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Sovereign immunity extends not just to foreign sovereigns, but to U.S. states and their agencies
and actors, which are protected from suit by the Eleventh Amendment to the U.S. Constitution.
Whether any particular state actor qualifies as an arm of the state and immune from suit is a
complex and fact-specific question, but a number of states employee retirement plans have been
found to meet the test and be presumptively entitled to sovereign immunity.
Unlike FSIA and SIA, the Eleventh Amendment does not distinguish between immunity from
suit and from enforcement, and does not provide any direct exception from immunity for acts
involving a commercial activity. A State may engage in commercial activity including
investing without giving up its protection from suit. A state may waive immunity, however,
either with a one-off agreement (e.g., in a side letter), through more generally applicable action
(e.g., by passing legislation waiving immunity for a certain category of disputes) or by failure to
assert it in the context of a particular litigation.
State and local governmental investors commonly request that any suit related to their
investment in a fund be brought only in their home state courts, often because of state legislation
permitting limited waiver of immunity for commercial disputes. For funds with such investors
from multiple states, however, this approach presents significant challenges.
Final Thoughts & Practical Considerations
While a full analysis of sovereign immunity requires careful attention to particular facts, two
considerations are fundamental at the time of the investment. One is the court chosen by the
parties to determine any disputes. Understanding in more detail than can be presented here
the particular requirements and limitations of sovereign immunity under the law of the
jurisdiction where the dispute is to be determined is essential to understanding the scope of legal
recourse if a dispute arises. The second is the possibility of waiver. If immunity exists, it can be
addressed in negotiations, and a carefully drafted waiver clause in the relevant transaction
documents can make the parties agreement as to immunity clear and enforceable.
For funds, its also important to remember that the sovereign immunity doctrine discussed here
governs the prosecution of legal actions and the judicial enforcement of judgments. In a private
investment, other methods of recourse may be available, including self-help remedies built into
the fund documentation, and may be drafted in such a way to avoid questions of immunity
altogether.
http://privateequityreport.debevoise.com/winter-2014/issuedetail.aspx?
ID=c6b12554-72e1-4818-9a76-a3c291baa8db