Articles By Topic
By Topic: Corporate Governance
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From Vol. 6 No.19 (May 9, 2013)
Cayman Director Services Company Challenges CIMA’s Private Sector Consultation Process to Promote Fund Governance Reforms
On April 2, 2013, Cayman Private Manager II Limited (CPM), a Cayman director services company and an affiliate of DMS Group, which provides professional directors for many hedge funds and other private funds, filed an application in the Grand Court of the Cayman Islands. The application sought leave to apply for judicial review of its request for relief based on its allegations that the private sector consultation process used by the Cayman Islands Monetary Authority (CIMA) to reform private fund governance was flawed because CIMA did not satisfy its legal obligations with respect to the consultation process. The allegations arise out of CIMA’s publication of a consultation paper (Consultation Paper) on January 14, 2013 that outlined various proposed fund governance reforms that will invariably impact Cayman-domiciled hedge funds and other private funds. For an in-depth discussion of CIMA’s proposed reforms described in the Consultation Paper, see “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013). If the Court grants CPM leave to apply for judicial review, this could delay any decision-making by CIMA on its corporate governance reform proposals. This article provides a summary of CPM’s allegations as well as a description of the requested relief.
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From Vol. 6 No.17 (Apr. 25, 2013)
How Can Hedge Fund Managers Use Advisory Committees to Manage Conflicts of Interest and Mitigate Operational Risks? (Part Two of Two)
Domestic hedge funds typically have no governance analogue to the offshore fund board of directors. This governance asymmetry has been receiving increased scrutiny from regulators and investors, and that scrutiny has grown stricter in light of a series of notable governance failures. In response to that scrutiny, hedge fund managers have been exploring, and in some cases implementing, advisory committees for their domestic funds. At a broad level, advisory committees serve as a proxy board of directors for domestic hedge funds, typically Delaware limited partnerships. But advisory committees often do more than replicate onshore the functions of an offshore board of directors. To help hedge fund managers assess the applicability of advisory committees to their circumstances, this article – the second in a two-part series – addresses what types of funds should organize advisory committees; issues involved in organizing an advisory committee (including determining the committee’s composition and compensation); operation of advisory committees; benefits and drawbacks of serving as an advisory committee member; and liability and indemnity protections afforded to advisory committee members. The first installment discussed what advisory committees are; their principal functions; how they are different from offshore fund boards of directors; how much authority advisory committees typically have; and the principal benefits and drawbacks of organizing and operating advisory committees. See “How Can Hedge Fund Managers Use Advisory Committees to Manage Conflicts of Interest and Mitigate Operational Risks? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 15 (Apr. 11, 2013).
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From Vol. 6 No.15 (Apr. 11, 2013)
How Can Hedge Fund Managers Use Advisory Committees to Manage Conflicts of Interest and Mitigate Operational Risks? (Part One of Two)
Hedge fund managers often launch onshore and offshore versions of funds following substantially similar investment strategies. Funds in different jurisdictions are intended to be different in some ways and similar in other ways. They are intended to be different in terms of tax and regulation because different investors are subject to different tax and regulatory regimes. (For example, U.S. tax-exempt entities often invest in offshore hedge funds to, among other things, avoid paying tax on Unrelated Business Taxable Income.) They are typically intended to be similar in terms of strategy and performance, particularly where the onshore and offshore funds are feeders in a master-feeder or similar structure. See “Hedge Fund Managers Using ‘Mini-Master Funds’ to Retain Favorable Tax Treatment of Performance-Based Revenue from Offshore Funds,” The Hedge Fund Law Report, Vol. 2, No. 22 (Jun. 3, 2009). Notably, onshore and offshore funds are intended to be similar in terms of fund governance. However, the different structures typically used for onshore and offshore funds inhibit the similarity of governance across jurisdictions, at least structurally. Many onshore funds are structured as limited partnerships, with no explicit governing body, and many offshore funds are structured as corporations, with a board of directors. Experience and caselaw have highlighted shortcomings in the fund director model as it is often deployed. See “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators,” The Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012); “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011). Nonetheless, a growing chorus of institutional investors has highlighted the asymmetry in governing structures in the course of due diligence – focusing in particular on the absence of a board of directors of domestic hedge funds. In response to the expressed concerns of institutional investors on this topic, hedge fund managers have started to explore – and in some cases, to implement – advisory committees. Part of the purpose of such committees is to serve as a proxy board of directors for domestic funds. But they do more than that for domestic funds, and also provide services to offshore funds. They are an important, yet insufficiently understood, innovation in the relationship between hedge fund managers and investors. To shed much-needed light on this innovation, The Hedge Fund Law Report is publishing this two-part series designed to help hedge fund managers and investors understand the reasons for and mechanics of establishing an advisory committee. This first installment addresses what advisory committees are; their principal functions; how they are different from offshore fund boards of directors; how much authority advisory committees typically have; and the principal benefits and drawbacks of organizing and operating advisory committees. The second installment will discuss what types of funds should organize advisory committees; the process of organizing an advisory committee (including determining the committee’s composition); the operation of advisory committees; benefits and drawbacks of serving as an advisory committee member; and liability and indemnity protections afforded to members of an advisory committee.
