Corporate governance and the Weavering judgement
Anne Dolan, a chartered secretary with Walkers Management Services in the Cayman Islands, argues that it is telling that in the recent case regarding the collapsed Macro Fixed Income Fund, which resulted in a USD111m judgement against the fund’s independent directors, significant weight was given to documentary evidence of board meetings and the way in which these meetings were conducted.
In the case of Weavering Macro Fixed Income Fund Limited (In Liquidation) vs. Stefan Peterson and Hans Ekstrom, the Grand Court of the Cayman Islands has handed down a useful judgement that throws the spotlight firmly on directors and the way in which they perform their supervisory role. The directors were found responsible for wilful neglect and default, and have been ordered to pay an eye-watering sum of USD111m plus costs.
The Weavering case has attracted significant media attention both locally and internationally. Much has been said about Jones J’s damning criticism of the conduct of the directors themselves.
However, from my own perspective working as a chartered secretary in the Cayman Islands and providing professional company secretarial services to numerous Cayman, BVI and Delaware entities, what was most interesting about the judgement was the way in which the conduct of the board meetings and the minutes themselves were analysed in detail by the court.
Following Jones J’s comments in his judgement, it may now be incumbent upon directors to provide evidence that they have exercised appropriate skill, care and diligence in discharging their duties to arrange for minutes to be taken of formal meetings that fairly and accurately record the matters considered and decisions which were made. He said: “The discussion should be summarised, at least to the extent that it is necessary for the reader to understand the basis upon which the decisions were made.”
It is clear from the judgement that independent directors should insist that, when regular board meetings are held, those meetings are fully and accurately documented. Far from merely signing pro forma minutes that are drafted in advance and which simply “note” certain reports (as appeared to be the case in this instance), board minutes should provide a record of the substance of discussions among the directors and other meeting participants, any enquiries that are made of third parties (including the investment adviser and/or investment manager) and any approvals or resolutions in relation thereto.
Board minutes that meet these critical standards are essential for several reasons. They give comfort to directors that, if they ask questions of professional service providers to whom they have delegated certain functions such as investment management, administration and accounting, their record of doing so is documented, such that if questions were raised at a later date, a director has a clear and irrefutable record of having discharged his or her duties to the fund and holding service providers to account.
Unlike the pro forma minutes which were replicated for numerous meetings and ‘rubber-stamped’ by the directors in this instance, accurate and detailed board meeting minutes often take a considerable amount of time to draft.
Jones J also commented adversely on the fact that a representative of the investment manager had prepared the board minutes for each meeting, calling into question the extent to which the minutes could be truly considered an accurate reflection of matters discussed and the independence of directors in considering relevant matters.
The assistance of a professional chartered secretary may therefore offer significant benefits to hedge funds both in alleviating the administrative burden and in maintaining that third-party objectivity that was lacking in this instance.
The court noted that a board meeting agenda should be prepared and circulated in advance of each formal meeting, reflecting input from the investment manager, the administrator and the directors themselves. A chartered secretary can prepare detailed agendas and circulate them to all meeting participants inviting comment, additions or amendments, well ahead of each board meeting.
As well as dealing with logistics such as location, timing and conference call facilities, the agenda would typically also set out the matters to be discussed, the reports being presented and the individuals who will participate. Again, the preparation of agendas is a standard part of a professional chartered secretary’s role when providing company secretarial services.
Attendance of service providers
Although it is ultimately a question for the directors themselves, when taking on a new client and discussing board meeting conduct and procedure, we invariably suggest to clients that it is good corporate governance to request the attendance at board meetings of the various service providers to whom the directors have delegated certain functions.
The judgement affirms that principle by stating that “directors need to satisfy themselves, on a continuing basis, that the various professional service providers are performing their functions in accordance with the terms of their respective contracts, and that no managerial and/or administrative functions which ought to be performed are being left undone.”
It is difficult to see how, in practice, directors can satisfy themselves that an administrator is performing its functions in accordance with its service contract unless they have the opportunity to receive and discuss a report from the administrator at a meeting either in person or by conference call.
It is not enough for directors to assume that the mere delegation of a function to a third-party service provider is enough to discharge their duty to act in the best interests of the company and to discharge their high-level supervisory function. A director must go further and actually review the performance of those functions by the service provider on a regular basis, ensuring that it is performing its contracted role.
The case against the directors of the Weavering Macro Fixed Income Fund resulted in substantial damages being awarded to the plaintiff, and may result in sleepless nights for independent directors who cannot take comfort in the fact that they are properly discharging their duties to a company.
It is telling that significant weight was given to documentary evidence of board meetings and the way in which such meetings were conducted.
It has always been my view that an independent third party providing company secretarial services to a fund is worth its weight in gold to investors by giving them comfort that a fund is being properly governed. This judgement now also lends credence to the view that the same applies to directors – about USD111m worth of gold to be precise.
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