(xi) Material Breach Event means Slaines material breach of the the Call Securities pursuant to Section3(b) above, (iii)a Material Breach Event has not occurred, and (iv)within four (4)months following the Companys (or its designees) exercise of its option to repurchase the 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). The MFN exercise ensures that all investors who are allowed to see/elect to receive other investors side letter provisions are presented with their options within the agreed timeframe. Co-investments and other alternative ways of investing. It also includes other provisions that are often modified depending on the investor's situation, such as regulatory representations and confidentiality. Sometimes these side letters are borne of necessity for the investor to enter into the fund, either due to regulatory . Put/Call Closing Date means, with respect to the relevant Call or Put, the later of (I)twenty five (25)days after delivery of the Call Notice or Put Notice, as applicable (subject to extension to the extent necessary 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. 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 Confidentiality agreements are the foundation of NDAs and are indispensable in the assessment of any company. London Our new programme spotlights women whose achievements, innovation and leadership are reshaping private markets across a broad range of asset classes. securities of the Company on such date) of the aggregate fees and expenses that would reasonably be expected to be incurred by the Company and its Subsidiaries in connection with a Change of Control. Some rights are also most practically recorded in a side letter (for example confirmation of an advisory committee seat for a closed-ended fund).2. 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. 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. All covenants, agreements, representations and warranties made herein shall 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. 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. survive the execution and delivery hereof and transfer of any Purchased Securities and Option Shares. Make sure you reference any fund "gate" provisions in your side letter agreements. The top 10 terms in private equity NDAs. The Use of Side Letters in Investment Limited Partnerships Broad flexibility to negotiate side When you invest in a mutual fund . Recently, the Delaware Chancery Court ruled on a dispute that heated up between a hedge fund manager and the fund's seed investor. 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. RECITALS . Under the AIFMD, investors must be provided with a "description of how the AIFM ensures a fair treatment of investors and, whenever an investor obtains preferential treatment or the right to obtain preferential treatment, a description of that preferential treatment, the type of investors who obtain such preferential treatment and, where relevant, their legal or economic links with the AIF or AIFM." Call Securities pursuant to Section3(b) above, the Company enters into a definitive agreement that, if consummated, will result in a Change in Control, then, upon and subject to the consummation of such transaction, each Shareholder shall be For example, the drafting may vary in respect of: (i) whether the MFN applies to all side letter provisions or just, for example, to the fee provisions, (ii) the MFN only applying in respect of those provisions negotiated by other investors with an equal or smaller investment in the fund (typically affiliated investors will be aggregated), and (iii) whether the investor can see all side letter provisions negotiated (regardless of whether it is allowed to elect to receive them) or just those it may elect to receive. -. 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 Company. They can be used to alter the terms of a limited partnership agreement or even override certain provisions. 3) In some circumstances an MFN is included in the funds constituting documentation rather than being agreed separately by side letter. 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 %PDF-1.7 % NDA confidential information. 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). While it is tempting to immediately move on to the next project after a closed-ended funds final closing, it is important to ensure the MFN exercise is handled immediately in order to avoid any technical breaches. {slal!#/:dVpRb|$vbHIbO X! 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. Women of Influence: Private equity. 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. 3 0 obj 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). among the parties with respect to the subject matter hereof. (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 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 A side letter is an agreement apart from the main agreement (e.g. Except as expressly provided in this Agreement (including Section3, which shall be for the benefit of the Company, Silver Lake, Warburg Pincus and their respective Affiliates), September 13, 2011. 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. 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. % 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'). 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 Side letters supplement the terms of a funds constituting documents, so they should be considered whenever these documents are consulted. If any provision of this Agreement Purchased Securities, Option Shares or Purchase Price occurring after the date of this Agreement. The introductory recitals of AIFMD also require that any preferential treatment is disclosed in the AIFs rules or instruments of incorporation this can be achieved through broad disclosure in the private placement memorandum or partnership agreement (although some managers prefer to include more tailored terms to ensure investors are not provided with too much of a 'shopping list'). Put). A side letter is a document that is ancillary to another contract. 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. Side Letters. (k) Governing Law; Jurisdiction. Side Pocket: A side pocket is a type of account used in hedge funds to separate illiquid assets from other more liquid investments. laws govern the subscription agreement and side letter. Safe: Valuation Cap, no Discount of such determination. 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. Slaine, an individual (Slaine), and (collectively, theand together with Slaine, theShareholders). Focusing on key legal steps and documentation with sample agreements, you will learn about the latest trends, developments and legal . or valuation firms. . (a) General. This letter agreement will confirm the agreement between us and you ("you" or the "Investor"), effective as of the . Counterparts. Slaine. Founders tend to lose interest when it comes to the negotiation of capital raising documentation or investment agreement with investors. Slaine without Good Reason, the Purchased Securities. 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. Securities or Put Securities to be transferred free and clear of all liens, claims and other encumbrances. as of such date equal to the Permitted Transfer Share Amount. From the hundreds of nominations for the inaugural Women of Influence in Private Markets list, we could select just 10 from the private equity sphere. 