side letter agreement private equity side letter agreement private equity

e.g. This investor fills out a form documenting his or her suitability for investing in the 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 . 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. In this key features document, we briefly highlight some considerations relevant to the use of side letter arrangements in Irish ILPs. 1. (c) Legends. c'5HJ~L;x}=u! A side letter is a side agreement between the company and the investor made at the time the investor invests in the SAFE. General Partners ("GPs") have an interest in reducing the length of side letter agreements, providing fundraising certainty, and lowering their fund formation costs. For example, if a private equity fund buys $100 of debt of a related portfolio company for $75, the portfolio company will generally have $25 of COD income and the debt will be treated as having been reissued to . If these issues arise, managers should ensure that the concessions are achievable, do not unduly limit their firms growth and development strategy and that they can be effectively monitored. 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. 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. (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 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). Investors are increasingly looking to funds to make ESG commitments with respect to their investments. shares (thePurchased Securities) in the aggregate of common stock of the Company, par value $0.01 per share (the Common Stock); WHEREAS, the Shareholders and the Company desire to enter into this Agreement to set forth the terms of their mutual understanding relating to certain transfer restrictions and repurchase rights that (v) Cost means (I)with respect to any Purchased Securities, the Purchase Price and (II) We very much appreciate your support and trust. Employment Agreement. In the world of private equity, side-letters are a globally recognised and prevalent practice among many . Download the March 2023 issue of Private Equity International. (m) Employment by the 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. Trial. The SEC staff on examination has been known to review side letters to test whether they are being adhered to and whether proper disclosure was made. While investors commonly seek an acknowledgement in a side letter that they are interested in co-investment opportunities (or a similar election right), the range of alternative investment structures currently in vogue introduces new side letter concerns, particularly in relation to strategy and allocation issues (for example strategy caps and successor fund provisions). 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. 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 Under the law of contracts, a side letter has the . 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). 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 (xi) Material Breach Event means Slaines material breach of the In recent years there has been growing interest in co-investment vehicles, separately managed accounts and other alternatives to classic commingled funds. 3 March 2012 State Gonments rev With substantial defined benefit . RESPECT OF ANY ISSUE, CLAIM OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH THE DEALINGS OF ANY PARTY HERETO IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER 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 All No Shareholder shall assign September 13, 2011. 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. 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. (vi) Disability shall have the meaning set forth in the Employment Agreement. (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 (i) Call Event means either (I)the termination of Slaines employment for any reason or (II) a Material MFN clauses play a key role in the commercial negotiations of an investment in a modern private . The themes identified in this note also demonstrate that the private fund space continues to evolve and that managers also need to adapt in order to ensure that they move with the times, rather than getting caught out by a term that is hastily agreed to without the overall implications receiving proper attention. (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 The sidecar investment will usually be used when one of . (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 WHEREAS, the Shareholders, on the one hand, and Warburg Pincus order or other equitable relief to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States or any state thereof, in addition to any or any specified portion of the Call Securities owned by any such Shareholder or any of his or its Permitted Transferees at the Put/Call Price. 1 Whilst 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 . 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. 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), No. stream Credit facilities are an increasingly popular tool used by closed-ended funds to satisfy short-term bridging needs and smooth the capital call process. the employment of Slaine at any time or for any reason whatsoever, with or without Cause. Any provision of this Agreement may be waived if, but 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 This disclosure obligation applies prior to investment and following any material changes to such preferential treatments. Counterparts. 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. 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 amended from time to time, the Employment Agreement). [2] My letter addresses what appears to be one of the most profound . Arrangement. (b) 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. Side letters are frequently used to enter into legal agreements between private funds and investors. Side letters set out terms that supplement or, in some cases, modify the . Side letters are frequently used to enter into legal agreements between private funds and investors. (3)days after deposit in the U.S. mail, to the respective addresses, facsimile numbers or electronic email addresses of the parties set forth below: (i) If to the Company, to it at the following address: (ii) If to any Shareholder or any of his or its Permitted Transferees, to Slaine at the following address: (h) Injunctive Relief. Each Call Notice shall set forth the Call Securities applicable to such Call and the Put/Call Price with Nb"qA4Sz^Hj26$DVZ (x) Independent Appraiser means an independent investment banking or valuation firm jointly selected by the Company While side letters can be helpful in securing key investments, it is imperative to fully understand their legal implications. provisions, side letters can never override the provisions of an offshore fund's memorandum and articles of association. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> 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. The top 10 terms in private equity NDAs. Finally, as a technical drafting point, side-letter covenants should be carefully drafted to ensure that the correct party is making the covenant. (ii) Call Securities means (I)in the event Slaines employment is terminated by Integration Clauses (also known as "entire agreement" clauses)make sure that each of the fund's governing agreements . . (j) Severability. (c) Legal Counsel and Interpretation. (l) Stock Splits and Similar Transactions. If a Shareholder believes in good faith that the Put/Call Price is greater than the amount set forth in the Call Notice or the Put Pricing Notice, as applicable, then such Shareholder may deliver a (ix) Good Reason shall have the meaning set forth in the Employment Agreement. One of the first steps of buy-side M&A (in a private equity transaction timeline) is when the bankers send teasers to the Private Equity players. 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. Private Equity News & Analysis. 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. Options. affording the single member special rights, e.g. One of the simplest (and cheapest) ways to invest in an early-stage company is often through a Simple Agreement for Future Equity (SAFE). 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 . However, side letters generally raise various fiduciary and other concerns that must be addressed. Shares shall bear legends as provided in the Shareholders Agreement. 