A key person event is a trigger, and what it triggers is read more carefully than who it names.

A register backs a manager because of the people in it, and the key person clause is the register's protection against the people leaving. The clause names them, defines what counts as their departure or their absence, and says what happens when it occurs. Registers negotiate the names, because the names are the people they met, and they negotiate the definition, because the definition is what departure means. They spend least on the consequence, and the consequence is the clause. A key person event that suspends the investment period until the register lifts the suspension is a consequence that stops the manager buying new positions for a fund whose existing positions the departed people were running; it protects the undrawn commitments and leaves the drawn ones with whoever is left. A clause that protects the register is read from the consequence backward: what happens, who decides it, how fast, and what the manager must do to end it.

This note sets out what the clause protects against, the names and the time commitment, the definition of an event, the consequences and what each protects, the cure and the replacement, the committee's part, the lender's reading, the successor fund and the people's division, the manager's internal arrangements beneath the clause, the platform's developer as a key person, the onshore interface, a comparison, a worked clause as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the clause protects against

The register's risk is that the manager it backed becomes a different manager: the principals that raised the fund leave for a competitor, retire, fall ill, die, or stay on paper and work elsewhere. The fund's commitments are for a decade and cannot be withdrawn, so the register's protection is not exit but control: the power to stop the fund doing what the departed people would have done, to require the manager to replace them, and in the last case to replace the manager. The clause gives that control in a sequence, and the sequence is the consequence.

The names and the time commitment

The clause names individuals, or a number from a list, and requires each to devote substantially all, or a stated proportion, of their business time to the fund and to the manager's other vehicles the register accepts. The names are negotiated and they are the register's people. The time commitment is the definition's core, because a key person that remains employed and devotes a quarter of its time to the fund has not departed and has not stayed. The proportion is stated, the vehicles it may be divided among are listed, and the manager certifies compliance annually.

The definition of an event

An event is the departure, death, incapacity or failure of the time commitment of a stated number of the named people within a period: two of four, or the founder and any other, or any named person. A definition that requires all the names to leave is a clause that never triggers; one that triggers on any one is a clause that triggers on a retirement the register expected. The usual form is a number from the list, with the founder's departure alone as a trigger where the founder is the manager. The definition also says what departure is: ceasing employment, ceasing to be a principal, removal, or a change in the manager's control that removes the names from it.

Why the consequence is negotiated least

The names are people the register met and the definition is a sentence the register can test against a scenario; both are concrete. The consequence is a mechanism in the constitution's later pages, drafted by the manager's counsel from a precedent, and it is read by the register's counsel after the names are agreed. By then the register has what it asked for, the names, and the manager's counsel has what it wanted, a consequence that suspends and no more. The register that negotiates the consequence first asks what it wants to happen when the people leave, and the answer, control over the drawn positions and the undrawn commitments both, is the four consequences. The order of negotiation is reversed by putting the consequence in the term sheet.

The change of control as an event

A change in the manager's control, by a sale of the manager or of its parent, may leave the key people employed and remove them from control of the fund's decisions, and the clause treats it as an event where the named people cease to control the manager. The definition reaches the change of control because the register backed the people and their control, not their employment, and a manager sold to a group that keeps the people as employees and takes the decisions has changed what the register backed. The change of control trigger is drafted with the regime's own rules on changes of control of a regulated manager, which require notice or approval regardless of the clause.

The absence that is not departure

A key person on extended leave, for illness or otherwise, has not departed and is not devoting the time, and the clause says how long an absence becomes an event: a stated number of consecutive months, with the committee's power to extend. A clause without an absence provision has a key person who is present on paper for years; one with too short a period triggers on a surgery. The period is stated and the committee holds the extension.

The consequences

The consequences run in a sequence, and each protects something different. Suspension of the investment period: the manager may not make new investments, other than follow-ons and completions of commitments already made, until the suspension is lifted. It protects undrawn commitments from being deployed by a different manager. It does nothing for the drawn ones. Termination of the investment period: the suspension becomes permanent if not lifted within a period, and the fund holds what it has. It protects the undrawn commitments permanently and reduces the charge's base. The right to replace the manager: the register, by a reduced majority, may remove the manager without cause and without the penalty a no-cause removal usually carries. It protects the drawn commitments, because it puts the existing positions under a manager the register chooses. The reduction of the charge: during suspension the charge falls, because the manager is doing less. It protects the register's cost.

