Enforceability Of Preferential Rights In Side Letters

The enforceability of preferential terms granted to certain investors in private funds is often a topic of interest. The Delaware Chancery Court provided some additional clarity on this topic in a recent decision.

In ESG Capital Partners II, LP v. Passport Special Opportunities Master Fund, LP, C.A. No. 11053-VCL (Del. Ch. Dec. 16, 2015), the Delaware Chancery Court found that a side letter was nullified when a subscription agreement entered into a day later contained an integration clause that did not include the side letter. The court also held that a general partner did not have the authority to grant preferential rights through this side letter because such preferential rights would "materially and adversely" change the rights of the parties.