side letter hedge fund
And if any term of the side letter relates to a provision in the articles (for example, a lock-up period), the provision should be one the application or exercise of which is left to a broad discretion given to the directors by the articles, to be exercised solely and absolutely, either generally or in any particular case.A good rule of thumb for directors when considering whether the provisions of a side letter will affect the economic contract of existing shareholders, is to ask whether existing shareholders would be affected if the side-letter investor invested or did not invest.
They are often granted to large or important investors prior to investment and provide preferential treatment and typically, for example will cover agreements by the manager to waive or reduce fees, grant enhanced transparency, or allow preferential liquidity provisions to that particular investor. The side letter is drafted by the hedge fund attorney and will be signed by the investor at the same time that the investor signs the hedge fund subscription documents.
The side letter is one of the most important items for a hedge fund manager. It is a species that can be unpredictable, even dangerous.
The Cayman Island courts are currently considering an action concerning a side letter, one of the few to be judicially considered, which may in time provide useful guidance for the enforceability (or not) of side letter arrangements.What are the common terms of side letters and which ones are potentially problematic to hedge fund directors, general partners, investment managers and investors alike?Monitoring side letters with most favoured nation clauses can be particularly problematic and hedge funds and their investment managers must ensure that they do not enter into conflicting arrangements with different investors.Many side letters are not actively monitored on an on-going basis and the more side letters a fund enters in to, the greater the likelihood certain terms of those side letters conflict.Seemingly, not much. Side letters are agreements that hedge fund advisers enter into with certain investors that give the investors more favorable rights and privileges than other investors receive. If the articles give specific rights to certain members only, these members become a class of members and their shares constitute a class of shares, even though the shares It is important that a side letter's terms do not give rights to the side-letter investor that inadvertently create a separate class of shares, requiring the existing shareholders' approval for such modification. The side letter is an animal increasingly seen in the hedge fund jungle. The Seward & Kissel 2015/16 Hedge Fund Side Letter Study, a first-of-its-kind analysis released today, shows that hedge funds in the study entered into side letters most frequently with funds-of-funds (making up 30.5% of all side letter investors) and government plans (making up 27.1% of all side letter …
For example, a hedge fund will need to ensure that it does not agree terms with one investor that conflict with any undertaking agreed with another investor.
An investor will, through the use of a side letter, often require a manager to provide the investor with access to a pre-determined amount of a fund's capacity in excess of the latter's initial investment. https://thehedgefundjournal.com/the-use-of-side-letters-in-hedge-funds Hedge Fund Side Letters: The Current Marketplace, Enforceability, and Legal Issues.
Chief among these types of side letter agreements are those that give certain investors liquidity preferences or provide them with more access to portfolio information.
Case law to date is scant. At least not yet… An FSA spokesman, in a recent newspaper article, commented that the FSA doesn't look at investment terms set by hedge funds because the hedge funds themselves are typically domiciled outside its jurisdiction in the UK.The SEC, meanwhile, in its new registration rules for hedge fund investment advisors was not giving much away either, merely highlighting the use of side letters by hedge funds in a footnote. Who is keeping track of the terms of each of the side letters? A side letter should not modify the provisions of the memorandum and articles of association that bind an investor once the shares are registered in the fund's register of members.To accommodate the creation of side letters, the fund must include provisions in its offering memorandum that disclose the possibility of side letters, alerting investors that others could be given preferential offering terms. If the key person(s) should die, become disabled or otherwise cease to participate in the fund's business, the manager's abilities could be severely impaired. The disclosure should clearly distinguish between two issues: modification of class rights and variation of offering terms.
The side letter is drafted by the Below are some of the reasons a hedge fund manager may use a side letter arrangementThere are many different ways which any of the above concepts can be implemented into the side letter and generally it will depend on the business points negotiated by the manager and the investor.
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