Sometimes an investor fund dispute is unavoidable. So what strategies can fund managers deploy to resolve investor fund disputes? Sadly, there is no one-size-fits-all approach, but in this post I will highlight some effective and commonly-deployed tactics.
Take legal advice early
As I mentioned in my previous post, speaking to both onshore and offshore counsel early in the process will save a manager time and money. If things do go past the point of no return, it will be important to be advised by onshore and offshore counsel who have seen similar issues before and who ideally have helped shape the applicable law in the relevant jurisdiction(s) – to be clear, from a BVI and Cayman perspective, that’s us! If a dispute arises, it is important to evaluate all the available options, including negotiation, mediation, arbitration or ultimately litigation.
There is no weakness in negotiating and “settlement” is not a dirty word. It can be the most cost-effective and least disruptive route to a manager’s business and it may minimise the amount of attention they have to take away from the fund. But of course, it completely depends upon the circumstances. Again, speaking with counsel at an early stage is likely to lead to a manager being in the position to assess the strengths and weaknesses of the case and in turn develop a strategy to resolution which might include an agreed, and far less costly, compromise.
Mediation and arbitration
The decision whether to refer disputes to formal mediation and/or arbitration as opposed to the courts will usually have been made well in advance of any dispute occurring and will be baked into the fund documentation.
A few words on alternative dispute resolution (ADR): it often sounds like a good idea but investors should be careful that they don’t commit themselves to a process that leaves them unable to act quickly or unable to seek appropriate relief, potentially without notice to the fund. Things can change very quickly for a fund when it starts to go south and an investor does not want to be left in a position whereby, as they are going through an ADR process, the value of their overall investment continues to plummet.
Fund directors have duties to treat all investors fairly, so disputes affecting an entire class of investors are less likely to be capable of settlement and payments to creditors will carry an additional risk if the fund is approaching the zone of insolvency. As a result, it’s worth remembering that settlement negotiations can be a trap for inexperienced managers or directors if they do not consider the effect on the fund as a whole.
When all avenues have been explored and still the investor fund dispute continues, subject to the fund documentation, litigation can be inevitable. Yes, this will often be prolonged and expensive, but sometimes this is just what’s going to happen. If that's the case the manager will have been advised as to the likely chances of success or failure and the manager will be putting contingency plans in place to deal with both scenarios.
Here’s the shameless plug: Harneys’ litigation teams in Cayman and BVI are outstanding and they work hand-in-glove with our equally outstanding funds teams. The manager, or indeed the investor, will be walked every step of the way through the entire process of the investor fund dispute. If we end up in the Cayman Courts, it’s our litigators who will be representing the client in the Cayman Courts. We are not like other firms, we don’t “farm out” cases to be presented by lawyers from London, we specialise in advocacy every bit as much as they do. Full litigation support is fundamental to the way we work. The client will meet and know the people who are actually presenting their case, us! We don't hand-over the engagement to outside QCs. We believe in a “one stop shop”. Given the results we get, it works!