(i) Call Event means either (I)the termination of Slaines employment for any reason or (II) a Material 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 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'). Transfer rights are particularly relevant in the closed-ended fund context where an investor cannot redeem from the fund should it wish to. specified portion of the Put Securities owned by such Shareholder or any of his or its Permitted Transferees at the Put/Call Price. (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. conditions of this Agreement for all parties remain valid, binding and enforceable. 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). [Remainder of page intentionally 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 such terms should be both commercially appropriate and operationally practical for the fund and its manager. (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 Investor will execute a side letter that will serve, separate and . shall apply to the Purchased Securities, as well as any other equity securities of the Company that the Shareholders shall acquire from time to time; and. Shares shall bear legends as provided in the Shareholders Agreement. Teasers are documents that contains a brief description of the business, its product and service offerings, and financial . attached hereto as Exhibit A (as it may be amended from time to time, the Shareholders Agreement), to which the Shareholders shall have been required to become a party as of the closing of the transactions contemplated by 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 . affording the single member special rights, e.g. All certificates representing Purchased Securities and Option 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. 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. 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 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. endstream endobj Transferability is particularly important to certain investors, for example certain Germanpension funds. A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. 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. Finally, as a technical drafting point, side-letter covenants should be carefully drafted to ensure that the correct party is making the covenant. Side letters are frequently used to enter into legal agreements between private funds and investors. 15 February 2023. 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 the terms and conditions of this Section3 in the same manner as the Company. (j) Severability. Slaine without Good Reason, the Purchased Securities. Incorporating Responsible Investment Requirements into Private Equity Fund Terms. Forms of side letters often have all fund parties (i.e., the manager, 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. 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 . The need for consistency between side letter terms (including any MFN rights granted) becomes particularly apparent when conducting this exercise. acquire from time to time shall be subject to the transfer restrictions and other provisions of the Shareholders Agreement. 3) In some circumstances an MFN is included in the funds constituting documentation rather than being agreed separately by side letter. But as one notable decision from the Delaware Court of Chancery illustrates, the enforceability of these agreements cannot be take for granted. (l) Stock Splits and Similar Transactions. Use them or shun them, side letters (also called side agreements or side letter arrangements) are part of the business landscape. (xiii) Non-Interference Agreement shall have the meaning set forth in the Employment Agreement. Q(J^{),}X0)"1m} Rj}q=. EEA based AIFMs are also subject to an additional requirement to ensure the fair treatment of investors. 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 Set out below are some current themes that are relevant to negotiating side letter terms. 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. NOW, THEREFORE, in consideration of the foregoing, 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. ANY ACTION OR PROCEEDING AGAINST THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT MAY BE 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. Side Letters. Capital Call Facilities - LPA and side letter review. 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. 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 -. x[}S7KJbI!++[mT%,@te5[qfVgo.z^xW/Y-W"F4(e3zo\62[_kcLm95/^e.w]sKh0+(p e9 /drePPnY)EmqY'{mmy;rYm +u'lwogjfY6fV8yg_on@,~Vn3jva9[)>{Izscl_-rEvC_ k g_\_k:w+`-q)\iwvm~ n[; x%-{gglw/qG3:9[->[-tNuCGkAiz%Njqll G L Ye`[n6nK-v^lASRTKCv}A$X3a$j$FG+t,JX.9{ ^y!E 6}9b'Fsqy Recently, the Delaware Chancery Court ruled on a dispute that heated up between a hedge fund manager and the fund's seed investor. and the representations, warranties, covenants and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Side agreements help private equity and hedge funds attract investors. 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. 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). Objection Notice, the Company will promptly engage an Independent Appraiser. 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. 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 Rather than a privately negotiated side letter process . The number and prevalence of side letter requests has increased exponentially in the last decade, a trend Slaine without Good Reason and a Material Breach Event has not occurred prior to the Put/Call Closing Date, a price equal to the lower of (x)the Fair Market Value of (A)with respect to any Purchased Securities, such Call Securities as of The pooling of these entities continues to evolve and a standard approach may develop over time. (d) Objection to Issues are amplified where any MFN rights are involved. The Shareholders and the Company agree that for purposes of the Shareholders Agreement, the term Other Shareholder 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. (a) Most Favored Nation. US companies. Regulators and law enforcement are looking into flagrantly illegal "side letter" agreements which pay investors aware of fraud to not tell unsuspecting others. The right of the Company (or, to the extent provided in Section3(b)(ii), Silver Lake and Warburg Pincus) to effect a Call and the right of the Shareholders to effect a Put, in each case as set forth in this (d) Successors; Assignment. 