Granting Enhanced Liquidity and/or Transparency to Investors
James Tinworth, Managing Associate
Simmons & Simmons LLP
As the hedge fund industry has become more institutionalised, requests for enhanced liquidity and/or transparency have become increasingly common and increasingly demanding. This article reviews the options available to an FSA-authorised hedge fund manager (assuming that it manages funds structured as Cayman companies) and the main issues surrounding each option.
New Share Class
A new share class with enhanced rights could be established: having different share classes in a fund, each with different terms, is permitted by Cayman law.
A new share class will need to be created in accordance with the articles of association and Cayman law and may require the consent of the existing shareholders.
The directors will need to consider their duties (primarily a duty to act bona fide in what they consider is in the best interests of the company) and, for example, whether their duties require them to disclose and/or offer the new shares to all investors. The directors should also consider whether adequate disclosure (of the fact that new classes with different rights could be created) has been given to shareholders in the prospectus.
Where the fund's prospectus and/or its memorandum and articles of association provides flexibility to grant the relevant enhanced rights in a side letter, however, it is more common for a side letter to be entered into than it is for a new share class to be established.
The advantages of using a side letter include: (i) it should not require the consent of the existing shareholders; (ii) it avoids the potentially greater costs involved in establishing a new share class, which may include amending a number of documents (including the prospectus, the articles of association, investment management agreement etc) when compared with the costs involved in negotiating a side letter; (iii) it avoids the increased administrative/operational burden of having a new share class and; (iv) a new share class is more permanent, in that once a side letter is terminated any enhanced rights granted are switched off.