A Client Asked Us: GSAs And Share Pledge Agreements

Q: If a lender has a general security agreement (GSA) from its borrower, should it also have a share pledge agreement to cover the shares held by the borrower in its subsidiaries?

A: Both a GSA and a share pledge agreement that includes a proper collateral description can create a security interest in all shares and other equity securities held by a borrower in any subsidiary or other corporation specified in the document or its schedules (collectively, the "Shares").  However, taking possession of the share certificates ^[1] (in the case of certificated securities) or obtaining a control agreement (in the case of uncertificated securities or security entitlements) is an additional step needed under the Ontario PPSA ^[2] to ensure that such a security interest will have a first priority ranking over the relevant Shares as against other secured creditors of the borrower.  Otherwise the borrower could attempt to use those Shares as collateral to obtain financing from