PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
CALDERWOOD & HARKNESS LLP 1585 Broadway, 34th Floor New York, NY 10036
Matter No.: 1024-00002
Date: June 11, 2024
To: Driftwood Capital Management LLC 680 Lexington Avenue, 31st Floor New York, NY 10022
Attention: Elaine R. Sato, Deputy Chief Investment Officer
From: Stephen Adler, Lead Associate, Funds & Asset Management Theresa Kim, Working Associate, Funds & Asset Management
Reviewed By: Graham Sutherland, Responsible Partner, Funds & Asset Management
Re: Analysis of Key-Person Event Under Section 8.04 of the Amended & Restated Limited Partnership Agreement of Driftwood Absolute Return Fund Ltd.
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I. Executive Summary
Calderwood & Harkness LLP has been engaged by Driftwood Capital Management LLC ("DCM" or the "General Partner"), the general partner of Driftwood Absolute Return Fund Ltd. ("DARF" or the "Fund"), a Cayman Islands exempted limited partnership (Cayman Registration No. ELP-87234) governed by a Delaware-law Amended & Restated Limited Partnership Agreement dated March 15, 2017 (the "A&R LPA"), to advise on the legal implications of a Key Person Event triggered by the medical incapacitation of Marcus J. Whitmore, the Fund's sole designated Key Person under Section 8.04(a) of the A&R LPA. This memorandum sets forth our analysis of the relevant contractual provisions, identifies the operative trigger for the Key Person Event, details the immediate consequences and cure mechanics, and provides a recommended course of action for the General Partner.
Key Conclusion. A Key Person Event under Section 8.04(b)(iv) of the A&R LPA has been triggered effective June 10, 2024 — that date representing the expiration of the seven consecutive calendar day period following Mr. Whitmore's hemorrhagic stroke on June 3, 2024, during which he has been unable to devote substantially all of his professional time to the affairs of the Fund.
Immediate Consequences. The occurrence of the Key Person Event triggers the following immediate consequences under the A&R LPA:
• Suspension of the Investment Period. The Investment Period (as defined in Section 1.01(bb) of the A&R LPA) is immediately suspended. The General Partner may not make any new portfolio investments on behalf of the Fund during the suspension. Follow-on investments in existing portfolio positions are permitted but capped at $28.7 million, representing 1% of assets under management as of the most recent NAV reporting date (May 31, 2024).
• Mandatory LP Notification. The General Partner must notify all Limited Partners in writing within five (5) business days of the Key Person Event. Given the June 10, 2024 trigger date, the notification deadline is June 17, 2024.
• Commencement of Cure Period. A ninety (90) calendar day Cure Period commences on the date of the Key Person Event and expires on September 8, 2024. During this period, the General Partner may propose one or more Successor Key Persons for LP approval.
• LP Consent Threshold. Any proposed Successor Key Person must be approved by Limited Partners holding at least 66⅔% of aggregate LP capital commitments, excluding the General Partner's co-investment. Based on our calculations, this requires written consent from LPs whose aggregate capital commitments equal or exceed $1,865,500,000 (66⅔% of $2,798,250,000 in voting LP capital commitments).
• Failure-to-Cure Consequences. If the General Partner fails to secure LP approval of a Successor Key Person within the Cure Period, Limited Partners holding a majority-in-interest may elect either (i) to extend the Cure Period by up to an additional ninety (90) calendar days (to approximately December 7, 2024) or (ii) to commence an orderly wind-down of the Fund.
Based on the qualifications of the most likely Successor Key Person candidates — Elaine R. Sato (Deputy CIO, 19 years of experience) and Jonathan K. Huang (Head of Credit Strategies, 16 years of experience) — and the Fund's strong year-to-date performance, we assess the risk of a wind-down election as low, provided the General Partner acts promptly and transparently in the consent solicitation process. The primary risk to successful cure is delay, given the compressed timeline imposed by the Cure Period. This memorandum identifies the key action items and recommends an aggressive but achievable implementation timeline.
II. Background
A. The Fund
Driftwood Absolute Return Fund Ltd. ("DARF" or the "Fund") is a Cayman Islands exempted limited partnership registered at 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman, KY1-1104, Cayman Islands, under Cayman Registration No. ELP-87234. The Fund's registered agent in the Cayman Islands is Archipelago Corporate Services Ltd., P.O. Box 2681, George Town, Grand Cayman, KY1-1111.
The Fund pursues a multi-strategy absolute return investment program encompassing equity long/short, event-driven, and credit relative value strategies, with a particular sector focus on the asset management and banking industries. The Fund was established on its inception date of March 15, 2017, and has operated continuously since that date under the governance framework established by the A&R LPA.
