Isle of Man: W(e)avering In Your Choice Of Domicile For Your Company Or Fund? Happy Ending Or Grimm Tale?

Last Updated: 15 October 2012
Article by John Spellman

Do you as a Non Executive Director or the appointed Non Executive Directors ("NEDs) of your client funds actually realise why they are in situ? Harsh? Fair? Irrelevant? For many years the role of the NED has, for some companies, been seen as a necessary evil rather than a necessity: NEDs being appointed by tax advisors for tax reasons or imposed by the parent or the relevant regulator.

Of course, the choice of NED is often left to the appointing entity and some companies took the view that they wanted passive NEDs and to this end paid them to attend 4 board meetings a year or so and subsequently entertained them for their trouble. The regulator and tax adviser's box was ticked and the company continued as it always had. Everyone lived happily ever after...or so they all thought...

The recent Weavering case demonstrated that it is all too easy to appoint a NED but the impact of getting it wrong can be devastating on both the professional advisers and the directors themselves. In that sorry tale, the damages awarded for negligence in their duties meant a nightmare ending for those involved.

Choosing the right NED is a difficult decision: the NED needs to display many skills and often a NED may not possess all the skills that the company may typically need over its lifecycle. Further, with a limited pool of NEDs, sometimes NEDs are appointed because they are 'friends' of the company and perhaps there only to make up the numbers to satisfy the tax advisers and appease investors.

Horror Story

In case you don't like full length horror stories, here is a quick precie.

On 26 August 2011 in the Grand Court of the Cayman Islands the honourable Mr Justice Andrew Jones QC handed down the decision in Weavering Macro Fixed Income Fund Limited (in liquidation) (the 'Fund') v Stefan Peterson ('Peterson') and Hans Ekstrom ('Ekstrom'). The case examined the role of the NED and what will hopefully grab your attention is that Peterson and Ekstrom were held liable to the Fund's losses of $111 million for wilful neglect or default of their duties.

The Fund was a typical offshore fund based in the Cayman Islands which was put into liquidation shortly after the directors and professional service providers discovered that a high proportion of the assets held by it were fictitious. Obviously not ideal. The Fund had been established in 2003 and was put into liquidation some 6 years later in 2009, after having made some redemptions during the credit crisis in 2008. As Warren Buffet would have said described as one who were not wearing trunks when the tide went out.

The Fund appointed a UK investment adviser which was itself owned by a Magnus Peterson (a relative of Peterson) and also appointed an unconnected Fund Administrator based in Dublin. The case determined that Peterson and Ekstrom failed to:

  1. Ensure the Offer Memorandum was correct (as to auditors and administrators);
  2. understand the roles and duties of the service providers;
  3. to read fully or analyse reports provided to them; and
  4. to verify what the Investment Manager told them.

In addition the directors:-

  1. signed anything the Investment Manager asked them to sign without review;
  2. did not hold meetings as stated;
  3. produced no agendas or board papers in advance of meetings;
  4. allowed proforma minutes to be drafted by lawyers rather than the minutes reflecting matters discussed;
  5. requested no independent reports; and
  6. did not require other parties other than the Investment Manager to attended meetings to report to the board.

The case examined the three phases of the Fund's life and coincidentally the case notes provide an excellent account of what a NED should do during the start-up phase, during the Fund's operation and when a crisis occurs. It is a salutary tale of what not to do but many aspects of the case are not uncommon in a lot of companies who appoint NEDs. The reason for this is simple: the role the NED is clear but companies still have to embrace that role.

Our Heroes

Typically the NED should make sure he or she understands the structure, understands where responsibilities lie and that those responsibilities are clearly defined, eg with service providers. Further, reliance should not simply be placed on the company's lawyers to make sure everything is drafted correctly. In addition the NED should make sure the company understands the scope of the NED's supervisory role and that the Offer Memorandum complies with the law and is accurate and complete.

The Plot Thickens

The directors must:

  1. hold regular meetings, have proper agendas circulated in advance with proper minutes being taken to reflect discussions. Some communication between meetings is to be expected if circumstances affecting the company change. If such circumstances arise then they should be considered promptly; Also board papers should be circulated sufficiently in advance to allow Directors to review them prior to the meeting
  2. require the appointed service providers to occasionally attend meetings and reports should periodically be requested of them where appropriate;
  3. review management accounts (eg ability to read a balance sheet) and ensure investment criteria are being met; and
  4. not rely on other directors to undertake a task without discussion (or without understanding their findings).

When Disaster Strikes

The directors must:

  1. meet promptly to consider internal and external events which might affect the company;
  2. request relevant reports to facilitate impact assessment; and
  3. take immediate appropriate action.

