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 . c'5HJ~L;x}=u! The pooling of these entities continues to evolve and a standard approach may develop over time. (c) Legal Counsel and Interpretation. Dear Investor: Thank you for your investment in [Name of Company], a [Delaware] corporation (referred to as the "Company" or as "us" and "we" in this 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 . One of the simplest (and cheapest) ways to invest in an early-stage company is often through a Simple Agreement for Future Equity (SAFE). 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 . 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 specified portion of the Put Securities owned by such Shareholder or any of his or its Permitted Transferees at the Put/Call Price. 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, #+Cq..mw>@>J6@\?%'SFm!K*k_K!Zx'"AVboBEqp_D"9j }$w[u?"1GT!nAY\#BuhTloC? private equity and real assets sectors. 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 The sidecar investment will usually be used when one of . 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 Definitions. Rather than a privately negotiated side letter process . The typical management rights letter provides the fund with the minimum . 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. 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 The key question wherever the content or effect of a side letter is disputed is whether or not the side-letter is binding. Capital Call Facilities - LPA and side letter review. Confidentiality agreements are the foundation of NDAs and are indispensable in the assessment of any company. SAFEs solve two problems: (1) nobody knows what an early-stage . 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. Capital Call Facilities - LPA and side letter review | Ogier between a private equity fund (a "Fund") and an investor (an "Investor") are generally contained in the constituent documents of the Fund, often a limited partnership agreement (an "LPA"), which sets forth the rights and obligations of the general partner and each . xc```b`` B@1XJYJ9 WX i 022s :/602[8a (k) Governing Law; Jurisdiction. Obligations of Transferees. provisions, side letters can never override the provisions of an offshore fund's memorandum and articles of association. A blanket consent is therefore not advisable. ANY ACTION OR PROCEEDING AGAINST THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT MAY BE Managers should be alive to the implications of agreeing to side letter provisions, considering each term from a commercial, legal, regulatory and operational perspective. Q(J^{),}X0)"1m} Rj}q=. An investor in a PE fund will often indicate (commonly in the subscription agreement or a side letter entered into with the fund) whether it is interested in co-investment opportunities. 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. or valuation firms. 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 endobj A blanket consent is therefore not advisable. Accordingly, it is agreed that the Company shall be entitled to an injunction, restraining A side letter, or side agreement, is a collective bargaining agreement that is not part of the underlying or primary collective bargaining agreement (CBA) but is used by the parties to the contract to reach agreement on issues that the CBA does not cover, to clarify issues in the CBA or to modify the CBA (permanently or temporarily). The Benefits and Pitfalls of Using Side Letters for Private Placements or the potential to establish . Each Call Notice shall set forth the Call Securities applicable to such Call and the Put/Call Price with 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 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. 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 Similarly, Limited [] 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 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 . 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 (g) Make-Whole. YC Safe Financing Documents | Y Combinator But as one notable decision from the Delaware Court of Chancery illustrates, the enforceability of these agreements cannot be take for granted. The above is a summary of common side letter requests. 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. Thanks to the $2 trillion . as of such date equal to the Permitted Transfer Share Amount. +44 20 7184 7460, Dubai For example, if a private equity fund buys $100 of debt of a related portfolio company for $75, the portfolio company will generally have $25 of COD income and the debt will be treated as having been reissued to . {slal!#/:dVpRb|$vbHIbO X! 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 Purchased Securities pursuant to the Purchase Agreement. Any Transfer in derogation of the foregoing Issues are amplified where any MFN rights are involved. This disclosure obligation applies prior to investment and following any material changes to such preferential treatments. 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. 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. Notwithstanding anything herein to the contrary, in the event that (i)Slaines employment is terminated by the Company without Cause or by Slaine for Good Reason, (ii)the Company (or its designee) exercises its option to repurchase 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 Purchase Agreement, dated as of August4, 2010 (thePurchase Agreement), pursuant to which the Shareholders have agreed to purchase from the Sponsors, and the Sponsors have agreed to sell to the Shareholders, 20,000,000 Size: A4, US. 19, No. Control. (xii) Material Breach Price means, with respect to any Call Securities or Put 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 A subscription agreement can also be used to sell stock in a privately owned business. -. Has Your Company Used Side Letter Arrangements? - MHM (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 They can be used to alter the terms of a limited partnership agreement or even override certain provisions. 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 . 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. 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. The Use of Side Letters in Investment Limited Partnerships Broad flexibility to negotiate side (d) Objection to (i) Slaine without Good Reason, the Purchased Securities. 2) Conversely, certain rights generally should not be included in a side letter, notably those that would create a new class of interests from a local law perspective or restrict the fund as a whole (such as tighter investment restrictions than those described in the funds constituting documentation). Download the March 2023 issue of Private Equity International 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. Too Big to Fail, COVID-19 Edition: How Private Equity Is Winning the Arrangement. left blank]. 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. (c) Exercise of Put. 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. 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 We very much appreciate your support and trust. 