The Fund's principal service providers are as follows:
• Fund Administrator: Pinnacle Fund Services (Cayman) Ltd., 2nd Floor, Century Yard, Cricket Square, George Town, Grand Cayman, KY1-1205. Pinnacle is responsible for the calculation of the Fund's net asset value, the maintenance of the Fund's books and records, and the preparation of periodic investor statements.
• Auditor: Graystone & Whitfield LLP, 6th Floor, Anderson Square, George Town, Grand Cayman, KY1-1104. Graystone & Whitfield conducts the Fund's annual financial audit in accordance with International Financial Reporting Standards and the requirements of Cayman Islands law.
• Prime Broker: Halcyon Securities International Ltd., 25 Cabot Square, Canary Wharf, London E14 4QA, United Kingdom. Halcyon provides trade execution, clearing, settlement, securities lending, and custody services to the Fund.
As of the date of this memorandum, the Fund has forty-seven (47) limited partners. The Fund's governance structure includes a five-member Investor Advisory Committee (the "IAC"), established pursuant to Section 9.02 of the A&R LPA and discussed in greater detail in Section IV.B below. The IAC serves in an advisory capacity to the General Partner with respect to certain matters, including conflicts of interest, valuation disputes, and — of particular relevance here — key governance events.
B. The General Partner
Driftwood Capital Management LLC ("DCM" or the "General Partner") is a Delaware limited liability company with its principal office located at 680 Lexington Avenue, 31st Floor, New York, NY 10022. DCM's Delaware registered agent is Capitol Registered Agents, Inc., 1209 Orange Street, Wilmington, DE 19801. DCM's Employer Identification Number is 82-4917653.
DCM serves as the sole general partner of the Fund and is responsible for the day-to-day investment management and operations of the Fund in accordance with the A&R LPA and applicable law. DCM is registered as an investment adviser with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.
DCM has two Managing Members:
• Marcus J. Whitmore — Founder, Chief Investment Officer, and Managing Member holding a ninety percent (90%) membership interest in DCM.
• Elaine R. Sato — Deputy Chief Investment Officer and Managing Member holding a ten percent (10%) membership interest in DCM.
The governance and internal economics of DCM are set forth in the Third Amended & Restated Operating Agreement of Driftwood Capital Management LLC, dated as of January 1, 2022 (the "DCM Operating Agreement"), which is relevant to the carried interest reallocation considerations discussed in Section V.D below.
C. Fund Financial Profile (as of May 31, 2024)
The following summarizes the Fund's financial position as of the most recent monthly reporting period, based on data provided by Pinnacle Fund Services (Cayman) Ltd.:
The Fund's fee structure follows a conventional 2/20 arrangement. The management fee is calculated at 2.0% of NAV per annum, payable quarterly in advance. The incentive allocation entitles the General Partner to twenty percent (20%) of net new profits above the Fund's high-water mark of $142.67 per unit (established at December 31, 2023), subject to a six percent (6%) annualized hurdle rate with full catch-up. As of May 31, 2024, the Fund's NAV per unit of $150.53 exceeds the high-water mark by $7.86 per unit, placing the Fund in a meaningful accrued incentive allocation position.
The strong year-to-date net return of +5.4% is noteworthy in the context of the Key Person Event analysis: positive performance creates a more favorable backdrop for LP engagement and reduces the likelihood that LPs would elect to wind down a well-performing fund. Conversely, the Fund's substantial gross exposure of $5.31 billion (1.85× gross leverage) underscores the operational risk of managing the portfolio without a designated Key Person and highlights the urgency of establishing a successor governance framework.
D. Marcus J. Whitmore — The Key Person
Marcus J. Whitmore is the Founder, Chief Investment Officer, and Managing Member (90%) of DCM, and the sole designated "Key Person" under Section 8.04(a) of the A&R LPA. Mr. Whitmore has been designated as the Key Person since the Fund's inception on March 15, 2017, and no other individual has at any time been named as a Key Person or co-Key Person under the A&R LPA as currently in effect.
Mr. Whitmore brings twenty-eight (28) years of experience in multi-strategy investing to the Fund. Prior to founding DCM and the Fund in 2017, Mr. Whitmore served as Managing Director at Veltrano Asset Partners LLC from 2004 to 2016, where he led the firm's multi-strategy investment platform. Before Veltrano, Mr. Whitmore served as a portfolio manager at Fieldstone Capital Advisors LP from 1996 to 2004, where he managed equity long/short and event-driven portfolios with a focus on the financial services sector.
Mr. Whitmore's capital commitment to the Fund is $57,400,000, representing approximately 2.0% of the Fund's assets under management. This commitment is made through DCM as part of the General Partner's co-investment. Mr. Whitmore's carried interest entitlement under the DCM Operating Agreement is eighteen percent (18%) of the General Partner's twenty percent (20%) incentive allocation, which equates to an effective rate of 3.6% of net new fund profits above the high-water mark.
