Financial Institutions

Stepping Up Offshore Governance: Director duties move to the fore in Cayman and other offshore centers

Some of the most hotly contested issues around corporate governance and operations have arisen from the Cayman Islands. Hayden Isbister and Simon Dickson of Mourant Ozannes summarize the firm’s offshore practice, litigation trends and the increased need for – and use of – corporate secretarial services. Their remarks have been edited for length and style.

MCC: Please tell our readers about your firm and your offshore practice.

Isbister: We are one of the leading global offshore law firms, advising on the laws of the British Virgin Islands, the Cayman Islands, Guernsey and Jersey. We have a substantial presence in each of those jurisdictions, as well as offices in Hong Kong and London. In addition, our corporate services affiliate, Mourant Ozannes Corporate Services (MOCS), provides corporate services to financial institutions, global corporates, managers and various sovereign wealth funds. In terms of our clients, they include many of the world’s leading financial institutions, public companies, corporations and fund promoters, as well as high net worth private individuals.

Within the umbrella of the Cayman Corporate group, we advise on all aspects of corporate and commercial work, investment funds (both hedge and private equity), and banking and finance. We also have the largest litigation practice in Cayman, as well as an international trusts and private client practice. We handle many installments of restructuring work that is often affiliated and led by our litigation practice.

Before moving to Cayman, I worked in the corporate and commercial department of Minter Ellison, a top-tier law firm in Australia. I have been in Cayman for almost nine years, and I continue to focus on corporate work, with an emphasis on investment funds, including hedge funds, private equity funds, hybrid funds and all other variations of funds. I also enjoy working on banking and finance transactions, which are often linked to an investment fund structure.

Dickson: As Hayden says, we have the fastest growing and most successful litigation practice in the Cayman Islands. We also have successful litigation practices in the British Virgin Islands, Hong Kong and the Channel Islands. The Cayman Islands litigation department has a particular focus on insolvency and restructuring, associated fund litigation, and fraud and asset tracing. We have a growing regulatory and contentious trust practices too.

In the insolvency space, the department is probably best known for the Primeo liquidation (arising out of Madoff) and the associated litigation against the SIPA trustee Irving Picard, HSBC and the Herald fund, and the Weavering liquidation and associated litigation. In the restructuring space, we are probably most recognized for our work on Arcapita bank. In the fraud and asset tracing practice, our headline case is the Algosaibi v. Saad fraud, where we act for the plaintiff, with claims of over $6 billion.

MCC: Hedge fund governance has been under continuing scrutiny from regulators, particularly in Washington, D.C., and London. What’s the state of governance and director duties, and where do you see things going, particularly in the light of the Weavering decision out of the Cayman courts?

Isbister: Weavering brought directors’ duties into the spotlight, particularly in the Cayman context of investment funds. Whilst Weavering was a significant decision, it did not tell us anything new in relation to the duties that a director must uphold when acting as a director of a Cayman corporate fund. It did, however, make us recognize that we do not want directors of Cayman funds behaving in the manner of the directors related to Weavering.

Since Weavering, the Cayman Islands Monetary Authority (CIMA), the regulatory authority of open-ended investment funds in the Cayman Islands, issued a statement of guidance on matters of fund governance (SOG). This has been a welcome addition to the Cayman funds industry. Apart from setting out good practices of supervision and the monitoring of service providers that a fund’s board must do, one of the main requirements is that the board must meet a minimum of twice per year for all regulated funds. Many boards were already adopting this practice (or more), but now it has brought more consistency across the industry.

Our firm has seen a significant increase in requests through our corporate services affiliate, MOCS, for board support or corporate secretarial services. This is designed to ensure that the board meetings are conducted in a professional way in terms of preparing the board packs with all of the necessary information, organizing the meetings and then having proper minutes of the meetings prepared. Clients have appreciated having us offer board support services as it makes the whole governance process quite smooth.

In addition to the SOG, we now have a Directors Registration and Licensing Law (DRLL), which requires directors of CIMA-regulated funds and investment management companies registered as “excluded persons” under the Securities Investment Business Law to be either registered or licensed (as the case may be) before they can be appointed to the board of a relevant covered entity. CIMA conducts this process through its website portal.

As a result of the SOG and DRLL, we have seen the state of governance improve. A number of former attorneys, accountants, administrators and various other industry professionals have become independent directors. This rise in new independent directors is driving an increase in split boards – boards that include two independent directors, with each director represented from a different independent director services firm. All of these changes have improved the state of governance, which remains an important consideration for institutional investors, as well as smaller investors who are investing in Cayman funds.

While the SOG and DRLL were both a direct result of Weavering, it is worth noting that Cayman has always been quick to react whenever there are issues of concern, such as those issues identified in Weavering. As a result, Cayman remains an accepted and recognized offshore investment funds jurisdiction that has a flexible investment funds regime set within a clear and effective regulatory environment, which is implemented by CIMA. There are also other appealing features, such as the number of quality and experienced legal, administrative and accounting services providers, and the ease of registration procedures.

