Guernsey: The Carlyle Case And Directors' Duties

Last Updated: 13 December 2017
Article by Simon Davies and Charlotte Henshall

A judgment handed down in September 2017 by the Royal Court of Guernsey cleared the Carlyle Group, Carlyle Investment Management, and TCGH (represented by Simon Davies of Ogier) together with its seven executive and non-executive directors of liability over the collapse of Carlyle Capital Corporation (CCC), a Guernsey investment fund that went into insolvency in the wake of the financial crash in 2008. Ogier were instructed by Williams & Connolly LLP of Washington DC.

The Plaintiffs pleaded more than 187 claims against the Defendants, including, inter alia, breaches of fiduciary duties and duties of skill and care.

This article will focus on how the Judge dealt with the allegations relating to directors' duties, record-keeping and board minutes.

Background

CCC was an investment fund set up as a Guernsey company which went into insolvency in 2008, losing all of its $1 billion of capital. CCC invested mainly in residential mortgage backed securities (RMBS) issued by US government sponsored entities known as Fannie Mae and Freddie Mac. The RMBS purchased by CCC had express guarantees that principal and interest would be paid by the government agencies in the event of any default by the homeowners and also carried the implied guarantee of the US government itself.

The RMBS assets were purchased using one-month repurchase (repo) borrowing. The assets were subject to daily margin calls if prices changed and CCC's investment guidelines stated that CCC should keep a 20% liquidity cushion in cash (or equivalent) to meet foreseeable margin calls should they occur.

The claims were brought by the fund in liquidation and its liquidators against the executive and independent directors of the fund, the investment manager, the promoter of the fund and a Carlyle holding company of the structure.

The central allegation pursued by the Plaintiffs was that the Defendants breached their duties to CCC by failing to insist or recommend that CCC take urgent steps to sell down CCC's RMBS assets, raise additional equity capital or conduct an orderly winding down of CCC from the end of July 2007.

Directors' Duties

The Judge went through the main alleged breaches of duty and the following is a summary of the Judge's findings.

1. Duty to act in good faith

The Plaintiffs alleged that the Defendants had acted in breach of the duty to act in good faith.

In terms of the scope of this duty, the Judge noted that "the central point is ... that a management or governance decision of a director, honestly and responsibly made, amounts to due performance of that director's duty of good faith [and] the test for this is subjective."

The Judge went on to state that the only objective element of this test can be "if the relevant decision appears clearly and objectively not to have been in the best interests of the company, this could certainly cast doubt on a director's assertion that he genuinely believed that it was."

The Plaintiffs argued that this duty was breached and said the amendment or suspension of CCC's risk management measures in its Investment Guidelines was "plainly" not in CCC's best interests. However, the Judge rejected this contention and held in any event that as a breach of its own, it caused no loss and added nothing to the key complaint of the Plaintiffs.

1. Duty to exercise own independent judgment

The Plaintiffs raised this breach of duty particularly in respect of the independent directors. The Plaintiffs alleged that the independent directors were not truly independent, but merely acted as a rubber stamp for decisions made by Carlyle.

The judge accepted that the "broad principle behind this duty is that the company is entitled to the benefit of an actual and freely arrived at decision or judgement from those who are its directors. A director will therefore breach this duty if he merely does what he is told by others for whatever reasons, or acquiesces without question or consideration in what he is asked to do or told by others."

The Judge then went on to qualify that "a duty to exercise an independent judgement does not mean a duty to act entirely alone, nor to act without taking into account any views expressed or even decisions which are made by his fellow director. A director must exercise his own judgement according to his own assessment of the facts but where, for example, a director does not possess a particular expertise but is aware that one of his fellow directors does, there is nothing in this duty which obliges the first director either to make a decision without ascertaining the views of the expert director or without having regard to them, or to make himself a sufficient expert in the area that he can assess the opinions of the expert director from a position of expertise."

The Judge held that the directors did exercise independent judgement throughout all decisions made in respect of CCC.

1. Duty not to act in relation to the affairs of CCC in circumstances where there was an actual or possible conflict between their duties to CCC and their other duties or interests

The Plaintiffs alleged that there was a conflict between the corporate and reputational interest of Carlyle and the personal financial interests of the Carlyle directors on the one hand, and the interests of CCC on the other.

Here, the parties agreed that this is an objective test. The Judge agreed with the Defendants in holding that "there is no rule in English law ... that a person may not be a director of more than one company, even if both companies are in competition."

The Judge held that there was no evidence to support the Plaintiffs' allegations in this regard and that the directors felt no tension between CCC's own interests, which they saw as being survival and recovery, and Carlyle's best interests, which they also saw as being CCC's survival and recovery.

