The amount payable pursuant Download the Safe. But as one notable decision from the Delaware Court of Chancery illustrates, the enforceability of these agreements cannot be take for granted. Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. In partnership with Aumni, a leading provider of investment analytics for the private capital markets, NVCA offers a new Enhanced Model Term Sheet v.3.0 and a new Enhanced Investors' Rights Agreement, each with an embedded market analysis of deal term frequency and usage. (xviii) Put/Call Exercise Date means, as applicable, (I)the date on which the Company delivers a Call Notice to a Shareholder with respect to the Companys exercise of a Call +44 20 7184 7468, London Including appropriate provisions to accommodate a capital call . PEI Staff. However, side letters generally raise various fiduciary and other concerns that must be addressed. If Slaines employment with the Company shall be terminated for any reason, the Company shall have the right, but not the obligation, by one or more written notices to the Shareholders (each, a Call Notice) delivered on or The side letter can add provisions to the SAFE, or can change (amend) provisions in the SAFE. Developing business ideas and pioneering products is a fun thing to do, but the procedures of finding investors and raising capital may be long and complex. Once an investment enters a side pocket account, only the . the limited partners of a venture, private equity or hedge fund . with the evaluation, preparation, negotiation and execution of this letter agreement, the Back-to-Back Equity Commitment Letter, the LP Agreement, the Subscription Agreement and any other agreement, document or instrument entered into in connection therewith or related thereto and the consummation of the transactions contemplated hereby or thereby. 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). minority discount, discount for illiquidity or other similar type of discount shall be taken into consideration minus (II) such Call Securities or Put Securities, as applicable, pro rata portion (based on the aggregate outstanding equity An MFN right allows an investor to elect to receive the side letter provisions negotiated by other investors.3However, MFN provisions can be drafted in a number of ways, meaning that what the investor may actually be entitled to elect to receive can vary widely. %PDF-1.5 % In such event, Silver Lake (and/or its assignee) and Warburg Pincus (and/or its assignee) shall have a pro rata right (based on their relative ownership of Shares at the time of delivery of such notification by the Company) to 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 Accordingly, it is agreed that the Company shall be entitled to an injunction, restraining 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. (a) General. The ESG Capital Partners Case serves as an important reminder that private fund managers, investors and practitioners should always consider the following points to ensure enforceability of side letter agreements: 1. Any such terms should be both commercially appropriate and operationally practical for the fund and its manager. Sidecar Investment: An investment strategy in which one investor allows a second investor to control where and how to invest the capital. ANY ACTION OR PROCEEDING AGAINST THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT MAY BE Firm Insights. London A side letter is a document that is ancillary to another contract. A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. All (xxi) Put Securities means the Purchased Securities and the Option Shares. However, they pose certain distinct issues with respect to side letters which can be problematic, particularly where the lenders ability to take security is compromised or the borrowing base is otherwise restricted. 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 or the potential to establish . 1. Introduction. [2] My letter addresses what appears to be one of the most profound . Environmental, Social and Governance ("ESG") concerns. Board, then the costs and expenses of such Independent Appraiser shall be borne by such Shareholder (which costs and expenses may, in whole or in part, be deducted from the cash delivered to such Shareholder and/or his or its Permitted Transferees, All certificates representing Purchased Securities and Option Control. Company. Below are some practical considerations that could be relevant when managing a fund with side letters: Side letters are becoming an increasingly significant part of a fundraise. 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 A subscription agreement can also be used to sell stock in a privately owned business. held by the Sponsors and their respective Permitted Transferees immediately prior to the consummation of the IPO. 1. They can be used to alter the terms of a limited partnership agreement or even override certain provisions. agrees that a violation of any of the terms of this Agreement will cause the Company irreparable injury for which adequate remedy at law is not available. 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 A blanket consent is therefore not advisable. Breach Event. (xix) Put/Call Price means, with respect to any Call Securities or Put Securities, as applicable, (I)if Slaines employment is terminated by the Company for Cause or by The Shareholders acknowledge and agree that the Purchased Securities and any other equity securities of the Company or any of its Subsidiaries that the Shareholders shall MFN. 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. exercise such Call right pursuant to the terms and conditions of this Section3 in the same manner as the Company; provided that in the event that any Sponsor (and/or its assignees) (the Non-Exercising Sponsor) elects The use of side letters is becoming a common theme amongst investors . seller, in an arms length transaction on such date, it being understood that the voting and economic rights associated with such Call Securities or Put Securities, as applicable, shall be taken into consideration but no control premium, (j) Severability. 