What Are the Legal and Practical Effects of a Discrepancy between the Provisions of a Cayman Hedge Fund’s Articles of Association and Offering Documentation?

Before the recent global economic crisis impacted the hedge fund world, it was not uncommon for even sophisticated investors to subscribe for shares in corporate offshore vehicles without having first scrutinized in detail the offering memorandum, the Articles of Association and the other governing documentation of the fund.  The change in the economic climate has given rise to a heightened awareness of the need to review carefully, and in some cases to seek to negotiate, the terms of subscription.  It has also caused those who have suffered investment losses to scrutinize subscription terms carefully in order to consider whether, based on the terms upon which they invested and the terms of the Articles of Association of the fund, they have grounds for bringing proceedings to recover damages from the fund or its directors, or other service providers.  A number of the disputes that have arisen in the last few years between Cayman funds and their investors have been caused by apparent material differences in key provisions in fund documents, in particular the offering memoranda and the Articles of Association – for example, the fund’s rights to suspend redemptions, delay payment of redemption proceeds, side-pocket illiquid positions and to set aside reserves for contingent liabilities post declaration of net asset value.  The question arises: What is the effect of a provision in the offering documentation which appears to be inconsistent with the wording of the Articles?  Does the provision in the offering documentation constitute an enforceable right of the fund (for example, to suspend payment of redemption proceeds if such a provision is not provided for in the Articles) or a shareholder (for example, to require adherence by the fund to an investment policy specified in the offering document but not contained within the Articles)?  Or does such an inconsistency constitute a misrepresentation of the terms of the Articles, which may give rise to a cause of action against the fund or its directors at the suit of an investor who relied on the misrepresentation in deciding to invest or remain invested in the fund?  In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, address the foregoing questions and others, and discuss relevant guidance provided by the UK Privy Council in an important recent decision.

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