of such determination. 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 In connection with any purchase of Call Securities or Put Securities, It also includes other provisions that are often modified depending on the investor's situation, such as regulatory representations and confidentiality. 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. 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. Slaine. ANY ACTION OR PROCEEDING AGAINST THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT MAY BE 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 Employment Agreement. 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. or the potential to establish . side letters. 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 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. minimum statutory withholding requirements, and (ii)the applicable Shareholder and/or his or its Permitted Transferees, as applicable, shall, simultaneously therewith, transfer and deliver such Call Securities or Put Securities, as applicable, determined by the Board, then the costs and expenses of such Independent Appraiser shall be borne by the Company. 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. 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. 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). Definitions. The number and prevalence of side letter requests has increased exponentially in the last decade, a trend Control. A more detailed analysis of the ILP is available here. Investors are increasingly looking to funds to make ESG commitments with respect to their investments. co-investment rights, not tendered to the investor generally, usually the basis of the single member being the largest investor. The side letter can add provisions to the SAFE, or can change (amend) provisions in the SAFE. This document is not legal advice and should not be relied on as such. 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 . 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), 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 First, a quick summary of the events leading up to the . 3 March 2012 State Gonments rev With substantial defined benefit . The Use of Side Letters in Investment Limited Partnerships Broad flexibility to negotiate side 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 These . Put). the limited partners of a venture, private equity or hedge fund . While side letter terms will vary from fund to fund, and from investor to investor within a given fund, side 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 (xvii) Recently, the Delaware Chancery Court ruled on a dispute that heated up between a hedge fund manager and the fund's seed investor. 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. 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. Law portal; A side letter or side agreement or side letter arrangement is an agreement that is not part of the underlying or primary contract or agreement, and which some or all parties to the contract use to reach agreement on issues the primary contract does not cover or for which they require clarification, or to amend the primary contract. 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. You should . 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. 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 1) In certain circumstances the manager may also be a party. A side letter supplements and, where the fund takes contractual form (such as a partnership), can override the terms of the funds constitutional documents and is typically required where an investor has specific commercial, legal, regulatory, taxation or operational concerns with respect to its investment in the fund. agreement (or related side letters), such as limiting outstanding debt to a . %PDF-1.5 Download the Safe. (j) Severability. stream Examples of this include where excusal or transfer rights affect the existing credit assessment on the borrowing base. 4 0 obj US companies. Such election by the LP is informational and should not impose any obligation on the general partner (GP) of the fund. Simple example. This allows continuity of application. Exercise Date or (III) if a Material Breach Event has occurred prior to the Put/Call Closing Date, the Material Breach Price. Side letters may provide the ability for an investor to elect to receive the benefit of side letter provisions the fund has entered into with other investors. This Agreement and the other agreements referred to herein set forth the entire understanding While side letters can be helpful in securing key investments, it is imperative to fully understand their legal implications. A most favoured nation (MFN) clause entitles an investor to have visibility of side letter entitlements of other investors in the private equity fund and, in certain circumstances, allows such investor to elect to benefit from those entitlements. Teaser Sent by Bankers. Private Equity News & Analysis. the Purchase Agreement. 1. 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. Each Shareholder acknowledges and Side letters supplement the terms of a funds constituting documents, so they should be considered whenever these documents are consulted. Whether it is appropriate to grant such requests should be considered on a case by case basis. . Disgorgement of Profits. (c) Legal Counsel and Interpretation. Use of Side Letters. {slal!#/:dVpRb|$vbHIbO X! The need for consistency between side letter terms (including any MFN rights granted) becomes particularly apparent when conducting this exercise. 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. 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) 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 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"). Our new programme spotlights women whose achievements, innovation and leadership are reshaping private markets across a broad range of asset classes. These side letter requests can come in many guises, including requests to vary the frequency, format and content of reporting. Enhanced reporting and information rights. 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. Financial Services and Investment Management, California Notice at Collection & Privacy Notice, Private fund side letters: common terms, themes and practical considerations. Any Transfer in derogation of the foregoing NOW, THEREFORE, in consideration of the foregoing, 15 February 2023. (f) (xxi) Put Securities means the Purchased Securities and the Option Shares. It also considers the regulatory context and practical points for managers navigating the restrictions and obligations of multiple side letters. 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 . IN WITNESS WHEREOF, As a general matter, to avoid any enforceability issues, care should be taken to ensure that the correct parties are parties to the side letter and in the right capacity. Notwithstanding any other provision of this Agreement or any subscription agreement, in addition to this Agreement and any subscription agreements, the Limited Partners hereby acknowledge and agree that the General Partner or any Affiliate of the General Partner, on its own behalf or on behalf of the Partnership, may enter into side letters or other written agreements to or with . (e) Closing. survive the execution and delivery hereof and transfer of any Purchased Securities and Option Shares. Download. 