February 28, 2017
Private Equity: Tred Lightly With Those Side Letters
Side letters detailing special rights for certain large investors are fairly common features of private equity funds. This Nixon Peabody blog discusses the problems that can arise with the enforceability of these arrangements. Here’s the intro:
A little over a year ago, the Delaware Court of Chancery issued a forceful reminder that not all side letter agreements are enforceable. In ESG Capital Partners II, LP v. Passport Special Opportunities Master Fund, L.P. C.A. No. 11053-VCL (Del. Ch. 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 limited partnership private fund entity (the Fund) was nullified and rendered useless by the fact that the side letter was entered into one day prior to the limited partner’s entering into the subscription agreement to acquire interests in the Fund, and the “entire agreement” clause included in the subscription agreement did not reference or otherwise contemplate the existence of any side letter agreement.
The court also found that the side letter’s provisions purported to confer a “super-limited-partner status” upon the limited partner investor in violation of the amendment provisions of the limited partnership agreement.
– John Jenkins