However, side letters generally raise various fiduciary and other concerns that must be addressed. But as one notable decision from the Delaware Court of Chancery illustrates, the enforceability of these agreements cannot be take for granted. This disclosure obligation applies prior to investment and following any material changes to such preferential treatments. WHEREAS, in connection with the execution and delivery of this Agreement, Slaine has entered into an Employment Agreement, dated as of the date hereof, among the Company, IDC and Slaine (as it may be or the potential to establish . Side letters are the separate arrangements with the fund managers which either will address matters that are not covered in the partnership agreement of the applicable fund or will override some . Integration Clauses (also known as "entire agreement" clauses)make sure that each of the fund's governing agreements . However, even with careful drafting, an MFN right can significantly extend the funds (or the managers) obligations; managers should therefore carefully consider which investors terms are likely to be captured by the MFN when negotiating these (and other) side letter provisions. (xxi) Put Securities means the Purchased Securities and the Option Shares. the Purchase Agreement. No. 11053-VCL (Del. In the world of private equity, side-letters are a globally recognised and prevalent practice among many . (d) Objection to In recent years there has been growing interest in co-investment vehicles, separately managed accounts and other alternatives to classic commingled funds. Under the law of contracts, a side letter has the . (e) Closing. Model Limited Partnership Agreement - ILPA PDF VENTURE CAPITAL & PRIVATE EQUITY FUNDS - Morgan, Lewis & Bockius Model Legal Documents - National Venture Capital Association - NVCA Most favored nation clause samples. Below we've outlined key side letter terms, highlighted some of the challenges in complying with those terms, and assessed the potential operational impact for GPs. NOW, THEREFORE, in consideration of the foregoing, Silver Lake and Warburg Pincus) shall have the right, but not the obligation, to purchase, from time to time, all or any portion of the Call Securities then owned by any Shareholder or any of his or its Permitted Transferees (a and a Shareholder within fifteen (15)days after the date of the Companys receipt of an Objection Notice; provided that if the Company and such Shareholder are unable to agree upon who shall serve as the Independent Appraiser Side letter vs Fiduciary Duty: Conflict in Private Equity Firms the employment of Slaine at any time or for any reason whatsoever, with or without Cause. 1 March 2023. A key man is an important employee or executive who is critical to the operation of the business, and whose death, absence, or . For example, there have been cases in the Cayman Islands where it has been held that a side letter is not enforceable because the beneficiary rather than the registered interest holder was a party to a side letter and because a manager had entered into a side letter on behalf of the fund (and did not have sufficient authority to bind the fund). Whether it is appropriate to grant such requests should be considered on a case by case basis. Annual (or more frequently if appropriate) certifications from the teams responsible for compliance with individual provisions can support this process. Private equity side letters - Lexology Finally, a private equity fund of funds may seek side letter pro-visions to ensure that the terms of an invest-ment do not conflict with the fund of funds' governing documents. Managers negotiating side letters on behalf of a fund should ensure that a transfer right provides them with sufficient comfort with respect to the identity and nature of the transferee (this is particularly the case where the fund has a credit facility and does not want to jeopardise its borrowing base) and that appropriate customer due diligence information will be provided in connection with any transfer. amended from time to time, the Employment Agreement). the Other Shareholder Restricted Period. from such Shareholder or his or its Permitted Transferees. The sidecar investment will usually be used when one of . the parties hereto, intending to be legally bound by the terms hereof, have caused this Agreement to be executed as of the date first above written by their officers or other representatives thereunto duly authorized. (d) Successors; Assignment. PDF The Use of Side Letters in Investment Limited Partnerships A recurring theme in private equity fund investing is the use of 'side letters' between individual limited partners and the general partner of the fund. The need for consistency between side letter terms (including any MFN rights granted) becomes particularly apparent when conducting this exercise. Securities, such Call Securities or Put Securities, as applicable, as of the date of Slaines termination of employment and (y)with respect to any Option Shares, such Call Securities or Put Securities, as applicable, as of the Put/Call LPAs are multilateral agreements among the General Partner, the Fund and the limited partners. General Partners ("GPs") have an interest in reducing the length of side letter agreements, providing fundraising certainty, and