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. Put). the exercise of its repurchase right pursuant to Section3(b) above, and (B)the positive difference, if any between (x)the price per share of Common Stock received by the Companys shareholders in connection with such This is an area of particular sensitivity in the open-ended fund context where portfolio level information should generally only be provided when stale, e.g., after further trading of the portfolio so that its then-current composition is not selectively shared. While side letters can be helpful in securing key investments, it is imperative to fully understand their legal . 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. 1 0 obj (i) This survive the execution and delivery hereof and transfer of any Purchased Securities and Option Shares. A sample side letter to a limited partnership agreement (LPA) that can be used by a limited partner investing in a private equity fund that is structured as a limited partnership. amended from time to time, the Employment Agreement). . 108 0 obj <>stream (xiv) Option means any options to purchase shares of Common Stock granted pursuant to any Employee Equity Any Transfer in derogation of the foregoing Deficiencies in this area can result in negative written findings at the conclusion of an examination and, in sufficiently serious cases, could result in an enforcement referral. shall be null and void. Side letters set out terms that supplement or, in some cases, modify the . Our new programme spotlights women whose achievements, innovation and leadership are reshaping private markets across a broad range of asset classes. Shares, the lower or (x)the Fair Market Value of such Call Securities or Put Securities, as applicable, on the applicable Put/Call Exercise Date and (y)the Cost of such Call Securities or Put Securities, as applicable. If a fund is willing to negotiate excusal rights, it should try to limit the amount of investor discretion in determining what an excused investment is as the emphasis should be on using the investors full commitment rather than allowing it to cherry pick deals. Incorporating Responsible Investment Requirements into Private Equity Fund Terms. A side letter is a side agreement between the company and the investor made at the time the investor invests in the SAFE. Restricted Period shall mean, with respect to the Shareholders and their respective Permitted Transferees, the period from the Closing Date until the later of (A)the second (2nd)anniversary of the consummation of the IPO and 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. Download the March 2023 issue of Private Equity International. Managers should be alive to the implications of agreeing to side letter provisions, considering each term from a commercial, legal, regulatory and operational perspective. Boards Determination of Put/Call Price. 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 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 shall apply to the Purchased Securities, as well as any other equity securities of the Company that the Shareholders shall acquire from time to time; and. Side letters are frequently used to enter into legal agreements between private funds and investors. (vi) Disability shall have the meaning set forth in the Employment Agreement. x@g1c:/Zpd$ 9PGF No. (v) Cost means (I)with respect to any Purchased Securities, the Purchase Price and (II) 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. (iv) Change in Control shall have the meaning set forth in the Employment Women of Influence: Private equity. fWEbQ#]qe|"Dc}6n~2Q!/qDvp2@YA -. This Side Letter Agreement (this Agreement) is made as of August4, 2010, by and among Igloo Holdings Corporation, a Delaware corporation (the Company), Mason 7. While side letters can be helpful in securing key investments, it is imperative to fully understand their legal implications. Steps in a Private Equity Transaction Timeline. to obtain required governmental or other approvals), and (II) in the event that an Objection Notice has been timely delivered with respect to the Call Notice or Put Pricing Notice, as applicable, ten (10)days after the determination of the For example, a fund of . Since a typical private equity fund raises capital over a period of time with multiple closings, a side letter is a convenient way to address the specific concerns of an investor. Make sure you reference any fund "gate" provisions in your side letter agreements. laws govern the subscription agreement and side letter. (a) Entire Agreement; Third Parties. 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. <> The Independent Appraiser will be engaged to deliver to the Company and such Shareholder a written determination (such determination to include a report setting forth all nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and permitted assigns, any rights under this Agreement. 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 conditions of this Agreement for all parties remain valid, binding and enforceable. of a Put with respect to all or a portion of the Put Securities owned by such Shareholder and/or his or its Permitted Transferees. For example, a request for portfolio level information should not result in the investor holding information it could use to its competitive advantage or to the detriment of other investors. Nb"qA4Sz^Hj26$DVZ If such a provision is contemplated by a fund, it should ensure it is able to comply with these provisions and, from a practical perspective, to provide any reporting agreed. Any time parties enter a contract, whether it is for sales, purchases, an acquisition, or any other contract, there is a possibility that the contracting parties will create an agreement outside of the formal . Transferability is particularly important to certain investors, for example certain Germanpension funds,4who may need to be able to demonstrate free transferability (or as near to free transferability as the fund can practically offer) for regulatory reasons. Securities or Put Securities to be transferred free and clear of all liens, claims and other encumbrances. the limited liability partnership agreement) and is usually an extension or supplement in the sense that it further clarifies certain provisions of the main agreement. %PDF-1.5 Issues are amplified where any MFN rights are involved. In connection with any purchase of Call Securities or Put Securities, Recently, the Delaware Chancery Court ruled on a dispute that heated up between a hedge fund manager and the fund's seed investor. 