Cayman Islands: Board Observer Rights – Is It A Good Idea?

A professional director for a hedge fund might take an instinctive view that board observer rights are not desirable given the traditional view of separation of capital ownership and those responsible for fund governance. Professional directors confident in their abilities would, however, welcome the opportunity to show how seriously they take their fiduciary responsibilities and demonstrate their skills and knowledge of good governance under the scrutiny of a board observer.

A board observer can take different forms but the general idea is that an investor would have the right to attend formal meetings held in the context of a fund's governance structure and be able to review sensitive board documents and reports. This poses both opportunities and challenges for those charged with governance.

The investor might have a number of reasons for seeking observer status ranging from oversight of the governance process, to a genuine desire to offer advice where the observer believes value can be added, to having access to information not normally accessible to investors. This obviously does raise some issues similar to those for side letters, an issue well understood in the hedge fund industry.

Lessons from the financial crisis

During the 2008 financial crisis there were instances where investors found hedge funds to be lacking transparency and felt deprived of information as they relied on directors and investment managers to make decisions on their behalf without prior consultation with investors. Frequently, this situation led to surprise communications from fund managers to investors imposing gating provisions or suspending redemptions. Since that time, investors, especially institutional investors, have expanded the scope of their operational due diligence on hedge funds and their managers (with ever expanding questionnaires) or even sought direct participation on boards. If it is believed that "The people in charge don't know much more than you" as observed in an 2013 article on the financial crisis in The Wall Street Journal, then why not take governance matters into your hands as an investor and be more directly involved in fund governance? This has led to the developing trend of institutional investors seeking board observer rights.

The challenges

Sitting on a board comes with responsibilities and challenges that investors may not be prepared to add to their risk profile. First, a director has fiduciary responsibility to a fund and has to represent the best interests of the fund which would include all the investors. By contrast, an investor having board observer rights will have access to board meetings and sensitive information without being bound by the same fiduciary standards governing directors. Second, board members should feel comfortable to discuss any issues that may be confidential in nature without revealing information that may afford an observing investor a strategic or tactical advantage over non-observing investors. This situation could give rise to significant conflict of interest issues if the observing investor gains access to negative news about the fund that could prompt the observer to act ahead of other investors in the fund. An additional issue is that legal privilege can also potentially be compromised if an observing investor participates in a meeting where communications from legal counsel to the fund or the manager are involved. In common law jurisdictions, legal privilege protects all communications between a professional legal adviser (a solicitor, barrister or attorney) and his or her clients from being disclosed without the permission of the client. From an investor perspective, there are also potential challenges. Observer presence could be construed as an affirmation of decisions made by directors. Should investors find themselves in need of remedy via legal action against the fund, they may find their legal remedies weakened, given their involvement on the board and potential influence over board decisions.

The solution

For reasons discussed in this note, affording board observer status may give rise to inequitable treatment of non-observing investors in a fund. Therefore, allowing some investors access to certain information requires balancing the interests of those investors with equitable treatment of all investors. From a hedge fund perspective, an agreement or side letter could be a logical place to formulate the terms of board observer rights and set a range of parameters for an investor with such rights. Confidentiality clauses and minimums on the level of capital invested for the investor to be eligible for observer rights should be included. The governing principle of this agreement would be that the observing investor should act in a fiduciary manner similar to a director. In addition, the observer should commit not to act on information obtained through their status as an observer, similar to rules governing dealing with material non-public information for listed companies. Similarly, consideration should be made to disclosing in offering documents the possibility of a fund entering into observer agreements with strategic investors who meet the commercial requirements (such as minimum investment).

If the challenges of having observer rights outweigh the benefits, a few alternatives could be considered. One option, often seen in the industry, is for the investor to have its own managed account or fund of one, where it can enjoy freedom and access to any information about the fund without limitation. The downside of this solution is that the costs of such a fund might be a drag on return unless the AUM is sufficient as compared to a commingled fund. A second alternative would be to set up an advisory committee for a commingled fund governed by an agreement among the fund, the investment manager and the investor. This type of tri-party agreement would specify the areas of investor involvement and the type and form of information they will be provided with while managing the types of conflict of interest issues that may be associated with investor observer status. This could well be a preferred option if the investor's intention is to offer advice and expertise to the board without being bound by the formalities of board membership.

The future

The hedge funds industry is a dynamic and ever-changing landscape, always ready to present new challenges or opportunities. If you are a board member, brace yourself for more investor activism as investors continue to find ways to protect their capital through the governance process. While there are challenges that investor involvement could bring to boards, there are also benefits as board members will be more in touch with investor needs. If directors are open and transparent, it should become apparent that these types of directors would principally be in strong support of board observer rights.

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

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

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions