The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Indemnification

  • From Vol. 9 No.48 (Dec. 8, 2016)

    How Fund Managers May Deploy the Cayman Islands LLC Structure

    Since the introduction of the Cayman Islands Limited Liability Companies Law on July 8, 2016, over 150 Cayman Islands limited liability companies (Cayman Islands LLCs or LLCs) have been registered. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In a guest article, Walkers partners Tim Buckley and Melissa Lim, along with senior counsel Andrew Barker, review: (1) some of the key features of Cayman Islands LLCs, including how they differ from their Delaware counterparts and other Cayman Islands entities; (2) how LLCs are currently being used; and (3) possible future developments with respect to LLCs. For additional insight from Lim on the Cayman Islands LLC, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016). For further commentary from Buckley, see “Annual Walkers Fundamentals Seminar Discusses How Managers Attract Investors in a Challenging Market by Tailoring Fund Structures and Governance Policies” (Dec. 1, 2016); and “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation” (Dec. 20, 2012).

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  • From Vol. 9 No.28 (Jul. 14, 2016)

    What D&O and E&O Insurance Will and Will Not Cover, and Other Hot Topics in the Hedge Fund Insurance Market

    As hedge fund managers anticipate potential fallout from regulatory enforcement actions, it is critical to have a sophisticated understanding of the mechanics of directors and officers (D&O) and errors and omissions (E&O) insurance, as well as the types of liability covered by those policies. These issues were the subject of a recent webinar hosted by Seward & Kissel. During the discussion, Mark Hyland, a partner at Seward & Kissel, and Jason Duffy, a partner and founder of Fieldstone Insurance Group, explained how insurance can be used to anticipate and mitigate the adverse financial impact of covered acts or omissions. This article analyzes the key points from the webinar. For a comprehensive overview of D&O and E&O insurance, see “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities” (Nov. 17, 2011). For additional insight from Seward & Kissel, see “Reduced Management Fees and Narrower Liquidity Among Trends in New Hedge Funds” (Mar. 31, 2016); and our two-part coverage of the Seward & Kissel private funds forum: “Trends in Hedge Fund Seeding Arrangements and Fee Structures” (Jul. 23, 2015); and “Key Trends in Fund Structures” (Jul. 30, 2015). 

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  • From Vol. 8 No.45 (Nov. 19, 2015)

    Hedge Fund Managers Must Exercise Restraint in Deploying Indemnification Provisions

    Indemnification provisions are the forbidden fruit in every hedge fund partnership agreement.  On the one hand, they are typically drafted in such a broad fashion as to protect the general partner and its affiliates from seemingly any issue arising out of the partnership, provided that their actions do not constitute gross negligence, willful misconduct, fraud or bad faith.  On the other hand, utilizing an indemnification provision almost always places the general partner and investment adviser’s fiduciary duties at risk.  In a guest article, David T. Martin, a partner at Cummings & Lockwood, explains how courts have analyzed indemnification provisions under Delaware law and offers some fundamental principles that every fund counsel should consider before deploying an indemnification provision.  For more on indemnification, see “Stanley Druckenmiller’s Counsel Provides a Tutorial for Negotiating Exculpation, Indemnification, Redemption, Withdrawal and Amendment Provisions in Hedge Fund Governing Documents,” The Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  For a Cayman Islands perspective, see our two-part series on “Exculpation and Indemnity Clauses in the Hedge Fund Context”: Part One, Vol. 3, No. 50 (Dec. 29, 2010); and Part Two, Vol. 4, No. 1 (Jan. 7, 2011).

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  • From Vol. 8 No.42 (Oct. 29, 2015)

    Rajaratnam Sued by Younger Brother for Alleged Unpaid Compensation and Indemnification of Legal Expenses

    Rengan Rajaratnam has filed a civil action in New York State Supreme Court against his brother Raj and various Galleon entities, claiming that he was fraudulently induced into settling his commission and compensation claims for a small fraction of what he was owed, and that he has a right to indemnification from the defendants for legal and other expenses he incurred in defending himself in the civil and criminal insider trading cases against him.  He seeks damages of at least $13.5 million, together with interest, attorneys’ fees and disbursements.  This article summarizes his allegations.  For coverage of other high-stakes compensation or severance disputes, see “New York Court Assesses the Validity of a Former Portfolio Manager’s Claim against a Fund Management Company for Unvested Performance Compensation,” The Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015); “U.S. District Court Evaluates FINRA Arbitration Decision in High-Stakes Severance Dispute Between UBS and Former Portfolio Manager,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011); and “New York State Supreme Court Upholds Former Portfolio Managers’ Claims Against Hedge Fund Manager Touradji Capital,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).

