Side Letter

A large institutional investor negotiates a separate side letter with the issuer, granting it additional information rights and a fee reduction not reflected in the standard subscription agreement that other, smaller investors in the same offering sign. Does the existence of the side letter mean that investor's actual terms differ from what the standard subscription agreement alone would suggest?

1. A.No -- side letters have no legal effect and cannot alter the terms established in the standard subscription agreement signed by all investors in the offering.Wrong. A properly executed side letter can have legal effect modifying that investor's terms; it is not automatically without effect.
2. B.Yes -- the side letter can modify or supplement the standard terms for that particular investor, so her complete, actual terms are found by reading the side letter together with the standard subscription agreement, not the standard agreement alone.Correct. The side letter and the standard subscription agreement together establish that investor's actual, complete terms.
3. C.No -- but only because side letters may only grant additional voting rights and are legally incapable of altering fee terms.Wrong. There is no such limitation restricting side letters to voting rights only; they can address a range of terms, including fees, as described here.
4. D.Yes -- but only because side letters automatically extend the same additional terms to every other investor in the offering as well.Wrong. A side letter negotiated for one investor does not automatically extend its terms to every other investor in the offering.

Why: A side letter is a separate agreement that can modify or supplement the terms otherwise stated in the standard subscription agreement for a particular investor; where a side letter exists, that investor's actual, complete terms are found by reading the side letter together with the standard subscription agreement, not by looking at the standard subscription agreement alone as if it were the complete and final word on that investor's arrangement.

During solicitation, a sophisticated institutional investor asks the placement agent for a side letter granting it additional information rights not described in the standard subscription documents. May the placement agent agree to this side letter on the issuer's behalf without checking with the issuer first?

1. A.Yes, because the placement agent's general authority to sell the offering automatically includes authority to negotiate and agree to any investor-specific terms it believes will help close the sale.Wrong. This over-extends selling authority into contract-modification authority.
2. B.No, but only because side letters are prohibited entirely in private placements, so the placement agent must simply decline the request without involving the issuer.Wrong. Side letters are a normal, permitted feature of private placement negotiations.
3. C.No -- absent specific authority to bind the issuer to individualized terms, the placement agent generally must obtain the issuer's approval first.Correct. Selling authority and authority to modify issuer contractual terms are different grants of authority.
4. D.Yes, provided the side letter is offered to every other investor in the offering on identical terms, since uniform treatment is what makes it permissible without issuer approval.Wrong. Uniform treatment does not establish the placement agent's authority to bind the issuer in the first place.

Why: No. Absent specific authority granted in the placement agency agreement to negotiate and bind the issuer to individualized side letter terms, the placement agent generally must obtain the issuer's approval before committing the issuer to terms that deviate from the standard offering documents. The authority to solicit and sell does not automatically include authority to modify the issuer's contractual terms.