A clause with the first consequence alone has protected the undrawn commitments. A clause with all four has protected the fund.

The disclosure the memorandum carries

The memorandum names the key people, describes their roles and their time commitment, and summarises the clause's consequences, because the prospective holder's decision to subscribe is a decision about the people and the regime expects the memorandum to describe what protects it. A memorandum that names the people and describes the clause as customary key person protections has described the names and not the consequence, and the holder that subscribes on it learns the consequence at the event.

The cure and the replacement

The manager ends the suspension by proposing replacements, and the register or the committee approves them. The clause says who approves, by what majority, within what period, and what happens if the proposal is declined: a second proposal, or termination. A cure that the manager may effect by its own appointment of a replacement, with the register's approval deemed if not refused within a short period, is a cure the manager controls; one that requires the committee's positive approval on the replacement's record is the register's. The replacement becomes a named person under the clause from approval, and the time commitment applies.

The removal right's mechanics

Removal of the manager at a reduced majority after an event needs a replacement manager, a transfer of the management agreement, the regulator's approval of the new manager in the fund's jurisdiction, the lender's consent, and the onshore vehicles' boards reconstituted. The clause gives the right; the constitution's removal provisions give the mechanics; and a register that exercises the right without a replacement lined up has a fund with no manager for the period the regulator's approval takes. The committee's reading at the event includes the replacement managers available, and a removal resolution is drafted with the replacement's appointment in the same document.

The carry on removal after an event

A manager removed after a key person event keeps, under most constitutions, a share of the carry on the positions made before the removal, reduced by a stated proportion, and loses the carry on positions made afterwards. The clause's removal without penalty means without the payment a no-cause removal usually carries, and the carry's treatment is the constitution's. The departed key people's share of the manager's carry is governed by the manager's internal vesting, and a register that removes the manager does not reach it. The economics of removal are read at the close, because at the event they are the negotiation.

The committee's part

The committee receives notice of the event within a period, usually days, and decides, where the constitution gives it the power, whether to lift the suspension, whether to approve replacements, and whether to recommend termination or removal to the register. A committee that must meet to lift the suspension meets; a register that must vote takes a quarter, and the clause says which for each consequence. The committee's minute of the event, the notice, the proposal and the decision is the record the regulator and the next fund's register read.

The regulator's reading

Each regime licenses the manager on the basis of its people, and a change in the key people is a change the regime requires notified and in some cases approved, whatever the fund's clause says. The regulator reads the departure as a question about the manager's continued fitness to hold its licence, and the manager's notice to the regulator runs beside its notice to the committee. A replacement approved by the committee is a person the regulator may also need to approve, as a controlled function, and the cure's period is drafted with the regulator's approval time in view. A manager whose replacement the committee approved and the regulator declined has a cure that did not run, and the clause says what follows.

The lender's reading

A capital-call lender reads the key person clause for the suspension, because a suspended investment period suspends drawdowns for new investments and may be a default under the facility, and for the removal right, because a removed manager is a change the facility treats as an event. The facility names the key people too, often the same names, and a key person event at the fund is a facility event the lender must waive or act on. The manager that notifies the committee notifies the lender the same day.

The successor fund and the people's division

The clause's time commitment names the vehicles the key people may divide their time among, and the successor fund is the one that matters: a manager that raises its next fund moves its people's attention to it, and the first fund's clause says what proportion must remain. A first fund without the successor-fund limit in the clause has key people who remain employed and work on the second fund, which is not an event under the definition and is the departure the register feared. The clause and the successor-fund term in the constitution are drafted together.

The internal arrangements beneath

The manager's own arrangements with its principals, which the register does not see, decide whether the key people stay: their share of the carry, its vesting, the forfeiture on departure, the non-compete, the succession plan. A key person clause above a manager with no vesting is a clause that will trigger, and a register that reads the clause without asking about the vesting has read the consequence without the cause. The anchor asks for the vesting terms in summary, and a manager that has them answers.

The platform's developer

A development platform's key people include the developer's principals where the developer is affiliated, because the platform's capability is theirs, and the clause names them with the manager's. A developer's principal that leaves is an event at the platform, and the consequence reaches the joint ventures: the development management agreements name the same people, with the same time commitment, and their departure is a default under the agreements the platform may act on. The platform's clause and the joint ventures' key person provisions are drafted to match.