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  • From Vol. 8 No.13 (Apr. 2, 2015)

    RCA Asset Manager Panel Offers Insights on Hedge Fund Due Diligence

    As institutional investors seek better returns or mitigation of downside risk in their portfolios, they frequently turn to hedge funds.  A recent program sponsored by the Regulatory Compliance Association provided an overview of the basic due diligence steps that such investors take with regard to investments with hedge fund managers, and focused on alignment of interests, indemnification provisions, liquidity, investor consent and the issues raised when investing through or alongside separate accounts.  The program was moderated by Scott Sherman, a Managing Director at Blackstone and Senior RCA Fellow from Practice.  The other speakers were Maura Harris, a Senior Vice President at The Permal Group; Nicole M. Tortarolo, an Executive Director at UBS A.G.; and David Warsoff, Executive Director at J.P. Morgan Alternative Asset Management.  For more on investor due diligence, see “Operational Due Diligence from the Hedge Fund Investor Perspective: Deal Breakers, Liquidity, Valuation, Consultants and On-Site Visits,” The Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).  For fund managers’ perspectives on investor due diligence, see “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014).  For more on due diligence from the Regulatory Compliance Association, see “RCA Session Covers Transparency, Liquidity and Most Favored Nation Provisions in Hedge Fund Side Letters, and Due Diligence Best Practices,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  This month, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.  For a discussion of another RCA program, see “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them,” The Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).

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  • From Vol. 7 No.34 (Sep. 11, 2014)

    Federal Appellate Court Determines That “Officer” Is Not a Self-Effectuating Term in Corporate Bylaws, with Implications for Hedge Fund Manager Indemnification Provisions and D&O Insurance Policies

    In connection with an ongoing dispute involving alleged trade secret theft, a federal appellate court recently construed the meaning of the term “officer” in the bylaws of a notable financial holding company.  See “How Can Hedge Fund Managers Protect Themselves Against Trade Secrets Claims?,” The Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).  The bylaws provided for indemnification and advancement of attorney fees for officers of the company and certain of its subsidiaries.  See “Stanley Druckenmiller’s Counsel Provides a Tutorial for Negotiating Exculpation, Indemnification, Redemption, Withdrawal and Amendment Provisions in Hedge Fund Governing Documents,” The Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  Thus, if the alleged trade secret thief was an “officer,” he would be entitled to indemnification and advancement of attorney fees, to the extent permitted by relevant law.  If he was not an officer, he – rather than his former employer – would bear the cost of litigation and remedies.  The appellate court’s opinion is notable in at least two respects, both discussed in this article.  See also “How Can Hedge Fund Managers ‘Manuscript’ D&O and E&O Insurance Policies to Broaden Coverage without Increasing Cost?,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

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  • From Vol. 7 No.5 (Feb. 6, 2014)

    Stanley Druckenmiller’s Counsel Provides a Tutorial for Negotiating Exculpation, Indemnification, Redemption, Withdrawal and Amendment Provisions in Hedge Fund Governing Documents

    Gerald Kerner, general counsel of Duquesne Family Office LLC, and former general counsel of famed investor Stanley Druckenmiller’s Duquesne Capital Management, L.L.C., recently drafted a white paper, the general thesis of which is that hedge fund investors pay insufficient attention to certain “boilerplate” terms in fund documents – terms that, in practice, can have important consequences for the economics of an investment.  In the first instance, the white paper recommends that hedge fund investors negotiate such boilerplate provisions – and walk if the manager refuses to engage in productive dialogue.  The white paper then offers specific recommendations for hedge fund investors when negotiating exculpation, indemnification, redemption, withdrawal, amendment and other provisions.  The white paper incorporates the wisdom accumulated by Kerner over years negotiating the deployment of capital by one of the hedge fund industry’s leading lights.  Its insights can tangibly impact the way investors approach negotiating with managers, and vice versa; the white paper, therefore, is illuminating reading for both constituencies.  This article summarizes the recommendations in the white paper.

