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26 August 2020
In Ardon Maroon Asia Master Fund (in Official Liquidation) (CICA, 20 May 2020), the Court of Appeal reiterated the importance of following the natural and ordinary meaning of a fund's articles in order to ensure that redemptions are effective. This is particularly important in the context of a master-feeder fund structure.
Ardon Maroon Asia Dragon Feeder Fund (Feeder Fund) was a feeder fund into the Ardon Maroon Asia Master Fund (Master Fund), which primarily invested in equity and equity-linked instruments in Asian companies. Investors subscribed for redeemable shares in the Feeder Fund, which in turn subscribed for redeemable shares in the Master Fund.
On 11 August 2014 an investor in the Feeder Fund submitted a redemption notice. Consistent with most master-feeder fund structures, the Feeder Fund invested all of its funds in the Master Fund and, as such, had no assets of its own from which to meet any redemption requests. As the Master Fund had insufficient funds to redeem the investor's shares, on 30 October 2014 (after the redemption day applicable to the redemption notice) the directors of both the Master Fund and the Feeder Fund passed resolutions suspending the redemption of shares and payment of redemption proceeds. The Master Fund and the Feeder Fund were subsequently placed into voluntary liquidation and thereafter came under the supervision of the court.
On receipt and acceptance of the redemption notice from the investor, the Feeder Fund had not submitted its own redemption notice to the Master Fund before the suspension. As such, the question before the court in the liquidation was whether the Feeder Fund's receipt and acceptance of the redemption notice had triggered an automatic back-to-back redemption of its holding in the Master Fund.
At first instance, the Grand Court rejected the Feeder Fund's claim that an automatic back-to-back redemption had taken place on the grounds that:
The Court of Appeal affirmed and upheld the Grand Court's findings.
The threshold question that the Court of Appeal had to determine was the appropriate approach to construction of a company's articles of association. The court considered the weight to be given to commercial considerations and, in particular, the extent to which extrinsic evidence of commerciality and business efficacy can be used to imply terms into the statutory contract created by the articles of association of a company. The Court of Appeal upheld the judge's approach to construction, which focused on the natural and ordinary meaning of the articles in question, having regard to the comprehensive redemption procedure set out in the articles (which left no room to imply additional provisions).
Having regard to the principles of construction to be applied, the court then considered whether, notwithstanding the comprehensive redemption regime set out in Article 37, the Master Fund's articles gave the directors a general discretion as to the terms on which shares could be redeemed, provided that they were not inconsistent with the terms of the Companies Law. Section 37(3)(c) of the Companies Law provides for redemption in such manner and on such terms as may be authorised by the articles and Section 37(3)(da) makes clear that determination by the directors must not be inconsistent with the articles. Accordingly, the court concluded that any analysis of the scope of a director's discretion invariably comes back to the terms of the articles and there was no scope for the directors to prescribe a redemption mechanism which was consistent with the law but inconsistent with the articles.
The Feeder Fund also argued that the language of its offering memorandum, which had been approved by the Master Fund and provided that "the redemption procedure for the Master Fund is identical to [the Feeder Fund's] procedure", meant that the steps required to perform the redemption procedure had to be performed only once to effect a redemption in both the Feeder Fund and the Master Fund. Although the court's conclusion on the construction point would have disposed of the appeal in its entirety, it nevertheless addressed this question. The Court of Appeal concurred with McMillan J that while such an automatic procedure might be possible, it was not the ordinary meaning of the relevant provision. The court took the view that "the expression means no more than that similar procedures for redemption have been adopted at Master Fund and Feeder fund levels". The court further held that the inclusion of this statement in the offering documents was merely intended to convey information and did not represent a decision of the directions about an adjusted redemption process.
As to whether the Master Fund had waived the requirement for a separate redemption notice to be issued, the court also held that as the directors of the Master Fund had no power to allow redemptions to take place without written notice, it was impossible for them to have waived the requirement for a redemption notice from the Feeder Fund to the Master Fund.
This decision should not unsettle managers of Cayman funds as it is consistent with longstanding authority that a fund's articles are the primary source of "the collective rights and obligations between a company and its shareholders and its shareholders inter se".(1) However, it does highlight the importance of ensuring that the redemption procedures set out in a master fund's articles are strictly adhered to as a matter of practice.
For further information on this topic please contact Marc Kish, Gemma Lardner, Justin Savage or Giorgio Subiotto at Ogier by telephone (+1 345 949 9876) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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