The security package for a subscription facility will typically include security over the uncalled capital commitments of the fund’s investors, including: (i) the right to make capital calls on investors in respect of their uncalled capital commitments, together with rights to enforce payments of them; and (ii) the right to receive the proceeds of such capital calls. It will generally also include security over the bank account into which investors are required to deposit their capital contributions.
Giving notice to investors is a common feature of taking security over the uncalled capital commitments of investors. Sending the notice to investors can be a sensitive issue and something that is often subject to negotiation.
In this summer edition of Ogier's Cayman Fund Finance Briefings, we set out 10 commonly asked questions regarding the investor notice.
1. Why is notice required?
Priority of the security is achieved by giving notice of the creation of the security interest to the investors. Generally, where there are competing security interests over uncalled capital commitments, the first security interest that has been notified to the investors will take priority regardless of when the security interests were created.
2. Any other benefits?
Notice can also assist in respect of set-off. After investors have been notified of the security interest the investors will not be able to set-off against their uncalled capital commitments any amounts which become due and payable to the investors after they have received the notice. Of course it would be hoped that the constitutional documents of the fund expressly contain waivers by investors in respect of any set-off rights, but if that is not the case the investor notice can help address this.
3. What form should the notice take?
The notice should be in writing, but there are no specific requirements concerning the form of notice or the party who must give it (although in practice the notice is typically given by the security provider rather than the secured party). All that is required is that the investors are made aware of the security. The notice should contain a description of the security document and a statement that the security comprises security over uncalled capital commitments and rights to call capital from investors. Generally there is no requirement for the notice to be signed by the fund or the fund's general partner.
4. When does the notice need to be given?
Notice of the security can only be given once the security has been created. Ideally notice should be given immediately upon execution of the security document, or within a few days, to ensure the secured party’s priority is fixed. The security document should also contain a requirement that notice be given to any new investor that is admitted to the fund after closing of the facility. Timing of the notice can be subject to negotiation. Often it is agreed that the notice can be delivered at the time of the next regular investor communication. We have also seen instances where it has been commercially agreed that notice will only be given to investors following an event of default.
5. How is the notice delivered?
The notice should be delivered in accordance with the provisions of the constitutional documents of the fund that govern service of notices on the investors (i.e. the fund's partnership agreement). Very often notices will be sent to investors via email. However, we are increasingly seeing instances where investor communications are conducted via online portals and we expect that trend to continue. As mentioned above, sometimes the investor notice is contained in the fund's next regular investor communication.
6. When is notice effective?
The notice is only effective upon receipt of the notice by the investor (not upon it being sent by the fund).
7. Are acknowledgments from investors required?
Acknowledgements are not necessary, but they help evidence receipt of the notice by the investors. In our view it is rare that lenders will require acknowledgements from investors where the fund has multiple investors and in many circumstances this may not be feasible from a practical perspective.
8. What evidence should be obtained?
Although investor acknowledgments are rarely obtained, it is very common for lenders to require some sort of evidence to confirm that the investor notices have been sent to investors. The available evidence will depend upon how the notices have been delivered - if the notices have been sent by email, a copy of the email from the fund to its investors would likely suffice. On rare occasions email read receipts are requested. If the notice has been uploaded onto the fund's online portal the available evidence may depend in part on what the portal can generate to evidence delivery, although we would expect the lender to receive a copy of the message that is sent to the investors, together with a screenshot of the notice uploaded to the portal. If for whatever reason little or no evidence can be provided we would recommend that a representative of the fund certify that the notice has been sent.
9. If the facility is being amended or amended and restated should the fund re-issue the notice to investors
Assuming the security package is remaining the same there is no need to re-issue the notice. However, a lender may wish to consider asking for the notice to be re-issued, particularly if the initial notice was sent some time ago. If there have been changes in the fund's investor base re-issuing the notice would ensure that all current investors of the fund have received the notice and are aware of the security.
10. What if the notice is not sent?
If notice is not sent and if the fund subsequently grants a competing security interest to a third party, and if notice of that competing security interest is sent to the investors, the third party's security interest will take priority. However, it is worth pointing out that in such circumstances the third party would not get priority if at the time the third party's security interest was created the third party had notice of the pre-existing security interest.