3 March 2012 State Gonments rev With substantial defined benefit . Shareholders waiver of his or its rights to trial by jury. Examples of this include where excusal or transfer rights affect the existing credit assessment on the borrowing base. Side Letters. Private equity investments involve significant risks, including the loss of the entire investment. (xvi) Purchase Price means the per-share consideration paid by the Shareholders for the Employment Agreement. co-investment rights, not tendered to the investor generally, usually the basis of the single member being the largest investor. (l) Stock Splits and Similar Transactions. The letter agreement includes sample language for certain rights granted to investors, such as most favored nation (MFN), co-investment, information, and advisory board rights. Non-Interference Agreement. Disgorgement of Profits. Side letter agreements have long been used in private equity fund investments to supplement or interpret the terms of a partnership agreement and related documents. the agreement as between the general partner and an investor. 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. which such restriction or prohibition has terminated and (y)the one-year anniversary of the delivery of the Call Notice or Put Notice, as applicable. (5)Business Days after delivery of such notice) to the Company in immediately available funds to an account designated by the Company in such notice the excess, if any, of (i)the aggregate gross proceeds previously received by such First, a quick summary of the events leading up to the . 1 March 2023. 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 Certain investors will require side letters, providing them with additional . The rights and remedies provided herein Annual (or more frequently if appropriate) certifications from the teams responsible for compliance with individual provisions can support this process. 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 agreement (or related side letters), such as limiting outstanding debt to a . Forms of side letters often have all fund parties (i.e., the manager, Inside: The price is right - the ins and outs of portfolio valuation; From regulation to collaboration - a 17-page special report on co-investing; Expert comment and analysis from industry leaders; Plus much more. MFN clauses play a key role in the commercial negotiations of an investment in a modern private . NDA confidential information. The private equity fund will generally be required to include the OID in income as "phantom income" as it accrues. RECITALS . between a private equity fund (a "Fund") and an investor (an "Investor") are generally contained in the constituent documents of the Fund, often a limited partnership agreement (an "LPA"), which sets forth the rights and obligations of the general partner and each . (g) Notices. This letter agreement will confirm the agreement between us and you ("you" or the "Investor"), effective as of the . would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. (viii) Fair provisions, side letters can never override the provisions of an offshore fund's memorandum and articles of association. 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 While side letter terms will vary from fund to fund, and from investor to investor within a given fund, side A sample side letter to a limited partnership agreement (LPA) that can be used by a limited partner investing in a private equity fund that is structured as a limited partnership. From a side letter perspective, this effectively increases their negotiating power, particularly if one of the schemes is granted an MFN which is extended to all members of its pool. Canadian private equity and venture capital funds are often structured as limited partnerships which are governed by limited partnership agreements (LPA). While these are just a handful of the most important provisions commonly found in a side letter agreement, GPs are often dealing with thousands of individual obligations, to . or valuation firms. respect to such Call Securities as determined in good faith by the Board. Set out below are some current themes that are relevant to negotiating side letter terms. A number of private equity funds and hedge funds are structured as limited partnerships that are governed by the terms of a limited partnership agreement (an 'LPA'). 3 0 obj (xi) Material Breach Event means Slaines material breach of the Securities or Option Shares, as applicable, in accordance with Section4.02 of the Shareholders Agreement) shall be required, at the time of and as a condition precedent to such Transfer, to become a party to this Agreement (unless such Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. (including the amount of Non-Exercised Call Securities) and, in such event, such other Sponsor (and/or its assignees) shall have a right to exercise such Call right with respect to all or any portion of the Non-Exercised Call Securities pursuant to (ii) If, at any time prior to the Put/Call . Managers that are subject to the Alternative Investment Fund Managers Directive (2011/61/EU; "AIFMD") (whether as a European Economic Area ("EEA") based alternative investment fund manager ("AIFM"), managing an EEA alternative investment fund ("AIF") or through marketing an AIF to investors located in the EEA) must comply with the AIFMD rules on preferential treatment. 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. A side letter is an agreement between an investor and a fund that alters the terms of the investor's investment in the fund (i) by superseding some of the applicable terms in the partnership agreement or subscription agreement or (ii) by adding additional terms to the agreements and commitments between the fund and the investor.. It also considers the regulatory context and practical points for managers navigating the restrictions and obligations of multiple side letters. Similarly, the staff observed private fund advisers that set up undisclosed side-by-side Inspire awe in others with the right use of this private equity investment proposal template. . The letter agreement includes sample language for certain rights granted to investors, such as most favored nation (MFN), co-investment, information, and advisory board rights. acquire from time to time shall be subject to the transfer restrictions and other provisions of the Shareholders Agreement.
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