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 Simple Agreement for Future Equity (aka SAFE): An Overview for x][s8~OUNS6C*:v$\gMvlR%g. e4 Ju.PRG-:'M|Fx+Ml/y@[j:#msSt6-YTXj./Bx^ The Down Side of Side Letters in Private Equity - MLT Aikins 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). The rise of private equity secondaries nancings Samantha Hutchinson, . Side letter vs Fiduciary Duty: Conflict in Private Equity Firms 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 Private Funds' Secretive 'Side Letter' Deals Are Targeted by SEC Each Put Notice shall set forth the Put Securities applicable to such Put. 1. Securities or Put Securities to be transferred free and clear of all liens, claims and other encumbrances. This Limited Partner Advisory Committee (LPAC) clause for private equity fund (PEF) side letter is to be used when the PEF grants an investor the right to appoint a representative to the PEF's LPAC. held by the Sponsors and their respective Permitted Transferees immediately prior to the consummation of the IPO. Use them or shun them, side letters (also called side agreements or side letter arrangements) are part of the business landscape. 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 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and representatives. This letter agreement will confirm the agreement between us and you ("you" or the "Investor"), effective as of the . Download this easily editable template through formats like MS Word and Mac Pages. 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'). 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 7. Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. The use of side letters is becoming a common theme amongst investors . 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 Put/Call Price by the Independent Appraiser; provided, however, that if, as of the date that otherwise would be the Put/Call Closing Date pursuant to the foregoing clauses (I)and (II), the Company is restricted or prohibited from RECITALS . Managers with a number of side letters should consider keeping a centralised record of all side letters agreed for the fund, allowing compliance to be monitored on an ongoing basis. (l) Stock Splits and Similar Transactions. Alexander J. Davie. 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 rQpg$cj'?w8+6+*CVt-[PsuiO;yL4PQ#LZK0!zDPSh]o'S$V&\]V. 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. (viii) Fair the Other Shareholder Restricted Period. For example, a fund of . 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. Nb"qA4Sz^Hj26$DVZ (x) Independent Appraiser means an independent investment banking or valuation firm jointly selected by the Company 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. (c) Legends. Such election by the LP is informational and should not impose any obligation on the general partner (GP) of the fund. 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. Codify ESG expectations within side letter agreements - ILPA 2) Conversely, certain rights generally should not be included in a side letter, notably those that would create a new class of interests from a local law perspective or restrict the fund as a whole (such as tighter investment restrictions than those described in the funds constituting documentation). What is a management rights letter and why is my investor asking for it Side Pocket: Definition, How Side Pocketing Works, Pros & Cons General Partners ("GPs") have an interest in reducing the length of side letter agreements, providing fundraising certainty, and lowering their fund formation costs. (b) What is a Side Letter? | Aronoff, Rosen & Hunt, LPA Enacting the proposal as a rule would curtail competition among funds, according to fund representatives. 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 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. Boards Determination of Put/Call Price. the agreement as between the general partner and an investor. Side Pocket: A side pocket is a type of account used in hedge funds to separate illiquid assets from other more liquid investments. 1 0 obj 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 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). 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 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. WHEREAS, the Shareholders, on the one hand, and Warburg Pincus These . WHEREAS, the Shareholders, on the one hand, and Warburg Pincus . Side Letters: A Round-Up of Common Issues for Lenders | May 17, 2019 A more detailed analysis of the ILP is available here. Agreement can be amended only by an instrument in writing signed by (x)each of the parties hereto and (y)solely with respect to Section3, each of Silver Lake and Warburg Pincus. Certain investors will require side letters, providing them with additional . Options for ESG provisions in private equity fund terms (i) Waiver of Jury 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 of such determination. 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. 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. Examples of most favored nation clauses in contracts - Afterpattern (iii) Cause shall have the meaning set forth in the Side letters set out terms that supplement or, in some cases, modify the . 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. In ESG Capital Partners II, LP v.Passport Special Opportunities Master Fund, L.P. C.A. 2 0 obj <> endobj 4 0 obj <>stream 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. In the world of private equity, side-letters are a globally recognised and prevalent practice among many . 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 However, side letters generally raise various fiduciary and other concerns that must be addressed. from such Shareholder or his or its Permitted Transferees. 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 If the scope of the prohibited investments is stated in the side letter itself, it is generally helpful to state why they are prohibited in order to increase the chance that the provision is taken outside the scope of any relevant MFN right. EEA based AIFMs are also subject to an additional requirement to ensure the fair treatment of investors. There are three versions of the post-money safe intended for use by US companies, plus an optional side letter. the employment of Slaine at any time or for any reason whatsoever, with or without Cause. The private equity fund will generally be required to include the OID in income as "phantom income" as it accrues. %PDF-1.7 % For instance: Private equity firm Thoma Bravo, which manages $114 billion of investor money, says in its federal disclosures that it will use side letters as it pleases: "Thoma Bravo is likely to have its own economic and/or other business incentives to provide certain terms to certain limited partners or the potential to establish . PEI Staff. ( Check out our private equity due diligence playbook) Institutional and accredited investors dedicate large sums of money for private equity investments. Sidecar Investment: An investment strategy in which one investor allows a second investor to control where and how to invest the capital. +44 20 7184 7468, London No later than ten (10)days after the shall be deemed to be the Put/Call Price with respect to such Call or Put, as applicable, and shall be final and binding on the parties. Inside Wall Street's "Side Letter" Scam - jacobin.com