[guest-authors: James Heinicke, Jad Nader, Tommy Tuohy, Catharina von Finckenhagen]*
The security package for an underwriting facility will generally include security over the uncalled capital commitments of investors in a fund, including: (i) the right to make capital calls to investors in respect of their capital commitments not called, as well as the right to demand their payment; and (ii) the right to receive the proceeds of such capital calls. It will generally also include a guarantee on the bank account in which investors are required to deposit their capital contributions.
Providing notice to investors is a common feature of taking security over uncalled capital commitments of Cayman and Luxembourg domiciled fund investors. Below, we have defined 10 frequently asked questions regarding investor notice from the perspective of Caymanian and Luxembourg law.
1. Why is notice required?
The priority of the security is obtained by notifying the creation of the security to the investors. Generally, where there are competing security interests in uncalled capital commitments, the first security interest that has been notified to investors will have priority regardless of when the security interests were created.
The security is perfected by the execution of the security agreement. Delivery of the investor notice to each of the investors in the fund ensures that no investor can perform its capital commitment obligations other than as provided in the investor notice on the basis that it had not unaware of the title.
2. What form should the notification take?
The notice must be in writing, but there are no specific requirements regarding the form of the notice. All it takes is for investors to be made aware of the stock. The notice must contain a description of the security document, a statement that the security includes security over uncalled capital commitments and rights to call capital from investors, and the identity of the secured party. The form of the notice is usually agreed before closing and is attached to the credit agreement.
No specific form of notification is required under Luxembourg law. As with the notice to Caymanian investors, for the notice to Luxembourg investors, it is advisable that the notice be in writing and contain a detailed description of the security documents and security interests created thereunder. The notice is agreed to by the parties prior to closing and a form of it is appended to the Luxembourg law surety agreement over the uncalled capital commitments.
3. When must notice be given?
Notice of guarantee can only be given once the guarantee has been lodged. Notices are often issued upon signing of the relevant security document, or within 3-5 business days, to ensure that the priority of the secured party is fixed.
If the general partner of the fund is a Caymanian company, the security created must be registered in its register of mortgages and charges. The credit agreement or security document should also contain a requirement that notice be given to any new investors admitted to the fund after the facility closes.
Lenders are taking a stricter approach to providing notice to investors. In Luxembourg, the notice must be delivered as soon as possible after closing. Market practices and electronic delivery methods have encouraged a move towards delivery of the notice at close or within 3-5 business days.
4. Should the notice be executed?
Although there is no legal requirement for the notice to be signed by the fund or the general partner of the fund, generally the fund and/or the general partner of the fund will sign the notice.
For consistency with the Luxembourg pledge on uncalled capital and to avoid complications due to competing laws, it is advised that notices are governed by Luxembourg law and effectively executed.
5. By whom should the notification be sent?
The notice may be sent by the security provider or the secured party, although in practice the notice is usually given by the security provider.
Although there is no legal requirement as to how notices must be served, binding effect is best achieved if the terms of the notice are effectively aligned with the provisions of the uncalled and executed capital pledge. by the Luxembourg fund acting through its general partner.
6. How is the notice issued?
The notice must be given in accordance with the provisions of the fund’s governing documents which govern the giving of notices to investors. Very often, notices will be sent to investors by e-mail. However, it is increasingly common to see investor advisories disseminated via online portals.
7. When does the notice take effect?
The notice is only effective upon receipt of the notice by the investor (and not upon its sending by the fund). This is why proof of delivery is required to ensure that investors have been notified.
8. What proof of delivery should I obtain?
Lenders require a fund to confirm what form of evidence of delivery of notices to investors will be provided prior to closing, and the evidence available will depend on how the notices were delivered. If the notices were sent by email, a copy of the fund’s email to its investors is often provided by the fund. On some occasions, confirmation that no bounce email has been received is requested by lenders.
If the notice was uploaded to the fund’s online portal, the evidence available will depend in part on what the portal can generate for evidence delivery. We expect the lender to receive a copy of the email or message sent to investors (which may provide further reassurance to lenders when explicitly referring to security given over uncalled capital commitments), informing them of a displayed notification, along with a screenshot of the notice uploaded to the portal. Some online portals can now also generate reports that confirm, among other things, the date and time of publication of the notice, the identity of the investors and the confirmation of each investor’s last access to the online portal. Although not tested in court, providing such reports to lenders is generally accepted as an effective means of proving delivery of notices to investors.
9. If the facility is amended or amended and restated, does the fund have to reissue the notice to investors?
Assuming the security package remains the same, it is not strictly necessary to reissue the advisory. However, a lender may wish to consider asking for the notice to be reissued, particularly if (i) the original notice was sent some time ago; or (ii) if the original notice contained specific information about the amount or term of the facility that is no longer correct. If there have been changes in the fund’s investor base, reissuing the notice would ensure that all current investors in 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 the Fund subsequently grants a competing security interest to a third party, and if notice of such competing security interest is sent to investors, the security interest of the third party will prevail. However, it should be noted that in such circumstances the third party would not obtain priority if, at the time the third party security interest was created, the third party had been given notice of the pre-existing security interest.
Although not strictly necessary for opposability, the creation of the security must nevertheless be notified, as under the Luxembourg civil code (and recalled in the law on financial securities), if an investor is unaware of the creation of the security constituted on its obligation to pay, this investor may validly discharge this obligation directly towards the Luxembourg fund.