There is a famous phrase which is particularly apt in the area
of pension fund investing – "the devil is in the
details". This is the first in a series on practical issues
that arise in connection with investments by Canadian pension funds
in alternative asset classes. The subject of this post is the
execution of subscription agreements.
It is becoming common now for pension funds in Canada to invest
in pooled funds. Such investments can take different forms. For
example, a pooled fund may be structured as a limited partnership
or a trust. Whatever the structure, the investor is typically
required to complete and sign a "subscription agreement".
An issue that frequently comes up is: what entity should execute
the subscription agreement?
You might ask: why does it matter who signs the subscription
agreement? Isn't this just a technicality? It is probably
correct that nothing will turn on who signs — as long as
everything is going well. But what happens if the investment fails
and/or the plan becomes insolvent? In those scenarios the last
thing anyone needs is a dispute over who is on the hook for
payments under the agreement. Even if the dispute is ultimately
resolved in favour of the party who is properly liable under the
agreement, time and money will have been wasted over an issue which
could have been addressed up front.
Many subscription agreements make the "pension plan"
or "pension fund" the signatory. This assumes that the
pension fund is a "person" capable of entering into a
legal agreement. In some jurisdictions, a "pension plan"
is deemed by law to be a separate legal person. In those
jurisdictions, the pension plan or pension fund may be the proper
person to enter into the subscription agreement. But this is not
the law in Canada. In Canada, a pension plan or pension fund does
not have the status of a separate legal person and therefore cannot
legally enter into a subscription agreement.
So who is the proper person to enter into the agreement? The
answer depends on a range of factors, including the nature of the
plan, the terms of the plan's funding documents, any internal
delegations of authority and the form of subscription agreement.
What is important to remember is that, under pension legislation,
the investment of the plan assets is a "plan
administrator" function, not an "employer" function.
This means that if the employer is also the legal plan
administrator (which is the norm for private sector plans in most
Canadian common law jurisdictions), it must be made clear that
the employer is signing the subscription agreement in its
capacity as the plan administrator, not in its personal
Another issue which needs to be kept in mind when completing a
subscription agreement arises from the interaction between pension
law and securities law. Generally, a subscription agreement
requires the pension plan to confirm that it is an "accredited
investor" under applicable securities legislation. It is
important to review the documentation carefully to make sure it is
clear that the "accredited investor" is the pension fund,
since the person signing on behalf of the plan may not qualify as
an "accredited investor". This may require modifications
to the wording of the subscription agreement.
Next time we will consider how to deal with ERISA
representations in a subscription agreement.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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