Draft 4/10/2018
JOINT TASK FORCE ON SECURITY INTERESTS IN LLC MEMBERSHIP
AND OTHER UNINCORPORATED ENTITY INTERESTS
LLCs, Partnerships and Unincorporated Entities Committee
Uniform Commercial Code Committee
Commercial Finance Committee
MODEL SECURITY AGREEMENT
FOR LIMITED LIABILITY COMPANY INTERESTS
Prefatory Note:
This Model Security Agreement for Limited Liability Company Interests is a product of the Task Force on Security Interests in LLC Membership and Other Unincorporated Entity Interests, which is comprised of members of the ABA Business Law Section LLCs, Partnerships and Unincorporated Entities Committee, Uniform Commercial Code Committee and Commercial Finance Committee.
The hypothetical scenario upon which this model form is premised is a loan transaction involving a pledgor that holds general intangible, uncertificated LLC interests in a multi-member limited liability company.
Other possiblepermutations for the nature of the LLC interest include:
- General Intangible (Article 9), Certificated, Single Member LLC
- General Intangible (Article 9), Uncertificated, Single Member LLC
- General Intangible (Article 9), Certificated, Multi-Member LLC
- Investment Security (Article 8), Certificated, Single Member LLC
- Investment Security (Article 8), Uncertificated, Single Member LLC
- Investment Security (Article 8), Certificated, Multi-Member LLC
- Investment Security (Article 8), Uncertificated, Multi-Member LLC
The Joint Task Force determined that, for the purposes of the model form, the chosen scenario(General Intangible (Article 9), Uncertificated, Multi-Member) would be the most useful and interesting, and would yield a form that would be the most thorough and useful to the largest possible audience (particularly because any form that is limited to a single member scenario avoids the thorny issues raised by the “pick your partner principle”, as well as the operation and enforceability of UCC Sections 9-406 and 9-408 in that context; and in a situation where an LLC interest is an “investment security” there are other available forms relating to the pledge of securities). However, where appropriate in the model form, alternate scenarios are addressed through the use of footnotes, annotations and riders.
The other preliminary consideration addressed in the model form is choice of law. There is considerable variety among state statutes governing the creation and operation of limited liability companies. While the State of Delaware is often selected due to the great number of entities organized there, we believed it more appropriate to use as the governing law of the entity the Revised Uniform Limited Liability Company Act, or RULLCA, and to use the Uniform Commercial Code (as amended through 2010) as the governing law of the jurisdiction in which the security interest is created, perfected and enforced. Practitioners should revise the form accordingly to replace with the governing laws appropriate for their transaction, and revise provisions relating to issues for which the local law differs from the uniform acts.
No form or model can possibly address all transactional scenarios or fact-patterns, but hopefully the provisions in this form and the related annotations will provide sufficient guidance to enable the practitioner to adapt this form to suit his or her specific needs. And there are many provisions in the form that are not unique to pledges of LLC Interests and therefore the practitioner may replace, add to or delete any such provisions as may be necessary to be consistent with local market or industry practice or desirable for the parties’ transaction.
***
4826-4887-5109, v. 4
Revised Draft 3/2/2018
SECURITY AGREEMENT[1]
(LIMITED LIABILITY COMPANY INTERESTS)
THIS SECURITY AGREEMENT is made on [], (the “Effective Date”) between [ ] a [jurisdiction] [corporation/limited liability company] (the “Debtor”)[2] and [ ][in its capacity as agent for the [lenders] under the Financing Agreement referred to below] ([in such capacity,] the “Secured Party”).
RECITALS:
The [Obligor] [Debtor] and the Secured Party have entered into a [loan transaction/financing transaction/credit transaction] (the “Financing Transaction”) under the terms of that certain [loan agreement/financing agreement/credit agreement] dated [ ][as of the Effective Date](the “Financing Agreement”).
The Debtor enters into this Agreement to grant Secured Party a security interest in the Debtor’s LLC Interests to secure the [Obligor’s][Debtor’s] payment and performance of the Secured Obligations.
