Guernsey: Corporate Governance

Last Updated: 10 July 2012

Article by Valerie Rouse

Originally published in HFM Week, Guernsey Special Report, May 2012

Valerie Rouse and Anthony Williams of Mourant Ozannes discuss the introduction of the new corporate governance code and what lessons, if any, the Guernsey investment funds industry can take from the recent Cayman case of Weavering.

In the world of offshore funds, corporate governance is dominating the headlines as the investment funds industry continues to learn from the hard lessons of the 2008/2009 global financial crisis. With onshore regulators scrutinising their island neighbours ever more closely, offshore regulators are under pressure to ensure that internationally acceptable standards of corporate governance are enshrined in local law, while at the same time balancing the competing market demand for flexibility.

Guernsey has already heeded these warning signs and demonstrated once again its ability to adapt to changing market conditions to the benefit of all its key stakeholders. This article discusses the new Code of Corporate Governance which came into effect on 1 January 2012, queries whether the ripples of the recent Cayman decision of Weavering will be felt in Guernsey, and finally submits that Guernsey's existing regulatory framework already provides a robust system of checks and balances for the benefit of investors and funds alike.

The Guernsey code

Guernsey authorised or registered funds together with their Guernsey licensed service providers, if established as corporate entities, are now subject to the Finance Sector Code of Corporate Governance (the "Code") issued by the Guernsey Financial Services Commission (the "Commission").

The Code came into effect on 1 January 2012 and applies to all companies licensed under Guernsey's main regulatory laws, including The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the "POI Law"). Underlying special purpose vehicles or investment holding companies are not included. Although it does not apply directly to investment funds established as limited partnerships, it will apply to a corporate general partner licensed under the POI Law. Companies which report against the UK Corporate Governance Code or the Association of Investment Companies Code of Corporate Governance are deemed to meet the Code.

The Code is intended to supplement other corporate governance requirements and applicable law. It consists of eight principles ("Principles") along with second level guidance on meeting those Principles and the approach is one of "comply or explain". It is non-prescriptive, allowing the company concerned to adopt a corporate governance strategy that is proportionate and appropriate to the nature, scale and complexities of the particular business.

Non-compliance with the Code does not automatically render a company liable to any sanction or proceedings but the approach taken for adoption of the Principles and the explanation for any non-compliance will be matters for consideration by the Commission as part of its ongoing supervision.

The eight principles

  1. Companies should be headed by an effective board of directors which is responsible for governance.
  2. Directors should take collective responsibility for directing and supervising the affairs of their company's business.
  3. All directors should maintain good standards of business conduct, integrity and ethical behaviour and should operate with due care and diligence and at all times act honestly and openly.
  4. The board should have formal and transparent arrangements in place for presenting a balanced and understandable assessment of the company's position and prospects and for considering how they apply financial reporting and internal control principles.
  5. The board should provide suitable oversight of risk management and maintain a sound system of risk measurement and control.
  6. The board should ensure the timely and balanced disclosure to shareholders and/or regulators of all material matters concerning the company.
  7. The board should ensure remuneration arrangements are structured fairly and responsibly and that remuneration policies are consistent with effective risk management; and
  8. The board should ensure that satisfactory communication takes place with shareholders and is based on a mutual understanding of needs, objectives and concerns.

Directors of companies subject to the Code must consider and minute discussions relating to it periodically at board meetings. They are also required to confirm to the Commission on an annual basis by means of a written assurance statement that they have considered the effectiveness of their corporate governance practices and, in the context of the nature, scale and complexity of the relevant company, are satisfied with the degree of compliance with the Principles for the relevant period.

Weavering – what does it mean for Guernsey?

In August 2011, the Grand Court of the Cayman Islands handed down its judgment in the case of Weavering Macro Fixed Income Fund Limited (in liquidation) (the "Weavering Fund") v Stefan Peterson and Hans Ekstrom (the "Weavering Judgment"). It triggered a wave of interest in the industry for the extent to which the Court has sought to establish how directors of open-ended funds should approach the discharge of their fiduciary and other duties to the funds of which they are directors.

