In the past, few players in the market paid attention to the treatment of redeeming shareholders. However, with funds imposing gates and suspensions over the last few years, investors’ ability to redeem has come to the forefront of their minds.
As was made clear by the Privy Council in the Strategic Turnaround decision at the end of last year, whether a redeeming investor will be treated as a shareholder or a creditor in a Cayman Islands fund will depend on a precise analysis of the fund’s articles. In that particular case, it was decided that a redeeming investor became a creditor of the fund upon the passing of the relevant redemption date (and so from then on would no longer entitled to enjoy the rights (and, supposedly, no longer be subject to the obligations) of continuing investors).
In a recent BVI case, the courts there came to the view that a redeeming investor whose redemption proceeds have been calculated but not yet paid out is not a creditor of the fund because redeeming investors receive proceeds “in their character as a member” of the relevant fund. As a result, their claims do not rank in priority to other shareholders, nor do they not have standing to petition for the winding up of the fund on grounds of non-payment.
The BVI decision hinged on a particular provision of the BVI insolvency law of which there is no direct equivalent in Cayman, but in both jurisdictions the precise provisions of the articles of the fund are clearly crucial (and we are seeing offshore counsel trying to make their standard form fund articles more manager-friendly as a result!).
Managers should check their fund articles to ensure they have the rights to suspend redemptions they believe they have, while investors should also make sure they are familiar (and happy) with the redemption provisions, especially when investing in new funds going forward.
A final note of caution: in the recent BVI decision, the court ordered the petitioning investors to pay the wasted costs of appointing the liquidator, thereby adding insult to injury!