Mr. Whitmore's central role in the Fund's investment process, combined with his sole designation as Key Person under the A&R LPA, creates a structural vulnerability that is now acutely relevant. The A&R LPA provides no mechanism for automatic succession or substitution of the Key Person, and the entire key-person framework depends on Mr. Whitmore alone.
E. The Incapacitation Event
On June 3, 2024, Mr. Whitmore suffered a severe hemorrhagic stroke. He was transported by emergency medical services to Lenox Hill Medical Center in New York, where he underwent emergency neurosurgical intervention. As of the date of this memorandum, Mr. Whitmore remains at Lenox Hill Medical Center, where he has been transferred from the intensive care unit to the intensive rehabilitation unit.
Mr. Whitmore's attending physicians have projected a minimum recovery period of twelve to eighteen (12–18) months, with an uncertain return-to-work prognosis. The medical team has not yet determined whether Mr. Whitmore will be able to resume his professional responsibilities at any point, and the extent of any residual cognitive or physical impairment is not yet fully ascertainable.
Since June 3, 2024, Mr. Whitmore has been completely unable to devote any professional time to the affairs of the Fund. He has not participated in investment committee meetings, portfolio management decisions, risk oversight functions, or any other aspect of the Fund's operations. All day-to-day investment management and operational responsibilities have, as a practical matter, been assumed by Ms. Sato and other members of the DCM investment team.
The suddenness of the stroke is significant for purposes of the Key Person Event analysis: no prior written notice was given to the Limited Partners regarding Mr. Whitmore's anticipated absence, which is relevant to the operative trigger under Section 8.04(b)(iv), as discussed in Section III.B below.
III. Section 8.04 Key-Person Clause — Detailed Analysis
A. Definition of Key Person — Section 8.04(a)
Section 8.04(a) of the A&R LPA provides, in relevant part:
"Key Person" shall mean Marcus J. Whitmore.
The definition is name-specific, identifying Mr. Whitmore as the sole Key Person of the Fund. Notably, the provision does not include any other individual — whether by name or by reference to a title, role, or position — as a Key Person or co-Key Person. Nor does the definition include any provision for automatic succession or substitution in the event that Mr. Whitmore ceases to serve in such capacity. The designation is, in this respect, both narrow and rigid: it depends entirely on the continued active involvement of a single named individual.
Several observations merit discussion. First, the absence of a co-Key Person designation is atypical for a fund of DARF's size and complexity. Industry practice for multi-strategy funds with assets under management in excess of $2 billion generally favors the designation of two or more Key Persons, often including the Chief Investment Officer and one or more senior portfolio managers or principals. The single-Key-Person structure at DARF reflects Mr. Whitmore's dominant role as founder and CIO, and was likely a product of the original subscription negotiations in which the founding LPs accepted the concentration risk associated with Mr. Whitmore's sole designation in exchange for the investment returns and strategy expertise he was expected to provide.
Second, the absence of any automatic succession mechanism means that a Key Person Event cannot be cured by operation of the agreement itself. Rather, cure requires an affirmative act of LP consent to approve a Successor Key Person, as discussed in Section III.C.4 below. This structural feature gives the LP base significant leverage in the cure process, as the LPs effectively hold a veto right over the Fund's ability to continue active investment operations.
Third, we note that Section 8.04(a) does not define or cross-reference the concept of a "Successor Key Person," which is addressed separately in Section 8.04(c). The two provisions operate in tandem but are structurally independent: Section 8.04(a) establishes who the Key Person is, while Section 8.04(c) establishes the mechanism by which a successor may be installed following a Key Person Event. There is no ambiguity in the current designation, and no basis for an argument that any other individual currently qualifies as a Key Person under the existing terms of the A&R LPA.
B. Key Person Event Trigger — Section 8.04(b)
1. Triggering Events Enumerated. Section 8.04(b) of the A&R LPA provides that a "Key Person Event" shall be deemed to have occurred upon the occurrence of any of the following events with respect to the Key Person:
(i) death of the Key Person;
(ii) permanent disability of the Key Person;
(iii) departure of the Key Person from the General Partner (whether by resignation, termination, retirement, or otherwise); or
(iv) the inability of the Key Person to devote substantially all of his professional time to the affairs of the Partnership for a period of seven (7) consecutive calendar days, absent prior written notice to the Limited Partners providing reasonable justification for such absence and identifying the expected duration thereof.
Each of these triggering events is designed to address a different scenario in which the Key Person's active involvement in the Fund's operations is interrupted or terminated. Sub-clauses (i) through (iii) address definitive status changes (death, permanent disability, departure), while sub-clause (iv) addresses temporary or indefinite absences that may not rise to the level of the other triggers but nevertheless constitute a material disruption to the Fund's management.