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  • From Vol. 5 No.44 (Nov. 21, 2012)

    Morgan Stanley Sues Former FrontPoint Partners Portfolio Manager Joseph F. “Chip” Skowron III for Losses Allegedly Caused by Skowron’s Insider Trading and Subsequent Cover-Up

    In April 2011, Joseph F. “Chip” Skowron III, a former portfolio manager at hedge fund manager FrontPoint Partners, LLC (FrontPoint) pleaded guilty to criminal insider trading and obstruction of justice charges arising out of his trading in Human Genome Sciences, Inc. and his subsequent efforts to cover up that trading.  Morgan Stanley, which owned FrontPoint at the time of Skowron’s trading, paid $33 million to settle the SEC’s enforcement action against Skowron and FrontPoint’s funds.  Morgan Stanley has now commenced a civil suit against Skowron to recover that amount, along with the millions of dollars in compensation it paid Skowron and other substantial expenses and damages it claims it incurred as a result of Skowron’s admitted criminal conduct.  It asserts five separate causes of action against Skowron.  This article summarizes the allegations, claims and relief requested in Morgan Stanley’s complaint.  See also “Former Portfolio Manager of Hedge Fund Manager FrontPoint Partners, Joseph F. ‘Chip’ Skowron, Is Charged with Civil and Criminal Insider Trading Arising Out of Trading in Human Genome Sciences Stock,” The Hedge Fund Law Report, Vol. 4, No. 13 (Apr. 21, 2011); and “SEC and DOJ Commence, Respectively, Civil and Criminal Insider Trading Actions Against a Doctor Who Allegedly Tipped Off a Hedge Fund Manager to Impending Negative Information About a Drug Trial,” The Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

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  • From Vol. 5 No.35 (Sep. 13, 2012)

    Fund Misrepresentations Inducing Investment: Claims and Remedies Available to Fund Investors and Protections Available to Promoters, Fund Managers and Directors

    False statements inducing initial or continued investment in Cayman funds are relatively rare, but if they do occur, the financial consequences are often catastrophic for the misled investor and present him with a dilemma – whether to pull out and try to recoup the investment, or to stay in, try to recover what losses are retrievable and take whatever benefits there may be down the line.  Although the decision may be easy enough as a matter of choice in principle, a number of thorny legal issues may arise, such as the right to rescind an allotment of shares, derivative claims and the bar on recovery of reflective loss.  For promoters, managers and directors seeking to avoid such claims, the issue is how to protect themselves from accusations of misleading statements about the fund, and from consequent liability for such statements.  In a guest article, Christopher Russell and Jeremy Snead of Appleby (Cayman) discuss the claims and remedies available to misled fund investors and the protections available to promoters, fund managers and directors that seek to protect themselves from allegations of misrepresentation.

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  • From Vol. 5 No.1 (Jan. 5, 2012)

    Legal and Operational Due Diligence Best Practices for Hedge Fund Investors

    In the wake of the financial crisis in late 2008, many investors were left trapped in suspended, gated or otherwise illiquid hedge funds.  Unfortunately, for many investors who had historically taken a passive role with respect to their hedge fund investments, it took a painful lesson to learn that control over fundamental fund decisions was in the hands of hedge fund managers.  Decisions such as the power to suspend or side pocket holdings were vested in managers either directly or through their influence over the board of directors of the fund.  In these situations, which were not uncommon, leaving control in the hands of the manager rather than a more independent board gave rise to a conflict of interest.  Managers were in some cases perceived to be acting in their own self-interest at the expense, literally and figuratively, of the fund and, consequently, the investors.  The lessons from the financial crisis of 2008 reinforced the view that successful hedge fund investing requires investors to approach the manager selection process with a number of considerations in mind, including investment, risk, operational and legal considerations.  Ideally, a hedge fund investment opportunity will be structured to sufficiently protect the investor’s rights (i.e., appropriate controls and safeguards) while providing an operating environment designed to maximize investment returns.  Striking such a balance can be challenging, but as many investors learned during the financial crisis, it is a critical element of any successful hedge fund program.  The focus on hedge fund governance issues has intensified in the wake of the financial crisis, with buzz words such as “managed accounts,” “independent directors,” “tri-party custody solutions” and “transparency” now dominating the discourse.  Indeed, investor efforts to improve corporate governance and control have resulted in an altering of the old “take it or leave it” type of hedge fund documents, which have become more accommodative towards investors.  In short, in recent years investors have become more likely to negotiate with managers, and such negotiations have been more successful on average.  In a guest article, Charles Nightingale, a Legal and Regulatory Counsel for Pacific Alternative Asset Management Company, LLC (PAAMCO), and Marc Towers, a Director in PAAMCO’s Investment Operations Group, identify nine areas on which institutional investors should focus in the course of due diligence.  Within each area, Nightingale and Towers drill down on specific issues that hedge fund investors should address, questions that investors should ask and red flags of which investors should be aware.  The article is based not in theory, but in the authors’ on-the-ground experience conducting legal and operational due diligence on a wide range of hedge fund managers – across strategies, geographies and AUM sizes.  From this deep experience, the authors have extracted a series of best practices, and those practices are conveyed in this article.  One of the main themes of the article is that due diligence in the hedge fund arena is an interdisciplinary undertaking, incorporating law, regulation, operations, tax, accounting, structuring, finance and other disciplines, as well as – less tangibly – experience, judgment and a good sense of what motivates people.  Another of the themes of the article is that due diligence is a continuous process – it starts well before an investment and often lasts beyond a redemption.  This article, in short, highlights the due diligence considerations that matter to decision-makers at one of the most sophisticated allocators of capital to hedge funds.  For managers looking to raise capital or investors looking to deploy capital intelligently, the analysis in this article merits serious consideration.

