As successful activist investors can attest, transforming or ousting the board of directors when a company runs amok (or just runs afoul of expectations) can be one way to force change for the better. But what happens when an investor hit with horrific returns and redemption gates tries to round up fellow hedge fund shareholders to throw out the bums? Apparently very little — as a growing number of investors are beginning to figure out — because the fine print in a hedge fund charter usually makes it almost impossible for the ruling order to be overthrown.
“Some investors are finding out that even if they have support from their fellow shareholders, they do not have the collective power to remove the current board and appoint new, independent directors,” says Roger Hanson, a principal at Cayman Islands–based dms Management, a director-placement firm.
Hedge fund boards of directors have historically been known mostly for formalizing management decisions: approving compensation, signing off on annual statements and audits, deciding who can get into a fund. Management’s lesser-known powers — lesser known until recently, anyway — include imposing gates that keep investors from pulling their money.
Recourse ultimately rests in a fund’s articles of association, and they aren’t all the same. In some cases as few as 10 percent of investors can call an “extraordinary general meeting” — the first step in getting a majority to agree on a change. In other cases 75 percent support is required. To complicate things, many hedge funds have two main share classes: nonvoting ones and voting, or management, shares. The latter matter most, and they are usually owned by the very people shareholders are trying to dump.
Hanson says investors have traditionally failed to consider the fine print carefully enough, though he expects that to change.
“Investors will begin to perform some articles-of-association due diligence to ascertain their ability to change the composition of the board of directors should they ever feel that it might be in their best interest to do so,” he says. “I don’t think it is something that will be taken for granted going forward.”
