Governance In A Time Of Crisis – Legal Guidance For Fund Boards In COVID-19 Pandemic

"I recommend it to the Charity of all good People to look back, and reflect duly upon the Terrors of the Time; and whoever does so will see, that it is not an ordinary Strength that cou'd support it" - Daniel Defoe, A Journal of the Plague Year

Introduction

It is more than ten years since the Global Financial Crisis ("GFC"), but the strains of that time remain fresh in the memory for many. The current COVID-19 pandemic threatens to have a far deeper and longer lasting impact on business alongside the awful health effects which are already being seen in hospitals around the world. While governments grapple with the public health consequences, many businesses have already shut or failed and it seems likely that many more will suffer in the coming months. This briefing note is intended to provide some guidance for fund directors as they deal with the fallout from this pandemic.

Meetings

The first challenge being faced by directors at this time is the ability to function as a board and to ensure that the appropriate business decisions are being taken despite social distancing requirements and the absence or unavailability of key personnel. Cayman fund board members are typically in different locations and so have long experience of using conference and video calls as a means of making decisions remotely and without close contact. Most articles of association also permit unanimous decisions to be recorded in written resolutions. In most cases, boards will simply be able to adopt or adapt existing practices. However, the pandemic will inevitably present fresh challenges in this regard so where any arrangements are made which are outside the norm, board members should consult the articles or other constitutional documents to ascertain whether what is proposed is permitted and the board meeting is quorate and properly constituted.

If fundamental decisions are required to be taken then directors should consider whether these are matters for an extraordinary general meeting ("EGM"). Again, the constitutional documents should be consulted as to whether that is the case and, if so, whether the requirements for an EGM can be complied with given current restrictions. Again, modern Cayman constitutional documents usually offer considerable flexibility, but it should not be assumed that a provision which may be "market standard" is in fact universal.

In crisis situations it is often the case that "the perfect is the enemy of the good"; nevertheless directors will be concerned to avoid situations where steps taken urgently now become open to challenge later. Helpfully, when it comes to matters requiring a shareholders' resolution, the Cayman courts have recently confirmed the applicability of the Duomatic principle to Cayman investment funds1. That is the principle that where a decision is taken with the informal but unanimous assent of the shareholders it will be legally effective notwithstanding any formal deficiencies.

Liquidity and Solvency

Many of the issues which arose during the GFC for fund boards (some of which continue to be litigated) related to the rush for liquidity and the occurrence of a "run" on the fund. Given the sudden and all-embracing nature of the current crisis, similar issues will certainly arise if they have not already. It may be a small comfort in the general scheme of things but there is far greater legal clarity in this area following the GFC and the many cases that came before the courts in the intervening years.

Preferences

The courts have found that Section 145...