68 THE US-ISRAEL | Legal Review 2025/26 exclusive jurisdiction in Israel, while the related pledge agreement may be governed by US state law where, in the event of a dispute, US state law would be applied. Perfecting the Equity Lien. The method for perfecting a security interest in pledged equity depends on how that equity is classified under the UCC: » Certificated Securities. Where the pledged equity is evidenced by a physical certificate, perfection may be achieved by either: (a) filing a UCC-1 financing statement, or (b) taking “control” of the certificates by taking possession of the certificates together with signed, undated stock powers (for shares) or assignments (for LLC or LP interests) in blank. Security interests perfected by control have priority over those perfected solely by filing. » Uncertificated Securities. Where the pledged equity is evidenced only on the issuer’s books and not certificated, perfection may be achieved by filing a UCC-1 financing statement. Regardless of classification, secured lenders should use all available perfection methods to maximize protection. Filing Location. A UCC-1 financing statement must be filed with the central filing office (typically the Secretary of State) in the jurisdiction where the pledgor is organized—not where the pledged entity is organized. If the pledgor is a foreign entity organized outside the United States in a jurisdiction that does not maintain a public filing system comparable to the UCC, the UCC-1 financing statement should be filed with the District of Columbia. Because Israel does not maintain a system comparable to the UCC, UCC-1 financing statements for Israeli pledgors should be filed with the District of Columbia. Remedy 1: Exercise of Voting Rights The first—and more immediate—remedy available to secured creditors is the ability to exercise voting rights with respect to the pledged equity interests. To effectuate this remedy, the pledge agreement must clearly provide for the transfer of voting rights from the pledgor to the secured party. If so drafted, upon the occurrence of an event of default, voting and other consensual rights will vest in the secured creditor and the pledgor will cease to have the ability or right to vote the pledged shares. Importantly, this transfer of voting power to the secured creditor is accomplished without any requirement of judicial proceedings or notice beyond what is stipulated in the pledge agreement, offering creditors a very flexible tool to protect their collateral. Once voting rights vest in the secured creditor, the secured creditor can: (1) vote to remove existing directors (for a corporation) or managers (for a limited liability company); (2) appoint an independent director or manager to replace prior management; and (3) amend organizational documents as needed to effectuate these governance changes (assuming the applicable organizational documents permit the pledged equity holder to make such changes). Appointment of an Independent Director or Manager The ability to remove and replace management is among the most valuable aspects of the voting rights remedy. By appointing an independent director or manager, the secured creditor places the company under the control of a fiduciary who will act in the best interests of the company, including its creditors. Existing equity holders lose authority to take significant corporate actions without the consent of the newly installed independent director or manager. These blocked actions include initiating bankruptcy proceedings, disposing of or transferring assets (including transferring cash from the borrower’s bank accounts), granting additional security interests, and otherwise subjecting the company’s assets to liens or encumbrances. Blocking Power Is Critical. This blocking power prevents former equity holders from taking adverse corporate actions and allows the secured creditor to preserve the value of its collateral while determining the appropriate path forward. “Regardless of classification, secured lenders should use all available perfection methods to maximize protection.”
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