A key man clause is a contractual clause that prohibits an investment firm or fund manager from making new investments if one or more key persons are not available to devote the necessary time to the investment. 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 side letter is a side agreement between the company and the investor made at the time the investor invests in the SAFE. Examples of this include where excusal or transfer rights affect the existing credit assessment on the borrowing base. No. 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 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. (g) Make-Whole. fWEbQ#]qe|"Dc}6n~2Q!/qDvp2@YA +44 20 7184 7468, London . ) =]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 BOTH SUCH COURTS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING. 1. endobj This document is not legal advice and should not be relied on as such. Co-investments and other alternative ways of investing. General Partners ("GPs") have an interest in reducing the length of side letter agreements, providing fundraising certainty, and lowering their fund formation costs. 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. The private equity due diligence process is a lengthy sequence of steps that involves a lot of research and information gathering, analytics, discussions, and assessments. Private equity investments involve significant risks, including the loss of the entire investment. or valuation firms, (II) each of the Company and such Shareholder shall strike two of the names submitted by the other party and (III) the Independent Appraiser shall be selected by lot from the four remaining names of investment banking If such Put/Call Price determined by the Independent Appraiser is higher than the Put/Call Price previously (ii) Call Securities means (I)in the event Slaines employment is terminated by . (x) Independent Appraiser means an independent investment banking or valuation firm jointly selected by the Company (b) (c) Exercise of Put. This Side Letter Agreement (this Agreement) is made as of August4, 2010, by and among Igloo Holdings Corporation, a Delaware corporation (the Company), Mason stream other remedy to which it may be entitled at law or equity. Exercise Date or (III) if a Material Breach Event has occurred prior to the Put/Call Closing Date, the Material Breach Price. Slaines employment is terminated (x)by the Company without Cause, (y)by Slaine for Good Reason, or (z)on account of Slaines death or Disability, and a Material Breach Event has not occurred, any Shareholder (or Regulators and law enforcement are looking into flagrantly illegal "side letter" agreements which pay investors aware of fraud to not tell unsuspecting others. RECITALS . 1 0 obj For purposes of this Section2(a), Permitted Transfer Share Amount shall mean, with respect to a Shareholder as of any date, a number of Shares equal to SAFEs solve two problems: (1) nobody knows what an early-stage . Thanks to the $2 trillion . 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. paying (or the Companys Subsidiaries are prohibited or restricted from delivering funds to the Company sufficient to permit the Company to pay) the Put/Call Price with respect to the Call Securities or the Put Securities, as applicable, +44 20 7184 7460, Dubai Legally, a side letter is nothing more than a contract between the fund or the GP and the investor, which sits alongside the other contractual relationships they have in the form of the LPA and . Integration Clauses (also known as "entire agreement" clauses)make sure that each of the fund's governing agreements . 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. 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. (d) Successors; Assignment. <> BROUGHT AND ENFORCED EXCLUSIVELY IN THE COURTS OF THE STATE OF DELAWARE OR (TO THE EXTENT SUBJECT MATTER JURISDICTION EXISTS THEREFOR) THE U.S. DISTRICT COURT FOR THE DISTRICT OF DELAWARE, AND THE PARTIES IRREVOCABLY SUBMIT TO THE JURISDICTION OF London 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. MFN clauses play a key role in the commercial negotiations of an investment in a modern private . 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. 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 (f) Termination Date, the Company shall determine not to exercise a Call right pursuant to this Section3 with respect to any Shareholder and/or his or its Permitted Transferees, then the Company shall promptly notify Silver Lake and Warburg Pincus Where a manager is willing to provide an MFN right, these rights are generally reserved for more significant investors as they can have wide-ranging implications for the fund, especially if they are not managed effectively. Given the popularity of side letters in fund finance . [1] On April 21, 2022, I filed a comment letter in response to the Proposal. But as one notable decision from the Delaware Court of Chancery illustrates, the enforceability of these agreements cannot be take for granted. Use of Side Letters. A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. 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 . (i) Waiver of Jury 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 (vi) Disability shall have the meaning set forth in the Employment Agreement. Private Equity and Hedge Funds. Put). While side letters can be helpful in securing key investments, it is imperative to fully understand their legal . The main source for these ground rules are the Company's Shareholders Agreement or Investor Rights Agreement (each of which we refer to in this article as the Shareholders Agreement).The Company's organizational documents, and any confidentiality agreements and side letters with shareholders, may also contain applicable requirements or . This investor fills out a form documenting his or her suitability for investing in the partnership. (iii) Cause shall have the meaning set forth in the Parties to a side letter negotiation should seek advice on the particular transaction in light of their circumstances. rQpg$cj'?w8+6+*CVt-[PsuiO;yL4PQ#LZK0!zDPSh]o'S$V&\]V. 