Cayman Investor Notices: 5 Key Reminders

The provision of investor notices in capital call facilities involving Cayman funds is very familiar to most participants in the fund finance space. However, the importance of such notices in a subscription line transaction should not be overlooked, particularly for lenders who may be more accustomed to the perfection of security interests by way of UCC filings. We have set out a quick refresher below on five key aspects of the investor notice process in transactions involving Cayman exempted limited partnerships (ELPs).

1. Why is Notice Needed?

For secured subscription line facilities involving ELPs, priority of capital call security is achieved through the delivery of written notice of the grant of the security to the ELP’s limited partners, with priority determined by the order in which such notices are given rather than by the date on which the relevant security interest was created. Accordingly, a delay in providing notice leaves open the possibility that the ELP could grant a competing security interest over its capital call rights to a third party (and if notice of such subsequent security interest in favour of a third party is given to limited partners ahead of notice of the first security interest, that subsequent security interest in favour of the third party will have priority). In addition to establishing priority, providing notice to the limited partners also (i) prevents set-off from arising after the date of service of such notice and (ii) restricts the ability of limited partners to discharge their obligations in any manner other than as set out in the notice.

2. Form of Notice

There is no set form to the notice, however, the notice should:

• be in writing;
• clearly refer to the credit agreement and the security agreement pursuant to which the security is being granted;
• include a description of the property subject to the security interest (i.e. that the security is over uncalled capital commitments and that the right to call capital from limited partners has been assigned to the secured party); and
• identify the secured party (and the capacity in which it is acting).

It is customary for the agreed form notice to be appended to the credit agreement as an exhibit and the description of the property secured will usually track the security language set out in the underlying security agreement.

3. Delivery

Ordinarily the notice is signed by the ELP and its general partner with a copy provided to the lender on closing. The notice then needs to be delivered to the ELP’s limited partners in accordance with the timeline specified in the credit agreement or the applicable security agreement. Whilst the timing of delivery is subject to commercial agreement, due to the importance of establishing priority we typically see this provided shortly after closing (noting that the notice can only be given once the security has been created). In addition, it is important that delivery of notice be made in accordance with the provisions of the ELP’s exempted limited partnership agreement which, in most cases, will provide for notices by email, via an investor portal or other electronic means.

4. Evidence of Delivery

The form of evidence of delivery of the investor notice varies according to the manner in which notice is provided to limited partners. Where notification by way of email is used by an ELP, lenders will usually require a copy of the email sent to limited partners and confirmation of no bouncebacks. Lenders may also request confirmation that the notice has been sent to all limited partners.

It is now commonplace for notice to be provided via online investor portals and such portals typically generate reports, showing the time and date that notices were sent and detailing the limited partners to whom they were sent. If such reports are not available, usually a screenshot of the notice on the investor portal is provided together with a copy of the email notification to the limited partners and confirmation that the notice has been sent to all partners. Some lenders get further comfort where the subject line of the notification message includes an explicit reference to the grant of security, even where the full description of the security is in the notice itself.

In addition to the notice and evidence of delivery provided to the secured party after closing, it is also important that ELPs adhere to the ongoing covenant/undertaking in the credit agreement to provide the same form of notice to any limited partner admitted post-closing together with the agreed form of evidence of delivery of such notice.

5. Agreed Approach

While the position in Cayman on investor notices is well settled, it is key that the form of notice, method of delivery and evidence of delivery to be provided is agreed between lender and fund counsel ahead of closing so that no negotiations are left open post-closing. Following completion, fund counsel need to provide lender counsel with the agreed form of evidence of delivery of the notice in accordance with the timeline set out in the underlying credit agreement or the applicable security agreement to ensure that the priority of the lender’s security is established.

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.