The Cayman Islands Directors Association (CIDA) has welcomed the judgement of Justice Jones QC relating to the failings of directors of a hedge fund in the Grand Court in the Weavering Macro Fixed Income Fund Limited case (Weavering) issued on 26 August 2011. In particular the CIDA agrees that the Weavering case shows serious failings by the directors of Weavering and shows clearly the value of appointing professional independent directors.
Paul Harris the President of CIDA noted that the directors of Weavering were not located in the Cayman Islands nor were they members of CIDA. Harris pointed out that if the Weavering Directors had been members of CIDA they would have been subject to the CIDA Code of Conduct, which is based, with permission, on the Institute of Directors in the UK (IOD) Chartered Directors Code of Professional Conduct and sets out the basics standard expected of a director who is a member of CIDA.
Harris noted that in the Weavering judgement Justice Jones described the role of a Cayman Islands director to a hedge fund as follows:
"The Cayman Islands investment fund industry works on the basis that investment management, administration and accounting functions will be delegated to professional service providers and a company’s independent non-executive directors will exercise a high level supervisory role.
"They are not entitled to assume the posture of automatons, as these Directors did, by signing whatever documents are put in front of them by the investment manager without making enquiry or applying their minds to the matter in issue, on the assumption that the other service providers have all performed their respective roles (actual or perceived) and therefore do not need to be supervised in any way whatsoever."
Harris said he considers the actions of the Weavering Directors as described by Justice Jones to be in stark contrast to the CIDA Code of Conduct that requires that directors insist that they are provided with sufficient regularly and timely information to enable the directors to discharge their duties. Also that the CIDA code includes duties of care and diligence whilst acting independently, truthfully and honestly and at all times being cognisant of their duties to the company and its stakeholders.
In the Weavering case the learned judge found the Directors involved, not only did whatever the Investment Manager told them to do but they apparently signed minutes of meetings that did not actually take place. We find the described actions of these Directors abhorrent to the independent director profession. Although there is no requirement to have a director located in the Cayman Islands this case certainly makes clear that hedge funds should at the very least appoint a high quality professional director such as can be found from the Cayman Islands.
Harris said that this of course reflects the concentration of hedge funds located in the Cayman Islands although the concept of being an independent director as a profession is somewhat unique to the Cayman Islands they have proved their value. In particular during the recent financial crisis it became apparent that independent directors offered from the Cayman Islands were indispensible when hedge funds were faced with making difficult decisions. They ensured that all decisions made during that time were made in accordance with the fund documents and that all shareholders were treated fairly. The vast majority of all new hedge funds have at least one independent director on their boards and if hedge funds do not have these then they at least risk the perception by investors that a situation such as the Weavering case may arise with their fund.
CIDA Executive Committee Member, Victor Murray (LLB, PG Dip LP) said that the availability of an increasing number of independent directors from the Cayman Islands is vital to the continued confidence that investors have shown in the Cayman based hedge fund product. Not only have they helped make the Cayman Islands hedge fund an efficient investment vehicle they have ensured that they are trusted by all counterparties.
In conclusion Harris said that the Weavering case reaffirms, that professional hedge funds should appoint independent professional directors.
In addition, as all informed counterparties have always known, the directors offered from the Cayman Islands are of a very high quality and they understand the specific requirements of a Cayman Islands hedge fund
By selecting a CIDA member as a director counterparties can be sure that they are subject to the CIDA code of Conduct which is analogous to the UK Institute of Directors code. Harris advised that CIDA intends to host a seminar (open to CIDA non-members) in the next few weeks to review the Weavering decision in CIDA’s role of educating and promoting further directors education in the Cayman Islands.