MCC: What types of litigation are most common, and are you seeing an increase in enforcement actions?

Dickson: We continue to see a broad array of fund litigation, ranging from shareholder disputes to full-scale litigation against service providers. On the insolvency side, although there have been fewer winding up petitions over the last year, we continue to see an uptick in the number of insolvency related matters coming from Asia. For example, we have recently been heavily involved in parallel applications in Hong Kong and the Cayman Islands in respect of an application to wind up a multibillion dollar operation.

In the restructuring space, there remains a significant interest in the use of light touch provisional liquidators to facilitate onshore restructuring, particularly with respect to Chapter 11 proceedings. We successfully used this procedure in the Arcapita matter, where the court allowed a moratorium over claims against a Cayman subsidiary in Chapter 11 proceedings together with the appointment of provisional liquidators with limited powers to oversee the progress of the US restructuring. The appointment allowed the Chapter 11 proceedings to move forward and ultimately allowed us to facilitate a reorganization of the Cayman subsidiary in the US. This model has been used a number of times since and is growing in popularity.

In the fraud market, there remains a steady flow of instructions. To date, no fraud case being litigated in Cayman rivals the Saad litigation, which is due to go to trial in July.

We are seeing more regular use of the statutory mechanisms for the taking of depositions and the obtaining of evidence to assist in onshore fraud litigation. Whilst these statutory steps can be time-consuming, they remain an excellent and underused tool for discovery from offshore centers.

We have seen a great deal of interest in applications under Part XVI of the Cayman Islands Companies Law where, in the context of a statutory merger, a dissenting shareholder can trigger the court process for determining “fair value” of its shares. The recent decision of the court in Integra gave useful guidance as to how the court will approach such applications, and it approved in large part the approach taken by the Delaware and Canadian courts.

On the regulatory side, the increasing burdens are causing financial institutions concern, and we have seen a great deal of advisory work arising out of this. We are beginning to see some institutions take a more critical look at the requests being made of them and have seen a greater appetite for challenging the decision-making behind the requests. We expect to see a growth in this area over the next few years.

We have not seen a particular rise in instructions to enforce foreign judgments. The Cayman Islands generally abides by the common law rules of enforcement, and so, absent submission to the relevant jurisdiction, enforcement can be problematic.

MCC: What should our readers know about litigation in the Cayman Islands and other offshore jurisdictions your firm represents?

Dickson: Perhaps the most important point to be made is with respect to the infrastructure, which has been put in place to deal with high-value, complex litigation. The Cayman Islands court has a specialized financial services division, a court of appeal (of which a majority of the judges are former Lord Justices of Appeal from the UK) and a final court of appeal in the Supreme Court in London. The Cayman Islands has offices of all of the major offshore law firms and all the major UK accountancy firms. It follows that the jurisdiction is well set up to deal with any financial services litigation.

As Hayden points out with reference to the Weavering matter, the Cayman Islands tends to throw up some of the most hotly contested issues around corporate governance and operations. Indeed, much of the litigation we have been involved in over the last few years has taken a critical look at the manner in which investment vehicles have operated and the issues arising, particularly in the event of insolvency. Cases such as these and the intricacies they have shown, together with the day-to-day expertise brought by our finance, corporate and investment fund teams, allows us to remain not only at the forefront of investment fund litigation but at the forefront of the issues concerning the investment fund community.

MCC: Where do the Cayman Islands fit in as far as businesses evaluating the various offshore jurisdictions? What are the relative strengths and weaknesses of the jurisdictions?

Isbister: We operate as one firm globally. The British Virgin Islands, the Cayman Islands, Jersey and Guernsey are the preeminent offshore jurisdictions in which we wish to operate for the moment. Given our model and one firm approach, we are able to give clients a balanced view when considering structuring offshore.

MCC: It depends on the type of work, doesn’t it?

Isbister: Yes, to a degree. If someone wants to start an offshore hedge fund, they often come to Cayman because it is recognized as a leading hedge fund jurisdiction, but if, for example, someone wants to just set up a basic holding company, they may look to go to the British Virgin Islands instead.

Cayman is constantly evolving. We are about to have Cayman LLC vehicles, which are based in part on the Delaware LLC. They will strengthen Cayman’s position particularly for U.S. providers, promoters, managers and lawyers who may look to use Cayman LLCs in various fund and other corporate structures. It is expected that the Cayman LLC vehicle will be available in the first half of this year.

Hayden Isbister is a partner and the head of the Corporate group. He can be reached at [email protected]

Simon Dickson is a partner and the head of the Litigation group. He can be reached at [email protected]

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