1.Defined Terms; Rules of Construction.
(a)Specifically Defined Terms. Capitalized terms used in this Agreement have the meanings set forth below:
“Acknowledgment and Consent” means the Issuing Entity and Co-Member Acknowledgment and Consent in substantially the form attached hereto as Exhibit A.
“Agreement” means this Security Agreement, as amended, modified, supplemented or restated from time to time.
“Collateral” is defined in Section 2.
“Debtor” is identified in the Preamble.
“Distributions” means any distribution or other transfer of cash or property, [whether or not] in respect of the LLC Interests,[3] by the Issuing Entity to the Debtor, however characterized.[4] For the avoidance of doubt, “Distributions” include so-called “tax neutral distributions” (i.e., amounts distributed to the Debtor in respect of its estimated federal, state and local tax liability calculated on the basis of its actual or anticipated allocation of the profits of the Issuing Entity) [and guaranteed payments].
“Effective Date” is defined in the Preamble.
“Event of Default” is defined in Section 8(a).
“Financing Agreement” is defined in the Recitals.
“Issuing Entity” means [entity name], the limited liability company that issues[5] the LLC Interests, or in which the Debtor holds an interest that is pledged hereunder.
“Issuing Entity Governing Documents” means the certificate of formation, certificate or articles of organization (or similar document)[6] and operating agreement or limited liability company agreement (or similar agreement)[7] of the Issuing Entity, together with all other agreements or understandings of any kind, nature or description relating to the governance and management of the Issuing Entity and the corresponding legal and economic relationships of the owners of the equity interests (however designated) in the Issuing Entity, including the LLC Interests.
“LLC Act” means the [______] Limited Liability Company Act, as amended from time to time.[8]
“LLC Interests” is defined in Section 2(a).
[“Obligor” means [], the party obligated for repayment and performance of the Secured Obligations.][9]
“Secured Obligations” means all indebtedness or other obligations of the [Obligor][Debtor] to the Secured Party of any nature or character under the Financing Agreement (including, without limitation, interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the [Borrower][Obligor] or any other Pledgor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding).[10]
“Secured Party” is identified in the Preamble.
“Securities Act” is defined in Section 8(d)(iii).
“UCC” means the Uniform Commercial Code-Secured Transactions as adopted and in effect in the State of [Forum Jurisdiction]; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the perfection, the effect of perfection or nonperfection, or priority of, or remedies with respect to, any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of [Forum Jurisdiction], the term “UCC” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions hereof relating to such perfection, the effect of perfection or nonperfection, or priority, or remedies.[11]
(b)Rules of Construction. The following rules of construction and interpretation apply to this Agreement:
(i)Paragraph headings are for convenience only and are not relevant to the construction or interpretation of any provision of this Agreement.
(ii)The terms “hereof”, “herein”, “hereby”, “hereto” and derivative or similar words refer to either the entire Agreement or to specified clauses, as the context requires.
(iii)Pronouns include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs includes the plural and vice versa.
(iv)The word “including” is by way of example rather than limitation and shall be deemed to be followed by the words, “without limitation”.
(v)Reference to any agreement, document or instrument, including this Agreement, means the agreement, document or instrument as amended or modified from time to time in accordance with the terms thereof and, if applicable, hereof.
(vi)The words “or”, “either”, “any” or “all” are not exclusive.
(vii)No presumption or burden of proof will arise in favor of or against the Debtor or Secured Party by virtue of the authorship of any provision of this Agreement.
(c)Terms Defined in Financing Agreement. Capitalized terms used and not otherwise defined in this Agreement have the meanings assigned to them in the Financing Agreement.
(d)Terms Defined by Statute. Unless otherwise defined in this Agreement or the Financing Agreement and where plainly apparent by the context in which [capitalized] terms are used in this Agreement, such terms used have the meanings assigned to them in the UCC (with respect to those matters governed by the UCC) or the LLC Act[12] (with respect to those matters governed by the LLC Act).
