The key person clause is one of the most important instruments of governance and discipline for investment funds. At its core, the key person provision helps to ensure that individuals who are identified as being critical to the prospects of the fund are focused on the investments of the fund, failing which the fund will usually be precluded from making further investments.
In this piece, we introduce the broad elements of the key person provision and closely examine some of the key aspects to keep in mind when drafting and negotiating key person provisions for private funds.
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Key Takeaways
- The occurrence of a key person event should not trigger a domino effect across other funds managed by the sponsor
- The 'time and attention' requirement should be drafted so as to avoid inadvertent foot faults
- The question of whether or not a key person event has occurred should not be the subject of a long-drawn determination process
- It may be in the interests of both LPs and the GP to allow some latitude for investments during a suspension period
- Internal management is key – sponsors should draw up robust employment contracts with their senior management to safeguard against the consequences of a key person event
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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