† Total abrogation of responsibility
Within a corporate Cayman fund structure, the board of directors may delegate the day-to-day investment management activities to the Cayman fund’s investment manager. While a Cayman fund director will not normally interfere with the daily tasks of the Cayman fund’s investment manager, it is easy to succumb to thoughts of total abrogation of responsibility.
A fund director may be seen as backsliding if he does not inform himself of the Cayman fund’s affairs and join with his fellow directors in supervising them. This includes reviewing and monitoring the investment manager and assessing (from time to time) whether the delegation remains appropriate.
† Exercising powers for an improper purpose
A Cayman fund director owes a fiduciary duty to exercise the powers conferred on him for the purposes for which they were conferred.
A fund director may be at fault where he knows that exercise of a power is an improper purpose or he knows of the facts which make the purpose improper. A four stage test which might be applied is identifying (1) the power whose exercise is in question, (2) the proper purpose for which such power was conferred (3) the substantial purpose for which the power was exercised in the instant case and (4) whether that purpose was proper.
† Taking The Wrong Interests Into Account
Currently, it is normal practice for a representative of a fund’s investment manager to sit on the board of directors of a fund. Such a fund director is susceptible to the temptation to consider the wrong interest when the time comes to effect an important decision.
In the case of a Cayman fund, the fund director would fall out of the court’s grace if:
(i) In the case of a solvent fund, he does not have regard are the interests of the shareholders as a whole (a “subjective test”); or
(ii) In the case of insolvent fund or doubtfully solvent fund, he does not take into consideration the interests of creditors.
† Not Asking Questions
A fund director might be tempted to simply go through the motions of having a board meeting. In doing this, he may not ask any questions or apply his mind to the matters before him.
Total abomination for this fund director’s action may be found where:
(i) he has a reason to suspect the lack of integrity, skill and competence of his fellow directors and yet, relies on their judgment;or
(ii) he does not listen to the views of his fellow directors or take account of them and yet, defers to those views which may not be in the best interests of the fund;or
(iii) he does not exercise independent judgment
† Not Attending Meetings
A fund director ought to attend board meetings when he is reasonably able to do so. In the case of Cayman funds, the Cayman regulator recently issued a statement of guidance on corporate governance which requires the boards of directors of Cayman funds registered as mutual funds with the Cayman Islands Monetary Authority (“CIMA”) to have a minimum of two board meetings per annum.
The fund director will go astray if he decides to go on extended vacation in the Bahamas and never attends board meetings for the entire year. This may result in quorum not being met for proposed board meetings and the fund therefore falling foul of the CIMA guidance.
† Fettering Discretion
A fund director might be affiliated with a significant seed investor. As a technical matter, the fund director’s duty will still be owed to all of the fund’s investors taken as a whole, notwithstanding his affiliation with the seed investor.
The fund director may promote wrongdoing where he secretly takes instructions from the seed investor and agrees with the seed investor as to the future exercise of his fiduciary powers as a director in favour of the seed investor alone. This is referred to as the fettering of his discretion. Other investors are likely to see this as a sin.
† Undisclosed Conflicts of Interest
When you review the articles of association of a Cayman fund, they usually make provision for a fund director to vote on a matter notwithstanding a personal interest that he may have in the matter, as long as he discloses the conflict of interest.
Assuming that the beneficiary of the fiduciary power (i.e. the fund) has not waived the conflict, the transgression here will be the non-disclosure of the interest by the fund director and placing himself in a position where there is an actual or potential conflict between his own interests and his duties to the fund.
It is easy for a fund director to take the wrong path regarding the discharge of his legal and fiduciary duties. However, unlike a religious sin, the sins of a fund director are unlikely to be forgiven; instead, the fund director’s reputation may be forever damaged and he may be plagued with lawsuits in relation to fiduciary breaches and/or investor losses associated with his actions or inactions.
About the Author:
Alric Lindsay is a corporate lawyer and an independent fund director approved by the Cayman Islands Monetary Authority. Alric is also licensed as a professional director under The Directors’ Registration and Licensing Law. Alric also acts as voluntary liquidator to Cayman Islands entities. Alric can be contacted at firstname.lastname@example.org.