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  • From Vol. 4 No.29 (Aug. 25, 2011)

    Delaware Chancery Court Opinion Clarifies the Scope of a Hedge Fund Manager’s Fiduciary Duty to a Seed Investor

    In resolving a contentious lawsuit between a start-up hedge fund manager, Michelle Paige, and her seed investor, the Lerner family, the Delaware Chancery Court issued an opinion on August 8, 2011 that described the scope of a manager’s fiduciary duty to a seed investor, and the circumstances in which a manager viably may prohibit redemption by a seed investor by lowering a gate.  See “Is a Threatening Letter from a Hedge Fund Manager to a Seed Investor Admissible in Litigation between the Manager and the Investor as Evidence of the Manager’s Breach of Fiduciary Duty?,” The Hedge Fund Law Report, Vo. 4, No. 17 (May 20, 2011).  This feature-length article details the background of the action and the Court’s legal analysis.  The opinion is one of the longer statements to date by the Delaware Chancery Court on a hedge fund dispute, and thus provides valuable insight into the Chancery Court’s view of fiduciary duty in the hedge fund context.  In addition, given the factual background, the opinion is particularly relevant to hedge fund managers that have or are seeking seed investors, and to entities that make seed investments in hedge fund managers and hedge funds.  See “Ten Issues That Hedge Fund Seed Investors Should Consider When Drafting Seed Investment Agreements,” The Hedge Fund Law Report, Vo. 4, No. 12 (Apr. 11, 2011).

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Does a Hedge Fund Manager Have Standing to Pursue Claims on Behalf of a Hedge Fund?

    A recent decision by the United States District Court for the Eastern District of California addressed whether the typical legal arrangements between a hedge fund of funds manager and a fund under its management confer standing on the manager to bring claims on behalf of the fund against an underlying manager and other entities.  The decision is relevant for hedge fund and fund of funds managers in identifying the appropriate party to serve as a plaintiff in litigation, and for evaluating their D&O insurance and indemnification arrangements.  See “Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  This article explains the relevant factual background, the constitutional requirements to establish standing in federal court and the primary lessons of the decision for hedge fund managers.

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  • From Vol. 4 No.1 (Jan. 7, 2011)

    Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part Two of Two)

    In an increasingly litigious world, and a world of increasing commercial failures, those sustaining losses look for others to sue.  In the hedge fund context, this will typically take the form of funds, their liquidators or their shareholders derivatively suing service providers such as the investment manager, the investment adviser and the auditors, or the fund’s former directors.  Frequently, there will be clauses in the Articles of Association or other constituent documents of the fund, or in contracts with directors or service providers, for exculpation or indemnity, or both, of which potential defendants will seek to avail themselves.  If effective, these clauses will halt a claim in its tracks against those entitled to the benefit of them, but the ambit of such clauses, and the meaning of terms contained in them, are not always clear; and even if they are clear, they are not always clearly understood.  In a guest article, the second of a two-part series, Christopher Russell and Rachael Reynolds, Partner and Senior Associate, respectively, at Ogier, Cayman Islands, present a detailed discussion of the relevant global caselaw with respect to conferring the benefit of exculpation and indemnity clauses on third parties, and offer specific drafting and structuring suggestions.  See “Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part One of Two),” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).

