CitiTrust Blog

Duties of Directors – Cayman Islands Funds

Weavering v. Peterson

A director of a Cayman Islands company owes certain fiduciary duties to the company. While these duties, as a matter of theory, are well understood, it is sometimes difficult to describe, in very practical terms, what exactly a director should and should not do in order to fulfil them. The Grand Court of the Cayman Islands (Financial Services Division) recently had cause, in Weavering v. Peterson, to consider how these general principles ought to play out in the context of an investment fund company and its directors.

The Weavering decision represents the application of already well-established principles to a particular set of facts. While the guidance provided by the Court in Weavering is instructive, it should be noted that the circumstances in that case were particularly egregious and the Court’s advice must be considered within that context. The directors in Weavering essentially did nothing except sign what the promoter put before them. There was a complete absence of meaningful consideration.

Supervisory Duties

The management structure of a typical Cayman fund works on the basis that investment management, administration and accounting functions will all be delegated to professional service providers but this structure does not absolve the directors of their obligation to supervise in a professional and businesslike manner. Directors must still satisfy themselves on a continuing basis that:

• the investment manager’s strategy is accurately described in the offering document;
• the investment manager is complying with any investment restrictions;
• there is an appropriate division of function and responsibility between the investment manager and the administrator (barring which division the directors would have increased responsibility to supervise);
• the various service providers are performing their functions in accordance with their contracts and that no functions that ought to be performed are not done.

Operational Structure

Directors must satisfy themselves that a fund’s operational structure is consistent with Cayman industry standards. They must read and understand the proposed service providers’ contracts, particularly the terms dealing with the calculation of net asset value, remuneration, limitation of liability and the nature and scope of work to be performed, for the purpose of determining whether the proposed terms are industry standard.

Offering Documents

The directors are responsible for the accuracy of the offering document and must ensure that the offering document complies with the requirements of the Mutual Funds Law. They cannot simply rely on the investment manager’s or promoter’s lawyers to get it right and ought to make enquiries to gain a proper understanding if in doubt. The directors must be seen to have taken positive steps to satisfy themselves that the offering document is accurate and complete.

Skills and Experience

Any descriptions of the directors’ skills and experience should be a fair and accurate statement of what the director brings to the table for the company. The investors are entitled to rely on the director to actually employ such skills in the conduct of the company’s business.

Independent Judgment

Directors have a duty to exercise an independent judgment on the matters within the scope of their supervision. This duty cannot be delegated away. Directors are expected to be able to read a balance sheet and to have an understanding of the audit process.

Side Letters

Side letters present difficult management issues and must be considered very carefully. While the entry into a side letter does not, of itself, expose the directors to claims of breach of duty, directors must not just accept the investment manager’s recommendations to enter into a side letter without making an independent judgment on the issue. Directors must turn their minds to, and make enquiries into, the nature and impact of a side letter and satisfy themselves that it is in the best interests of the company. It is advisable for the directors to take legal advice on a side letter if there is any question as to whether it could adversely effect the fund.

Documenting the Decision Making Process

Board minutes must be maintained that accurately and completely reflect the outcome of the decision making process. The record must demonstrate that the directors are aware of any issues and acted in accordance with their duties. Care should be taken to record what efforts were made to investigate and verify information, what questions were raised and settled, and what decisions were ultimately made. Directors who have recorded such efforts will be well equipped to defend against an accusation that they failed to meet the standards imposed on them under the law.

Conclusion

Whilst delegation to professional service providers is, in itself, entirely appropriate, the directors of a Cayman hedge fund must:

• exercise their powers independently without subordinating those powers to the will of others;
• honour their continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business;
• perform a high level supervisory role;
• act in a professional, businesslike manner;
• satisfy themselves (on a continuing basis) that the investment manager is complying with the investment criteria and restrictions adopted by the fund; and
• when asked to sign financial statements and accompanying management representation letters addressed to the auditors, exercise an independent judgment by conducting a review in an inquisitorial manner.

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This advisory is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

About Conyers Dill & Pearman

Conyers Dill & Pearman advises on the laws of Bermuda, British Virgin Islands, Cayman Islands, Cyprus and Mauritius. Conyers’ lawyers specialise in company and commercial law, commercial litigation and private client matters. Conyers’ structure, culture and expertise enable responsive, timely and thorough service. Conyers provides clients with the highest quality legal advice from strategic global locations including offices in the world’s leading financial centres in Europe, Asia, the Middle East and South America. Founded in 1928, Conyers comprises 550 staff including 150 lawyers. Affiliated companies (Codan) provide a range of trust, corporate secretarial, accounting and management services.