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From Vol. 6 No.4 (Jan. 24, 2013)
Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors
To promote confidence in Cayman-regulated financial institutions, the Cayman Islands Monetary Authority (CIMA) recently introduced proposals designed to institute enhanced corporate governance reforms for CIMA-regulated financial institutions, including hedge funds. Of most importance for hedge funds, the rule proposals include rule amendments requiring professional directors to register with CIMA; all fund directors of CIMA-regulated entities to register with CIMA; the creation of a publicly-available database containing the names of CIMA-registered and CIMA-licensed entities and their directors; and the application of delineated governance standards that have historically been inapplicable to most CIMA-registered hedge funds. Such standards outline expectations concerning, among other things, director qualifications and responsibilities. This article summarizes the proposed rule amendments and links to the documents in which they are described. See also “Eight Corporate Governance Steps That Hedge Fund Managers Should Consider in Response to Concerns Expressed by Institutional Investors,” The Hedge Fund Law Report, Vol. 4, No. 35 (Oct. 6, 2011).
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From Vol. 6 No.2 (Jan. 10, 2013)
Lawsuits and Letters: TPG-Axon’s Playbook for Unseating a Recalcitrant and Underperforming Board of Directors
The shareholder consent solicitation process often affords company shareholders, such as hedge funds, an opportunity to effect portfolio company changes, such as the amendment of the company’s bylaws or the ouster of the company’s board, without calling a formal shareholder meeting. Nonetheless, in a recent row between hedge fund TPG-Axon Partners, LP (Axon Partners) and affiliated hedge funds (together with Axon Partners, Axon or the Funds) and SandRidge Energy, Inc. (SandRidge), Axon sued, claiming that SandRidge inappropriately interfered with the consent solicitation process, thus making it more difficult for Axon to obtain in a timely fashion the required consents necessary to effect its desired changes to the company’s bylaws and board. Axon’s suit requested, among other things, that SandRidge be enjoined from interfering with the consent solicitation process. The outcome of this suit could have a significant impact on the ability of hedge funds that owns shares in public companies organized in Delaware to effect changes through the consent solicitation process. This article describes the disputes between Axon and SandRidge in the courts and in the press; outlines the allegations contained in Axon’s complaint and in letters from Axon to the SandRidge Board; and discusses Axon’s proposed consent request to SandRidge shareholders.
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From Vol. 5 No.48 (Dec. 20, 2012)
Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation
On November 8, 2012, international law firm Walkers Global hosted its annual Walkers Fundamentals Hedge Fund Seminar in New York City. Speakers at this event addressed various issues of current relevance to hedge fund managers, including: recent developments in fund structuring and terms; fund governance; recent Cayman legal developments (including those relating to side letter disputes); implications of the Foreign Account Tax Compliance Act for hedge fund managers; and regulatory developments, including proposed amendments to the Cayman Islands Exempted Limited Partnership Law and the impact of the EU’s Alternative Investment Fund Managers Directive. This article summarizes noteworthy points discussed during the seminar on each of the foregoing topics. For our coverage of last year’s Walkers Fundamental Hedge Fund Seminar, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds,” The Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).
