Can your sofa enter into a contract? Of course not! Can a class of shares enter into a contract?  Of course not! Both your sofa and the shares are property, not persons. Only an entity with legal personality can enter into contracts. However, it isn’t unusual in the context of ISDA Agreements, for example, for fund managers to name a particular corporate class of shares as the counterparty. At times there isn’t even a clue in the agreement as to the name of the corporation that has issued the shares.

But if you are contracting with such an entity, make no mistake – your counterparty is the corporate entity. Practically speaking these fund structures work by allocating assets and liabilities on a class by class basis, with liabilities being allocated by including limited recourse provisions in material contracts. In other words, your counterparty is the corporation, but you (and others contracting with the corporation with respect to that fund) agree to limit recourse to the assets allocated to a particular class of shares. It is these limited recourse provisions that protect the shareholders of one class and creditors contracting with respect to that class from being exposed to the liabilities of the corporation contracted with respect to another class. Without them, that siloing does not exist.

If you want to contract in the most legally accurate fashion, the party should be named as “XYZ Corporation with respect to the class of shares listed on Schedule A” or something similar. It isn’t really a contract “on behalf of” a class of shares either. (I can buy new throw cushions for my sofa, but I didn’t do it on behalf of the sofa.)   That language is suggestive of an agency or trust relationship and it isn’t either of those.

It never hurts to be accurate, but am I being too picky in insisting on legal purity in this respect? The limited recourse provisions should, after all, strongly imply that the corporation is the legal party. There may be other clues to this in the documentation as well.  Since this is the only legal construct that makes sense one would hope and expect that the parties (and ultimately a judge if it ever came to that) would recognize that the contracting party is the corporation and interpret provisions accordingly.

In other words, don’t panic if you think you might have a number of these in your relationships! Nonetheless, I do believe that, at the very least, the name of the corporation should be represented to you in a legally binding fashion. Banks should know who they are contracting with.   How are you confident about enforceability if you don’t know what jurisdiction the entity was organized under? Will there be trade reporting issues without accurate information? While the prospectus will usually have the corporate name in it somewhere, the name might have changed through corporate events and you won’t necessarily find that information without doing some digging. Also, if you have to file any financing statements, you will need to file against the name of the corporation, not just the fund or class name.

In my experience when contracting parties are not accurate about the legal relationships in their documents, issues that they would otherwise think about or deal with are out of sight and, therefore, out of mind. Also, interpretation issues potentially arise. For example, how will the corporate status reps be interpreted if you’ve named the party as a class of shares? 

I really am not too heavy with the red pen when it comes to reviewing documents and like to think I’m not overly nitpicky.(C’mon, lawyers have to be a bit nitpicky.) But one thing I do think it is important to get right is the name of the counterparty.

Just don’t get me on the topic of contracting with insurance segregated funds!