The sub-clause (iv) trigger is particularly significant in this context because it operates on a short, seven-calendar-day timeline and does not require a determination of permanent disability or formal departure. It is, in effect, a "business continuity" trigger designed to ensure that LP interests are protected against even relatively short periods of Key Person absence that were not anticipated and disclosed in advance.
2. Application to Whitmore's Incapacitation. The factual predicate for a Key Person Event under Section 8.04(b)(iv) is straightforward and, in our view, unambiguous:
• Mr. Whitmore's hemorrhagic stroke occurred on June 3, 2024.
• Since June 3, 2024, Mr. Whitmore has been completely unable to devote any professional time to the affairs of the Fund. The "substantially all" standard set forth in sub-clause (iv) is therefore clearly unsatisfied — not merely has Mr. Whitmore been unable to devote "substantially all" of his professional time to Fund affairs, he has been unable to devote any professional time whatsoever.
• No prior written notice was given to the Limited Partners regarding Mr. Whitmore's anticipated absence. The stroke was sudden and unexpected, and no advance communication to the LP base was possible. The "absent prior written notice" proviso in sub-clause (iv) is therefore not satisfied, meaning the seven-day clock runs without interruption.
• The seven (7) consecutive calendar day threshold is calculated as follows: the period from June 3, 2024 (the date of the stroke) through June 9, 2024, constitutes seven consecutive calendar days during which Mr. Whitmore has been unable to devote substantially all of his professional time to Fund affairs. The seventh day is June 9, 2024, and the Key Person Event is deemed to have occurred upon the expiration of that seven-day period.
Conclusion: A Key Person Event under Section 8.04(b)(iv) of the A&R LPA is deemed to have occurred effective June 10, 2024.
We note that the A&R LPA does not specify whether the seven-day period is measured inclusive or exclusive of the first day of inability. Under the convention most commonly applied in Delaware contract interpretation — and consistent with the general rule that the day of the triggering event is excluded from the count — the seven-day period would run from June 4 through June 10, yielding a trigger date of June 10, 2024. However, even under the alternative calculation (June 3 through June 9, yielding a trigger date of June 9, 2024), the Key Person Event has already occurred as of the date of this memorandum. For purposes of clarity and conservative calculation of downstream deadlines, we use June 10, 2024 as the operative trigger date throughout this memorandum.
3. Alternative Trigger Considerations. While the "inability to devote substantially all professional time" trigger under sub-clause (iv) is the primary and operative basis for the Key Person Event, we briefly address the potential applicability of sub-clause (ii) ("permanent disability") to the current facts.
Permanent Disability. The A&R LPA does not define "permanent disability." In the absence of a contractual definition, a Delaware court would likely interpret the term in accordance with its ordinary meaning, informed by relevant context and, potentially, analogous definitions in related legal instruments (such as disability insurance policies, employment agreements, or the Americans with Disabilities Act). Under these authorities, "permanent disability" generally requires a showing that the individual suffers from a physical or mental condition that is expected to be of indefinite duration or to prevent the substantial performance of the individual's duties on a permanent or near-permanent basis.
The current medical prognosis for Mr. Whitmore — a minimum twelve to eighteen (12–18) month recovery period with uncertain return-to-work potential — does not yet conclusively establish permanent disability within the likely meaning of that term. While the prognosis is serious and the outcome uncertain, attending physicians have not yet determined that Mr. Whitmore's condition is permanent, nor have they concluded that he will be unable to return to his professional responsibilities at any point in the future. The situation is, at present, one of temporary incapacitation with an uncertain long-term outlook.
However, the distinction between sub-clause (ii) and sub-clause (iv) is, for present purposes, academic. The sub-clause (iv) trigger has already been activated, and the consequences under Section 8.04(c) are the same regardless of which sub-clause is the operative trigger. The Key Person Event has occurred, the Investment Period is suspended, and the Cure Period has commenced. Whether the event is characterized as arising under sub-clause (iv) or sub-clause (ii) does not affect the procedural or substantive obligations of the General Partner going forward.
Recommendation. The General Partner should rely on the sub-clause (iv) trigger as the operative basis for the Key Person Event in its LP notification. This approach avoids the need for a medical determination of permanent disability and is supported by the clear and unambiguous factual record. If Mr. Whitmore's condition subsequently worsens, or if his attending physicians determine at a later date that his disability is permanent, a supplemental notice to the Limited Partners may be appropriate to update the LP base on the nature of the Key Person Event, but such supplemental notice is not currently required as a contractual matter.
C. Consequences of the Key Person Event — Section 8.04(c)
Section 8.04(c) of the A&R LPA establishes the consequences that flow from the occurrence of a Key Person Event and the mechanics by which the event may be cured. We address each consequence in turn.
