• Off-Shore Courts Rule on Hedge Fund Shareholders' Redemption Rights
  • December 21, 2009
  • Law Firm: Ropes & Gray LLP - Boston Office
  • In BNY AIS Nominees Limited & Ors v. Stewardship Credit Arbitrage Fund, the Supreme Court of Bermuda recently ruled on the question of whether an off-shore hedge fund had validly made in-kind redemption payments to its shareholders, a group of funds advised by Gottex (the Gottex Funds). The Gottex Funds challenged the validity of the in-kind redemption and brought the action in a Bermuda court seeking to have provisional liquidators appointed for the purpose of liquidating the fund, which was formed under the laws of the Cayman Islands. The fund argued that the Gottex Funds did not have standing to bring the petition because the Gottex Funds were shareholders rather than "creditors" of the fund. The fund argued that it had tendered the amount owed for the redemption payments in-kind by delivering certain documents purporting to be "Participation Notes" issued by the fund. The Participation Notes were non-transferable certificates evidencing a beneficial interest in the underlying loans which continued to be held "in trust" by the fund. In the Court's view, in order to constitute a valid in-kind distribution, the following conditions must be met: (i) the distribution must consist of assets which are distributed; (ii) the assets distributed must be assets of the fund; and (iii) the assets distributed must have a value equal to the relevant redemption price. The Court concluded that the Participation Notes failed to meet any of these three requirements and accordingly ruled that provisional liquidators should be appointed for the fund as requested by the Gottex Funds.

    A similar case involving a fund liquidation proceeding was also recently decided by the Court of Appeals for the Cayman Islands. In that case, In the Matter of Strategic Turnaround Master Partnership, Limited, the plaintiff shareholder gave notice of its redemption request to the fund on October 31, 2007. According to the relevant fund formation documents, the valuation date for the redemption was March 31, 2008 and the redemption amount was payable by the fund on May 1, 2008. The directors of the company suspended redemptions on April 17, 2008. In determining whether the shareholder was a creditor of the fund, the court stated that under Cayman Islands law, a "redeeming shareholder remains a member of the company until he has received payment and his name has been removed from the register of members." The plaintiff claimed that it ceased to be a shareholder on March 31, when its request to redeem all of its interests became effective. The plaintiff contended that the removal of its name from the shareholder list was not significant because such removal was an administrative act entirely within the control of the fund. The court disagreed and ruled that the suspension of redemptions by the fund’s directors was effective and prevented the shareholder from changing its status to a creditor of the fund. However, the court allowed the plaintiff to amend its complaint to add allegations supporting its claim that it was entitled to the requested liquidation of the fund on "just and equitable grounds." The Court of Appeals remanded the case to the trial court to allow it to further adjudicate the plaintiffs alleged just and equitable grounds.