Reputation. Cutout words

The investigations into Odey Asset Management and its founder, Crispin Odey, which are currently capturing the headlines in the financial press, tell a familiar story of how fast a financial institution can fall from grace when disaster strikes. Institutional investors (and by extension some retail funds that had been invested in Odey’s strategies) have already caused the suspension of five Odey managed funds. The pattern that we saw in the wake of the Woodford saga of investors fleeing the sinking ship is very familiar, with suspensions of redemptions and finger pointing at the FCA.

Unlike in the Woodford case, the allegations which have precipitated the collapse of the Odey business are concerned with the conduct of a single individual, rather than under-performance. Although the financial sector is far from immune from claims of sexual harassment, the solution for investors has been to disassociate themselves with the alleged behaviour as fast as possible. Getting one’s money back aside, the saga raises some interesting questions about investor rights in such a situation.

Key Person Controls

Investment fund documentation often contains investor protections in the form of key person provisions.  However, those provisions are almost always focused on the devotion of an individual’s time to supporting and managing the fund in question, rather than that person’s conduct. The ability for investors to hold a manager to account for behaviour which brings an organisation into disrepute is therefore unlikely to be found in the terms of a key person clause. Even if the agreement can be invoked, the general partner may be able to cure the key person event and be protected contractually by dismissing the individual and replacing him or her (by which time the economic damage may have been done).

So where else can investors look for comfort if the conduct of an executive causes loss of investor confidence and a consequent run on the fund?

Advisory Committee Powers

As with many questions about investor rights, the structure of the investment vehicle is a good place to start.  Limited partner investors will find that they are not only constrained by inadequate key person clauses, but by the general rule which prevents them from being involved in the management of the partnership (otherwise they will sacrifice their limited liability). They will therefore have to rely on the efficiency of an advisory committee (if there is one) acting on their behalf to hold management to account. Terms of reference for advisory committees should always be reviewed to ensure that limited partners can act independently on such sensitive areas and, for instance, have the ability to exclude management from attending their meetings.

Removing the GP and Termination

If a conduct issue is so serious that it leads to a loss of confidence in the management of the general partner/investment manager as a whole, limited partners will need to look at their powers to remove the general partner and in extremis trigger the termination of the fund.  Both powers are obviously last resort provisions. They will bring into play considerations of the necessary voting requirements and a close examination of how far the general partner/manager (and those who work for those entities) are protected by the liability and indemnification provisions in the partnership agreement for any losses caused to investors. It is very rare to find unacceptable conduct as a ground for liability (perhaps the nearest would be acting in bad faith). However, it is commonplace that investors have no rights to be indemnified against losses unless a court from which there is no appeal has reached a judgment that finds the general partner breached its contractual standard of care to them. That might not include an employment tribunal where conduct claims would be heard.

Many limited partnership agreements rub salt into the wound by charging the fund the legal defence costs of bringing an action against the general partner and they may also provide compensation for the general partner and carried interest partner if the grounds for removing the general partner or manager do not fit neatly into the relevant liability provisions.

All of this may feel particularly unpalatable in circumstances where reputational risk has led to a collapse in investor confidence, monetary loss and the fund becoming unviable.