Epilogue

It is not the level of remuneration that is key here, it is the responsibility of the appointment and effectively undertaking the role. Those who refer to NED as NLE's (or Nice Little Earners) are sadly ignorant of the real world. In the Weavering case it was clear that:

  1. The level of remuneration paid to NEDs or directors generally does not reduce the level of responsibility. In Weavering the directors were not paid at all.
  2. No indemnity if you don't try your best.
  3. The indemnity clause contained in the articles only applied if the directors tried their best (even if they were incompetent). In Weavering the directors were found to have known what they should have done but failed to do it. One can imagine a position where a strong board could seek to frustrate a NED's role: this can happen if the NED is not sufficiently independent of the company. In such circumstances, the NED may take the option of an easy life and take the fees rather than carrying out that role.

Happy Ever After?

It is clear the NED has an (increasingly) important role and a role that cannot be taken lightly. It is clear from Weavering that it is likely that it will be the NED that will carry the responsibility and be answerable to investors if the executive directors fail to perform their duties diligently and independently.

In the UK the role of the NED is regarded as very important and is a highly respected factor in maintaining and enhancing a high level of corporate governance, whereas in the offshore environment a different view is often taken. Arguably the reason for this is probably tax: believing that the main reason why companies are likely to be offshore is for tax purposes. This does make a difference and often requires the appointment of NEDs who are independent of the investors to make the strategic decisions. This can lead to some stresses, strains and governance concerns between those who promote and invest offshore companies and the appointed directors.

There is a natural desire to interfere because to the average investor have every right to ask, 'Who are these people in the X location and what do they know about the proposed company's business?' Also revenue authorities are sceptical. As such there is a real burden on the appointed director to ensure good governance and also secure tax residence.

It is also essential to overcome the old perceptions. The only way one can achieve this, it appears, is by educating 'clients' (i.e. those who set up such structures) assisted by some level of regulation. Weavering teaches us that by choosing the wrong NED, things can go wrong but it also teaches that the executive board need to embrace the role of the NED and allow the NED to do his or her job, as set out earlier. The international community is now demanding that NEDs in overseas territories actually do their job, are accountable and are capable of standing up to scrutiny. Not before time many will say.

Their overriding role assists in ensuring tax residence remains offshore, not by throwing numbers of directors at the problem but by good and robust decision making and ensures that investors and other stakeholders are protected by ensuring the highest standards of governance.

It is only when a crisis occurs that the finger pointing starts and this affects not only the company involved itself but also could affect the jurisdiction from a reputational perspective and this is something any can ill afford.

Choosing the Right Jurisdiction

The Isle of Man has shown its foresight and already regulates the appointment of directorships so "jumbo directors" (individuals acting in a non-executive director capacity to over 100 companies) are not allowed unlike places like the Cayman Islands. Since 2000, individual non-executive directors within this jurisdiction, who hold more than 10 directorships of independent entities, are subject to regulation as "Professional Officers".

The application to the Isle of Man Financial Supervision Commission ("FSC") for a license, assesses amongst other things fitness, propriety and experience. Indeed there is a Code of Conduct contained within the Financial Services Rulebook 2011.

It should be noted that some persons are exempt, such as those who already hold a position of registration with the FSC or if you are employed within industry as an executive director as the individual will have already gone through the rigorous vetting process.

Emphasis is also given to a requirement of ensuring continuing professional development is gained and recorded as such. The FSC is now working on a comprehensive code of corporate governance for governing bodies that will consolidate the various Isle of Man statutory and regulatory provisions as a best practice guide. This will be supported by codifying the criminal and enforcement regime for breach of current statutory obligations for governing bodies of Isle of Man companies. The FSC also maintains "Guidance on the responsibilities and duties of directors under the laws of the Isle of Man". This is mandatory reading for everyone acting as a Director in the Isle of Man.

Choosing the Right NED

A company needs to be able to demonstrate for tax reasons that real decisions are made by the Board but this is one of many decision making responsibilities. These need to be based on facts and evidenced properly. The NED plays and integral role hereand tax is only part of the story, investor protection is paramount and hence the NED is there, in part, to ensure the required level of governance is in place. The NEDs role is not only becoming more important to give comfort to investors but companies and other stakeholders (such as tax authorities) are demanding higher standards.

The perception of role the NED needs to change. Many companies still have to embrace that role and it really is at their and their investors peril.

So the parable of this tale is a warning to all current NEDs, professional indemnity insurance does not protect against wilful neglect!

Let's all live happily ever after....

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.