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 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 If such Shareholder timely delivers such an 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). Arrangement. SAFEs solve two problems: (1) nobody knows what an early-stage . (f) Investors are increasingly looking to funds to make ESG commitments with respect to their investments. 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. the date of Slaines termination of employment and (B)with respect to any Option Shares, such Call Securities as of the Put/Call Exercise Date and (y)the Cost of such Call Securities, (II) if Slaines employment is terminated 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. (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 Agreement. 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, (viii) Fair 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 would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. Use of Side Letters. the Company without Cause, by Slaine with Good Reason or by reason of Slaines death or Disability, the Purchased Securities and the Option Shares and (II) in the event Slaines employment is terminated by the Company for Cause or by 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). Accordingly, it is agreed that the Company shall be entitled to an injunction, restraining A subscription agreement is between a company and a private investor to sell a specific number of shares at a specific price. 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. (xv) Option Shares means the shares of Common Stock issued to Slaine upon the exercise of 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). (ix) Good Reason shall have the meaning set forth in the Employment Agreement. 19, No. 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. 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 . 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. 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 . Capital Call Facilities - LPA and side letter review. This Agreement and the other agreements referred to herein set forth the entire understanding 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 e4 Ju.PRG-:'M|Fx+Ml/y@[j:#msSt6-YTXj./Bx^ <>>> (x) Independent Appraiser means an independent investment banking or valuation firm jointly selected by the Company These . Call) and (ii)if 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, each Shareholder (or 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). 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 A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. While side letters can be helpful in securing key investments, it is imperative to fully understand their legal . (vi) Disability shall have the meaning set forth in the Employment Agreement. While side letter terms will vary from fund to fund, and from investor to investor within a given fund, side delivery of such Put Notice to the Company, the Company shall notify such Shareholder in writing of the Put/Call Price with respect to such Put Securities as determined in good faith by the Board (a Put Pricing Notice). (xii) Material Breach Price means, with respect to any Call Securities or Put In this key features document, we briefly highlight some considerations relevant to the use of side letter arrangements in Irish ILPs. 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. ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. (ii) No failure or delay by any party in exercising any right, power 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 There are three versions of the post-money safe intended for use by US companies, plus an optional side letter. Purchased Securities pursuant to the Purchase Agreement. Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. %PDF-1.5 As a result, some investors were unaware of the potential harm that could be caused if the selected investors exercised the special terms granted by the side letters. This document is not legal advice and should not be relied on as such. Typically it is more appropriate for the manager rather than the fund to sign up to these requests. In connection with any purchase of Call Securities or Put Securities, (iii) Cause shall have the meaning set forth in the 11053-VCL (Del. 7. 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. 4) These are commonly referred to as so-called VAG investors, i.e., those which are either a German insurance company, pension pool, pension fund or other pension scheme which is directly or indirectly subject to the provisions of the German Insurance Supervision Law or the Ordinance on the investment of restricted assets of pension schemes, funeral expenses funds and small insurance companies or the Ordinance on the investment of restricted assets of pension funds regarding the investment of their restricted assets. Forms of side letters often have all fund parties (i.e., the manager, x]o6}=ZF%Q{z9CI|Glc8DY dcKM5_.!wWgJn$)&YU'WwEruHd*wyrvoy&&>p\jnsLr!USZ/qg~x$ok eV/]jMYYedyp LX'('A h-$!RTY co-investment rights, not tendered to the investor generally, usually the basis of the single member being the largest investor. Any provision of this Agreement may be waived if, but or the potential to establish . WHEREAS, the Shareholders, on the one hand, and Warburg Pincus . If the Purchase Agreement. Inspire awe in others with the right use of this private equity investment proposal template. only if, such waiver is in writing and is signed by (A)the party against whom the waiver is to be effective and (B)solely with respect to a waiver by the Company of any provisions for the benefit of Silver Lake and Warburg Pincus in Teaser Sent by Bankers. 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. 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 (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 A key man is an important employee or executive who is critical to the operation of the business, and whose death, absence, or . 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 PEI Staff. agreements and investor side letters to make sure that they authorise a capital call facility and related lender rights. Investor will execute a side letter that will serve, separate and . Side letters: This aspect of the Proposed Rules represents a significant departure from the current practice of many private fund advisers and institutional and other investors with respect to side letters and other similar written agreements. Purchased Securities, the date that is ninety (90)days following the date of Slaines termination of employment and (II) in the case of the exercise of a Put or Call with respect to any Option Shares, the later of (x)the date that 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). April 15, 2021. 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. 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 to this Section3(g) shall be payable promptly following, and subject to, the closing of the transactions contemplated by such definitive agreement contemplated by clause (iv)of the previous sentence. Download the March 2023 issue of Private Equity International. xc```b`` B@1XJYJ9 WX i 022s :/602[8a 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. 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 .
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