The Hedge Fund Law Report

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

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By Topic: Soft Wind-Downs

  • From Vol. 5 No.29 (Jul. 26, 2012)

    Cayman Islands Segregated Portfolio Companies: New Case Law Highlights Attractions for Promoters and Hedge Fund Managers

    Typically, hedge fund managers use exempted companies organized in a master-feeder structure or in an umbrella fund structure to organize their funds.  Presently in the Cayman Islands, approximately 70% of funds are organized using these structures.  However, with the introduction in 1998 of segregated portfolio companies (SPCs) (known in other jurisdictions as “single account” or “protected cell” companies), an opportunity was given to promoters to utilize a structure that was less expensive and more efficient than the traditional structures.  Although a seemingly attractive fund vehicle, SPCs have not gathered a great following in the Cayman Islands.  At present, only around 10% of Cayman registered funds are SPCs, and that proportion has been relatively constant in recent years.  Their use has been generally limited to single investor funds where there are a large number of participants and there is a need to have the ability to create new portfolios quickly and simply.  However, with the Cayman Islands Court of Appeal (Court) handing down its decision in ABC Company (SPC) v. J & Co Ltd in June 2012, it is opportune to revisit the option available to promoters and managers of using an SPC as an attractive alternative to the vehicles more commonly used to establish hedge funds in the Cayman Islands.  In a guest article, Christopher Russell and Jayson Wood, partner and counsel, respectively, in the litigation and insolvency department of Appleby (Cayman) Ltd., discuss: the purposes and the general advantages of SPCs; the reasons for the apparent unpopularity of SPCs; the facts and legal analysis of the ABC decision; and four key structuring lessons for hedge fund managers looking to use the SPC structure following the ABC decision.

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  • From Vol. 5 No.23 (Jun. 8, 2012)

    Cayman Court of Appeal Holds that Soft Wind-Down of One or More Segregated Portfolios of a Segregated Portfolio Company Does Not In and Of Itself Justify a Judicial Winding-Up of the Entire Company

    In the wake of the 2008 financial crisis, some troubled hedge funds organized under the laws of the British Virgin Islands (BVI) and the Cayman Islands elected to suspend redemption rights and undertook “soft wind-downs” of their operations.  See Cayman Hedge Funds, Soft Wind-Downs and Disclosure,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).  In response, fund investors sought to gain leverage by petitioning to force the funds into involuntary liquidation on the ground that the funds were no longer capable of carrying out their stated business purposes.  BVI and Cayman courts have taken conflicting views on whether a soft wind-down is a valid ground for an involuntary winding-up petition.  The Cayman Island Court of Appeal recently addressed a novel question involving whether the winding down of the various segregated portfolios comprising a “segregated portfolio company” (SPC) would warrant winding down of the entire SPC.

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  • From Vol. 4 No.15 (May 6, 2011)

    What Are the Legal and Practical Effects of a Discrepancy between the Provisions of a Cayman Hedge Fund’s Articles of Association and Offering Documentation?

    Before the recent global economic crisis impacted the hedge fund world, it was not uncommon for even sophisticated investors to subscribe for shares in corporate offshore vehicles without having first scrutinized in detail the offering memorandum, the Articles of Association and the other governing documentation of the fund.  The change in the economic climate has given rise to a heightened awareness of the need to review carefully, and in some cases to seek to negotiate, the terms of subscription.  It has also caused those who have suffered investment losses to scrutinize subscription terms carefully in order to consider whether, based on the terms upon which they invested and the terms of the Articles of Association of the fund, they have grounds for bringing proceedings to recover damages from the fund or its directors, or other service providers.  A number of the disputes that have arisen in the last few years between Cayman funds and their investors have been caused by apparent material differences in key provisions in fund documents, in particular the offering memoranda and the Articles of Association – for example, the fund’s rights to suspend redemptions, delay payment of redemption proceeds, side-pocket illiquid positions and to set aside reserves for contingent liabilities post declaration of net asset value.  The question arises: What is the effect of a provision in the offering documentation which appears to be inconsistent with the wording of the Articles?  Does the provision in the offering documentation constitute an enforceable right of the fund (for example, to suspend payment of redemption proceeds if such a provision is not provided for in the Articles) or a shareholder (for example, to require adherence by the fund to an investment policy specified in the offering document but not contained within the Articles)?  Or does such an inconsistency constitute a misrepresentation of the terms of the Articles, which may give rise to a cause of action against the fund or its directors at the suit of an investor who relied on the misrepresentation in deciding to invest or remain invested in the fund?  In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, address the foregoing questions and others, and discuss relevant guidance provided by the UK Privy Council in an important recent decision.

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  • From Vol. 4 No.7 (Feb. 25, 2011)

    Cayman Hedge Funds, Soft Wind-Downs and Disclosure

    The expression “soft wind-down” is used in the corporate hedge fund context to describe the operating state where a fund is still under the control of its directors and where the investment manager is conducting an orderly realisation of the portfolio with a view to redeeming out all remaining investors.  The fund is not formally in liquidation – a specific statutory process in Cayman where the directors’ powers cease and liquidators assume control with a view to shutting the company down.  Over the past several years, a number of hedge funds have been faced with large numbers of redemption requests with the consequence that the economic viability of those funds has come into question.  Faced with little alternative, those funds have imposed suspensions and instituted soft wind-downs.  For some funds, the duration and conduct of the soft wind-down procedures has proved unsatisfactory to investors with the result that a number have ended up in court.  In recent decisions, the Cayman court has indicated that it will grant an order to place a corporate hedge fund into formal liquidation on the statutory grounds of it being “just and equitable” if the fund has lost its sub-stratum.  Put another way, an open ended hedge fund which has represented to investors that they will get periodic liquidity should not be implementing an indefinite suspension of redemptions coupled with a long term soft wind-down in the absence of proper disclosure.  In a guest article, Tim Frawley, a Partner at Maples and Calder, offers a detailed discussion of: the definition of “disclosure” in the hedge fund context; the rationale for disclosure; the evolution of the purpose of hedge fund offering documents; Cayman Islands statutory and common law with respect to misrepresentation and disclosure; considerations in connection with disclosing the possibility of a soft wind-down; and recent Cayman and BVI caselaw bearing on disclosure considerations.

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