Citco

Wake-up call and road map for directors of investment funds based in The Cayman Islands

In recent years, best practices of proper corporate governance have rapidly developed and improved, both as a result of global regulatory reform as well as demands by investors, creditors, and other stakeholders. Although much of the focus of these developments has been on publicly traded companies and funds, these best practices have also influenced overseas alternative investment funds, for which The Cayman Islands is the preferred domicile.

The recent Weavering case is a stark example of the risks associated with lack of regard for the manual for proper corporate governance. In this case, two directors were held personally liable in the amount of US$ 111 Mio for losses of the Weavering Macro Fixed Income Fund Limited in a lawsuit brought by the Fund’s liquidators. This was the first time that a Cayman court held directors personally liable for losses of a fund, specifically because they had willfully failed to discharge their duties of skill, care and diligence to the fund which had resulted in significant losses.

In its ruling, the Cayman court gave a clear road map about what it considers best practices in corporate governance for directors of Cayman Islands funds. It emphasized that attention should be given to the process whereby directors document their supervision of funds. This not only requires that corporate actions should be properly reflected in minutes and other corporate records, but also that regular physical board meetings should be held. Minutes of board meetings should accurately reflect the discussions of the board, its review of the financials and contractual arrangements of the funds as well as any other business matters that are relevant to the day-to-day activities of the funds. In the case of Weavering, its directors had played no active role in board meetings, had signed pro-forma minutes of meetings which had been prepared in advance, and had delegated authority without proper review and oversight.

Key

Post-Weavering, Cayman based investment funds and their board should review their processes to ensure that they adhere to best practices in terms of corporate governance. Citco Cayman can assist clients with this review and with initiating compliance and governance procedures. Citco Cayman has built up a team of experienced and professional staff - lawyers and Chartered Secretaries - who have specialize in corporate governance.

Some improvements that may be implemented are:

• Preparation and convening of regular, structured (there should be a proper agenda and board packs) meetings of the board of director;
• Documentation of all material transactions entered into by the fund, including keeping up to date records, liaising with directors regarding the content and execution of documents, distributing notices and information to shareholders;
• Providing technical assistance to the board on the contents of documents tabled, relevant legal provisions or corporate governance requirements.

As detailed in the judgment, accurate board minutes are imperative and attendance by a Citco Secretary at a board meeting will ensure that reliable and comprehensive minutes are produced and promptly  circulated for review. Citco Cayman will also coordinate with other service providers (administrators, custodians, auditors etc) to ensure that their reports are available to the directors for discussion in board meetings - another key point in the judgment - and provide a Secretary’s report confirming that the records we hold on file are up to date and correct.

Post-Weavering, directors of Cayman based investment funds should also review their Directors & Officers insurance arrangements as well as consider the number of directorships that they hold. Although not addressed by the court, it is obvious that it may be challenging, if not impossible, for directors to properly observe their duties in case they serve on the multiple fund boards.

Our staff would welcome the opportunity to answer any questions you have about the judgment as well as providing a full transcript of the case.

For more information, please contact:

Citco Trustees (Cayman) Limited
Corporate Secretarial Services Department
89 Nexus Way, 2nd Floor, Camana Bay
P.O. Box 31106
Grand Cayman KY1-1205
Cayman Islands

Phone: +1 345 949 3977
Fax:    +1 345 945 7566
caycorpgov@citco.com