Can I enforce preferred return and anti-dilution protections in an Armenian private equity fund if the sponsor misprices the fund?

Hello, good morning

In Armenia, preferred return and anti-dilution protections in a private equity fund are generally enforceable, but their effectiveness depends on the fund's legal structure and the specific terms of your investment agreement. The primary law governing such funds is the "Law on Investment Funds," which sets the legal framework for their operation.

Enforceability of Protections
The enforceability of your rights as an investor hinges on how the fund is structured and the agreements you sign. Here are some key points to consider:

Contractual Provisions: Your investment agreement should clearly define the preferred return and anti-dilution mechanisms. Armenian law generally respects the terms of a contract, so well-drafted clauses are your first line of defense.

Shareholder Agreements: For funds structured as companies, a shareholder agreement can provide an extra layer of protection by explicitly outlining anti-dilution rights. In Armenian Limited Liability Companies (LLCs) and closed Joint-Stock Companies (JSCs), shareholders have pre-emptive rights by default to purchase new shares before they are offered to outside parties, which helps prevent dilution of your stake.

Legal Framework: The "Law on Investment Funds" provides the main legal basis for investment funds in Armenia. The government has also been working on amendments to this law to increase oversight of non-public funds and introduce more safeguards for investors. The Central Bank of Armenia (CBA) is the main regulatory body overseeing investment funds and their managers.

Remedies for Mispricing and Breach of Contract
If you suspect the fund's sponsor has mispriced assets, there are several avenues for recourse:

Fiduciary Duty: Fund managers in Armenia have a fiduciary duty to act in the best interests of the fund and its investors. A breach of this duty, such as intentionally mispricing assets to your detriment, can make the manager liable for damages.

Custodian Oversight: The fund's custodian also has a fiduciary duty and is responsible for monitoring the fund's activities for any legal or regulatory violations. If the custodian detects any irregularities, it is obligated to report them to both the fund manager and the Central Bank of Armenia within one working day.

Contractual Remedies: Your investment agreement may specify remedies for breach of contract, such as penalty clauses. However, be aware that Armenian law places caps on the maximum amount of penalties that can be levied.

Legal Action: You can bring a claim against the fund manager to recover any damages caused by their actions or inaction.

Dispute Resolution
If a dispute arises, you have several options for resolving it:

Armenian Courts: You can file a lawsuit in the Armenian court system. However, be mindful of the statute of limitations, as a recent case showed that a three-year deadline in the Armenian Civil Code could prevent a large investment arbitration claim.

Arbitration: Many international investment agreements with Armenia include provisions for international arbitration to resolve disputes. This can be a more neutral and effective option than relying on local courts, especially for foreign investors. Several law firms in Armenia specialize in international arbitration and can assist with cross-border disputes.

Bilingual Contracts: To avoid any misunderstandings, consider using a bilingual contract with a clause specifying which language will prevail in case of a conflict. While foreign-language contracts are enforceable, an Armenian translation will be required for court or administrative proceedings.

Thank you for your questions. Generally, these provisions are standard and enforceable under Armenian law and practice, especially when it comes down to investment funds. It will, however, depend on the exact terms of the provisions you refer to in order to determine the scope and implications for you specifically.