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.
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