What are material adverse effects?

Asked by:

Community Member

Jul 14, 2023

In the limited partner agreement, what are material adverse effects referring to?

Add a comment

1 answer

Hans Kim

Accepted Answer

Jul 17, 2023

The Cornerstone has a defined term: “Material Adverse Effect” means any activity relating to a Limited Partner’s participation in the Fund, if the Limited Partner or General Partner determines: (A) that such activity is reasonably likely to (i) result in a violation of a law, rule or government order, (ii) subject a Portfolio Company, such Limited Partner, the Fund or any Affiliate of the foregoing to any material filing, regulatory requirement or tax, or (iii) result in any Securities or other assets owned by the Fund being deemed to be “plan assets” under ERISA; or (B) that a Limited Partner or any of its Affiliates becomes subject to sanctions regulations from any country, the European Union, the United Nations Security Council or any other such organization that would impact the ability of the Fund to continue transacting with such Limited Partner.

@Hans Kim, yes exactly. I am asking EXACTLY what this paragraph actually means. Especially "(iii) result in any Securities or other assets owned by the Fund being deemed to be “plan assets” under ERISA"

Community Member

Jul 24, 2023 8:23pm

@AlBuda The definition is fairly specific and the circumstances of each situation that could trigger a Material Adverse Effect should be carefully reviewed by counsel. The purpose of this definition is for the fund to avoid certain compliance and regulatory issues. For example, if the fund assets were considered to be subject to ERISA, this would make operating the venture capital fund untenable -- for example, paying carry to managers would be prohibited.

What are material adverse effects?

Log In or Sign Up

Apply to VC Lab Cohort 18