At the end of 2008, hedge fund manager Steel Partners LLC (Steel Partners) adopted a novel and controversial approach in response to requests to redeem approximately 38 percent of the net assets in its Steel Partners II family of funds (Steel Partners II Funds). In a nutshell, Steel Partners proposed a restructuring plan in which investors could receive a cash distribution and either (1) shares (of limited or no liquidity) in a new publicly-traded entity that would hold the funds’ assets, or (2) a pro rata distribution of the funds’ (largely illiquid) holdings. Certain limited partners sued to enjoin that plan and demanded an “orderly liquidation” of the funds. On June 19, 2009, the Delaware Chancery Court denied the plaintiffs’ demand for a preliminary injunction. See “Delaware Chancery Court Permits Hedge Fund Manager Steel Partners to Restructure Fund and Redeem Certain Limited Partnership Interests
,” Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009). In light of the legal imprimatur of the Delaware Chancery Court, the following question has been floating around the hedge fund community: is the Steel Partners approach a precedent or an anomaly? Based on original research and interviews with market participants, the Hedge Fund Law Report has concluded that the answer is likely the latter: the Steel Partners approach, while legally plausible, is practically and optically cumbersome, and unlikely to be imitated precisely (though parts of the approach may inform responses to heavy redemption requests by similarly situated managers). In fact, quite apart from serving as a precedent for an anti-redemption technique, the Steel Partners case may induce hedge fund investors to demand language in the governing documents of future funds prohibiting such techniques. We describe the Steel Partners redemption plan; discuss the legal challenge to it; identify three reasons why it is unlikely to serve as a precedent; and offer insight into how the plan and the reactions to it may affect drafting of future fund documents.