Interview with Nick Plowman – Given that a high percentage of Hong Kong hedge fund managers prefer the Cayman Islands as a domicile for their fund structure it’s perhaps unsurprising that the recent Weavering case has led to a sharper focus on corporate governance for Cayman Islands law firms such as Ogier.
The judge in the case simply emphasised well-established expectations relating to directors’ duties in the context of a Cayman investment fund. However, it does provide some useful benchmarks for directors to refer to, particularly around the delegation of powers to a fund’s service providers such as a fund administrator.
Nick Plowman, partner at Ogier in Hong Kong says that directors of Cayman funds must ensure, for example, that investment managers act in accordance with their delegated authority under their investment management agreement.
“There’s been a real focus on corporate governance in Asia in light of recent failings with respect to fiduciary obligations of the “operator” of Cayman fund structures. Issues such as conflicts of interest between the principals of the fund, the investment manager and their service providers have been tested a lot lately and it’s a trend that’s likely to continue.”
“The Cayman Islands Monetary Authority (CIMA) are looking to try and regulate the provision of independent directorships in the Cayman. There’s a growing focus on directors acting for proper purpose and fulfilling their fiduciary obligations to the fund, rather than just fulfilling an investor requirement or a tax consideration,” says Plowman.
Plowman concedes that the extent to which Hong Kong managers are being pushed by investors to improve corporate governance largely depends on the size of the investor and how much influence they have over the manager: “Oddly, some independent directors may not fulfil the criteria of institutional investors, but might well meet the expectations of a non-institutional investor who’s less concerned with truly independent oversight,” states Plowman.
As to how the issue of independent directorships affects Hong Kong, Plowman adds: “In Hong Kong we have the Profits Tax Exemption for Offshore Funds which provides guidelines requiring “central management and control” of the fund not to be exercised in Hong Kong in order to avail yourself of the exemption, thereby avoiding profits tax for a Cayman fund. Whilst not a conclusive factor, a majority of a Cayman fund’s board of directors is preferred to reside outside of Hong Kong to fulfil the Exemption’s requirements.”
Historically, says Plowman, there was a reliance on professional independent directors fulfilling these tax requirements for Cayman funds managed out of Hong Kong. Now there’s more focus on these independent directors being truly independent, actually making a meaningful contribution and fulfilling their fiduciary obligations, albeit that the Exemption still plays a part in the need for independent directors.
Plowman says the key message with regard to corporate governance of Cayman fund structures is a need for managers to appoint truly independent directors who fulfil their fiduciary obligations and where conflicts of interest arise, ensure they are dealt with appropriately. If a manager can do one more thing to fulfil the requirements of an institutional investor, says Plowman, they’ll do it.
“When delegating powers to service providers, directors must also continually review and monitor the delivery of services by those providers. Delegation does not absolve a director of his fiduciary obligations in this context.”