Introduces Amendments to Back Act” authored by Stephen D.A. Clark, Kashif Zaman and Victoria Graham.

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