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 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 Securities or Put Securities to be transferred free and clear of all liens, claims and other encumbrances. If such Put/Call Price determined by such Independent Appraiser is not higher than the Put/Call Price previously determined by the (xv) Option Shares means the shares of Common Stock issued to Slaine upon the exercise of 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 held by the Sponsors and their respective Permitted Transferees immediately prior to the consummation of the IPO. Silver Lake and Warburg Pincus) shall have the right, but not the obligation, to purchase, from time to time, all or any portion of the Call Securities then owned by any Shareholder or any of his or its Permitted Transferees (a Side letters are frequently used to enter into legal agreements between private funds and investors. (c) Exercise of Put. 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 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 . 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. Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. A side letter is a side agreement between the company and the investor made at the time the investor invests in the SAFE. 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 Co-investments and other alternative ways of investing. +44 20 7184 7845. 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. 7. 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. Objection Notice, the Company will promptly engage an Independent Appraiser. 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. Teasers are documents that contains a brief description of the business, its product and service offerings, and financial . Purchased Securities pursuant to the Purchase Agreement. 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. 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. 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. endstream endobj The above is a summary of common side letter requests. Regulators and law enforcement are looking into flagrantly illegal "side letter" agreements which pay investors aware of fraud to not tell unsuspecting others. 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. Certain investors will require side letters, providing them with additional . Each Call Notice shall set forth the Call Securities applicable to such Call and the Put/Call Price with Accordingly, any rule of law, or any legal decision that Side agreements help private equity and hedge funds attract investors. General Partners ("GPs") have an interest in reducing the length of side letter agreements, providing fundraising certainty, and lowering their fund formation costs. 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. (xiv) Option means any options to purchase shares of Common Stock granted pursuant to any Employee Equity Side Letters. 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. and the representations, warranties, covenants and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows: 1. 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 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. A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. 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. 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'). 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 . NDA confidential information. 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). 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 Side letters are frequently used to enter into legal agreements between private funds and investors. the Other Shareholder Restricted Period. 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. If such Put/Call Price determined by the Independent Appraiser is higher than the Put/Call Price previously endobj (ix) Good Reason shall have the meaning set forth in the Employment Agreement. 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. (y)the Fair Market Value of such Call Securities or Put Securities, as applicable, on the applicable Put/Call Exercise Date and (z)the Cost of such Call Securities or Put Securities, as applicable and (II) with respect to any Option (d) Successors; Assignment. 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. (vi) Disability shall have the meaning set forth in the Employment Agreement. Pooling of UK local government pension schemes. In recent years there has been growing interest in co-investment vehicles, separately managed accounts and other alternatives to classic commingled funds. Download this easily editable template through formats like MS Word and Mac Pages. 3) In some circumstances an MFN is included in the funds constituting documentation rather than being agreed separately by side letter. (ii) Call Securities means (I)in the event Slaines employment is terminated by VENTURE CAPITAL & PRIVATE EQUITY FUNDS DESKBOOK SERIES . 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 No. 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, Safe: Valuation Cap, no Discount The top 10 terms in private equity NDAs. Ch. (i) Call Event means either (I)the termination of Slaines employment for any reason or (II) a Material TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, EACH PARTY HERETO WAIVES, AND COVENANTS THAT SUCH PARTY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN Slaine without Good Reason, the Purchased Securities. 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 . Agreement. Company. conditions of this Agreement for all parties remain valid, binding and enforceable. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and representatives. [1] On April 21, 2022, I filed a comment letter in response to the Proposal. (i) Waiver of Jury The use of side letters is becoming a common theme amongst investors . Similarly, the staff observed private fund advisers that set up undisclosed side-by-side . 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). (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 However, these documents are actually the most important as they can make or break your company. The Shareholders and the Company agree that for purposes of the Shareholders Agreement, the term Other Shareholder 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 . 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. 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, Each Put Notice shall set forth the Put Securities applicable to such Put. Transferability is particularly important to certain investors, for example certain Germanpension funds. 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. 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 A subscription agreement can also be used to sell stock in a privately owned business. back to such Shareholder (or to another Permitted Transferee of such Shareholder) any Purchased Securities or Option Shares he, she or it owns if such Permitted Transferee ceases to be a Permitted Transferee of such Shareholder prior to the end of (viii) Fair April 15, 2021. Nb"qA4Sz^Hj26$DVZ 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. (f) Thanks to the $2 trillion . SAFEs solve two problems: (1) nobody knows what an early-stage . Canadian private equity and venture capital funds are often structured as limited partnerships which are governed by limited partnership agreements (LPA). as of such date equal to the Permitted Transfer Share Amount. All certificates representing Purchased Securities and Option 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.
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