The onshore interface

Onshore holding companies and joint ventures in a register jurisdiction have directors the onshore regime licenses or registers, and a key person who is also an onshore director leaves a vacancy the onshore companies law requires filled within a period. The clause's replacement procedure reaches the onshore boards, and onshore counsel's list of the appointments each key person holds is the checklist for the replacement's onshore registrations. A key person event that leaves an onshore company without a resident director is an onshore default in some regimes, and the replacement is registered before the regime's period runs.

By consequence · by protection	What it does	What it protects	Who decides	What it leaves
Suspension of the investment period	Stops new investments	Undrawn commitments, for now	Automatic, lifted by the committee or the register	Drawn positions with whoever remains
Termination of the investment period	Ends new investments	Undrawn commitments, permanently	The register, or automatic after a period	Drawn positions with whoever remains
Removal without cause at a reduced majority	Replaces the manager	Drawn positions	The register	The replacement manager's appointment
Reduced charge during suspension	Cuts the cost	The register's money	Automatic	The manager's budget
Replacement approval	Restores the team	The fund's future	The committee on the record	The clause's names updated

A clause, as a type

A fund's clause names four people, requires each to devote substantially all business time to the fund and to the manager's other vehicles listed, with the successor fund permitted only after this fund's investment period ends, and defines an event as any two of the four, or the founder alone, ceasing employment, ceasing to be a principal, failing the time commitment or being removed by a change of control within a year. On an event the investment period suspends automatically, the charge falls to a stated proportion, the manager notifies the committee and the lender within five days, and the manager may propose replacements within ninety days; the committee approves replacements on their record, or declines; if declined, or if no proposal is made, the investment period terminates and the register may remove the manager by a reduced majority without penalty. In year three the founder and one other leave to form a new firm. The suspension takes effect, the charge falls, the lender waives, the manager proposes two replacements in sixty days, the committee approves one and declines the other, the manager proposes a third, the committee approves, and the suspension is lifted in day one hundred and ten. The register's drawn positions were never without a manager it could remove, and the undrawn commitments were never deployed by a team it had not approved.

The structure paper's page

The structure paper carries a page on the key people: the names and their roles, the time commitment and the vehicles, the definition by number and founder and change of control and absence, the four consequences with their deciders and periods, the cure, the match to the facility and the successor-fund term and the joint ventures, and the internal vesting in summary. The page is written before the term sheet so that the consequence is in it, and it is the page the committee reads at the event.

The replacement's record

A replacement proposed under the cure is approved on its record: its experience in the strategy, its time in the market, its standing with the authorities and the counterparties the fund's positions depend on, its availability under the time commitment. A committee that approves on the manager's description approves a description; one that reads the record and meets the person approves a replacement. The clause gives the committee the period to do it and the power to decline, and a manager with a succession plan has the replacement's record ready before the event.

The second fund's reading

A manager's second fund is read against the first fund's clause and its event, if there was one: who left, how fast the notice came, what the committee read, how the cure ran, and whether the remaining people stayed. A first fund whose event was handled in a hundred days under a clause with the four consequences is a manager whose second fund's register accepts the same clause; one whose event left the drawn positions with two people for seven years is a manager whose second fund's register writes the clause itself. The clause in the second fund is the first fund's record, and the anchor that sat through the first fund's event writes the second's.

Four cases, as types

A clause names six people and triggers on the departure of four. Three leave in a year, the fund's team is half its size, and the clause is silent.

A clause triggers on any two and suspends the investment period, with no other consequence. Two leave, the investment period suspends, and the fund's eight drawn positions are run by the two who remain for seven years, because the register has no removal right and no replacement approval.

A clause has all four consequences and a cure the manager effects by its own appointment with approval deemed in ten days. Two leave, the manager appoints two juniors, the committee's ten days pass over a holiday, and the suspension lifts on a team the register never read.

A clause names the right people, triggers on the right number, carries the four consequences, and gives the committee a positive approval of replacements on their record. The event in year three is handled in a hundred days and the fund's second half is run by a team the register chose.

What each party holds

The register holds the names, the definition, the consequences and the removal right.

The committee holds the notice, the lifting of the suspension, the replacement approval and the minute.