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'). (i) Enter to open, tab to navigate, enter to select, Practical Law Standard Document w-016-5805, https://content.next.westlaw.com/practical-law/document/Iba4bc2fcb68611e8a5b3e3d9e23d7429/Side-Letter-to-Limited-Partnership-Agreement?viewType=FullText&transitionType=Default&contextData=(sc.Default), Side Letter to Limited Partnership Agreement. Side agreements help private equity and hedge funds attract investors. shall be cumulative and not exclusive of any rights or remedies provided by law. "Preferential terms do not necessarily benefit the fund or other investors that are not party to the side letter agreement and, at times, . Annual (or more frequently if appropriate) certifications from the teams responsible for compliance with individual provisions can support this process. Incorporating Responsible Investment Requirements into Private Equity Fund Terms. 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. 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. 7. Boards Determination of Put/Call Price. 1) In certain circumstances the manager may also be a party. Upon the terms and subject to the conditions set forth in this Section3, (i)if a Call Event occurs, the Company (and, to the extent provided in Section3(b)(ii), Safe: Valuation Cap, no Discount Exhibit 10.18 SIDE LETTER AGREEMENT . SAFEs are easy to use and get the job done with minimal cost, and can work for both single investors and for groups of investors. The Company or any Shareholder may file an original counterpart or a copy of this Section4(i) with any court as written evidence of the consent of the Companys or such THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. A side letter is a document that is ancillary to another contract. NOW, THEREFORE, in consideration of the foregoing, 4 0 obj pursuant to the terms and conditions of the agreements governing the indebtedness for borrowed money of the Company and its Subsidiaries, then the Put/Call Closing Date shall be the earlier of (x)ten (10)days after the first date on Recently, the Delaware Chancery Court ruled on a dispute that heated up between a hedge fund manager and the fund's seed 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. A side letter is an agreement between the fund and one particular investor to vary the terms of the limited partnership agreement with respect to that particular investor (almost always to the benefit of the investor). Most favored nation clause samples. This letter agreement will confirm the agreement between us and you ("you" or the "Investor"), effective as of the . Letter Agreement - Artemis America Partnership, Apollo Investment Fund LP and Samsonite Corp. (Jul 13, 1999) Lock-Up Agreement - Sirius Satellite Radio Inc., Apollo Management LP, Blackstone Group LP, Space Systems/Loral Inc. and Lehman Commercial Paper Inc. (Oct 17, 2002) Similarly, the staff observed private fund advisers that set up undisclosed side-by-side 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. (B)the earlier of (x)the fifth anniversary of the Closing Date and (y)the 25% Float Date; provided, however, that following the six month anniversary of the consummation of the IPO, the Other Shareholder Restricted (xvii) 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 (f) %PDF-1.5 % You should . (c) Legal Counsel and Interpretation. (xxi) Put Securities means the Purchased Securities and the Option Shares. 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. 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. ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. amended from time to time, the Employment Agreement). material analyses used in arriving at such determination) within thirty (30)days of being engaged stating the Independent Appraisers determination of the Put/Call Price and such Put/Call Price as determined by such Independent Appraiser (v) Cost means (I)with respect to any Purchased Securities, the Purchase Price and (II) Obligations of Transferees. Founders tend to lose interest when it comes to the negotiation of capital raising documentation or investment agreement with investors. The number and prevalence of side letter requests has increased exponentially in the last decade, a trend Side Letters. Breach Event. Use them or shun them, side letters (also called side agreements or side letter arrangements) are part of the business landscape. 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 ESG provisions may include a confirmation that the fund will comply with the UN Principles for Responsible Investment when making investments or that investee companies comply with the ten principles of the United Nations Global Compact or other guidelines that are more specifically tailored to the investor in question, including restrictions on making investments in companies engaged in certain lines of business. The above is a summary of common side letter requests. held by the Sponsors and their respective Permitted Transferees immediately prior to the consummation of the IPO. The use of side letters by venture capital and private equity funds has become commonplacesome would say too commonplace. This allows continuity of application. PEI Staff. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> US companies. LPAs are multilateral agreements among the General Partner, the Fund and the limited partners. Investor will execute a side letter that will serve, separate and . 3) In some circumstances an MFN is included in the funds constituting documentation rather than being agreed separately by side letter. Slaine. 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 . Lenders should be mindful of any such provisions, commonly referred to as most favoured nation ("MFN") provisions (which may also be set out in the LPA). It is better to be consistent in agreeing side letter terms, for example, having a 'house' provision that is stuck to. applicable, from the applicable Shareholder and/or his or its Permitted Transferees, as applicable, for the Put/Call Price, in each case (x)payable in cash and (y)minus any applicable tax withholdings to satisfy the Companys This article provides an overview of common side letter terms and current themes in the private fund market. The side letter can be used to facilitate a large investment that attracts other strategic investors, which could benefit the fund and the execution of its investment strategy. Shareholders waiver of his or its rights to trial by jury. 