In the hedge fund industry both the approval and the disclosure of side letters to investors has always been a thorny issue.
Whilst we have always recommended our clients to include provisions dealing with these issues both in the offering materials and the constitutional documents of their funds, a couple of court decisions recently adopted by the courts of the Cayman Islands have shed some light over this matter.
Whilst this is not the place to provide an in depth analysis of these precedents we wanted to share with you our conclusions, which are as follows:
- To be enforceable, side letters must be executed by the entity which will hold the shares of the fund (the investor of record), not by the beneficial owner of such entity of some other party associated with the shareholder.
- Side letters must also clearly state whether they vary redemption rights and how.
- Side letters cannot be inconsistent with the constitutional documents of a fund.
- Both the constitutional documents of the fund and its offering materials must disclose that the fund may from time to time enter into agreements with investors which may contain different terms from those set out in the offering memorandum.