1. Immediate Suspension of the Investment Period. Upon the occurrence of a Key Person Event, the Investment Period is immediately and automatically suspended. The suspension takes effect as of the date of the Key Person Event — June 10, 2024 — and remains in effect until either (a) a Successor Key Person is approved by the requisite LP majority and the Investment Period is restored by operation of the cure mechanics, or (b) the Fund is wound down.
During the suspension of the Investment Period, the General Partner is subject to the following restrictions on its investment activities:
• New Investments Prohibited. The General Partner may not make any new portfolio investments on behalf of the Fund. For purposes of this restriction, a "new investment" includes the acquisition of any security, instrument, or other asset that does not represent an addition to an existing portfolio position held by the Fund as of the date of the Key Person Event. This prohibition encompasses both funded and unfunded commitments: the General Partner may not enter into new agreements, letters of intent, or other binding or non-binding arrangements to acquire new positions, nor may it draw on existing credit facilities for the purpose of funding new investments.
• Follow-On Investments Capped. Follow-on investments — defined as additions to existing portfolio positions held by the Fund as of the date of the Key Person Event — are permitted, but are subject to an aggregate cap of $28,700,000. This cap is calculated as 1% of the Fund's assets under management as of the most recent NAV reporting date. Based on the May 31, 2024 NAV of $2,870,000,000, the follow-on investment cap is $2,870,000,000 × 1.0% = $28,700,000. The General Partner should maintain a running ledger of all follow-on investments made during the suspension period to ensure compliance with this cap.
• Defensive and Portfolio-Maintenance Actions. Certain categories of investment activity are not restricted by the Investment Period suspension. Specifically, defensive and portfolio-maintenance actions — including hedging existing positions, managing margin requirements, responding to corporate actions (such as tender offers, rights offerings, and mergers) affecting existing holdings, and rolling or adjusting derivative positions that are part of existing investment strategies — are permitted and, in many cases, may be affirmatively required by the General Partner's fiduciary duties. However, the General Partner should exercise caution to ensure that defensive actions do not, in substance, constitute new investments in disguise. The line between a legitimate defensive action and a prohibited new investment may, in certain cases, be a matter of judgment; we recommend that the General Partner consult with Calderwood & Harkness on any investment activity during the suspension period that could reasonably be characterized as either.
2. LP Notification Obligation. Section 8.04(c) requires the General Partner to notify all Limited Partners in writing within five (5) business days of the Key Person Event. The notification must disclose (i) the occurrence of the Key Person Event, (ii) the nature of the triggering event, and (iii) the consequent suspension of the Investment Period.
The relevant deadline calculation is as follows:
• Key Person Event date: June 10, 2024 (Monday)
• Business day 1: June 11, 2024 (Tuesday)
• Business day 2: June 12, 2024 (Wednesday)
• Business day 3: June 13, 2024 (Thursday)
• Business day 4: June 14, 2024 (Friday)
• Business day 5: June 17, 2024 (Monday) — June 15–16 fall on a weekend and are excluded
Deadline: June 17, 2024.
The notification should be addressed to all forty-seven (47) Limited Partners at the addresses set forth in Schedule B to the A&R LPA (or such updated addresses as have been provided by the LPs in accordance with Section 15.01 of the A&R LPA). In addition, the notification should be separately delivered to each of the five (5) members of the Investor Advisory Committee, both in their individual capacities as LPs (to the extent applicable) and in their capacity as IAC members.
Recommendation. Given the significance of the Key Person Event and the importance of demonstrating good faith and transparency to the LP base, we recommend that the General Partner deliver the LP notification as soon as practicable. Our recommended target is June 14, 2024, which provides a buffer of one full business day before the June 17 contractual deadline. This buffer is advisable to account for any unforeseen delays in the preparation or distribution of the notice and to demonstrate to the LP base that the General Partner is acting promptly and in the interest of the partnership.
We will prepare a draft LP notification letter for the General Partner's review by the close of business on June 12, 2024. The draft will be circulated to Ms. Sato and DCM's in-house counsel for comment before finalization.
3. Cure Period. A ninety (90) calendar day Cure Period commences on the date of the Key Person Event. The Cure Period provides a window during which the General Partner may propose one or more Successor Key Persons for LP approval and, if such approval is obtained, restore the Investment Period and resume normal fund operations.
The Cure Period calculation is as follows:
• Key Person Event date: June 10, 2024
• Cure Period duration: 90 calendar days
• Cure Period expiration: June 10, 2024 + 90 calendar days = September 8, 2024
Several important features of the Cure Period merit emphasis:
• Firm Deadline. The 90-day Cure Period represents a firm outer deadline that cannot be unilaterally extended by the General Partner. The A&R LPA does not provide for any extension at the discretion of the GP, nor does it authorize the GP to toll or suspend the running of the Cure Period for any reason. The only mechanism for extension is an LP vote following the expiration of the initial Cure Period, as discussed in Section III.C.5 below.
