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Another Capital Call Enforcement Proceeding???
November 9, 2018 | Issue No. 3
Associate | Fund Finance

A case of interest to the fund finance market is proceeding in the Northern District of California. In summer of 2015, Indian IT firm Tech Mahindra Ltd. committed $40 million of capital to a private equity fund established by California-based Northgate Capital. A little over a year later, Northgate issued the initial capital call for the purpose of paying $1.04 million in management fees. Tech Mahindra declined and Northgate responded by dragging its investor before an arbitrator.

Tech Mahindra claimed it was not properly notified of managerial departures that would trigger a key person event clause in the fund’s LPA. In April 2016, former NFLers Brent Jones and Tommy Vardell left the fund they had co-founded in 2000. Their departures left the fund with no remaining key persons (the only other key person had already left). Tech Mahindra points to these intervening events and a lack of corresponding notice for its refusal to honor the September 2016 capital call. Northgate pointed instead to statements made two days prior to the due date of the capital call in which the investor allegedly claimed it had been unable to secure the required regulatory approvals from the Royal Bank of India – an assertion Northgate believes to be untrue. Northgate believes the investor did not want to fund for other, unexpressed reasons that would not justify a refusal to fund and that the investor is grasping at straws to find a reason not to honor its commitment.

The day that the arbitration was set to begin, Tech Mahindra was informed that a key witness – recently departed CEO of Northgate Dr. Hosein Khajeh-Hosseiny – would not be available, had left the country, and had no immediate plans to return. Tech Mahindra took its grievances to a federal judge in California and the dispute became public. According to the pleadings filed by the litigants, Tech Mahindra asserts that Dr. Hosseiny’s absence would significantly prejudice its case; the company contends that Dr. Hosseiny never intended to comply with the order to appear on November 2, 2018, having left the United States for London in early September. In response, Dr. Hosseiny claims that visa issues have prevented his return, despite his best efforts, including informing U.S. immigration officials in London of his scheduled arbitration appearance. In lieu of an in-person appearance, Dr. Hosseiny has offered to appear via videoconference from London – an offer that was not immediately accepted by Tech Mahindra, but ultimately was the remedy granted by the Northern District of California.

The enforceability of capital calls plays a prominent and critical role in the world of subscription finance, which makes cases such as this one of particular interest to professionals working in the industry.  As this case progresses, Cadwalader will monitor the proceedings and provide updates here as developments warrant.

Tech Mahindra Limited v. Khajeh-Hosseiny, Docket No. 5:18-cv-06613 (N.D. Cal. October 30, 2018).

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Another Capital Call Enforcement Proceeding???

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Another Capital Call Enforcement Proceeding???
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