Capital call security, notices, and investor portals - Asia fund finance update

Most market participants are already well aware that capital call security is perfected, as a matter of Cayman Islands law, by delivering notice of the grant of such security to the relevant grantor’s investors (although a general overview of the topic can be found in our prior note). 

As time, technology, and practice march on however, an issue we are seeing arise with greater regularity relates to the method of delivery used and, in particular, the use of investor portals.

The benefits of investor notice

As a brief recap, the authority on which the perfection process is based requires that investors each obtain a reasonable understanding of the nature of the security granted. That is to say, it is doubtful that “deemed” or “constructive” (as opposed to actual) notice will be sufficient (regardless of provisions in investor documents to the contrary). 

While it is worth noting that perfection in this instance goes solely to the security’s priority rather than its validity (such that, in the absence of prior security and any breach of the negative pledge, a lack of perfection may not impact a lender’s practical position) it is also worth noting that notice may provide other benefits, including:

• a bar to subsequent rights of investor set off;
• improved protection from “Abraaj risk” i.e., the unilateral waiver or release of commitments” (please see our prior note for further discussion on this point); and
• a reduction in the ability of investors to obtain good discharge for their obligations by payment to a third party. 

Practical considerations in the context of investor portals

Given the above, lenders under capital call facilities will seek to ensure that notice is delivered in a manner that provides reasonable evidence that each investor has indeed acquired the relevant knowledge. 

Market practice in respect of LP notices varies, depending on region and the identity of the parties. On the one hand, it may be the case that certain lenders require evidence of physical delivery of notices to LPs (e.g. a courier slip). On the other hand, it may be that a sponsor requires its banks to accept evidence that LP notices have been served via an investor portal.

In the context of an investor portal, much then will come down to how it is operated. In particular:

• Does it record whether an investor has accessed the notice? We would anticipate that lenders would have issues if the portal does not record investor access. Where however the system does make record of access (as many increasingly do) we expect that lenders would require a copy of a report evidencing that the relevant limited partners have accessed the notice, within a reasonable period of time. It is, in our view, doubtful that perfection can be demonstrated in relation to investors that can be shown never to have logged on and/or never to have accessed the notice at all.
• How are investors notified of the posting of the notice? Often, any posting will result in an email to investors notifying them of the same and providing a link for access. The nature and scope of information included in such an email may help some lenders to get comfortable with the use of a specific portal where they might not otherwise. For example, if the cover email expressly refers to the grant of security (ideally in the subject line and the body of the text), even if the more detailed information in the notice itself is contained to the portal posting itself. The argument here is that the email would also constitute notice of the security, thereby providing additional comfort. 
• When are investors notified of the posting of the notice? Even where a lender takes the view that a specific use of a portal is sufficient (perhaps because of the nature of the email notification) it is important that investors joining after the initial notification are provided with their own prompt or notification at that time or within the period permitted by the finance documents. A single posting of the investor notice on the portal at the time the capital call facility is entered into is likely insufficient to constitute notices to investors subsequently admitted to the fund.

A balanced approach

The approach to be taken with respect to LP notices is increasingly guided by the identities of the parties and their requirements, available technology and what is reasonable and practical in the circumstances. 

There is of course a clear convenience to the use of investor portals for funds, and indeed, where investors can be shown to have accessed the notice, it is an efficient approach where there is a large number of LPs. 

Where however a system clearly shows that an investor has not accessed or read the relevant information, in our view the parties should consider whether this is a concern that warrants an alternative approach or a secondary action (e.g., the sending of the notice by email or courier). This will help ensure that lenders are better protected and that fund parties are in clear compliance with their obligations under the finance documents. 

For assistance on any points discussed in this note, please reach out to your usual Carey Olsen contact.