A recent case in the Cayman Islands has once again raised the importance of understanding what rights side letters give fund investors, and how those rights can be lost.
Medley Opportunity Fund, Ltd v. Fintan Master Fund, Ltd and Nautical Nominees Limited involved a dispute arising from the terms of a side letter that Fintan and Medley had agreed when Fintan (through its nominee) invested in Medley. The court found that Fintan was not able to exercise its preferential redemption rights under the side letter because:
So, fund investors take note. Make sure the legal entity that will be registered as the investor signs the side letter. And, review fund restructuring proposals carefully against any preferential terms you have agreed in a side letter to ensure you don't inadvertently give up those rights.
Fund managers also need to be careful when entering into and amending side letters, to ensure that the terms reflect legal and regulatory requirements as well as commercial terms. Hong Kong's Securities and Futures Commission will generally ask fund managers to provide copies of side letters and the disclosures that have been made to fund investors about side letters when the Commission conducts routine inspections.