• GP's Sole Proposal Right. During the Cure Period, only the General Partner may propose Successor Key Persons to the LP base. The LPs do not have the right to nominate their own candidates, although as a practical matter, the LPs (particularly through the IAC) will have significant influence over the selection process through their consent rights.
• Multiple Proposals Permitted. The A&R LPA does not limit the General Partner to a single proposal during the Cure Period. If an initial proposal fails to achieve the requisite LP consent, the General Partner may submit a revised or alternative proposal, provided the Cure Period has not yet expired. As a practical matter, however, the compressed timeline makes sequential proposals difficult; the General Partner should aim to submit a single, well-supported proposal that is likely to achieve the necessary consent.
4. Successor Key Person Approval — LP Consent Threshold. The core of the cure mechanism is the LP consent requirement. Section 8.04(c) provides that any proposed Successor Key Person must be approved by Limited Partners holding at least sixty-six and two-thirds percent (66⅔%) of aggregate LP capital commitments, excluding the General Partner's co-investment.
Calculation of Voting LP Commitments. The determination of the voting base and the applicable consent threshold requires the exclusion of the General Partner's co-investment from the aggregate capital commitment calculation. The relevant figures are as follows:
We note that Jonathan K. Huang's capital commitment of $8,610,000 is also made through the DCM vehicle. Section 8.04(c) specifies the exclusion of "the General Partner's co-investment," which, read literally, would encompass all capital committed through DCM as the General Partner entity. If Mr. Huang's commitment is also excluded as part of the GP co-invest, the voting base would be further reduced to $2,789,640,000, and the 66⅔% consent threshold would be $1,859,760,000.
However, the more conservative approach — and the approach we recommend — is to use the $2,798,250,000 figure as the aggregate voting LP capital commitment base. This yields the higher consent threshold and therefore represents the more protective calculation from the General Partner's perspective: if the General Partner satisfies the higher threshold, it will a fortiori have satisfied any lower threshold that might result from further exclusions. This conservative approach also avoids any potential LP challenge to the consent calculation on the basis that the voting base was improperly enlarged.
66⅔% Consent Threshold Calculation:
$2,798,250,000 × 66.667% = $1,865,500,000
The General Partner must therefore obtain written consent from Limited Partners whose aggregate capital commitments equal or exceed $1,865,500,000 in order to approve one or more Successor Key Persons and cure the Key Person Event.
This is a supermajority threshold that requires broad-based LP support. It cannot be achieved through the support of only a handful of large investors. By way of illustration, the five IAC members collectively hold capital commitments of approximately $1,140,000,000 (as discussed in Section IV.B below), which represents approximately 40.7% of voting LP commitments — well short of the 66⅔% threshold on its own. The General Partner will need the support of the IAC members plus a significant number of additional LPs to reach the required level.
5. Failure to Cure — Wind-Down or Extension. If no Successor Key Person is approved by the requisite LP majority within the 90-calendar-day Cure Period (i.e., by September 8, 2024), Section 8.04(c) provides that Limited Partners holding a majority-in-interest may elect either:
(i) to extend the Cure Period by up to ninety (90) additional calendar days (which would extend the deadline to approximately December 7, 2024); or
(ii) to commence an orderly wind-down of the Fund in accordance with the dissolution and liquidation provisions of Article XII of the A&R LPA.
"Majority-in-interest" is defined in Section 1.01(jj) of the A&R LPA as Limited Partners holding more than fifty percent (50%) of aggregate LP capital commitments. Based on the voting LP capital commitment base of $2,798,250,000, this majority-in-interest threshold is:
$2,798,250,000 × 50% = $1,399,125,000
Limited Partners holding aggregate commitments in excess of $1,399,125,000 may therefore exercise the extension or wind-down election. Notably, this is a lower threshold than the 66⅔% supermajority required to approve a Successor Key Person — meaning that a group of LPs that is insufficient to approve a successor may nonetheless be sufficient to elect a wind-down.
A wind-down election, if triggered, would have severe consequences for the Fund and its stakeholders. The Fund's current portfolio consists of $5.31 billion in gross exposure across equity long/short, event-driven, and credit relative value strategies, with a concentrated sector focus on asset management and banking. An orderly liquidation of this portfolio could take six to twelve (6–12) months, depending on market conditions, and would likely result in significant market impact costs, particularly with respect to the more illiquid credit relative value positions. We discuss the wind-down scenario in greater detail in Section VI.A below.
IV. LP Consent Solicitation — Procedural Considerations
A. Form of Consent
Section 14.01 of the A&R LPA governs amendments to the partnership agreement and provides that any amendment or modification of the A&R LPA requires the written consent of the General Partner and the requisite percentage of Limited Partners specified for the particular action in question. For purposes of the Successor Key Person approval, the requisite LP percentage is 66⅔% of aggregate LP capital commitments (excluding the GP's co-investment), as set forth in Section 8.04(c).
