Fund byelaws and payments-in-kind
Typically, a Bermuda fund is incorporated as an exempted mutual fund, formed as an exempted limited partnership or established as a unit trust. The focus of this article is upon the first of the trio.
As with most Bermuda companies, mutual fund companies are governed, in addition to being subject to Bermuda law and regulation, by the provisions of their byelaws, which regulate the relationship of the company, its shareholders and its directors.
While any investment is a risk and does not guarantee a return, the purpose of a fund is to generate profit for its investors. Profit is generally returned to investors in two ways: (i) dividends and distributions, and, perhaps more commonly in a fund context, (ii) redemption of shares held by the investor in the fund.
Whilst the process for declaring and paying a dividend or distribution is a fairly well understood route in a broader Bermuda company law context, it is worth emphasising that the byelaws of a fund should make specific provision for the way in which shares are redeemed, including the method and timing of calculation of the redemption price and timing of payment. These provisions should also be accurately described in the offering materials for the fund.
There may be occasions when a fund wants to redeem the shares held by investors, but it does not have the cash reserves available to do so, or the board does not wish to use the available cash for such purpose. The byelaws should therefore provide that shares can be redeemed not only by way of a cash payment but also by way of a payment-in-kind.
Again, these should also be fully disclosed in the offering materials, not least to avoid arguments that investors have been misled and to protect against a challenge due to inconsistencies between constitutional and offering documentation.
A payment-in-kind is a payment in a form other than cash and can take many forms including, but not limited to, shares in another company, the transfer of an asset or an interest in an asset.
The byelaws should enable directors to determine what form a payment-in-kind will take and how such payment is to be made to the investor.
Depending upon the form of the payment-in-kind, it may not be appropriate for such payment to be made directly to an investor — for example, if the payment-in-kind takes the form of an asset or interest in an asset and due to the value or nature of the asset or interest is such that it is appropriate to allocate the same to multiple investors in satisfaction of the sums due to them on redemption.
Clearly, if multiple investors are entitled to a proportion of the same asset, it would not be appropriate to transfer the asset to only one of them — and transferring the assets to multiple investors may not be ideal from an administrative or management perspective.
In these cases, the board may, subject to having the appropriate right in the byelaws, transfer the asset to a liquidating trust or special purpose vehicle which in turn makes distributions to the investors as sums are realised from the assets, e.g. on sale.
Ultimately, from the perspective of the fund, in order to ensure maximum flexibility over its life cycle, the byelaws of the fund should afford the board of directors a high level of discretion over the timing and means of redemption and return of funds to its investors.
This enables the board to ensure that the fund can operate for the benefit of all its investors.
In the exercise of this discretion, the interests of the investors are protected by the obligations placed on the directors of the fund pursuant to Bermuda law and regulation, which require directors to (among other things) act honestly and in good faith in the best interests of the company of which they are a director.
• Attorney Josephine Noddings is a senior associate and a member of the corporate team at Appleby. A copy of this column is available on the firm’s web site at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer
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