Notwithstanding the excitement generated by some of the commentary in the industry concerning the

Weavering Judgment, the short point is the case is remarkable in that for the first time, the Court has considered the extent and scope of directors' duties in the context of an open-ended investment fund, and the interplay of those duties with the obligations delegated to and assumed by professional service providers including investment advisers and fund managers.

The Judgment summarises the duties owed by directors to their companies. Although these duties were expressed in the context of a Cayman fund, they are likely to be adopted in Guernsey. Of particular relevance to fund governance will be the series of important statements that the Court made in relation to the duty of directors to perform a high level supervisory role, particularly in respect of the powers they have delegated to others.

It is common ground in the industry that the facts underlying the Weavering Judgment were extreme. In that case, the liquidators of the Weavering Fund alleged that the directors of the fund were in wilful default and neglect of their duties as directors, an allegation which was upheld by the Court. In the Weavering Judgment, the defendant directors were described as "automatons" who signed whatever documents were put in front of them without "making enquiry or applying their minds to the matter in issue, on the assumption that the other service providers have all performed their respective roles (actual or perceived) and therefore do not need to be supervised in any way whatsoever". It was held that they in effect rubber-stamped the advice they received concerning the performance of the Weavering Fund.

While it would be easy to dismiss the Weavering Judgment as an extreme case, the Guernsey investment funds industry would be wise to heed the benchmark set by the Court in relation to the supervisory role to be exercised by directors in relation to the performance of the appointed service providers. It is important to note in this regard that the Court stated that the Weavering Fund's management structure was entirely conventional (except perhaps for the composition of its board of directors), in that it had appointed an administrator, custodian and investment manager, each of whom undertook to perform the roles typically assumed by those types of service providers.

Therefore the comments of the Court may be applied equally to other conventional fund structures. Importantly, while the Court acknowledged that "in the context of open ended investment funds, investment management, administration and accounting functions are invariably delegated to contracted professional service providers...", the directors of the fund must continue to exercise an independent judgment by conducting a review of the performance of those service providers in an inquisitorial manner.

While this may sound obvious to professional fund directors, the Court also raised the bar in relation to the reasonable care, skill and diligence to be exercised by directors in relation to their duties. The Court held that directors of open-ended investment funds must have a proper understanding of the financial results of the fund's investment and its trading activity as part of their overall supervisory role.

While there will always be extreme cases in any forum, lessons can be learned from the Weavering Judgment, particularly in respect of the supervisory role which directors are now expected to undertake. However, in light of the new Corporate Governance Code, it is submitted that Guernsey's corporate governance regime is well placed to tackle these issues and prevent, to the best extent possible, the potential pitfalls expressed in the Weavering Judgment.

Back to the code

The Code is a binding code of practice. While it does not codify or amend any existing laws, it adds another layer of focus on the increasingly important requirement for appropriate corporate governance. By requiring a board to provide an annual written assurance statement confirming its satisfaction with its degree of compliance with the Code, it necessarily requires the board to consider that compliance in the context of the nature, scale and complexity of the business in light of its common law fiduciary and other duties.

Valerie Rouse is a senior associate at Mourant Ozannes. Rouse specialises in offshore collective investment schemes and regulatory issues and has considerable experience in this area through employment for many years in the offshore finance sector. Before joining the firm in 1997, Rouse spent three years with the Guernsey Financial Services Commission.

Anthony Williams is a senior associate at Mourant Ozannes. Williams joined Mourant Ozannes in 2008 from Australia where he specialised in corporate litigation. He specialises in banking and finance litigation and contentious trust disputes. He also has a particular interest in funds litigation and advises a wide range of investment funds, investment companies and fiduciaries.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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.

 
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”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

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.