Restrictive covenants, including non-competition clauses, are commonly misunderstood, and such misunderstandings can cause problems not only for employees, but also employers.  When hedge fund managers hire new employees, these types of restrictions are often included in employment agreements or in partnership agreements (or side letters), often when an employee or partner is granted an interest in the fund manager’s profits.  Additionally, they can be found in purchase agreements when a fund manager sells some or all of its business.  See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).  When properly drafted and applied, restrictive covenants can protect an employer against harm created by the theft or misuse of valuable proprietary firm information.  When improperly drafted or applied, such restrictive covenants may not be enforced and will not provide the desired protection.  In addition, fund managers hiring new employees who may be subject to restrictive covenants should take certain precautions to avoid allegations that they aided or abetted a breach of a restrictive covenant which can cause reputational harm, among other things.  On November 10, 2011, Ronald E. Richman and Holly H. Weiss (SRZ Partners), both partners at Schulte Roth & Zabel LLP, hosted a seminar entitled “Restrictive Covenant Issues for Investment Managers” (Seminar) in which they discussed a variety of issues relevant to hedge fund managers, including the different types of restrictive covenants, common misconceptions about restrictive covenants, how to properly draft restrictive covenants, how restrictive covenants are analyzed by the courts, what happens once a dispute involving restrictive covenants arises and best practices for hedge fund manager employers looking to hire prospective employees.  For the most part, Richman and Weiss focused on restrictive covenants in the employment arena.  This article summarizes the issues discussed by the SRZ Partners and includes additional guidance relevant for hedge fund managers dealing with restrictive covenants. Read full article …

Hedge fund investors are demanding greater liquidity where liquidity is practicable.  See “What Do Hedge Fund Investors Want in Terms of Liquidity and Transparency?,” Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011).  Some managers are addressing such demands by launching more liquid funds.  See our recent interview with Dechert Partner George Mazin (question on bifurcation in post-crisis hedge fund launches along liquidity lines).  Other managers are addressing such demands by launching moderately liquid hedge funds but granting certain investors preferential redemption rights, often via side letters.  See “Are Side Letters Granting Preferential Transparency and Liquidity Terms to One Investor Ipso Facto Illegal?,” Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  The former approach passes regulatory muster.  To an increasing degree, the latter approach does not.  Regulators are concerned that any asymmetry in the redemption rights granted to hedge fund investors that otherwise are getting the same material terms may conflict with the manager’s uniform fiduciary duty to all fund investors.  See “Delaware Chancery Court Opinion Clarifies the Scope of a Hedge Fund Manager’s Fiduciary Duty to a Seed Investor,” Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011).  Top SEC officials have expressed this concern with increasing volume of late, most recently at this week’s Practising Law Institute program on hedge funds.  A recent enforcement action illustrates a factual scenario in which the SEC’s legal concern may give rise to causes of action against a hedge fund manager.  Practically, this action will help hedge fund managers define the scope of accommodation that permissibly may be granted to a significant investor that demands greater liquidity than other investors.  See “How Can Liquid Hedge Funds Be Structured to Accommodate Investments in Illiquid Assets?,” Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011).  Theoretically, this action is part of a growing body of regulatory statements and authority suggesting that uniform liquidity for similarly situated hedge fund investors is in the nature of an inalienable investor right.  This article details the factual and legal allegations in the order and discusses the implications of the order for hedge fund liquidity, brokerage activity by hedge fund managers and principal transactions. Read full article …

On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA).  This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others. Read full article …

On November 10, 2011, the Securities and Exchange Commission (SEC) announced the simultaneous filing and settling of charges against investment adviser Lilaboc, LLC d/b/a ThinkStrategy Capital Management, LLC (ThinkStrategy) and its founder and managing director, Chetan Kapur (Kapur, and together with ThinkStrategy, Defendants).  The SEC’s Complaint in the action (Complaint) alleges that over nearly seven years the Defendants made false statements to investors in ThinkStrategy Capital Fund (Capital), a hedge fund managed by the Defendants, and TS Multi-Strategy Fund (Multi-Strategy, and together with Capital, Funds), a fund of funds managed by the Defendants.  Those allegedly false statements related to the Funds’ performance, longevity and assets under management (AUM), as well as the credentials of Kapur and his management team.  Moreover, with respect to Multi-Strategy, the Complaint alleges that the Defendants failed to perform due diligence commensurate with their representations to investors before investing with underlying managers.  As a result of such inadequate due diligence, Multi-Strategy invested in notorious Ponzi schemes such as Bayou, Valhalla/Victory Funds and Finvest Primer Fund.  See “Recent Bayou Judgments Highlight a Direct Conflict between Bankruptcy Law and Hedge Fund Due Diligence Best Practices,” Hedge Fund Law Report, Vol. 4, No. 25 (Jul. 27, 2011).  Allegations in the SEC action incorporate and expand upon allegations in a private civil action recently filed against the Defendants, and – as discussed more fully in this article – highlight the interaction between private claims and SEC enforcement actions.  See “Federal Court Decision Holds that a Fund of Funds Investor May Sue a Fund of Funds Manager That Fails to Perform Specific Due Diligence Actions Promised in Writing and Orally,” Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011). Read full article …

On November 2, 2011, Gibson, Dunn & Crutcher LLP announced that Yi Zhang and Graham Winter will join the firm as partners.  On the relevance of Hong Kong to the global hedge fund industry, see “AsiaHedge Study Finds That a Growing Proportion of Hedge Funds with Asia-Focused Strategies are Managed From Asia,” Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  For a discussion of accounting considerations in connection with investments by hedge fund managers in Chinese companies, see “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011). Read full article …