A recent change in Bermuda's company law aimed at enhancing
the Island's attractiveness as an international financial
center has also brought into sharp focus the standards of
governance advisable in the investment funds industry.
The Companies Amendment Act (No.2) 2011 (the "Amending
Act") allows Bermuda exempted companies to appoint a sole
director who may be a corporate director. Prior to the Amending
Act, Bermuda law required that all Bermuda investment funds (the
"Funds") appoint and have at all times at least two
directors, both of which were required to be individuals.
While this move makes Bermuda more attractive to international
companies seeking to set up on the Island, the investment fund
industry should be careful to evaluate whether having one director
is appropriate and in the best interests of the Fund.
Funds in Bermuda are pooled investment vehicles structured as
either mutual fund companies, unit trusts or partnership funds.
The Fund's directors are responsible for managing the
affairs of the Fund through its relationships with a series of
service providers performing investment management, administration
and accounting functions.
In the wake of the Madoff case and the financial crisis of 2008,
corporate governance in the investment funds industry has come
under the microscope. Fund governance relies, in large part, on
each Fund's director(s) to guard against the conflicts of
interest inherent in the Fund's interactions with its service
providers, and a director's duty to exercise independent
Directors owe a variety of duties to the Fund. When a Fund is
insolvent, the directors' duties include having regard to the
interests of the general body of shareholders. Under common law,
directors are subject to the duty of skill and care and a number of
statutory duties, including:
the duty to act in good faith in what the director considers is
in the best interests of the Fund and not for any collateral
the duty to exercise power for a proper purpose, advancing the
interests of the Fund itself as a separate entity, distinct from
the duty to avoid conflicts of interest with the Fund and not
put himself or herself in a position in which his or her duties to
the Fund and his or her personal interests may conflict (unless the
conflict is disclosed), and
the duty not to make secret profits.
Directors owe a fiduciary duty to the Fund to act bona
fide (in good faith) in the best interests of the Fund as a
whole. This does not mean that the courts will consider whether any
given transaction is in the best interests of the company from a
commercial perspective. Instead, the courts examine the bona
fides of the directors and will only, as a general rule,
impugn a director's conduct when he has acted improperly or for
an improper purpose.
Cases involving breaches of fiduciary duty often feature
circumstances where the directors allowed their personal interests
to conflict with the interests of the company which they serve.
The common law rule of duty of skill and care has three
a degree of skill – the standard required from the
director is that of a person of his particular knowledge and
attention to business – a director should attend to
the affairs of the company diligently, and
reliance on others – a director is not liable for the
acts of co-directors or company officers solely by virtue of being
a director; rather, a director may rely in good faith on executives
who have been appointed specifically for the purpose of attending
to the detail of management. However, directors cannot absolve
themselves entirely of their responsibilities by delegation to
A recent decision in The Cayman Islands has highlighted the
standards of governance appropriate to investment funds. In the
Cayman Islands Grand Court judgement of Weavering Macro Fixed
Income Limited (In Liquidation) ("Weavering") v Peterson
and Ekstrom, delivered on 25 August 2011, two directors of
Weavering were found guilty of wilful neglect of their duties and
held personally liable for losses of US$111 million.
The key point to draw from the court's decision is for
directors to understand that they can no longer fulfil their role
in a relatively passive manner. Rather, they must take an active
approach, ensuring not only that they make enquiries of, and
consider the input of the various service providers, but also that
any steps that are taken are fully recorded.
Given the recent amendment to company law in Bermuda allowing
for the possibility of an investment funds company having just one
director – and the greater attention being paid to
standards of governance by both investors and the courts
– the advisability of having just one director is an
important issue for investment funds companies to consider.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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