Worldwide: Structuring And Drafting Changes

This article originally appeared in Offshore Funds Today. To read the magazine in it's entirety please click here.

Since August 2007 the financial landscape has changed. Last year we presented seminars on offshore funds which were sub-titled "Stress-Tested Structures for the Current Market". In discerning lessons from the credit crunch we focused on drafting changes that were required to insert or improve mechanisms to deal with issues raised by liquidity mismatches and distressed assets. The key legal or mechanical levers were and still are: Side Pockets, Gates, Suspensions and Redemption Payment terms. Offering documents and constitutional documents for offshore funds have evolved quickly and these provisions are now almost universally embedded into the documents. However, the world never stands still, and as a result the following provisions are now also in the spotlight:

  • Managed Accounts/Single Investor Funds
  • Valuation Committees
  • Payments in Kind
  • Suspension of Redemption Payments

Below we take a brief look at some structuring developments that we are seeing evolve and share some further drafting refinements that have been necessitated by litigation or fear of litigation.

Managed Accounts/Single Investor Funds

2008 provided many examples of precipitous runs on funds which resulted in the gating or suspension of redemptions. Some funds of funds and strategic investors determined that they would avoid this risk in future by only investing in managed accounts or (their offshore equivalent) single investor funds. Another benefit of this approach is that it avoids the need for a Side Letter and the potential risks inherent in granting preferential terms to a special investor.

There was quite a hubbub on this issue with a number of industry commentators predicting that this would be a major trend as investors sought to protect themselves and avoid being hostage to the fortunes of others. We have set up a number of such funds, but despite predictions, there has not been a flood of such structures. The main reason for this is, in order to make economic sense the investor needs a lot of money to allocate to a portfolio that will be managed in parallel to the fund. We have acted for a number of managers who have set up parallel single investor funds for sovereign wealth fund investors and for some fund of funds and in each case the allocations have ranged from $100m to $500m. Given the gradual removal of gates and suspensions as liquidity returns, it will be interesting to see if certain investors remain wary of commingling their funds with others or if, under pressure on costs, funds of funds continue to invest in multi-investor funds rather than single investor vehicles.

Valuation Committees

Pricing and valuation of underlying positions has become a huge challenge. Auditors have struggled with accounting standards and funds have faced claims from disgruntled investors who have received NAV statements which provided for valuations at a much higher level than was actually achieved when the investor sought to redeem its shareholding and cash out from the fund.

Much has been made in recent years of the convergence between private equity and hedge funds. As a result of the experiences of many funds in the economic crisis it could be said that a lot of hedge fund investors have, unwittingly, become private equity investors as open-ended funds have mutated into closed ended funds with side pockets, run-off portfolios, suspensions of redemptions and payments in kind.

One area where this convergence has led to the adoption by hedge funds of private equity practices is in the establishment of valuation committees. Funds should consider at the structuring stage whether a valuation committee would be helpful in fixing asset values and assuaging investor fears as to possible self-serving discretionary valuations by the investment manager. Even if not envisaged at the outset, the establishment by a manager of a valuation committee following consultation with investors is a useful investor relations and risk management tool.

Payments In Kind

Long gone are the days when payment in kind provisions were standard boiler plate provisions which no one paid much attention to as they were seldom, if ever, invoked. Legal challenges and volatile markets demand that special care is given to the drafting of such provisions and to the operational execution of a redemption payment in kind. Set out below is an example of an expanded payments in kind provision which we recommend should be considered for all new funds:

"Payment of the Redemption Price to a shareholder on redemption will be made in cash or, in the discretion of the directors (following consultation with the Investment Manager), in securities (which may include short positions, as well as long positions) selected by the directors (following consultation with the Investment Manager), or partly in cash or partly in securities (which may include short positions, as well as long positions) selected by the directors (following consultation with the Investment Manager). In-kind distributions may be made directly to the redeeming shareholder, or alternatively:

  1. may comprise interest in special purpose vehicles established by the Fund for the purpose of liquidating the securities which are being transferred (either outright or by a participation interest) by the fund; or
  2. may be distributed into a liquidating trust or account and sold for the benefit of such redeeming shareholder,

in either such case (i) payment to such shareholder of that portion of its redemption attributable to such securities will be delayed until such time as such securities can be liquidated and (ii) the amount otherwise due to such shareholder shall be increased or decreased to reflect the performance of such securities through the date on which the liquidation of such securities is effected, and any applicable fees and expenses."

The underlined terms are additions and clarifications. Key issues to consider providing for are:

  • a fuller exposition of the securities which may be transferred. If a fund's portfolio is comprised of long and short positions then explicitly state that an interest in short positions may be transferred (directly or by way of a participation agreement), otherwise it is likely that the fund will be precluded from transferring a slice of its underlying portfolio to an investor;
  • that a payment in kind provision includes not just securities of third party issuers, but also interests in special purpose companies established by the fund;
  • inclusion of the right to charge fees on a redemption in kind where the manager will be managing the assets through to their eventual liquidation and conversion into cash.

