How Fund Managers Can Use Non‑Reliance Clauses to Protect Themselves From Investor Claims of Misrepresentation

When an investment manager sends a prospective investor the subscription package for one of its funds, the documents almost always contain a so-called “non-reliance” clause requiring the investor to expressly disclaim reliance on any representation or statement not contained in the fund’s governing documents and private placement memorandum. Those clauses are intended to protect the manager from potential liability arising from, among other things, statements made in meetings, teasers or pitch books concerning the merits of an investment in the fund. Their enforceability is nuanced, however, particularly under New York or Delaware law – commonly chosen to govern fund documents and disputes. In a guest article, Pryor Cashman partner Jonathan Shepard, along with counsel Eric Dowell and associate Lauren Cooperman, discuss how non-reliance clauses are treated by New York courts, including in a recent instructive decision issued in the Southern District of New York; provide practical guidance for asset managers and their legal advisors on crafting appropriate non-reliance clauses; examine how managers can include additional protections in their fund documents to protect against investor misrepresentation claims; and review how the laws of New York and Delaware are both well-developed and more favorable to managers than those found in other states, most notably California. See “Contractual Provisions That Matter in Litigation Between a Fund Manager and an Investor” (Oct. 2, 2014). For insight from another Pryor Cashman attorney, see “How Fund Managers Can Mitigate the Impact of Litigation on Their Transactions and Relationships” (Apr. 4, 2019).

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