Weavering Case

By Victor Murray

Following the Weavering decision what should a Cayman Islands fund expect from their directors?

Although it is true to say that the Weavering case (Weavering Macro Fixed Income Fund 26 August 2011) did not create any new law, it does provide some insight as to the basic minimum standards that should be expected from a fund director at least by the Cayman Islands Court.

In the Weavering case the directors of the fund were found not to meet basic standards in relation to the discharge of their fiduciary obligations. The judge in the case stated that the Cayman Islands funds industry “…works on the basis that investment management, administration and accounting functions will be delegated to professional service providers and a company’s independent non-executive directors will exercise a high level supervisory role.” There was no evidence of the directors of Weavering asking any questions of any service providers.

The judge further went on to say that the directors of the Cayman Islands fund must:

have relevant experience in the review of offering documents to ensure that the fund offering documents fairly describes the offering of its investments;
exercise their duty to review all the funds service agreements and satisfy themselves that each is appropriate and consistent with industry standards to ensure a division of responsibility amongst all the service providers (the case also stated that this is not a task that can be delegated to the lawyers retained by the investment manager); satisfy themselves on a continuing basis that the fund service providers are performing their functions in accordance with the relevant agreements;

actually hold regular board meetings where minutes are taken which fairly and accurately record the matters considered and the agenda should be prepared with input from the funds service providers before the meeting;
be able to understand the funds financial statements and the audit process;
exercise independent judgment in respect of all matters falling within the scope of their supervisory responsibilities.

These basic duties to be undertaken by a fund director are not (and should not be) a surprise to any professional independent director.

The general thrust of the decision is that independent directors should be expected to provide a certain amount of investor protection following the establishment of the fund, whilst recognizing that they may delegate the core functions of the fund. The directors have a duty to ensure that the service providers are actually carrying out their delegated services correctly. It is difficult to envisage how a director affiliated with investment manager, or other service provider, can be seen to exercise independent judgment no matter how competent as the suggestion that they were influenced by their connection can be levied as in the Weavering case.

It is clear (as it always has been) there are many drivers requiring the appointment of independent directors to a fund and the recent Weavering case simply underscores this requirement.

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