The manager holds the time commitment, the annual certification, the cure and the internal arrangements beneath.

The key people hold their vesting and their obligations.

Counsel holds the clause's drafting with the successor-fund term, the facility and the joint ventures' provisions.

The lender holds its own key person terms and its waiver.

Where it surfaces

It surfaces at the term sheet, where the names are and the consequence is not. It surfaces at the annual certification, when a key person's time has moved to the successor fund and the manager certifies anyway. It surfaces at the departure, when the manager's notice arrives and the committee reads the clause for the first time since the close. It surfaces at the lender, when the suspension is a facility event. It surfaces at the cure, when the replacements are juniors and the approval is deemed. It surfaces at the joint ventures, when the developer's principal leaves and the development management agreements name nobody else. And it surfaces at the second fund's raise, when prospective holders ask how the first fund's event was handled.

The cost of getting it wrong

A clause that suspends and does nothing else costs the register seven years of drawn positions under a team it did not choose. A clause with a cure the manager controls costs the register the approval it thought it had. A clause without the successor-fund limit costs the register the people's attention without an event. A clause without the change of control trigger costs the register the people's control. Each cost is a paragraph the register's counsel read after the names were agreed, and the cost of getting it right is reading the paragraph first.

The committee's reading at the event

On notice of an event the committee reads five things: the clause, for the consequences and the periods; the facility, for the lender's event and its waiver; the manager's proposal, for the replacements' records; the manager's internal arrangements, for whether the remaining people are retained; and the positions, for what needs doing during the suspension. It meets within the period the clause fixes, minutes its reading, and decides on the cure when it comes. A committee that reads the clause at the event for the first time reads it in a hurry, and the one that read it at the close reads it again in an hour.

A timeline, as a type

At the term sheet the consequence is named beside the names: suspension, charge reduction, termination after ninety days, removal at a reduced majority, and the committee's positive approval of replacements. At the close the constitution carries it, matched to the facility and the successor-fund term, and the anchor reads the vesting in summary. In year two the manager certifies the time commitment and the committee reads it. In year three two key people leave; the manager notifies the committee and the lender in two days; the suspension and the charge reduction take effect; the lender waives; the committee meets in a week and reads the five things. In day sixty the manager proposes two replacements; the committee approves one on its record and declines the other; a third is proposed and approved; the suspension lifts in day one hundred and ten. In year five the regulator reads the minutes. In year seven the manager raises its second fund and the first fund's event is a page in the data room that the second fund's anchor reads as competence.

The sequence

1. The names and the time commitment are fixed, with the vehicles the time may be divided among and the successor fund's limit.
2. The event is defined by number, by founder and by change of control.
3. The four consequences are drafted in sequence with their deciders and periods.
4. The cure is drafted with the committee's positive approval on the record.
5. The clause is matched to the facility's key person terms, the successor-fund term and the joint ventures' provisions.
6. The manager's internal vesting is read in summary by the anchor.

Questions a manager asks

Should the founder alone be a trigger. If the founder is the manager, yes; a register that backed the founder has backed one person.

What proportion of time. Substantially all to the fund and listed vehicles is usual for principals; a stated proportion for senior people below them.

Can the manager keep investing during suspension. Follow-ons, completions of signed commitments and protective investments, listed; nothing new.

What if the register does not want to remove. It lifts the suspension on the replacements or keeps it; the removal right is an option, not an obligation.

Does the charge fall during suspension. In most registers' clauses, to a stated proportion, because the manager is not investing; the manager's budget is read against it.

Who certifies the time commitment. The manager, annually, to the committee, with the key people's own confirmation.

Terms used

Key person: a named individual whose departure or absence the clause protects against.

Time commitment: the proportion of business time each key person must devote to the fund and listed vehicles.

Key person event: the departure, death, incapacity or time-commitment failure of a stated number of key people.

Suspension: the automatic halt of new investments on an event.

Cure: the manager's proposal of replacements and the committee's approval, which lifts the suspension.

Removal at a reduced majority: the register's right to replace the manager without cause and without penalty after an event.

What to read

The constitution's key person clause; the facility's key person terms; the successor-fund term; the joint ventures' key person provisions; the manager's vesting terms in summary; the committee's minutes of any event. On this site, the governance room under Where complexity arises and the economics and vehicles rooms under Structures.