The A&R LPA expressly permits written consent in lieu of a formal meeting of the Limited Partners. Section 14.03 provides that any action that may be taken at a meeting of the Limited Partners may alternatively be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by Limited Partners holding the requisite percentage of capital commitments. This written consent mechanism is the appropriate procedural vehicle for the Successor Key Person approval, and we do not recommend convening a formal LP meeting for this purpose.
The written consent must be executed in writing (which, under Section 15.01, includes electronic signature and delivery) and must specifically reference the action being consented to. A generic or open-ended consent form would be insufficient; the consent must describe the identity of the proposed Successor Key Person(s) and the terms of any associated amendment to the A&R LPA with sufficient specificity to demonstrate informed LP approval.
Deliverables. The General Partner should prepare and circulate the following materials to the LP base in connection with the consent solicitation:
(a) A detailed Successor Key Person Proposal describing the identity, qualifications, experience, and proposed role of each proposed Successor Key Person, together with a narrative explanation of the proposed successor governance framework (including any changes to the Fund's investment committee structure, risk oversight protocols, and reporting obligations).
(b) A draft First Amendment to the A&R LPA implementing the successor governance framework, including amendments to Section 8.04(a) (designation of Successor Key Persons), any applicable changes to Schedule A (carried interest allocation), and any other conforming amendments necessitated by the successor framework.
(c) A Form of LP Written Consent for execution and return by consenting LPs, together with instructions regarding the consent process, deadline for return, and methods of delivery.
B. Timing Constraints
The 90-day Cure Period imposes a firm outer deadline of September 8, 2024. Within this window, the General Partner must (i) prepare the Successor Proposal and draft Amendment, (ii) engage with the IAC in advance of broader LP circulation, (iii) circulate the proposal materials to all 47 LPs, (iv) allow adequate time for LP review and deliberation, (v) negotiate with IAC counsel on any proposed revisions, and (vi) collect executed consents from LPs holding at least 66⅔% of aggregate voting LP capital commitments.
Recommended Timeline. Based on our experience with comparable consent solicitations and taking into account the compressed timeline, we recommend the following target schedule:
• Prepare and circulate the Successor Proposal and draft LPA amendment no later than mid-July 2024 (target: July 15, 2024), providing LPs approximately forty (40) calendar days to review, deliberate, and return consents before the Cure Period deadline of September 8, 2024.
• Prior to the broader LP circulation, the IAC should be briefed in advance. We recommend scheduling an IAC meeting for late July 2024 (target: July 29, 2024) to present and discuss the Successor Proposal. The IAC's advisory role and the collective weight of its members' capital commitments make early IAC engagement essential to the success of the solicitation.
IAC Composition and Capital Commitments. The five IAC members, their affiliations, and their respective capital commitments are as follows:
The IAC members collectively hold $1,140,000,000 in capital commitments, which represents approximately 40.7% of voting LP commitments ($1,140,000,000 ÷ $2,798,250,000 ≈ 40.74%). This is a substantial block, but alone falls well short of the 66⅔% consent threshold. Nevertheless, securing the unanimous support of the IAC would provide a strong foundation and signal to the broader LP base, and would leave the General Partner needing to secure approximately an additional $725,500,000 in consenting LP commitments to reach the threshold ($1,865,500,000 − $1,140,000,000 = $725,500,000).
Early engagement with the IAC Chair, Diana Cortland of Northvale PERS, is particularly critical. Northvale PERS is the Fund's single largest limited partner, and Ms. Cortland's leadership of the IAC gives her an outsized influence on the LP base. We recommend that Ms. Sato initiate direct communication with Ms. Cortland no later than the week of June 17, 2024, following delivery of the formal LP notification.
C. Role of IAC Counsel
The IAC is represented by independent counsel, Wexford Crane & Albright LLP ("WCA"), located at 51 West 52nd Street, 40th Floor, New York, NY 10019. The WCA team includes Helen M. Calloway (Partner) and David Pineda (Senior Associate), both of whom have represented the IAC since its formation in 2017 and are familiar with the Fund's governance structure and the terms of the A&R LPA.
WCA will almost certainly review and comment on the proposed First Amendment to the A&R LPA on behalf of the IAC. Based on our prior interactions with WCA in the context of previous Fund governance matters, we anticipate that WCA will focus on the following areas:
(a) The qualifications and track record of the proposed Successor Key Persons, with particular attention to investment performance attribution and the extent to which historical returns are attributable to the proposed successors versus Mr. Whitmore.
(b) The proposed Investment Committee structure and decision-making protocols, including whether the successors will have joint authority or whether a lead decision-maker will be designated.
(c) Any proposed changes to carried interest allocation, management fee structure, or other economic terms, particularly to the extent that the cure process is used as an occasion to renegotiate economic terms in the LPs' favor.
