A most favored nation (MFN) clause is a side letter provision that entitles an investor to receive any more favorable terms granted to other investors in the same fund. If Investor A has an MFN clause and Investor B later negotiates a lower management fee, Investor A can elect to receive the same fee reduction.
Why It Matters
MFN clauses create a cascading effect. One generous side letter can trigger MFN elections across your LP base, significantly impacting fund economics. Managing MFN obligations requires a systematic process for tracking which investors hold MFN rights, disclosing newly granted terms, and processing elections within the required timeframes.
Key Details
- MFN rights are typically limited to "economic" terms such as fees and carried interest. "Non-economic" terms like reporting frequency or governance rights are often carved out from MFN eligibility.
- When a new side letter is executed, the GP must disclose the relevant terms to all investors holding MFN rights. Failure to disclose is a compliance breach.
- MFN holders usually have a 30 to 60 day election period after disclosure to decide whether to adopt the new terms.
- Some MFN clauses include additional carve-outs. For example, terms granted to investors above a certain commitment threshold may be excluded from MFN disclosure.
- The administrative burden of MFN tracking increases with each closing and each new side letter. Without a disciplined process, missed disclosures or late elections become likely.
For more on side letter management and MFN workflows, see the Side Letters Guide.
Capital Company handles MFN tracking, disclosure, and election processing as part of fund administration.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.