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. They can be used to alter the terms of a limited partnership agreement or even override certain provisions. NOW, THEREFORE, in consideration of the foregoing, Each Put Notice shall set forth the Put Securities applicable to such Put. Our new programme spotlights women whose achievements, innovation and leadership are reshaping private markets across a broad range of asset classes. Boards Determination of Put/Call Price. A blanket consent is therefore not advisable. Simple example. 3) In some circumstances an MFN is included in the funds constituting documentation rather than being agreed separately by side letter. (xxi) Put Securities means the Purchased Securities and the Option Shares. 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 would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. Given the popularity of side letters in fund finance . (c) Exercise of Put. If such Put/Call Price determined by the Independent Appraiser is higher than the Put/Call Price previously Women of Influence: Private equity. 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), laws govern the subscription agreement and side letter. It also includes other provisions that are often modified depending on the investor's situation, such as regulatory representations and confidentiality. 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 "Preferential terms do not necessarily benefit the fund or other investors that are not party to the side letter agreement and, at times, . Inspire awe in others with the right use of this private equity investment proposal template. 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 Side letters supplement the terms of a funds constituting documents, so they should be considered whenever these documents are consulted. 106 0 obj <> endobj 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. Side Letters. (e) Survival. 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, survive the execution and delivery hereof and transfer of any Purchased Securities and Option Shares. 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 This 7-page template has everything you could ever want: business-standard fonts, the right color space, and it is available in many file formats. A subscription agreement can also be used to sell stock in a privately owned business. Founders tend to lose interest when it comes to the negotiation of capital raising documentation or investment agreement with investors. This document is not legal advice and should not be relied on as such. This article provides an overview of common side letter terms and current themes in the private fund market. Slaine without Good Reason, the Purchased Securities. 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 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. 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). 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. 3 Vol. is determined to be invalid, illegal or unenforceable by any governmental entity, the remaining provisions of this Agreement, to the extent permitted by law shall remain in full force and effect provided, that the essential terms and private equity and real assets sectors. Side Pocket: A side pocket is a type of account used in hedge funds to separate illiquid assets from other more liquid investments. or arrangement for the benefit of one or more employees, directors and/or consultants of the Company or any of its Subsidiaries (other than this Agreement). Focusing on key legal steps and documentation with sample agreements, you will learn about the latest trends, developments and legal . 1 March 2023. 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 Transfer, each Permitted Transferee to which such Purchased Securities or Option Shares are to be Transferred shall, and the applicable Shareholder shall cause his or its Permitted Transferees to agree in writing with the Company to, Transfer VENTURE CAPITAL & PRIVATE EQUITY FUNDS DESKBOOK SERIES . (f) 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 Sidecar Investment: An investment strategy in which one investor allows a second investor to control where and how to invest the capital. 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 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. 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 +44 20 7184 7845. Managers may therefore wish to include a carve-out in their standard MFN clause in respect of side letter provisions which affect the funds credit facility. It also considers the regulatory context and practical points for managers navigating the restrictions and obligations of multiple side letters. 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 . 3 0 obj Purchased Securities, Option Shares or Purchase Price occurring after the date of this Agreement. (a) General. (d) Successors; Assignment. 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). Q(J^{),}X0)"1m} Rj}q=. 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). Upon the exercise of any Put or Call pursuant to this Section3, (i)the Company shall, on the Put/Call Closing Date, purchase such Call Securities or Put Securities, as left blank]. 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. Alexander J. Davie. The need for consistency between side letter terms (including any MFN rights granted) becomes particularly apparent when conducting this exercise. 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 The SEC recently published a proposed rule (the "Proposal") that would impose unprecedented mandatory disclosure obligations and various other forms of intervention in the private funds industry. Introduction. agreement (or related side letters), such as limiting outstanding debt to a . x@g1c:/Zpd$ 9PGF 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." 15 February 2023. Side letters are an (increasingly) common way of formalising negotiated arrangements between a private fund and an investor. 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. (e) Closing. 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 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 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). The Shareholders and the Company agree that for purposes of the Shareholders Agreement, the term Other Shareholder The typical management rights letter provides the fund with the minimum . 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). Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. Firm Insights. [1] On April 21, 2022, I filed a comment letter in response to the Proposal. (xii) Material Breach Price means, with respect to any Call Securities or Put (ii) If, at any time prior to the Put/Call If any provision of this Agreement This Side Letter Agreement (this "Agreement") is made as of August 4, 2010, by and among Igloo Holdings Corporation, a Delaware corporation (the "Company"), Mason Slaine, an individual ("Slaine"), and (collectively, the and together with Slaine, the "Shareholders"). Capitalized terms used but not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the Shareholders Agreement substantially in the form PEI Staff. Incorporating Responsible Investment Requirements into Private Equity Fund Terms. The key question wherever the content or effect of a side letter is disputed is whether or not the side-letter is binding. EEA based AIFMs are also subject to an additional requirement to ensure the fair treatment of investors. (xvi) Purchase Price means the per-share consideration paid by the Shareholders for the the agreement as between the general partner and an investor. Download this easily editable template through formats like MS Word and Mac Pages. Nothing contained in this Agreement shall be deemed to obligate the Company or any Subsidiary of the Company to employ Slaine in any capacity whatsoever or to prohibit or restrict the Company (or any such Subsidiary) from terminating 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. Some investors may have genuine tax related concerns (for example, the need to be supplied with K-1 schedules in order to prepare their US tax returns) or regulatory reporting issues (such as the need to comply with the Solvency II Directive (2009/138/EC)). Slaine. 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. specified portion of the Put Securities owned by such Shareholder or any of his or its Permitted Transferees at the Put/Call Price. 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. 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 There are three versions of the post-money safe intended for use by US companies, plus an optional side letter. 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 . When you invest in a mutual fund . Most favored nation clause samples. 11053-VCL (Del. 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.