(ii) Call Securities means (I)in the event Slaines employment is terminated by 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 . affording the single member special rights, e.g. SAFEs are easy to use and get the job done with minimal cost, and can work for both single investors and for groups of investors. The ability to request further information from the manager is also commonly included in the private placement memorandum, with summaries of side letter rights typically made available. 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). This allows continuity of application. 3 0 obj Given the popularity of side letters in fund finance . 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. 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. . The pooling of these entities continues to evolve and a standard approach may develop over time. . 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), They can be used to alter the terms of a limited partnership agreement or even override certain provisions. 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. Ground Rules for Secondary Deals - And Variations. Similarly, Limited [] Exhibit 10.18 SIDE LETTER AGREEMENT . 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)). Firm Insights. endstream endobj Side letters set out terms that supplement or, in some cases, modify the . The need for consistency between side letter terms (including any MFN rights granted) becomes particularly apparent when conducting this exercise. While side letters can be helpful in securing key investments, it is imperative to fully understand their legal . Termination Date, the Company shall determine not to exercise a Call right pursuant to this Section3 with respect to any Shareholder and/or his or its Permitted Transferees, then the Company shall promptly notify Silver Lake and Warburg Pincus 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. 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. 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. 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. 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 . Thanks to the $2 trillion . Below, we've outlined some of the most important terms of NDAs in the private equity space, which draw nuance from changing business conditions. A side letter supplements and, where the fund takes contractual form (such as a partnership), can override the terms of the funds constitutional documents and is typically required where an investor has specific commercial, legal, regulatory, taxation or operational concerns with respect to its investment in the fund. ESG provisions may include a confirmation that the fund will comply with the UN Principles for Responsible Investment when making investments or that investee companies comply with the ten principles of the United Nations Global Compact or other guidelines that are more specifically tailored to the investor in question, including restrictions on making investments in companies engaged in certain lines of business. Boards Determination of Put/Call Price. Definitions. x]o6}=ZF%Q{z9CI|Glc8DY dcKM5_.!wWgJn$)&YU'WwEruHd*wyrvoy&&>p\jnsLr!USZ/qg~x$ok eV/]jMYYedyp LX'('A h-$!RTY The top 10 terms in private equity NDAs. 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 If such Put/Call Price determined by such Independent Appraiser is not higher than the Put/Call Price previously determined by the 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 ANY ACTION OR PROCEEDING AGAINST THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT MAY BE 7. A subscription agreement can also be used to sell stock in a privately owned business. Enacting the proposal as a rule would curtail competition among funds, according to fund representatives. % 1 0 obj Private Equity: Legal Perspectives & Documentation is designed to provide you with a solid understanding of how law and finance work together in the private equity industry to ensure informed decision-making. The Shareholders and the Company agree that for purposes of the Shareholders Agreement, the term Other Shareholder 4 0 obj 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. Introduction "Capital call" facilities (also known as "subscription line" facilities) are facilities made available to funds (often on a revolving credit basis and for general working capital purposes) which are secured against the uncalled capital commitments of the investors in the fund including: (i) the right to make capital calls on . as of such date equal to the Permitted Transfer Share Amount. Any such terms should be both commercially appropriate and operationally practical for the fund and its manager. 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 . Market Value means, with respect to any Call Securities or Put Securities, as applicable, as of the relevant date, (I)the price that a willing buyer would pay for such Call Securities or Put Securities, as applicable, from a willing 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. c'5HJ~L;x}=u! BOTH SUCH COURTS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING. A management rights letter is a key aspect for venture capital funds when investing in companies, as it enables funds to raise capital without subjecting the activities of the fund to the various restrictions imposed under ERISA. as applicable, at the closing of the purchase of the Call Securities or Put Securities, as applicable, pursuant to Section3(e)). Teasers are documents that contains a brief description of the business, its product and service offerings, and financial . 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. (i) Call Event means either (I)the termination of Slaines employment for any reason or (II) a Material Similarly, the staff observed private fund advisers that set up undisclosed side-by-side (c) Legends. 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 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 . 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) 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. Purchased Securities pursuant to the Purchase 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 Safe: Valuation Cap, no Discount Regulators and law enforcement are looking into flagrantly illegal "side letter" agreements which pay investors aware of fraud to not tell unsuspecting others. 107 0 obj <>/Metadata 16 0 R/ViewerPreferences 161 0 R>> endobj 109 0 obj <>/ExtGState<>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI]>>/MediaBox[0 0 612 792]/Contents 110 0 R/Group<>/Tabs/S/StructParents 0/CropBox[ 0 0 612 792]/Rotate 0>> endobj 110 0 obj <>stream Section3, each of Silver Lake and Warburg Pincus. It is better to be consistent in agreeing side letter terms, for example, having a 'house' provision that is stuck to. 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 An MFN right allows an investor to elect to receive the side letter provisions negotiated by other investors. 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, Side Letters. LPAs are multilateral agreements among the General Partner, the Fund and the limited partners. 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 . Make sure you reference any fund "gate" provisions in your side letter agreements. co-investment rights, not tendered to the investor generally, usually the basis of the single member being the largest investor. 1. (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 Transferability is particularly important to certain investors, for example certain Germanpension funds. 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. 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 Put). (iv) Change in Control shall have the meaning set forth in the Employment While side letters can be helpful in securing key investments, it is imperative to fully understand their legal implications. 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 However, side letters generally raise various fiduciary and other concerns that must be addressed. 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. (xx) Put/Call Termination Date means (I)in the case of the exercise of a Put or Call with respect to any 15 February 2023. other remedy to which it may be entitled at law or equity. 1 March 2023. 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. This disclosure obligation applies prior to investment and following any material changes to such preferential treatments. (xiv) Option means any options to purchase shares of Common Stock granted pursuant to any Employee Equity Download the Safe. Certain investors will require side letters, providing them with additional . [Remainder of page intentionally 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. 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 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). 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. 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. shall be cumulative and not exclusive of any rights or remedies provided by law. In the world of private equity, side-letters are a globally recognised and prevalent practice among many . +44 20 7184 7468, London If such a provision is contemplated by a fund, it should ensure it is able to comply with these provisions and, from a practical perspective, to provide any reporting agreed. 106 0 obj <> endobj Private equity investments involve significant risks, including the loss of the entire investment. 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. 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. (xxi) Put Securities means the Purchased Securities and the Option Shares. There are three versions of the post-money safe intended for use by US companies, plus an optional side letter. 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. <> MFN clauses play a key role in the commercial negotiations of an investment in a modern private . Our new programme spotlights women whose achievements, innovation and leadership are reshaping private markets across a broad range of asset classes. VENTURE CAPITAL & PRIVATE EQUITY FUNDS DESKBOOK SERIES . 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). 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 Forms of side letters often have all fund parties (i.e., the manager, 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 from such Shareholder or his or its Permitted Transferees. 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 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. A key man is an important employee or executive who is critical to the operation of the business, and whose death, absence, or . xc```b`` B@1XJYJ9 WX i 022s :/602[8a 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 Steps in a Private Equity Transaction Timeline. These side letter requests can come in many guises, including requests to vary the frequency, format and content of reporting. 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. SAFEs solve two problems: (1) nobody knows what an early-stage . Alexander J. Davie. Nb"qA4Sz^Hj26$DVZ or the potential to establish . In ESG Capital Partners II, LP v.Passport Special Opportunities Master Fund, L.P. C.A. WHEREAS, the Shareholders, on the one hand, and Warburg Pincus . e.g. 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). All certificates representing Purchased Securities and Option Rather than a privately negotiated side letter process . 2 0 obj <> endobj 4 0 obj <>stream In particular, any preferential treatment accorded to one or more investors must not result in an overall material disadvantage to other investors. 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. This document is not legal advice and should not be relied on as such. US companies. PEI Staff. 121 0 obj <]>>stream Background ESG Capital Partners was formed to purchase [] the Purchase Agreement. 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 Side letters are an (increasingly) common way of formalising negotiated arrangements between a private fund and an investor. private equity and real assets sectors. Side agreements help private equity and hedge funds attract investors. The rise of private equity secondaries nancings Samantha Hutchinson, . Side Pocket: A side pocket is a type of account used in hedge funds to separate illiquid assets from other more liquid investments. within such fifteen (15)day period, (I)each of the Company and such Shareholder within five (5)days of the end of such fifteen (15)day period shall submit a list of the names of four nationally recognized investment banking 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 The Shareholders acknowledge and agree that the Purchased Securities and any other equity securities of the Company or any of its Subsidiaries that the Shareholders shall 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. (ix) Good Reason shall have the meaning set forth in the Employment Agreement. [Signature Page to Side Letter Agreement]. 19, No. 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 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. %PDF-1.7 % Once an investment enters a side pocket account, only the . Examples of this include where excusal or transfer rights affect the existing credit assessment on the borrowing base. No. A letter agreement between a single member of an investor syndicate . Certain UK local government pension schemes have recently pooled their investment assets into eight distinct pools to improve the efficiency of the management of their assets. the Other Shareholder Restricted Period. Issues are amplified where any MFN rights are involved. 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 respect to such Call Securities as determined in good faith by the Board. The use of side letters is becoming a common theme amongst investors . 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. Side letters supplement the terms of a funds constituting documents, so they should be considered whenever these documents are consulted. Accordingly, it is agreed that the Company shall be entitled to an injunction, restraining Simple example. Author: Dan Brecher. 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. 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. Teaser Sent by Bankers. 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. (m) Employment by the (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. The above is a summary of common side letter requests. All covenants, agreements, representations and warranties made herein shall (x) Independent Appraiser means an independent investment banking or valuation firm jointly selected by the Company A blanket consent is therefore not advisable. specified portion of the Put Securities owned by such Shareholder or any of his or its Permitted Transferees at the Put/Call Price.
side letter agreement private equity