The Cayman Grand Court has handed down a decision that has significance for Cayman master-feeder fund structures. Funds and their advisers should review the redemption provisions in master fund articles of association and partnership agreements to ensure that, operationally, redemptions are being effected in accordance with such documents.
In the matter of Ardon Maroon Asia Fund (In Official Liquidation) concerned 'back-to-back' redemptions within a master-feeder fund structure, in which a feeder fund's liquidators contended that, upon receipt and acceptance by the feeder fund of a redemption request by one of its investors, an 'automatic' redemption of the Feeder Fund's holding in the Master Fund had occurred on a 'back-to-back' basis.
The feeder fund’s offering memorandum provided that "the redemption procedure for the Master Fund is identical to [the Feeder Fund’s] procedure." The feeder fund's liquidators argued that there was therefore a single procedure that resulted in the simultaneous redemption of shares at the feeder fund level and at the master fund level without the need for a separate redemption notice to be given by the feeder fund. The liquidators contended that this was the understanding of the directors of the master fund (who were also the directors of the feeder fund) and that this form of automatic' back-to back redemption procedure was general market practice for master-feeder fund structures in Cayman.
The court rejected the feeder fund's claim. The court concluded that, as the master fund's articles provided that any redemption of shares in the master fund required written notice from the registered shareholders of the master fund, and as the directors did not have power under the master fund's articles to determine that no redemption notice from registered shareholders of the master fund would be required (or to waive such notice) the master fund's articles did not support an automatic redemption of its shares without notice. The court ruled that the natural and ordinary meaning of the statement in the offering memorandum, that the redemption procedure for the master fund was identical to that of the feeder fund, contemplated two separate identical procedures and not simply one procedure that served automatically for two purposes.
The court stated that: "In principle there is, of course, nothing in the least amiss with the concept that a redemption at Feeder Fund level can lead to an automatic corresponding redemption at the Master Fund level without the need for an additional separate redemption notice at Master Fund level to be served. The real questions are whether such a course has been constitutionally authorised and, if so, whether a determination to that effect has been made."
This case does not create new law, and it should not unsettle managers of Cayman funds. It does, however, serve to highlight the importance of ensuring that the redemption procedures set out in a master fund's articles are strictly adhered to in order to effect a redemption legally. If you manage a master-feeder structure with a Cayman master fund it would be prudent to check with the fund's administrator that the operational procedures it applies to the redemption of the master fund's shares are in compliance with the master fund's articles.