Memorandum and articles of association (M&A)

Memorandum and articles of association are the foundational governing documents for offshore hedge funds Offshore fund An offshore fund is a hedge fund established outside the United States, typically in low-tax jurisdictions like the Cayman Islands or British Virgin Islands. These funds primarily serve non-U.S. investors and U.S. tax-exempt organizations by offering tax advantages and greater regulatory flexibility than domestic fund structures. that are organized as corporations. This structure is particularly common for funds incorporated in the Cayman Islands. These documents serve two main purposes: they establish the fund's legal existence and define its powers and purpose. They also create the governance framework that determines how the fund operates.

For offshore hedge funds, which are typically organized as Cayman Islands corporations, the memorandum and articles of association serve the same fundamental purpose as articles of incorporation in U.S. jurisdictions. These documents create the constitutional framework within which the fund operates. This is similar to how limited partnership agreementsThe governing document that establishes the terms, conditions, and operational structure of a limited partnership fund. govern funds organized as partnerships.

The memorandum and articles of association give the board of directors the power to oversee the hedge fund's operations. The board can take action on behalf of the fund and vote on various matters that affect the fund. These documents work together with the offshore hedge fund's offering documentsLegal documents provided to prospective investors that describe the terms, risks, and other material information about an investment opportunity. to create a complete governance structure.

However, the board of directors can choose to delegate some of its authority to other parties, such as the investment manager or the administrator. This delegation makes it easier and faster for decisions to be made on behalf of the offshore hedge fund. Even when authority is delegated, the board maintains proper oversight of the fund's operations.

These constitutional documents typically establish several important elements. They create the corporation's legal existence and establish its official name. They define the corporation's authorized share capitalThe maximum number and value of shares that a corporation is legally permitted to issue according to its constitutional documents. and the different classes of shares it can issue. The documents also specify the rights and restrictions that apply to each class of shares.

Additionally, these documents establish the basic governance structure, including what powers the directors have. They set up procedures for shareholder meetings and corporate actionsEvents initiated by publicly traded companies that affect their shareholders, including dividends, stock splits, mergers, and proxy votes.. They also define what types of business activities the corporation is permitted to engage in.

For hedge funds, these documents must be carefully written to accommodate the unique requirements of investment fund operations. This includes provisions that address how shares are issued and redeemed. The documents must also cover director authority to make investment decisions and establish mechanisms for calculating and paying fees. They need to include procedures for handling investor communications and reporting requirements.

In some cases, an offshore hedge fund may issue "management shares Management shares Management shares are a special class of equity in a hedge fund (typically in offshore corporate structures) issued to the investment manager or its principals, often with voting rights but minimal economic value, providing control over certain corporate governance matters. " to the investment manager, an entity affiliated with the investment manager, or a designated trustee of the hedge fund. A management share does not participate in the profits and losses of the offshore hedge fund. However, each management share is entitled to one vote. For funds that use the management share structure, the holder of the management shares often controls all of the voting power of the offshore hedge fund.

Management shareholders who control the voting power are typically authorized to modify the memorandum and articles of association. They do this through special resolutionCorporate resolutions requiring higher approval thresholds than ordinary resolutions, typically used for significant decisions like constitutional amendments and requiring at least a two-thirds majority of shareholders. procedures, but there are important limitations regarding shareholder rights that must be respected.

According to Cayman Islands legal principles, certain protections remain in place even when regular investors hold non-voting shares Non-voting shares Non-voting shares are a class of equity in a hedge fund structure that provides economic rights but no voting authority, commonly used in offshore funds to accommodate investors concerned about potential regulatory consequences of holding voting securities. while a third party controls the voting shares. Fundamental shareholder protections typically require approval from a significant majority of the affected share class. This usually means two-thirds of the outstanding shares must approve certain changes.

Under certain legal theories, some changes may require individual shareholder consent regardless of the voting structure. This typically happens when fundamental contractual arrangements between shareholders and the fund face material alteration.

As a result, while management share arrangements make routine governance amendments easier, they do not provide unlimited authority to modify governing documents. Many changes that could negatively impact shareholders will still require some level of shareholder approval, regardless of whether those shareholders have voting or non-voting shares. Different offshore jurisdictions have different rules governing how governing documents can be amended.

Having all decision-making authority held by one person, rather than spreading such authority across all shareholders, can be useful in several situations. It helps when it may be difficult or time-consuming to organize a vote of all shareholders. This is particularly helpful when nonmaterial changes are required to an offshore hedge fund's memorandum and articles of association.

The management share structure is also useful if an offshore hedge fund needs to be liquidated. It allows all shareholders to be repaid while the management shareholder remains to help with the final liquidation process.

When a company has not established management share structures, the board of directors must typically obtain approval from a specified percentage of shareholders to modify the memorandum and articles of association. Such modifications require special resolution procedures.

Standard practice requires at least two-thirds of eligible shareholders to approve changes. This approval can happen either through formal meeting votes or through unanimous written consent from all shareholders with voting authority on the matter.

Different offshore jurisdictions have different rules governing how governing documents can be amended. Consent mechanisms may vary between domestic and offshore vehicles, even when those vehicles service parallel fundsInvestment structures where separate domestic and offshore fund vehicles invest side-by-side in substantially the same portfolio to accommodate different investor types and regulatory requirements. or master-feeder structures Master-feeder structure A master-feeder structure is a fund arrangement where multiple feeder funds (typically designed for different investor types) invest into a single master fund that makes all investments, creating operational efficiency while accommodating diverse investor needs. . For instance, negative consentAn approach where continued participation or unchanged status is assumed unless the party specifically provides notice to the contrary. mechanisms may not be recognized by certain offshore jurisdictions.