69 The independent director or manager can also: (1) effectuate asset sales to satisfy the secured debt; (2) consent to an Article 9 foreclosure of the company’s assets; and (3) consent to or authorize a bankruptcy filing where appropriate for the protection of creditors’ interests. As recent case law confirms, courts will enforce these bargained-for terms of pledge agreements, rewarding secured creditors who invest in strong documentation with correspondingly robust creditor protection. It is important to note that exercising voting rights, as described above, does not affect ownership of the pledged equity—the pledgor retains economic ownership, and repayment of the secured obligations reinstates the pledgor’s voting rights and economic entitlements. In order to transfer the actual ownership, the secured creditor will need to exercise its rights to foreclose under Article 9 of the UCC. This remedy is discussed below. Remedy 2: Article 9 Foreclosure The second principal remedy found in equity pledges is the ability to foreclose under Article 9 of the UCC. Upon default, a secured creditor may dispose of or sell the collateral and apply the proceeds to satisfy the debt. This foreclosure process is governed by UCC Article 9, which provides two main paths for enforcement: UCC Section 9-610 disposition or UCC Section 9-620 strict foreclosure. UCC Section 9-610 Disposition Under UCC Section 9-610, a secured creditor may dispose of collateral through either a private or public sale. The process requires: » Reasonable authenticated notice of intent to sell, which must be provided to the debtor, any secondary obligors, and any other interested parties that held a perfected security interest in the pledged equity within ten days before the notification date; » Sale of collateral in a commercially reasonable manner with respect to method, manner, time, place, and other terms; and » Proper disposition of sale proceeds in accordance with UCC priority rules. Timing Matters. For public sales, the secured party must advertise or provide public notice and ensure the public has had a meaningful opportunity for competitive bidding. Although notice must be reasonable regarding manner, content, and time, the UCC provides that ten days’ notice is generally deemed reasonable for non-consumer transactions. However, because the UCC requires a commercially reasonable sale, the actual timing for a Section 9-610 disposition typically ranges from 10 to 90 days, depending on the specific facts and whether the underlying company owns real estate. In the context of foreclosing on the equity of distressed real estate companies, secured lenders pursuing their remedy of foreclosure will need to market the foreclosed equity with an appropriate broker and publish notice to potential purchasers containing a description of the equity or underlying property, the applicable debt securing the equity and/ or the property, the bidding procedures, and any other terms governing the sale, including the time and place of any auction to be held and how interested parties become qualified to attend and bid at the auction. Secured lenders are entitled to “credit bid” (i.e., bid the cancellation of all or a portion of the outstanding debt as opposed to cash), meaning that any third party looking to purchase the collateral must bid in excess of what the lender is owed unless the lender agrees to accept less than its entire debt. At a public sale, the lender has the right to purchase the collateral (UCC § 9-610(c)(1)), whereas at a private sale, the lender may only purchase collateral of the type that is customarily sold on a recognized market or that is the subject of widely distributed standard price quotations (UCC § 9-610(c)(2)). When the secured creditor or a related party purchases the collateral at its own foreclosure sale, UCC Section 9-615(f) provides that any deficiency must be calculated based on the amount of proceeds that would have been realized through a proper disposition to an unrelated purchaser. UCC Section 9-620 Strict Foreclosure An alternative to the public or private sale disposition is strict foreclosure under UCC Section 9-620, whereby the secured creditor accepts collateral in full or partial satisfaction of the debt. This is often the most attractive method of foreclosure when available because it typically involves lower transaction costs and is less likely to result in a dispute. Two requirements must be met: (1) the debtor must consent, and (2) the secured party must not receive a timely notification of objection from any party entitled to object, including any person from whom the secured party received authenticated notice of a claim of interest in the collateral and any secured party or lienholder that perfected its interest within ten days before the debtor consented. US-ISRAEL — SECURED LENDING
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