Investment managers frequently negotiate preferred terms with investors for investment in a fund managed by the IM. Such preferred terms are typically set out in a side letter agreement. Clearly it is crucial to ensure that these careful negotiations result in a binding agreement among the investor and the fund.
The Cayman Islands Court of Appeal has recently considered the key elements of an enforceable side letter and its decision is instructive for IMs, directors, and investors.
First, it remains the case that it is the person entered into the register of members of the fund as a member that may enforce rights attaching to its shares. Where shares are held by an investor through a custodian, it is the custodian that is the registered member and not the ultimate investor.
Second, it should not be assumed that the mere fact of being the IM of a fund bestows authority on such IM to enter into side letters on behalf of a fund. Specific and express authorisation for the IM to agree side letters is necessary and cannot be assumed from general delegation of investment powers to the IM. This is a question of fact but a conservative approach should be taken.
Third, in order for a side letter to be effective it must be entered into on both sides by individuals with authority to bind the respective parties. For the fund, this will typically be a director of the fund. For the investor, this will be an authorized signatory of the investor unless the shares are held through a custodian in which case an authorized signatory of the custodian should execute the side letter.
If the fund is established as a partnership, then the principles remain the same but the authorized signatory would be the general partner of the fund.
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.