Document Templates Save Time, But Have You Checked If They Are Tailored To Your Fund?

By Alric Lindsay

Over time, offshore fund lawyers and service providers develop templates to process transactions efficiently. These templates include resolutions for launching new funds, memorandum and articles of association, partnership agreements, trust deeds, and various agreements for administration, custody, and investment management. While each law firm or service provider may have its own style or layout for these templates, it is crucial for offshore fund directors to review them thoroughly. In particular, offshore fund directors must ensure that the templates are tailored specifically for their fund rather than assuming they are error-free. Failure to do so may lead to significant issues later on, including the discovery of missing redemption provisions, inadequate discretions, a lack of authority granted to directors for certain matters, the absence of side pocket provisions, an inability to create liquidating trusts, or insufficient authorized share capital to issue additional shares.

Missing redemption provisions

In the case of missing redemption provisions, this sometimes (but rarely) happens because a client asks a corporate services provider, rather than a lawyer, to prepare their documents because it is “cheaper” to do so.  However, not all corporate service providers are built the same, and, in some cases, they may not include relevant provisions in their document templates. An example is when a client wants to process redemptions of participating shares, but later, the fund’s director discovers that there are no provisions dealing with submissions of voluntary redemption requests.  In fact, there may only be a provision addressing a share repurchase following an agreement on terms of repurchase with an investor.

In other cases, the above may occur when a law firm has two sets of articles of association- one used for quick incorporation, which contains no detailed provisions for redemption requests and another adopted upon the fund’s launch and includes detailed provisions.  On a rare occasion, someone may forget to amend and restate the articles of association to include the detailed redemption provisions. In such cases, the law firm may be prompted by the fund director to amend and restate the articles of association to include the proper redemption provisions. A fund director with a keen eye would quickly uncover this and draw it to the attention of the fund’s law firm. 

Inadequate discretions 

In addition to ensuring that adequate redemption provisions exist, it is essential for a fund director to have appropriate discretionary powers clearly defined in the articles of association. Such powers include waiving redemption notices, lock-up periods or designating alternative redemption dates.

Without these options, a fund director might need to defer a late redemption request to the next scheduled redemption day. This may cause inconvenience for redeeming investors who need the cash now.

Additionally, implementing gate provisions can be a valuable strategy, as they help manage and limit the amount that can be redeemed at any given time, ensuring the fund’s stability and safeguarding the interests of all investors. A fund director may need to discuss this with the investment manager before the fund’s launch to consider whether it would be helpful or appropriate to include it in the document template.

Insufficient authorized share capital

When it comes to subscriptions, an issue that can arise is when a fund purports to issue more shares than what is stated in its articles of association. In these cases, a fund administrator responsible for maintaining the shareholders’ register may bring this matter to the attention of a fund director.

Some fund directors may try to resolve the issue with lawyers by arguing that, although the shares may have not been legally issued, the subscriber has participated economically in the fund from the date their subscription payment was accepted. Consequently, the fund documents are amended and restated, and the investor is issued the appropriate shares.

However, the potential for such an issue could be reduced if a fund director discusses capital raising during the launch stage and considers how the stated authorized share capital and issue price align with these plans. If the stated authorized share capital, combined with the planned issue price, appears insufficient to meet the fund’s fundraising goals, the fund director could communicate this to the investment manager before the launch. This would allow for the authorized share capital to be amended at the earliest stage, enabling the issuance of a larger number of shares at the desired, initial issue price or subsequent net asset value.

Side pocket clauses

Once shares have been properly issued, it is essential to acknowledge that challenges can arise. For instance, markets may become volatile, or a financial crisis could emerge, complicating the valuation of certain investments.

To navigate these potential challenges effectively, fund directors should proactively examine the template for the fund’s articles of association. This examination is crucial in ensuring that they possess the authority to create side pockets when investment valuations become difficult.

Additionally, fund directors should consider the treatment of side-pocketed investments, as the associated share class may have different implications for management fees during the side-pocket period. By confirming the ability to establish side pockets or designated investments and applicable terms at the fund’s launch, directors can better position themselves to address potential issues down the line, ensuring smoother operations throughout the life of the fund.

Liquidating trusts

Flexibility concerning hard-to-value investments is also critical when a fund intends to terminate through voluntary liquidation. For example, the investment manager may seek to expedite the dissolution of the fund; however, certain challenging investments or assets may require an extended period to sell.

To avoid prolonging the life of the fund—which may incur additional regulatory fees and related complications—these assets can be transferred to a liquidating trust, contingent upon the inclusion of relevant provisions in the articles of association template. Once the assets are realized, which may take months or years, the beneficiaries and creditors can be compensated.

To prevent the potential oversight of a fund lacking a liquidating trust provision, fund directors should diligently review the articles of association templates to ensure that this provision is incorporated at the fund’s launch.

Summary

The foregoing shows that while a fund’s lawyer brings valuable experience in preparing fund documents, the directors must actively engage with the templates used to create those documents. Their review is not a challenge to legal counsel, but a proactive step to ensure that they have the essential flexibilities, discretions, and authorities needed to navigate future challenges with confidence.

Notes to readers:

The author, Alric Lindsay, is a professional director registered with the Cayman Islands Monetary Authority. He acts as a director of mutual funds, private funds, and investment management companies. He can be contacted at [email protected].

The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any matter. Fund directors must consider the specific circumstances of each case and must consult the fund’s legal counsel, properly registered in the Cayman Islands, to address Cayman Islands legal points.

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