Don't Let Your Side Letter be a Wipeout

Partners Amy Johnson-Spina and Shannon Gotfrit, and associates Emma Brady and Sarah Carter have co-authored “Don’t Let Your Side Letter be a Wipeout,” an article using relevant case law to underscore the significance side letters have in the private equity dealmaking space. This article has been published in PEHUB; below is the introduction.

Side letters have long been in use in the private equity market, helping to interpret, supplement, modify and establish the terms contained in fund agreements and related documents.

A notable memorandum opinion of the Delaware Court of Chancery, ESG Capital Partners II LP v. Passport Special Opportunities Master Fund LP, serves as a reminder that while side letters are negotiated and entered into with increasing frequency, their enforceability and the preferential terms contained in them cannot be taken for granted.

What You Need To Know

• When entering into a side letter, it is imperative to ensure that there is language to the effect that no one agreement supersedes and nullifies another.
• A side letter can only be binding to the extent the GP is authorized under the terms of the fund documents to enter into and agree to the provisions in such side letter.
• A side letter cannot be used to unilaterally amend the fund agreement. If the proposed terms in the side letter would alter the rights of other investors in the fund without their consent, then those provisions should be incorporated into the fund agreement.

Read the full article on PEHUB here.