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From Vol. 5 No.36 (Sep. 20, 2012)
The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators
Last month marks the one-year anniversary of the decision handed down by the Grand Court of the Cayman Islands (Court) against the directors of Weavering Macro Fixed Income Fund, in which both directors were found to have breached their duties and were ordered to pay damages in the amount of USD$111 million. In the days and weeks which followed, many stakeholders offered their own critique of the decision as well as the “checklist” promulgated by Mr. Justice Andrew Jones QC of the steps which an independent non-executive director of an investment fund should take in order to properly discharge his duties. Some critiques were lucid and objective dispositions of the decision, and some were not. Perhaps it was the size of the award, or that it was the first time that directors of a failed Cayman Islands investment fund had been found liable in damages for a fund’s losses, which provoked such interest; but no doubt the views expressed by many were, and are, influenced by personal circumstances. But what has been the true impact of the decision, and what mark has it left on the laws relating to directors generally? In this article Mourant Ozannes’ Shaun Folpp, who acted for Weavering with respect to both the first instance proceedings and the recent appeal, and Mr. Ian Stokoe of PwC Corporate Finance and Recovery (Cayman) Limited, one of Weavering’s Joint Official Liquidators, explore these very issues, and reflect on one of the most talked about decisions ever to be handed down by the Court. For background on the decision, see “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).
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From Vol. 5 No.22 (May 31, 2012)
RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part One of Two)
On April 16, 2012, the Regulatory Compliance Association held its Regulation and Risk Thought Leadership Symposium (RCA Symposium) in New York City at the Pierre Hotel. The RCA Symposium brought together leading practitioners and regulators in a series of panel discussions, each of which offered unique insight on various topics of relevance for hedge fund managers. This is the first article in a two-part series summarizing the highlights from the RCA Symposium. This first article discusses the sessions that covered: fund governance issues; interpreting, preparing for and completing Form PF; and enterprise risk management for hedge fund managers. The second article will discuss sessions that covered: the new paradigm of regulatory enforcement and white-collar prosecution; chief compliance officer and general counsel liability; and re-evaluation of the operating model for third party relationships.
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From Vol. 5 No.14 (Apr. 5, 2012)
Don Seymour Discusses Hedge Fund Governance and the Impact of the Recent SEC-CIMA Cooperation Arrangement on Hedge Fund Manager Examinations
On March 23, 2012, the U.S. Securities and Exchange Commission (SEC) announced that it had entered into a supervisory cooperation arrangement with the Cayman Islands Monetary Authority (CIMA). In its press release announcing the memorandum of understanding (MOU) embodying the supervisory cooperation arrangement, the SEC identified five categories of information that may be shared pursuant to the arrangement. Those five categories include information required to: (1) conduct routine supervision; (2) monitor risk concentrations; (3) identify emerging systemic risks; (4) better understand a globally active regulated entity’s compliance culture; and (5) conduct on-site examinations of registered entities located abroad. See “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012). Hedge fund managers, lawyers, compliance professionals and others have asked The Hedge Fund Law Report what this MOU means for their businesses. To help answer that question, we recently interviewed Don Seymour. Seymour is the founder and Managing Director of dms Management Ltd. (dms Management) and the former head of the Investment Services Division of the CIMA. At the CIMA, Seymour directed the authorization, supervision and enforcement of regulated mutual funds, including hedge funds, under the Mutual Funds Law of the Cayman Islands, and the supervision of company managers under the Cayman Companies Management Law. Seymour brought his CIMA experience to bear in explaining how the MOU will impact Cayman-domiciled hedge funds and their managers with respect to data collection and sharing, supervision, monitoring, examinations and regulatory coordination. Moreover, based on his service on the boards of several notable investment companies, Seymour offered insight on hedge fund governance issues, including: director independence; evolution in best corporate governance practices following the decision in Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom; valuation expertise required of fund directors; specific steps that directors can take to manage fund conflicts of interest; maximum number of directorships; and whether investors should have rights to appoint fund directors. This article includes the full transcript of our interview with Seymour.