In terms of the personal interests of the directors, the Judge held that she had some difficulty in seeing any real substance, as opposed to theory, in the alleged conflict of interest itself.

1. Duty of Skill and Care

The Judge stated that the test for the standard of care is "that of a reasonably diligent person having both (a) the general knowledge skill and experience that may reasonably be expected of a person carrying out the same functions as those of the relevant director with regard to the company and (b) the actual knowledge skill and experience of that director. ... It is further common ground that this is therefore a combined objective and subjective test, and that the subjective element is capable of raising, but not lowering, the standards to be expected of an individual director."

In terms of the subjective element to this test, the Judge said that this "refers to the particular attributes which a director is expected to bring to the Board for the benefit of the company".

On the question of breach, the Defendants argued, and the Judge agreed, that "the test for whether there has been a breach of duty is a high one. It is that a director will be in breach of his duty of skill and care only if the court is satisfied that no reasonably diligent director with the material degree of knowledge, skill and expertise could have acted in the way in which the particular defendant director did act. The point is that the court must be satisfied that the decision complained of went beyond a mere error of commercial judgment." (emphasis added).

The Plaintiffs' alleged that CCC's board was "dysfunctional" because they said it did not hold enough board meetings. In response, the Judge held that, "apart from any legal requirement of an actual meeting either under statute or to comply with the company's articles of association, there is no legal requirement to hold meetings, even though it will be common practice and probably most efficient to do so. Any suggested "rule" that the holding of meetings is part of a director's duty of care (or fiduciary duty) is simply expressing a facet of the directors' duty actively to join and participate in the conduct of the company's affairs as entrusted to its board. Holding meetings is not an end in itself. It is a means to an end, namely the arrival at considered and appropriate decisions on relevant aspects of the conduct of the company's business by those to whose charge it is confided."

Board Minutes

Moving on to the issue of board minutes, during cross examination, the Plaintiffs asked a lot of questions about changes made to draft board minutes during the process of getting them finalised and approved. The Judge made some specific comments about the content of board minutes and commenting on draft board minutes:

"The point of meeting minutes is, obviously, to provide an accurate and sufficient record of the business of the meeting for whatever purpose such record is required, but what that requires as to the minutes themselves can vary hugely, depending on the purpose and function of the body concerned. In addition, styles of minute taking can, in my view quite legitimately, vary enormously, from a detailed record of the entire course of discussion, to the style which records only that discussion took place and what was ultimately resolved. Whilst recording elements of the discussion can provide a helpful record of the ideas and views which were aired, the recording of too much such detail and the attribution of views to individuals can inhibit discussion and become invidious, even in a body which continues in existence with no pressures. When the possibility of later recriminations, or investigation by hostile outsiders, is added into the equation, the laconic style of minute taking, leaving no hostages to fortune, may reasonably appear to be preferable."

The Judge went on to say that the only legal requirement as to what is to be recorded in the minutes of Directors' meetings of a Guernsey company at the time was that it should be minutes of "the proceedings" at the meeting which she said would seem to encourage a more succinct style of minuting.

So the requirement in Guernsey is that all formal elements of the business of the meeting (items of business, presentations, proposals, motions, appointments, resolutions etc.) would need to be recorded, but the Judge doubted whether the content of a discussion, as contrasted the fact that there was discussion, would be within the concept of the "proceedings".

The Plaintiffs were very critical of the number and types of amendments that were made to draft minutes of the boards – both by the directors present and also their legal advisers. In relation to that the Judge found it quite unsurprising that draft minutes should bear the stamp of having been combed through and amended by lawyers. She also found it unsurprising and not unreasonable that lay persons (whose lawyers, acting on their behalf and examining proposed minutes of meetings) should accept legal advice or guidance as to what is either correct, necessary or appropriate to include in minutes, and that they would therefore tend to accept lawyers' amendments without demur. The Judge saw no reason why lay persons should not do so, so long as these still appear fairly and reasonably to represent what did occur at the meeting.

Conclusion

The Judge agreed with the Defendants that, "taking matters as they appeared at the time and without the benefit of hindsight, [the directors'] decisions and actions remained perfectly rational, prudent, proper and reasonable, in context. They were an appropriate response to market events as they unfolded and affected CCC, and were properly taken in what each of them believed, on adequate and careful consideration, to be CCC's best interests. Further, not only were the steps taken reasonably perceived to be in CCC's best interests, but on the evidence, they actually were the safest and best course for CCC to adopt in the circumstances."

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
Related Topics
 
Related Articles
 
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
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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