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. PEI Staff. EEA based AIFMs are also subject to an additional requirement to ensure the fair treatment of investors. affording the single member special rights, e.g. 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. 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. laws govern the subscription agreement and side letter. 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 Ground Rules for Secondary Deals - And Variations. A more detailed analysis of the ILP is available here. An MFN right allows an investor to elect to receive the side letter provisions negotiated by other investors. In connection with any purchase of Call Securities or Put Securities, In the world of private equity, side-letters are a globally recognised and prevalent practice among many . Private equity has made multibillionaires of executives like Blackstone's Steve Schwarzman (net worth: $17.5 billion) and Apollo's Leon Black ($7.5 billion). is ninety (90)days following the date of termination of employment of Slaine and (y)the date that is two hundred seventy (270)days following the date of exercise of the Option pursuant to which such Option Shares were issued to left blank]. The sidecar investment will usually be used when one of . #+Cq..mw>@>J6@\?%'SFm!K*k_K!Zx'"AVboBEqp_D"9j }$w[u?"1GT!nAY\#BuhTloC? Slaine without Good Reason and a Material Breach Event has not occurred prior to the Put/Call Closing Date, a price equal to the lower of (x)the Fair Market Value of (A)with respect to any Purchased Securities, such Call Securities as of Transferability is particularly important to certain investors, for example certain Germanpension funds. Period, with respect to the Shareholders and their respective Permitted Transferees, shall be deemed to have expired, as of any date, with respect to an aggregate number of Shares held by the Shareholders and their respective Permitted Transferees The constitutional documents of closed-ended funds typically include a mechanism whereby an investor can be excused from participating in particular types of investments (generally due to regulatory or other internal constraints). Certain investors will require side letters, providing them with additional . (c) Legends. When you invest in a mutual fund . 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 The Use of Side Letters in Investment Limited Partnerships Broad flexibility to negotiate side 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 . Trial. September 13, 2011. Requests for management rights letters are fairly common in today's market and do not impose significant burdens on . [2] My letter addresses what appears to be one of the most profound . Securities or Put Securities as may be reasonably requested by the Company, including but not limited to the representation that such Shareholder (or his or its Permitted Transferees, if applicable) has good and marketable title to such Call The right of the Company (or, to the extent provided in Section3(b)(ii), Silver Lake and Warburg Pincus) to effect a Call and the right of the Shareholders to effect a Put, in each case as set forth in this Enhanced reporting and information rights. (xiii) Non-Interference Agreement shall have the meaning set forth in the Employment Agreement. While side letters can be helpful in securing key investments, it is imperative to fully understand their legal implications. 11053-VCL (Del. Section3, each of Silver Lake and Warburg Pincus. Their use in the open-ended funds context is increasing, particularly to tie in certain key persons financially, including required investment levels and notification rights where a key person submits a significant redemption request (which could potentially be linked to favourable liquidity rights). Key person terms are common in the closed-ended fund context (where a key person event is likely to trigger the suspension of the investment period). 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. (viii) Fair 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 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 It also includes other provisions that are often modified depending on the investor's situation, such as regulatory representations and confidentiality. or the potential to establish . Securities, a price equal to (I)with respect to any Purchased Securities, the lowest of (x)the Fair Market Value of such Call Securities or Put Securities, as applicable, as of the date of Slaines termination of employment, (a) General. 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. 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. Arrangement. Financial Services and Investment Management, California Notice at Collection & Privacy Notice, Private fund side letters: common terms, themes and practical considerations. Agreement. sets out a range of recommendations regarding ESG factors throughout the life of a private equity fund (from the very early stages of fundraising through the investment process to . Transferee is already a party to this Agreement) by executing and delivering such documents as may be necessary, in the determination of the Company, to make such Person a party hereto, whereupon, except as otherwise expressly provided herein, such (l) Stock Splits and Similar Transactions. as of such date equal to the Permitted Transfer Share Amount. Including appropriate provisions to accommodate a capital call . among the parties with respect to the subject matter hereof. 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). Our new programme spotlights women whose achievements, innovation and leadership are reshaping private markets across a broad range of asset classes. +44 20 7184 7845. +971 4 425 6338, London 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. Make sure you reference any fund "gate" provisions in your side letter agreements. Side letters supplement the terms of a funds constituting documents, so they should be considered whenever these documents are consulted. This Agreement and the other agreements referred to herein set forth the entire understanding the employment of Slaine at any time or for any reason whatsoever, with or without Cause. written notice of objection to the Board within ten (10)days of delivery to such Shareholder of such Call Notice or Put Pricing Notice, as applicable (an Objection Notice).

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