DealLawyers.com Blog

I recently flagged a Nixon Peabody blog about how the Chancery Court’s ESG Capital Partners decision highlighted significant enforceability issues for “side-letters” with private equity fund investors.  Now the firm’s followed up with another blog offering some practice points for addressing this issue. Here’s an excerpt:

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. Integration Clauses (also known as “entire agreement” clauses)—make sure that each of the fund’s governing agreements include an integration clause that specifically references the fact that the side letter agreement will be a part of the entire agreement of the parties.

2. Subscription Agreement Provisions—in addition to the integration clause, the subscription agreement should also make clear that each applicable investor has received a copy of its side letter agreement (together with all other fund documentation) and is making its investment in the fund in reliance on the terms of all such agreements.

3. LPA Provisions—make sure that the Fund’s LPA specifically references the existence of side letter agreements, and specifically authorizes the general partner to enter into side letter agreements that supplement or alter the terms of the limited partnership agreement. Limited partner investors need to confirm this point as part of their legal diligence processes instead of assuming that a fund manager has this authority. This language would be in addition to the typical “most favored nations” provision included in each investor’s side letter agreement as further evidence that all investors were made aware that certain supplemental and preferential terms may be granted to some but not all investors in the fund;

4. PPM Provisions—make sure that the fund’s private placement memorandum references the fact that the fund may issue side letter agreements, and that it includes a risk factor highlighting the risk that such side letters may be issued to certain limited partners and not others, and that their terms may supplement or alter the terms otherwise provided in the fund’s LPA.

5. Preferential Rights—make sure that any supplemental rights granted to a limited partner in a side letter agreement do not materially or adversely affect the other limited partners in a way that would require an amendment to the fund’s LPA. When unclear, investors or sponsors should seek out advice of counsel.

– John Jenkins