Operationally, experience has shown that in order to avoid, or at least minimise, the risk of claims from investors, the following steps should be taken when a fund proposes to satisfy redemptions by payments in kind:

  • provide notice to redeeming investors prior to the redemption date (and allow withdrawals of requests);
  • explain why the redemption in kind is being invoked and offer an option to investors to take custody of assets (where possible) or to participate in a liquidating vehicle or trust managed by the manager;
  • ensure any fees attached to management of a liquidating vehicle incentivise the manager to dispose of assets as quickly as prudent (i.e., not a surrogate management fee);
  • effect the legal transfer of assets to the redeeming investor or to the liquidating vehicle or trust immediately following the redemption day. Although the documents will provide that risk transfers to the redeemed investor on the redemption day it is likely to be problematic if on the redemption day NAV per share is $100, but by the time the assets transferred to meet that price are received by the investor, their value has diminished so that they are only worth $50 when actually paid to the investor.

Suspensions Of Redemption Payments

Most funds have provisions that enable them to suspend redemptions in certain extreme circumstances. Such funds typically also include provisions which enable them to defer payment of a portion of the redemption proceeds (especially for funds of funds) attributable to unrealisable positions and to retain holdbacks from the redemption price to meet adjustments following the finalisation of the redemption price after the audit.

A suspension of redemptions clause, in order to be effective, must be invoked prior to a redemption date. However, it is possible for a fund to include a provision that allows it to suspend the payout of redemption proceeds, so that if the circumstances that would have caused it to invoke a suspension occur after a redemption date, but prior to the redemption payment date (typically 30 days after the redemption date) it can suspend payment.

The efficacy of such a provision has been upheld by the Cayman Court of Appeal in the recent case of In the Matter of Strategic Turnaround Master Partnership Limited. In its judgement the Court of Appeal analysed the procedure and effect of a redemption of shares in a corporate fund and made some significant points, which need to be taken into account from a legal drafting perspective and also operationally by the administrators of funds:

  • redemption is not a single event, but a process beginning with the submission of the redemption request and ending with the payment in full of the redemption price;
  • upon the redemption date, the redeeming shareholder becomes a creditor of the fund in respect of the redemption price, notwithstanding that that price has not yet been calculated;
  • as a creditor, on a winding up of the fund, a redeeming shareholder ranks behind unsecured third party creditors but ahead of shareholders who have not yet redeemed their shares; and
  • notwithstanding that it has become such a creditor, the redeeming shareholder remains a member of the fund at least until its name has been removed from the register of members.

The court's view of when a redeeming shareholder ceases to be a member of a fund is not clear as it appears to contemplate that a shareholder could continue to be a shareholder until the redemption price had been paid in full, notwithstanding that its name had previously been removed from the register of members. The Court of Appeal's decision was based on its interpretation of the contractual documents of a particular fund. To avoid any uncertainty we have amended our articles of association to include the following explicit provision:

"Upon the Redemption Day on which a share is redeemed, the holder shall cease to be a Member in respect of such share and shall not be entitled to any rights in respect thereof (and accordingly his name shall be forthwith removed from the Register with respect thereto and the share shall be cancelled and available for immediate reissue. Notwithstanding the preceding sentence a person whose share or shares have been redeemed, shall, in respect of such share or shares:

  1. have the right to receive as a creditor (1) the Redemption Price... and (2) any dividend which had been declared in respect thereof before such Redemption Day; and
  2. continue to be bound by the provisions of these Articles regulating the payment of the Redemption Price including the right of suspension of such payment hereunder."

The point at which a redeeming shareholder ceases to be a member is important, because, as a member, the shareholder continues to be bound by the articles of association including any provisions empowering the fund to suspend payment of the redemption price. Certainty on this issue is in the interests of the fund and the redeeming members. The anomaly of a redeemed shareholder remaining as a member as well as a creditor will have a number of unwelcome results, such as:

  • a shareholder who had redeemed all its shares and could continue to be locked into the fund for up to 18 months where the fund's documents provide for a partial holdback or redemption price pending completion of the audit. During this period, the redeemed shareholder would remain entitled to exercise its rights as a shareholder, and those rights would need to be taken into account in any proposed shareholder actions, including voting at any general meetings of the company.
  • two members of the fund existing in respect of the same shares. Redeemed shares are required to be cancelled and become available for re-issue when the redeeming shareholder has been removed from the register. If the redeemed shares were issued to a new investor, then there would be two members of the fund in respect of the same shares.

So, in addition to adopting our new language in the articles of association for new funds, which provide that a redeemed member ceases to have all the rights of a shareholder and that its name be removed from the register of members on the relevant redemption day, we suggest that funds liaise with their administrators to ensure that they are removing the names of redeeming investors on the relevant redemption day.

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
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must 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