lowering their fund formation costs. A side letter is a side agreement between the company and the investor made at the time the investor invests in the SAFE. Focusing on key legal steps and documentation with sample agreements, you will learn about the latest trends, developments and legal . PDF Observations from Examinations of Investment Advisers Managing Private There are three versions of the post-money safe intended for use by US companies, plus an optional side letter. Capital Call Facilities - LPA and side letter review | Ogier PEI Staff. x]o6}=ZF%Q{z9CI|Glc8DY dcKM5_.!wWgJn$)&YU'WwEruHd*wyrvoy&&>p\jnsLr!USZ/qg~x$ok eV/]jMYYedyp LX'('A h-$!RTY Prior to the expiration of the Other Shareholder Restricted Period, any Transferee of Purchased Securities or Option Shares (including Permitted Transferees of a Shareholder that have acquired their Purchased 7+ Private Equity Investment Proposal Templates Side letters are frequently used to enter into legal agreements between private funds and investors. In this example, a side-letter may be executed between the general partner and the investor regarding a different date when the investor can withdraw their investment. Sometimes these side letters are borne of necessity for the investor to enter into the fund, either due to regulatory . Download the March 2023 issue of Private Equity International Shareholder (or his or its Permitted Transferee) from the Company or any other Person in connection with the Transfer by such Shareholder or his or its Permitted Transferees of any Purchased Securities and Option Shares (including, without (e) Survival. prior to the Put/Call Termination Date (unless such Call is being exercised after the occurrence of a Material Breach Event, in which case such Call Notice may be delivered at any time after the occurrence of such Material Breach Event), to Call all A most favoured nation (MFN) clause entitles an investor to have visibility of side letter entitlements of other investors in the private equity fund and, in certain circumstances, allows such investor to elect to benefit from those entitlements. 107 0 obj <>/Metadata 16 0 R/ViewerPreferences 161 0 R>> endobj 109 0 obj <>/ExtGState<>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI]>>/MediaBox[0 0 612 792]/Contents 110 0 R/Group<>/Tabs/S/StructParents 0/CropBox[ 0 0 612 792]/Rotate 0>> endobj 110 0 obj <>stream . Dec. 16, 2015) (the ESG Capital Partners Case), the court found that a side letter agreement issued to a limited partner investor in a Delaware . In this key features document, we briefly highlight some considerations relevant to the use of side letter arrangements in Irish ILPs. Make sure you reference any fund "gate" provisions in your side letter Investor will execute a side letter that will serve, separate and . Market Value means, with respect to any Call Securities or Put Securities, as applicable, as of the relevant date, (I)the price that a willing buyer would pay for such Call Securities or Put Securities, as applicable, from a willing Aside from the commercial and practical considerations relevant to agreeing to a side letter provision, there are certain regulatory issues that managers should also bear in mind. (xiii) Non-Interference Agreement shall have the meaning set forth in the Employment Agreement. This Limited Partner Advisory Committee (LPAC) clause for private equity fund (PEF) side letter is to be used when the PEF grants an investor the right to appoint a representative to the PEF's LPAC. (ii) No failure or delay by any party in exercising any right, power Shares shall bear legends as provided in the Shareholders Agreement. transaction, and (y)the per share Put/Call Price paid by the Company (or its designee, as applicable) to repurchase the Call Securities upon the exercise of its repurchase right pursuant to Section3(b) above. These . Purchased Securities pursuant to the Purchase Agreement. You should . Any provision of this Agreement may be waived if, but agreements and investor side letters to make sure that they authorise a capital call facility and related lender rights. for any reason (other than by the Company for Cause or by Slaine without Good Reason) and a Material Breach Event has not occurred prior to the Put/Call Closing Date, a price equal to the Fair Market Value of (x)with respect to any Purchased Private equity investments involve significant risks, including the loss of the entire investment. with respect to all or a portion of the Call Securities owned by such Shareholder and/or his or its Permitted Transferees and (II) the date on which a Shareholder delivers a Put Notice to the Company with respect to such Shareholders exercise Managers managing open-ended funds can simplify monitoring and compliance by keeping a clear record of when an investor has redeemed (such that the side letter is no longer relevant). If at any time from the date of this Agreement until the earlier of the (i) Maturity Date of the Convertible Note and (ii) payment in full of principal and interest of the Convertible Note, the Company sells equity, including debt convertible into equity, in cash to third party . Nb"qA4Sz^Hj26$DVZ In the event a Material Breach Event occurs, at any time thereafter upon delivery of written notice by the Company, each Shareholder shall be obligated to deliver promptly (and, in any event, no later than five United Nations-supported Principles for Responsible Investment (PRI) offers guidance on the placement of ESG provisions in LPAs and side letters on pages 13-14 of their Incorporating Responsible Investment Requirements into Private Equity Fund Terms report. agreement. Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. The rules and regulations for starting a private equity or hedge fund are quite complex, especially when it comes to claiming the correct exemption from registration. EEA managers should bear this requirement in mind when deciding whether to agree to a particular side letter provision. Side letters are an (increasingly) common way of formalising negotiated arrangements between a private fund and an investor.1Whilst used more widely in the closed-ended fund context (given the limited withdrawal rights associated with such funds, the typically higher level of negotiation and greater structural complexity), they are also a feature of open-ended funds, for instance where there is a seed or cornerstone investor investing significant capital or an investor subject to specific tax or regulatory regimes that require bespoke terms. ) =]xIm"LU5-N%v$TjG&VD#ZWU_JP3HCcQp/&z@H2WK$#0IP)Z:*ji(Zz6HLOCh}4=R\{x9+O ;V= l xO!{Qxy2 a# g7@ [V: +6k.:f*`h+g~sc[u-)goO.wYKc{v8/q6C1:s13 7#e}m S~sq`]EX62 A letter agreement between a single member of an investor syndicate . Section3, shall terminate upon the earlier of the consummation of an IPO and the consummation of a Change of Control, whether or not a notice of exercise of any such Call or Put has been given prior to the consummation of an IPO or a Change of Managers with a number of side letters should consider keeping a centralised record of all side letters agreed for the fund, allowing compliance to be monitored on an ongoing basis. Similarly, the staff observed private fund advisers that set up undisclosed side-by-side entitled to an additional payment from the Company (or its designee, as applicable) in an amount equal to the product of (A)the respective number of shares of Common Stock repurchased by the Company or its designee from such Shareholder upon endobj the limited partners of a venture, private equity or hedge fund . Provisions regarding no bad acts are also common, especially in seed arrangements or where significant investments are made and are often particularly relevant for smaller managers where the conduct of a key person is more likely to impact performance of a fund. % WHEREAS, the Shareholders, on the one hand, and Warburg Pincus . If such Put/Call Price determined by the Independent Appraiser is higher than the Put/Call Price previously In particular, any preferential treatment accorded to one or more investors must not result in an overall material disadvantage to other investors. Trial. The Benefits and Pitfalls of Using Side Letters for Private Placements Shares Transferred by the Sponsors as of such date either in connection with the consummation of the IPO or following the consummation of the IPO (other than to a Permitted Transferee), and the denominator of which is the aggregate number of Shares All Side letters are an (increasingly) common way of formalising negotiated arrangements between a private fund and an investor. Purchased Securities, Option Shares or Purchase Price occurring after the date of this Agreement. endstream endobj {slal!#/:dVpRb|$vbHIbO X! Capital Call Facilities - LPA and side letter review. Certain investors will require side letters, providing them with additional . A side letter is a document that is ancillary to another contract. the agreement as between the general partner and an investor. All notices, consents and other communications required or contemplated by this Agreement shall be in writing and shall be delivered in the manner specified herein or, in the absence of such specification, shall be deemed to have been duly given No later than ten (10)days after the Side Letters. Alexander J. Davie. attached hereto as Exhibit A (as it may be amended from time to time, the Shareholders Agreement), to which the Shareholders shall have been required to become a party as of the closing of the transactions contemplated by Transferee will be treated as a Shareholder for purposes of Sections 2, 3 and 4 of this Agreement, as applicable, with the same rights, benefits and obligations hereunder as Shareholder; provided that, prior to the effectiveness of such Side Pocket: Definition, How Side Pocketing Works, Pros & Cons In many instances it is easier to agree concessions in these separate agreements rather than amend the funds constituting documents (being the private placement memorandum and the constitutional documents such as the partnership agreement or articles), especially as the latter approach would mean the rights agreed would generally then be available to all investors. This Side Letter Agreement (this Agreement) is made as of August4, 2010, by and among Igloo Holdings Corporation, a Delaware corporation (the Company), Mason 2) Conversely, certain rights generally should not be included in a side letter, notably those that would create a new class of interests from a local law perspective or restrict the fund as a whole (such as tighter investment restrictions than those described in the funds constituting documentation). side letters. Control. (vii) Employee Equity Arrangement means any option pool, stock option, stock bonus, stock ownership, stock purchase, phantom stock or other equity incentive plan, agreement, commitment (a) Transfer Restrictions. For instance: private equity firm Thoma Bravo, which manages $114 billion of investor money, says in its federal disclosures that it will use side letters as it pleases: "Thoma Bravo is likely to have its own economic and/or other business incentives to provide certain terms to certain limited partners . Private Equity NDAs: Top 10 Terms to Know | Ontra Enhanced reporting and information rights. Rather than a privately negotiated side letter process . RECITALS . %PDF-1.5 Slaine, an individual (Slaine), and (collectively, theand together with Slaine, theShareholders). rQpg$cj'?w8+6+*CVt-[PsuiO;yL4PQ#LZK0!zDPSh]o'S$V&\]V. Founders tend to lose interest when it comes to the negotiation of capital raising documentation or investment agreement with investors. agreement (or related side letters), such as limiting outstanding debt to a . Typically it is more appropriate for the manager rather than the fund to sign up to these requests. Recently, the Delaware Chancery Court ruled on a dispute that heated up between a hedge fund manager and the fund's seed investor. Slaines estate, as applicable) shall have the right, but not the obligation, to cause the Company to purchase, from time to time, all or any portion of the Put Securities owned by such Shareholder or any of his or its Permitted Transferees (a . Shareholders waiver of his or its rights to trial by jury. The private equity fund will generally be required to include the OID in income as "phantom income" as it accrues. A standard Model Limited Partnership Agreement ("LPA") has been a persistent need in the private equity asset class given the cost, time and complexity of negotiating the terms of investment. Private equity has made multibillionaires of executives like Blackstone's Steve Schwarzman (net worth: $17.5 billion) and Apollo's Leon Black ($7.5 billion). -. as of such date equal to the Permitted Transfer Share Amount. This is typically achieved through an election form and can take some time to coordinate if a significant number of side letters are involved and/or if a complex set of carve outs apply. Examples of most favored nation clauses in contracts - Afterpattern Once an investment enters a side pocket account, only the . (iii) Cause shall have the meaning set forth in the Private Equity: Legal Perspectives & Documentation is designed to provide you with a solid understanding of how law and finance work together in the private equity industry to ensure informed decision-making. as applicable, pursuant to this Section3, the Company will be entitled to receive customary representations and warranties from the applicable Shareholder (or his or its Permitted Transferees, if applicable) regarding the purchase of such Call GPs and LPs should take care when crafting ESG-related provisions for LPAs and side letters to ensure agreement on the legal interpretation of such provisions. However, the schemes have not pooled using a consistent structure so, as it stands, requests should be considered on a case by case basis it may be that the various schemes do not necessarily fall within a funds definition of affiliate (which is generally how entities are grouped together for the purposes of an MFN clause). limitation, pursuant to the exercise of all Puts and Calls) prior to the date of such Material Breach Event over (ii)the Cost of all Purchased Securities and Option Shares, as applicable, previously purchased by the Company or any other Person Although the usual intention is that side letters will give rise to legally enforceable rights and obligations, this is by no means guaranteed and, in some cases, they have nothing more than moral effect. any of his or its rights hereunder except in connection with a Transfer of the Purchased Securities in compliance with the terms and conditions of the Shareholders Agreement and Section2 hereof. 3) In some circumstances an MFN is included in the funds constituting documentation rather than being agreed separately by side letter. Purchasing Portfolio Company DebtThreshold Issues for Private Equity 1 0 obj to the Company free and clear of all liens, claims or other encumbrances by delivering to the Company such instruments of transfer as shall reasonably be requested by the Company. Slaines estate, as applicable) shall have the right, but not the obligation, by one or more written notices to the Company (each, a Put Notice) delivered on or prior to the Put/Call Termination Date, to Put all or any with respect to any Option Share, the exercise price paid upon the exercise of the Option pursuant to which such Option Share was issued to Slaine. (i) endobj However, such provisions may be acceptable if sufficiently disclosed to the other investors who are able to take the information into account when making their investment decision. Including appropriate provisions to accommodate a capital call . The LPAC is a governing body of the PEF comprised of a select number of investor representatives; its members have specific rights and duties outlined in the limited partnership agreement.