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Side Letters - Lancelot Investors Fund, Ltd. - Case Law Review

On 27 April 2015, the Court of Appeal handed down their reasons for judgment in In the Matter of Lancelot Investors Fund, Ltd. This case is of importance to any investor proposing to enter into a side letter with a fund.

In the Lancelot case, a fund investment manager varied the redemption terms of an investor by way of a side letter. When the investor sought to redeem the shares the redemption was rejected by the fund administrator and went unchallenged by the investor, however, just over a year later the fund was put into official liquidation and the investor filed a proof of debt in relation to the shares that they had previously sought to redeem. This proof of debt was rejected by the liquidators and the investor appealed.

The Court of Appeal held that the fund’s investment manager had no ostensible authority to bind the fund in relation to something as fundamental as a variation of the redemption rights of shareholders and that it was clear from the confidential offering memorandum that his tasks were limited to day to day activities in relation to the investment of funds. They further held that, despite the fact that the side letter purported to hold that the directors of the fund had given the investment manager authority to execute the side letter, it would have been clear to the ‘outside world’ that it was only the fund’s administrator that could convey decisions of the directors to shareholders in relation to a variation of shareholder rights. Finally, the Court of Appeal expressed concern that the variation of redemption rights would have, in any event, been an invalid variation of class rights.

The decision in Lancelot underlines the importance of exercising great care when entering into side letters. In particular, any investor should ensure that the contracting party on behalf of the fund has authority to act on the fund’s behalf which includes ensuring that the proposed party is acting consistently with the fund’s articles of association and offering documents. Furthermore, it is important to consider whether the side letter would amount to a variation of class rights which would render the side letter unenforceable in any event.

Read more on Side Letters in the Cayman Islands here.

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View profile for Richard AnnetteRichard Annette
Partner and Head of Litigation

This publication is for general guidance and is not intended to be a substitute for specific legal advice. Specialist advice should be sought about specific circumstances.