2.Grant and Continuation of Security Interest.[13]The Debtor hereby grants to the Secured Party a security interest in and to all of the Debtor’s right, title and interest in and to the following, wherever located, whether now owned or hereinafter acquired (collectively, the “Collateral”):
(a)all interests[14], no matter how characterized, in the Issuing Entity (the “LLC Interests”) including, without limitation, those identified on Schedule 1 annexed hereto[15];
(b)any rights related to the Debtor’s capital account[16] within the Issuing Entity in respect of the LLC Interests;
(c)any rights to acquire LLC Interests, including subscription rights, preemptive rights, conversion rights, options, warrants or analogous rights;
(d)certificates[17], if any, evidencing or representing the LLC Interests;
(e)all Distributions and rights of the Debtor to demand or receive Distributions[18];
(f)all equity interests, securities or other property received in connection with or as a result of exchange offers, recapitalizations of any type, contributions to capital, options or other rights relating to the LLC Interests, or issued or issuable in connection with or as a result of a split up, revision, reclassification, conversion or other like change of the LLC Interests or which otherwise are received in exchange for or in substitution of the LLC Interests;
(g)all rights, privileges, authority and power arising from the Debtor’s ownership of the LLC Interests or its membership in the Issuing Entity, including all of the Debtor’s rights under any Issuing Entity Governing Documents, the LLC Act, the UCC or otherwise to exercise and enforce every right, power, remedy, authority, option and privilege, or to give or receive any notification, consent, amendment, waiver or approval, on behalf of the Debtor relating to the LLC Interests or governance of the Issuing Entity[19];
(h)books and records, documents and other information (tangible or electronic) evidencing or relating to any of the foregoing; and
(i)Proceeds (including insurance proceeds) of any of the foregoing.
3.Perfection.
(a)Authorization of Financing Statement. The Debtor authorizes Secured Party to file UCC-1 financing statements (including amendments and continuations) in any filing office(s), deemed necessary by Secured Party, naming the Debtor as the debtor [and the Secured Party as the secured party][20]describing the Collateral generally or specifically, and containing any other information Secured Party deems necessary to comply with the UCC or other applicable law for perfection of the security interest in the Collateral.
(b)Certificated Collateral. If any of the Collateral is now or in the future evidenced or represented by a certificate or certificates[21], the Debtor shall immediately deliver all the certificates to the Secured Party, duly endorsed in a manner satisfactory to the Secured Party, or accompanied by LLC Intereststransfer powers duly endorsed in blank, to be held as Collateral pursuant to this Agreement.
(c)[Control. If any of the Collateral is now or in the future an uncertificated security, the Debtor shall cause the Secured Party to have “control” (within the meaning of Section 8-106 of the UCC) over such Collateral][22]
(d)Cooperation; Further Assurances. At any time and from time to time, upon the written request of the Secured Party, and at the cost and expense of the Debtor, the Debtor shall promptly and duly give, execute, deliver, file and record any further instruments and documents and take any further actions that the Secured Party may reasonably request for the purpose of obtaining, creating, perfecting, enforcing, validating or preserving the full benefits of this Agreement and Secured Party’s security interest in the Collateral and the rights and powers granted to Secured Party in this Agreement. Without limiting the generality of the foregoing, the Debtor shall obtain the written consent of the Issuing Entity and all other owners of equity interests in the Issuing Entity to the execution, delivery and performance of this Agreement by the Debtor, and to the exercise by the Secured Party of all rights and remedies contained in this Agreement (which, for the avoidance of doubt, includes the rights of a secured party under the UCC).[23]
4.Representations and Warranties.[24] The Debtor represents and warrants to Secured Party that:
(a)Power and Authority. The Debtor has the requisite power and authority to enter into this Agreement and to perform its obligations hereunder.[25]
(b)Authorization; No Breach or Default. Execution and delivery of this Agreement by the Debtor and performance by the Debtor of its obligations under this Agreement have been duly approved, consented to or authorized by all necessary action on the part of the [members/ stockholders/directors/managers] of the Debtor[26], and do not and will not result in any violation of any agreement, indenture or other instrument, license, judgment, decree, order, law, statute, ordinance or other governmental rule or regulation applicable to the Debtor.[27]
(c)Binding Obligation. This Agreement has been duly executed and delivered by the Debtor, constitutes the legal, valid and binding obligation of the Debtor, and[, subject to the execution and delivery of the Acknowledgment and Consent[28],] is enforceable against the Debtor in accordance with its terms.
