Pledges Of Ownership Interests
Continuing on past month's themes concerning buying and selling businesses, one of the ways that a buyer finances the purchase is through a seller carry-back.
Previous months articles have discussed pledging of the real property, most commonly by deed of trust but also by a mortgage. They have also discussed the filing of a UCC concerning the personal property of the debtor.
Another alternative or means of securing the debt is by the pledging of extra collateral, namely, the ownership interests in the borrowing entity. For example, buyers Abel and Ben purchased the stock of Corporation from Dana and Ethel. Abel and Ben would then be the owners of Corporation, but would pledge their interests to Dana and Ethel in the event that they do not pay their debt due, which is typically documented by a promissory note.
A pledge agreement is a typical means of securing such a transaction; ideally accompanied by certificating the membership or stock certificates and taking possession of them too.
This is a complicated area of the law. If you have any further questions, please contact your attorney or feel free to contact me.