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From Vol. 5 No.13 (Mar. 29, 2012)
Managing Risk in a Changing Environment: An Interview with Proskauer Partner Christopher Wells on Hedge Fund Governance, Liquidity Management, Transparency, Tax and Risk Management
The Hedge Fund Law Report recently interviewed Christopher M. Wells, a Partner at Proskauer Rose LLP and head of the firm’s Hedge Funds Group. Wells has decades of experience advising hedge funds and their managers, and a broad-based practice that touches on substantially every aspect of the hedge fund business. Our interview with Wells was similarly wide-ranging, covering topics including: hedge fund governance; investor demands for heightened transparency; co-investment opportunities; liquidity management issues; side pocketing policies and procedures; holdbacks of redemption proceeds; tax issues, including preparations for compliance with the Foreign Account Tax Compliance Act (FATCA) and the electronic delivery of Schedules K-1; and risk management, including practical steps to prevent style drift and unauthorized trading. This interview was conducted in conjunction with the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. For more information, click here. To register, click here. (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.) Wells is expected to participate in a session at that Symposium focusing on hedge fund governance and related issues.
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From Vol. 5 No.11 (Mar. 16, 2012)
Ernst & Young’s Arthur Tully Talks in Depth with The Hedge Fund Law Report About Hedge Fund Governance, Succession Planning, Valuation, Form PF and Administrator Shadowing
Ernst & Young’s (E&Y) recently published “Coming of Age: Global Hedge Fund Survey 2011” (Survey) highlighted a host of operational issues that hedge fund managers have recently grappled with, including issues related to corporate governance, succession planning and shadowing of fund administrators. See “Ernst & Young Survey Juxtaposes the Views of Hedge Fund Managers and Investors on Hedge Fund Succession Planning, Governance, Administration, Expense Pass-Throughs and Due Diligence,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012). We recently interviewed Arthur Tully, the Co-Leader of E&Y’s Global Hedge Fund practice, on various topics covered by the Survey, including: issues related to valuation of investments; independent reconciliation of investment positions; reconciliation and documentation of differences in NAV calculations; independent administration considerations for UCITS funds; and how to gather the data necessary to complete Form PF. See “Hedge Fund Valuation Pitfalls and Best Practices: An Interview with Arthur Tully, Co-Leader of Ernst & Young’s Global Hedge Fund Practice,” The Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012). In this follow-up interview, Tully shares his insight and experience on additional topics of pressing importance to hedge fund managers, including best practices for hedge fund corporate governance; compensation structures for effective succession planning; valuation issues (including a discussion of the biggest mistakes made in valuing assets); project management in the Form PF context; and administrator shadowing (including common functions shadowed by hedge fund managers). This article contains the full text of our second interview with Tully. Tully is expected to expand on these and related topics during a session focusing on hedge fund governance at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. For more information, click here. To register, click here. (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)
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From Vol. 5 No.10 (Mar. 8, 2012)
Former SEC Commissioner Roel Campos Discusses Hedge Fund Governance with The Hedge Fund Law Report
While day-to-day control of a hedge fund is largely vested in the hedge fund’s manager, the relationship between manager and fund is marked by inherent conflicts of interest. See, e.g., “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011). Hedge fund investors generally look to three factors to mitigate those conflicts: law, practice and structuring. Legally, fiduciary duty and regulatory and private enforcement of securities laws are intended to mitigate conflicts. Practically, reputational considerations and basic canons of ethical behavior are expected to limit manager overreaching. And structurally, the boards of directors of certain hedge funds are intended to serve as a check on manager conflicts and other manager behavior contrary to the interests of investors. Prior to the credit crisis, investors looked primarily to the first two factors to police conflicts. After the credit crisis and the concomitant exposure of notable frauds, investors and regulators are paying increasing attention to the role of hedge fund boards as the investor’s internal advocate. In short, investors and regulators now expect directors to be informed, engaged and competent. This view was resoundingly echoed by the Grand Court of the Cayman Islands in the August 2011 Weavering Macro Fixed Income Fund Limited (In Liquidation) decision, in which the Grand Court found hedge fund directors personally liable for losses caused by their willful failure to supervise fund operations. See “Corporate Governance Best Practices for Cayman Islands Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012). It is one thing to say that hedge fund directors need to be more informed, engaged and competent. It is another thing altogether to define with specificity what these concepts mean in practice. In an effort to do so, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will focus on hedge fund governance. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. For more information, click here. To register, click here. (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.) As part and parcel of the RCA’s effort to define with specificity the role of hedge fund directors, The Hedge Fund Law Report recently interviewed Roel Campos, one of the anticipated participants in the fund governance session, a former SEC Commissioner and a current Partner at Locke Lord LLP. Campos’ high-level SEC experience gives him particularly useful insight into regulatory expectations with respect to hedge fund directors; and his regulatory experience is complemented by private legal practice and corporate experience. Campos, accordingly, has a uniquely well-rounded view of what hedge fund directors should do, and the practical constraints on what they can do. Our interview focused on: the key purposes and goals of hedge fund boards; how hedge funds can make their boards more effective and accountable; what constitutes an “independent” director; the role to be played by hedge fund boards in the valuation of assets and implementation of risk management policies; the maximum number of boards on which one director can serve; whether investors should talk to hedge fund boards during the due diligence process; and whether hedge funds should conduct background checks on prospective directors. This article contains the full transcript of our interview with Campos.
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From Vol. 5 No.5 (Feb. 2, 2012)
The Changing Face of Alternative Asset Management in Switzerland
Switzerland is the third largest global centre of alternative asset management, after North America and the United Kingdom. Around three times the size of Connecticut, the small, central European country boasts approximately 15% of global assets under management. In a guest article, Matthew Feargrieve, leader of the Funds and Investment Services practice in the London and Zurich offices of Appleby, examines the composition of the Swiss alternative asset management market, focusing on single managers and managers of funds of hedge funds (FoHFs); reviews the current and prospective regulatory environment in Switzerland for each type of manager; and assesses the country’s future generally as a centre of alternative asset management against the backdrop of economic austerity and regulatory zeal in Europe.
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From Vol. 5 No.3 (Jan. 19, 2012)
Corporate Governance Best Practices for Cayman Islands Hedge Funds
With the financial crisis of 2008 and 2009, corporate governance practices in the global alternative investment funds industry came under the microscope. While investor views on how fund directors performed during the crisis vary, what is clear a few years on is that investors, hedge fund managers and service providers have a much better understanding of the role of an independent non-executive director of an alternative investment fund and that a best practice framework has started to become a topic for active discussion in the industry. As a result, hedge fund investors – particularly institutional investors – are increasingly scrutinizing a fund’s corporate governance structure to ensure that the directors are diligently and skillfully performing their duties in the best interest of the hedge funds on whose boards they serve. With the global hedge fund industry having its largest presence in the Cayman Islands, this guest article looks at some of the issues relating to corporate governance from the Cayman fund perspective. The authors of this guest article are Tim Frawley, a Partner in the Investment Funds practice of Maples and Calder, and Peter Huber, Global Co-Head of Maples Fiduciary Services. Frawley and Huber begin with a historical accounting of Cayman company fund governance. The authors then explain the various duties owed and roles performed by fund directors. Next, the authors discuss the findings and implications from the Weavering Macro Fixed Income Fund Limited (In Liquidation) decision handed down last year. The authors then move to a survey of some current hot-button issues related to fund governance, and conclude with a discussion of anticipated fund governance challenges facing hedge fund managers.
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From Vol. 4 No.42 (Nov. 23, 2011)
Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds
On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City. Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA). This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.
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From Vol. 1 No.13 (May 30, 2008)
Asian Corporate Governance Association Publishes White Paper Critiquing Corporate Governance in Japan
Asian Corporate Governance Association published a white paper calling for an overhaul of Japanese corporate governance, just as hedge fund TCI’s fight for greater control of J-Power heats up.
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