(d)Issuing Entity Governing Documents. Performance by the Debtor of its obligations under this Agreement does not conflict with, result in a breach of, or constitute a default under any provision of the Issuing Entity Governing Documents.[29]
(e)Perfection and Priority. Upon filing of the financing statement with the applicable filing office in the jurisdiction in which the Debtoris located (in accordance with Section 9-307 of the UCC), the security interest granted by the Debtor to the Secured Party in this Agreement will constitute a valid, perfected first priority security interest in the Collateral, enforceable against the Debtor, all other creditors of the Debtor or any persons purporting to purchase the LLC Interests from the Debtor[, subject as to priority only to [Permitted Liens][30]].[31]
(f)Organizational Information; Information Regarding Debtor. [The Debtor’s jurisdiction of organization, exact legal name as it appears on file with the Secretary of State of the State of ______, and chief executive office and/or principal place of business,[32] are as set forth on the signature page of this Agreement.] [the Debtor’s principal residence is ______, and either (i) the Debtor's unexpired driver's license [or alternative identification card] was issued by the jurisdiction in which the Debtor's principal residence is located and the exact name of the Debtor on such driver's license is ______or (ii) the Debtor has no driver's license [or alternative identification card] or the Debtor's driver's license was issued by another jurisdiction and the Debtor's first personal name is ______and the Debtor's surname is ______.[33]]
(g)Title to Collateral. The Debtor is the sole, direct, legal owner of the Collateral, has good and marketable title to the Collateral[34], and no part of the Collateral is subject to any lien, option, restriction on sale, claim, encumbrance, voting agreement, proxy or voting trust, option, right of first refusal or first offeror right of others [except for those rights set forth in the Issuing Entity Governing Documents, all of which have been waived by the Issuing Entity and other parties, if any, in whose favor or for whose benefit those provisions exist]and no other Person has a beneficial interest in the Collateral.[35]
(h)Capital Contribution Obligations. The Debtor has made all capital contributions heretofore required to be made to the Issuing Entity in respect of the LLC Interestsand no additional capital contributions are required to be made in respect of the LLC Interests.[36]
(i)Issuing Entity Governing Documents. The Debtor has delivered to Secured Party true and correct copies of all Issuing Entity Governing Documents, and all other documents or agreements representing, governing, or otherwise relating to the LLC Interests, the Debtor’s ownership of the LLC Interests or the exercise of the Debtor’s rights with respect to the LLC Interests, and (i) all of the foregoing are in full force and effect in accordance with their written terms, (ii) there are no other agreements or understandings, written or oral, between or among the Debtor, the Issuing Entity or any other person having an interest in the Issuing Entityrelating to the LLC Interests or the rights of the Debtorwith respect to or representing the LLC Interests, (iii) [to the knowledge of the Debtor,]the Debtor is not in breach or default of the Debtor’s obligations under any of the foregoing, and (iv) no event has occurred that would now, or upon the lapse of time or giving of notification, or both, constitute a breach or default by the Debtor under the Issuing Entity Governing Documents or that would otherwise result in the dissociation of the Debtor from the Issuing Entity or the dissolution of the Issuing Entity under the Issuing Entity Governing Documents or otherwise.
(j)No Article 8 Opt-In. The Issuing Entity has not elected to treat the LLC Interests as Investment Property under Article 8 of the UCC and none of the LLC Interests are credited to a securities account.[37]
(k)Non-Certificated Interest. There are no certificates or other writings evidencing the LLC Interests.[38]