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  • From Vol. 3 No.50 (Dec. 29, 2010)

    Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part One of Two)

    In an increasingly litigious world, and a world of increasing commercial failures, those sustaining losses look for others to sue.  In the hedge fund context, this will typically take the form of funds, their liquidators or their shareholders derivatively suing service providers such as the investment manager, the investment adviser and the auditors, or the fund’s former directors.  Frequently, there will be clauses in the Articles of Association or other constituent documents of the fund, or in contracts with directors or service providers, for exculpation or indemnity, or both, of which potential defendants will seek to avail themselves.  If effective, these clauses will halt a claim in its tracks against those entitled to the benefit of them, but the ambit of such clauses, and the meaning of terms contained in them, are not always clear; and even if they are clear, they are not always clearly understood.  In a guest article, the first of a two-part series, Christopher Russell and Rachael Reynolds, Partner and Senior Associate, respectively, at Ogier, Cayman Islands, provide an overview of exculpation and indemnity clauses in Cayman Islands hedge fund documents, then offer a detailed discussion of the relevant global caselaw with respect to carve-out terms including actual fraud, personal dishonesty, fraud, wilful fraud or dishonesty, wilful default, wilful neglect, wilful misconduct and gross negligence.

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  • From Vol. 3 No.41 (Oct. 22, 2010)

    Indemnification Provisions in Agreements between Hedge Fund Managers and Placement Agents: Reciprocal, But Not Necessarily Symmetrical

    In a recent article, we argued that the use of placement agents by hedge fund managers – especially smaller and start-up managers – is likely to continue and grow in the near term, for both macro and micro reasons.  At the macro level, we identified four rationales for this anticipated trend: (1) many new investments are going to larger managers; (2) many institutional investors plan to increase their hedge fund allocations in the next three to five years; (3) a noteworthy percentage of institutional investors plan to increase their allocations to new managers; and (4) manager reputation weighs heavily in the allocation decision-making of institutional investors.  And at the micro level, we suggested that the use of placement agents by hedge fund managers will continue and grow because placement agents provide a range of potentially valuable services to managers, including: marketing and sales expertise; division of labor between portfolio management and marketing; credibility; contacts and access; strategic and other services; geographic and cultural expertise; and the ability to avoid the question of whether the manager’s in-house marketing department must register with the SEC as a broker.  For a fuller discussion of each of these points, see “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010).  Another point we made in that article – and a large part of the reason why we have undertaken this article – is that while the business case for the use by hedge fund managers of placement agents is compelling, the recent regulatory attention focused on placement agent activities and hedge fund marketing more generally is unprecedented.  See, e.g., “Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them,” The Hedge Fund Law Report, Vol. 3, No. 36 (Sep. 17, 2010); “Third-Party Marketers that Solicit Public Pension Fund Investments on Behalf of Hedge Funds May Have to Register with the SEC within Three Weeks,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010); “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010); “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  Accordingly, hedge fund managers are increasingly sensitive to the prospect that retaining placement agents can involve burdens as well as benefits.  At best, placement agents can dramatically increase assets under management, revenues and profits.  But at worst, placement agents can materially expand the range and severity of liabilities to which hedge fund managers are exposed.  At the same time, marketing and selling hedge fund interests can expose placement agents to liability.  In short, the exposure created by the relationship is reciprocal, but not necessarily symmetrical: in most cases, and as explained more fully below, placement agents have more opportunities to harm managers than vice versa.  Sophisticated hedge fund managers and placement agents recognize that their relationships may create these reciprocal, asymmetrical liabilities, and, to the extent possible, seek to allocate the burden of such liabilities ex ante, by contract.  Specifically, the indemnification provisions included in agreements between hedge fund managers and placement agents theoretically aim to allocate a particular category of liability to the party best situated to avoid it.  (Practically, they often allocate more liabilities to the party with less bargaining power.)  By allocating (in theory) liabilities to the “least cost avoider,” indemnification provisions also seek to affect behavior in a manner that mitigates the likelihood of loss.  The idea is that a party is more likely to take precautions against a loss if it is required to internalize the cost of that loss; and the party best situated to take such precautions is the party that can do so at the lowest cost. This article explores a question that frequently arises in the negotiation of agreements between hedge fund managers and placement agents: who should indemnify whom?  Or more particularly – since the answer is not so absolute – for what categories of potential liability should placement agents indemnify managers, and vice versa?  To answer that question, this article discusses: the activities of placement agents that can give rise to claims (by regulators or investors) against or can otherwise adversely affect managers; the activities of managers that can give rise to claims against or can otherwise adversely affect placement agents; how indemnification provisions in placement agent agreements are drafted to incorporate the various categories of potential liability; other mechanics of indemnification provisions (including the relevant legal standard, term, advancement of attorneys fees and clawbacks); the inevitable insufficiency of indemnification; the consequent heightened importance of due diligence and monitoring (including a discussion of ten best compliance practices and procedures for broker-dealers); and the interaction in this context among indemnification, directors and officers (D&O) insurance and errors and omissions (E&O) insurance.

