Subscription Finance: Electronic Signatures

Should subscription finance lenders give borrowing base credit for investors that signed their subscription agreements using electronic signatures? While there are some exceptions, the answer is generally yes. This Legal Update walks through that analysis.

In the United States

In the United States, the Electronic Signatures in Global and National Commerce Act (“Federal E-Sign Act”)¹ establishes a nationwide framework where contracts generally cannot be denied legal effect due to the use of electronic signatures. Similarly, the Uniform Electronic Transactions Act, a model law proposed by the National Conference of Commissioners on Uniform State Laws (“Model E-Sign Law”), was proposed with the goal of creating a uniform framework at the state level that would remove barriers to electronic commerce by validating and effectuating electronic records and signatures. A version of the Model E-Sign Law has been adopted by all states other than New York, which enacted the Electronic Signatures and Records Act (“NY ERSA”), a substantively similar statute. These laws generally provide that electronic signatures in the context of a business contract will generally be given effect if the following elements are satisfied:

(1) Each party intended to sign;

(2) Each party consented to do business electronically;

(3) A record is maintained that reflects the process by which the signature was created; and

(4) A record of the electronic signature is retained for reproduction upon the parties’ request.

Collectively, these elements are referred to as the “Four E-Sig Hallmarks.”

The Federal E-Sign Act does not preempt NY ERSA or any other state’s version of the Model E-Sign Law unless such law is inconsistent with the Federal E-Sign Act^.2 Accordingly, where the governing law of a contract is identified as the law of a specific state (such as Delaware), the electronic signature law of that state will generally control, even in the case of “interstate transactions,” where federal law might otherwise apply.

The Federal E-Sign Act, Model E-Sign Law, and NY ERSA all define “electronic signature” broadly to include any electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record. As a result, under these electronic signature laws, executing a document can be performed in a wide variety of ways, including, most notably, manually signing and scanning a document, inserting a “stamped signature,” and even simply typing a signatory’s name on the dotted line. Third-party signing platforms such as DocuSign are structured specifically to satisfy the Four E-Sig Hallmarks.

In addition to the Four E-Sig Hallmarks, the validity of a particular method employed to duly execute a document depends on document-specific factors. Ideally, the document itself states that it can be duly executed in the manner contemplated. Additionally, the charter documents or resolutions of any applicable party should be diligenced to make sure that e-signing is not prohibited from a corporate authorization standpoint.³

Outside the United States

If a non-US jurisdiction is involved, whether due to an entity being incorporated/established in that jurisdiction or the relevant documents being expressed to be governed by the laws of that jurisdiction, consideration will also need to be given to any requirements of the law of that jurisdiction. Some issues arising in other commonly encountered jurisdictions in the fund finance market are set out below.

United Kingdom

The position from a practical point of view under English law in relation to signing remotely (i.e., other than with “wet ink” signatures) is similar to that in the United States. The current law on electronic signatures in England derives from a mixture of retained EU and domestic legislation, as well as case law. The Law Commission has confirmed that “an electronic signature is capable in law of being used to validly execute a document (including a deed).” This is subject to two caveats: (i) that the signatory intends to authenticate the document (that is, intends to sign and be bound by the document) and (ii) that any statutory or contractual formalities are satisfied. English law includes a type of document known as a “deed” that, while not requiring notarization or similar arrangements, does require additional signing formalities. While sometimes slightly ungainly, the standard approach used in connection with such signing formalities does allow “sign and scan” (under English law, often referred to as a “virtual” or “Mercury” signing after one of the leading cases⁴), subject to slight modifications (in that the document being signed (in its finalized form) needs to be included on the email, rather than just a signed signature page). Detailed guidance on this process has been laid out both in case law and by the Law Society. Similar methods can be used to achieve the same result with fully digital signatures, and these signatures (including for documents that are deeds) are commonly used and accepted.

Cayman Islands and Luxembourg

We also understand that both the Cayman Islands, via the Electronic Transactions Act (2003 Revision) (ETL), and Luxembourg, via Regulation (EU) 910/2014 on electronic identification (eIDAS) and via the Luxembourg Civil Code, follow very similar requirements as the Federal E-Sign Act. Therefore, a signature that satisfies the requirements of the Federal E-Sign Act, Model E-Sign or NY ERSA would typically be expected to be acceptable under the laws of the Cayman Islands and would not be expected to be unenforceable in Luxembourg courts based on the ground that it is an electronic signature. However, as with all legal questions involving foreign law, it is important to consult local counsel on any specific considerations or issues.

Takeaway

In light of the foregoing, absent unique circumstances, subscription facility lenders should generally be comfortable with including in the borrowing base investors that signed their subscription agreement via an electronic signature.

¹ 15 U.S.C. § 7001(a)(1).

² 15 U.S.C. § 7002(a).

³ In addition to the Four Hallmarks and authorization concerns, state laws may have nuanced exceptions. Also note that some non-business contracts (such as wills and trusts) and real property transactions may be subject to special rules.

⁴ R (on the application of Mercury Tax Group and another) v HMRC [2008] EWHC 2721