A recent case heard by The Grand Court of the Cayman Islands in which the directors of a hedge fund were found responsible for willful neglect and default and ordered to pay over $110 million each in fines, represents a timely reminder that directors of hedge funds should not only do their duty but must also be seen to do their duty. That is the view of Paul Harris, chairman of fiduciary services firm International Management Services (IMS).
He also observes that the recent case has thrown into sharp focus the need for detailed documentation when it comes to the affairs of a fund. He suggests that if a fund does not have its own full time staff, its needs can be dealt with by a professional provider of corporate services, several of which can be found in the Cayman Islands. Typically, such services include preparing board packs, agenda, memoranda, documents, invitations to necessary service providers such as administrators and auditors and follow up by preparing and circulating meeting minutes and action memoranda.
The case in question was that of the Weavering Macro Fixed Income Fund Limited (in liquidation) vs. Stefan Peterson and Hans Ekstrom. The Grand Court of the Cayman Islands highlighted the way in which directors should perform their supervisory role and how, in this case, they failed to provide evidence of proper corporate governance. The directors were found responsible for willful neglect and default, and were ordered to pay over $110 million each in fines as a result.
“As a matter of good corporate governance and best business practice it has always been important that any decisions of the board of directors are appropriately documented. The landmark Weavering judgment has thrown the necessity for this into even greater focus,” said Harris.“Since the judgment, effective documenting of proceedings is even more crucial because directors may now need to provide evidence that they have exercised appropriate skill, care and diligence in discharging their duties. In particular, board minutes and/or resolutions should be substantive in form and provide a true record of discussions among the directors and other meeting participants, enquiries that are made of third parties and any approvals or resolutions in relation to these discussions.”
Unfortunately, this was not the case in Weavering, Harris notes. Pro forma minutes were used and copied for meetings and simply ‘rubber-stamped’ by the directors. In addition, it was the investment manager who had prepared the board minutes for each meeting, apparently with little input from the directors, which raised doubts as to the accuracy of the minutes and the independence of the directors.
“Accurate board minutes take a considerable amount of time to prepare,” Harris continues. “A corporate secretarial services company can remove the administrative burden and maintain the third-party objectivity and independence clearly lacking in the Weavering case. “It can also arrange for the receipt of reports from the various service providers to whom the directors have delegated functions or their attendance at board meetings if necessary."