In the process of negotiating capital and private equity funds, the use of side letters is becoming more and more routine. A side letter is an ancillary document to a contract. Many prospective limited partners will ask that they have a side letter with which to memorialise their provisions to agreement. Whilst the usage of side letters can be important in setting up funds, if it is done carelessly or without proper procedure, then side letters will fail. Just last year, a UK Court of Appeal hearing the case of Georgi Velichkov Bardudev v EuroCom Cable Management Bulgaria Food & Ors found a side letter unenforceable despite the letter having been drafted by lawyers, referencing the Contracts (Rights of Third Parties) Act 1999 and a clear intention by the parties that the side letter be contractually enforceable. But the complications that side letters could bring does not stop with litigation, regulation and enforceability.

Whilst many funds would not have made it through the fundraising process without side letters to the partnership agreement, assuring that the provisions contained within each limited partner’s side letter do not conflict with others is an administrative battle that will last the duration of the fund. Moreover, if one or more of the limited partners had been extended most favoured nation (hereinafter “MFN”) protection, then the administrative complication is even more with regards to election rights, appropriateness of any elections made and recording provisions elected by those partners.

If a fund manager decides that the use of side letters is the best way to accomplish the needs of limited partners and meet the goals during fundraising, then there are a few guidelines to follow to help assure that the side letters are enforced and enforceable in law. To begin with, set out a road map to follow through the process and map any MFN rights are noted along with their scope. Work with legal counsel and take advantage of their expert consultation. Avoid creating side letters that aren’t required to accomplish the goals. Use specific language and details when creating the side letters.  As always, if you would like more information, require assistance with side letter formation or the fundraising process; do not hesitate to contact us.