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  • From Vol. 3 No.31 (Aug. 6, 2010)

    Delaware Chancery Court Rules that Countersuit for Indemnification by Manager of Fund Administration Holdings, LLC, May Proceed against those Members of the Fund who Sued Him for Intentional Withholding of Distributions

    On June 30, 2010, the Delaware Chancery Court denied a motion to dismiss counterclaims brought by James P. Kelly, the managing member of Fund Administration Holdings, LLC (FAH), as against members of FAH who had sued him.  Kelly had intentionally withheld payments from the sale of fund assets to those members after they had assisted another firm, State Street Bank and Trust Company (State Street), in unrelated litigation against him.  After the members sued Kelly, he counterclaimed for indemnification, breach of a non-disparagement clause, and release under FAH’s operating agreement.  The court, though “skeptical” of Kelly’s position in seeking indemnification, felt “constrained” to permit his claims to go forward due to ambiguities in the operating agreement.  We detail the background of the action and the court’s legal analysis.

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  • From Vol. 3 No.21 (May 28, 2010)

    New York State Appellate Division Denies Bid by Hedge Fund QVT LP to Establish that its Claim for Indemnification Pursuant to a Merger Agreement with Biosynexus Inc. Was Valid on its Face

    In 2005, defendant hedge fund QVT Fund LP (Fund) entered into an agreement and plan of merger (the Merger Agreement) with target company Biosynexus Inc (Biosynexus).  The target’s principal shareholder was plaintiff Orbimed Advisors, LLC (Orbimed).  At closing, Orbimed and the other selling shareholders placed a portion of the proceeds of the sale into escrow to secure their duty to indemnify the Fund for certain breaches of the representations and warranties made in the Merger Agreement.  The indemnification provision was to survive for one year and, if no claim was made, the escrow was to be released to the selling shareholders.  Days before the indemnification provision was to expire, the Fund submitted a claim to Orbimed.  After the expiration date, Orbimed commenced an action seeking a declaration that the Fund’s claim did not satisfy the requirements of the Merger Agreement and demanding release of the entire escrow to the selling shareholders.  The Fund moved to dismiss the complaint on the grounds that its notice was sufficient as a matter of law.  The trial judge determined that Orbimed had stated a valid cause of action against the Fund for release of the escrow.  The Appellate Division affirmed.  We summarize the facts surrounding the claim for indemnification and the court’s reasoning.

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  • From Vol. 2 No.32 (Aug. 12, 2009)

    Delaware Chancery Court Rules for Ex-Officers in Advancement and Indemnification Dispute

    Delaware has a history of vigorous enforcement of indemnification rights for directors and officers of corporations.  On July 14, 2009, the Delaware Chancery Court applied the principles developed in the corporate context on behalf of principals in a partnership when it ruled in favor of two former officers of Collins & Aikman Corp. (C&A), David Stockman and J. Michael Stepp.  The officers had sued for advancement of legal fees and indemnification from C&A’s majority investor, Heartland Industrial Partners LP (Heartland), for expenses arising from civil and criminal proceedings against them stemming from their C&A service.  The Chancery Court held: (1) ambiguous agreements must be construed against the entity, be it a partnership or corporation, and not the individual; and (2) a director is entitled to indemnification for proceedings that the director won without the need to wait until all proceedings against that director have concluded.  The case is likely to have important implications for officers and directors of hedge funds or hedge fund managers that are organized as Delaware limited partnerships.  We discuss the factual background of the case and the court’s legal analysis.

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