After being a hot topic in the Cayman Islands for a number of
years, the Grand Court has handed down two decisions in quick
succession relating to side letters entered into by Cayman Islands
corporate hedge funds - both being decisions of Justice Quin.
The first was Medley Opportunity Fund Ltd. v. Fintan Master
Fund Ltd & Nautical Nominees Ltd (21 June 2012), where
Justice Quin decided the point that a side letter must be signed by
the investor of record, and not some other party such as the
beneficial owner of the shares, in order to be enforceable (please
click here to see Appleby's eAlert on the Medley decision).
More recently, the Court took its analysis of the enforceability
of side letters significantly further in Lansdowne Limited
& Silex Trust Company Limited v. Matador Investments Limited
(In Liquidation) & Ors (23 August 2012).
In the Matador case, A incorporated a Cayman Islands
hedge fund in which both Lansdowne and Silex invested. B was a
shareholder in Lansdowne and also a beneficial owner of Silex. It
was alleged that, prior to the establishment of Matador, A had
verbally agreed with B that the fund's gating and suspension
powers in the Articles of Association would not apply to B's
investment. B claimed this amounted to an "oral side
Matador subsequently went into liquidation and the question
before the Court was whether, assuming the alleged facts to be
true, the oral side letter was capable of binding Matador and
therefore its liquidator.
In his judgment, Justice Quin held that neither Matador nor the
liquidator was bound by the agreement for the following primary
No agreement was made between Matador and either Lansdowne or
Silex. It was made between A and B. Applying the principles in the
Medley case, it could not be contended that the agreement
was binding on Matador or the liquidator.
The Articles of Association of a company comprise an agreement
that creates collective rights and obligations, as between the
company and all of its shareholders, and between its shareholders
inter se. In addition, third parties are entitled to rely
on the accuracy of the Articles when purchasing shares.
In order to protect non-redeeming shareholders, the terms and
manner of the redemption of shares must be sufficiently set out in
the Articles (applying the Privy Council decision in Culross
Global SPC Ltd v. Strategic Turnaround Master Partnership Ltd
and s.37(3)(c) of the Companies Law).
Therefore, even if the oral side letter had been between
Matador, Lansdowne and Silex, it was inconsistent with the Articles
and could not change the prescribed redemption and suspension
The Matador decision clarifies the status of side
letters and identifies issues which a fund and its promoters need
to consider when deciding the nature and extent of different terms
to be given to investors via side letters.
For existing funds, care needs to be taken to ensure that the
directors do in fact have the power (discretionary or otherwise)
under the Articles of Association to grant terms contained in side
letters to investors (either with or without creating a new share
class); and also that the side letter is directed to the registered
shareholder and not some other party merely associated with the
shareholder. If this is not possible, funds and fund promoters will
need to consult their lawyers as to alternative methods of
achieving their aims.
For new funds, this case serves as a further reminder to both
lawyers and fund promoters that clear drafting of both the Articles
of Association and offering documents is a must, if a fund wants to
have flexibility to offer preferential terms to certain investors.
The Articles of Association must contain appropriate discretionary
powers for the directors, especially in relation to liquidity; and
any offering documents must contain disclosure that the fund may
enter into side letters with investors which will contain different
terms from those set out in the main offering document.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Virtual currency trading value and volume is soaring globally, but regulating virtual currencies and those who provide virtual currency exchange services (Exchangers) is challenging.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).