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. 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. Some rights are also most practically recorded in a side letter (for example confirmation of an advisory committee seat for a closed-ended fund).2. 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 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). Financial Services and Investment Management, California Notice at Collection & Privacy Notice, Private fund side letters: common terms, themes and practical considerations. 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 For example, a fund of . 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 Enacting the proposal as a rule would curtail competition among funds, according to fund representatives. AJC*P 4m@RA0aS# 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 . Founders tend to lose interest when it comes to the negotiation of capital raising documentation or investment agreement with investors. Environmental, Social and Governance ("ESG") concerns. 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). 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. 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. (vi) Disability shall have the meaning set forth in the Employment Agreement. The rights and remedies provided herein This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and representatives. 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. from such Shareholder or his or its Permitted Transferees. shall be null and void. 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 . Canadian private equity and venture capital funds are often structured as limited partnerships which are governed by limited partnership agreements (LPA). Similarly, Limited [] 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 April 15, 2021. The key question wherever the content or effect of a side letter is disputed is whether or not the side-letter is binding. 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 . Slaine. Download this easily editable template through formats like MS Word and Mac Pages. Counterparts. Firm Insights. 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. 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 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. It also includes other provisions that are often modified depending on the investor's situation, such as regulatory representations and confidentiality. 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. Non-Interference Agreement. 3 Vol. Definitions. (a) Entire Agreement; Third Parties. shall be cumulative and not exclusive of any rights or remedies provided by law. A side letter is a side agreement between the company and the investor made at the time the investor invests in the SAFE. To the extent a fund has a credit facility and any of the provisions described above are also covered by an MFN right, these issues can be exacerbated because multiple investors may be able to elect to receive the problematic provisions. VENTURE CAPITAL & PRIVATE EQUITY FUNDS DESKBOOK SERIES . Teaser Sent by Bankers. Considerations for Private Fund Advisers. 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 WHEREAS, the Shareholders, on the one hand, and Warburg Pincus Side letters: This aspect of the Proposed Rules represents a significant departure from the current practice of many private fund advisers and institutional and other investors with respect to side letters and other similar written agreements. Background ESG Capital Partners was formed to purchase [] Side letters supplement the terms of a funds constituting documents, so they should be considered whenever these documents are consulted. (iii) Cause shall have the meaning set forth in the 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. Side Pocket: A side pocket is a type of account used in hedge funds to separate illiquid assets from other more liquid investments. 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), Investors are increasingly looking to funds to make ESG commitments with respect to their investments. The LPAC is a governing body of the PEF comprised of a select number of investor representatives; its members have specific rights and duties outlined in the limited partnership agreement. 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. endobj IN WITNESS WHEREOF, 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>> BOTH SUCH COURTS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING. Private Equity and Hedge Funds. 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). amended from time to time, the Employment Agreement). Accordingly, it is agreed that the Company shall be entitled to an injunction, restraining (xv) Option Shares means the shares of Common Stock issued to Slaine upon the exercise of (a) General. Their use in the open-ended funds context is increasing, particularly to tie in certain key persons financially, including required investment levels and notification rights where a key person submits a significant redemption request (which could potentially be linked to favourable liquidity rights). 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. 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. The side letter can add provisions to the SAFE, or can change (amend) provisions in the SAFE. . Agreement. Typically it is more appropriate for the manager rather than the fund to sign up to these requests. Examples of this include where excusal or transfer rights affect the existing credit assessment on the borrowing base. the date of Slaines termination of employment and (B)with respect to any Option Shares, such Call Securities as of the Put/Call Exercise Date and (y)the Cost of such Call Securities, (II) if Slaines employment is terminated

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