(d) Enhanced governance protections, such as expanded IAC advisory rights, additional reporting obligations, or LP approval requirements for future Key Person changes.
(e) Provisions addressing Mr. Whitmore's ongoing role (if any) in the Fund, including the terms of any Senior Advisor designation and the conditions under which Mr. Whitmore might be reinstated as a Key Person if his health permits.
The General Partner and Calderwood & Harkness should anticipate a negotiation process with WCA that may take two to three weeks. This reinforces the importance of initiating the IAC engagement process no later than early July 2024, to allow sufficient time for negotiation before the broader LP circulation and consent collection phases.
V. Delaware Law Considerations
A. Governing Law
Section 16.01 of the A&R LPA provides that the agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to conflict-of-laws principles that would require the application of any other jurisdiction's laws. This choice-of-law provision is enforceable under both Delaware and New York law and controls the interpretation of the key-person provisions and all other terms of the A&R LPA, notwithstanding the Fund's Cayman Islands domicile.
The Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §§ 17-101 et seq. (the "DRULPA"), provides the statutory framework governing the formation, operation, and governance of limited partnerships formed or operating under Delaware law. Although DARF is a Cayman Islands exempted limited partnership rather than a Delaware limited partnership, the parties' contractual election of Delaware law as the governing law of the A&R LPA means that Delaware substantive law — including DRULPA principles — governs the interpretation of the agreement and the rights and obligations of the General Partner and the Limited Partners thereunder. Certain procedural matters and matters relating to the Fund's legal status as a Cayman Islands entity (such as registration, filing requirements, and regulatory compliance) remain subject to Cayman Islands law.
B. Fiduciary Duties of the General Partner
Under DRULPA § 17-1101(d), a partnership agreement may expand, restrict, or eliminate fiduciary duties, subject to one important limitation: the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing. This provision gives broad latitude to the parties to define the scope and nature of the fiduciary duties owed by the general partner, but preserves a baseline obligation of good-faith conduct in the performance of contractual obligations.
The A&R LPA does not eliminate the General Partner's fiduciary duties. Rather, Section 7.01 of the A&R LPA provides, in relevant part, that the General Partner shall manage the business and affairs of the Fund in accordance with its fiduciary obligations to the Limited Partners, subject to the contractual limitations, exculpation provisions, and safe harbors set forth elsewhere in the agreement. Specifically, Section 7.02 exculpates the General Partner from liability for losses arising from actions taken in good faith and without gross negligence or willful misconduct, and Section 7.03 provides for indemnification of the General Partner and its affiliates to the fullest extent permitted by Delaware law.
The GP's fiduciary duties are particularly relevant during the Investment Period suspension in several respects:
Investment Activity During the Suspension. During the suspension, the General Partner retains discretionary authority over follow-on investments (within the $28.7 million cap) and defensive and portfolio-maintenance actions. The exercise of this discretion must be consistent with the GP's fiduciary duties to the partnership and its Limited Partners. This means, among other things, that the GP must:
(a) exercise investment judgment with the degree of care, skill, and diligence that a reasonably prudent person in a similar position would exercise under similar circumstances;
(b) act in the best interests of the partnership as a whole, rather than in the personal interests of the GP or its principals;
(c) avoid conflicts of interest or, where conflicts are unavoidable, disclose them fully and ensure that the conflicted transaction is fair to the partnership; and
(d) maintain adequate risk management and portfolio monitoring during the transition period, notwithstanding the absence of Mr. Whitmore.
Successor Key Person Proposal. The GP's proposal of Successor Key Persons must likewise be made in good faith and with due consideration of LP interests. The GP may not propose individuals who manifestly lack the qualifications, experience, or integrity to serve as Key Persons for a fund of DARF's size and complexity. Proposing unqualified successors — or successors whose primary qualification is their willingness to serve the personal interests of the GP's principals rather than the interests of the partnership — could expose the GP to claims of breach of fiduciary duty.
Communication and Disclosure. The GP's fiduciary obligations extend to its communications with the LP base. The GP must provide LPs with accurate, complete, and timely information regarding the Key Person Event, the Fund's operations during the suspension period, and the Successor Key Person proposal. Material omissions, misleading statements, or unreasonable delays in communication could give rise to fiduciary duty claims and, separately, claims under the implied covenant of good faith and fair dealing.
C. LP Consent Solicitation Under Delaware Law
Delaware law strongly favors freedom of contract in the limited partnership context. DRULPA § 17-1101(c) provides that "[i]t is the policy of [DRULPA] to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements." The consent threshold (66⅔%) and solicitation mechanics established by the A&R LPA are therefore enforceable as written, and a Delaware court would give effect to these provisions according to their terms.
However, the implied covenant of good faith and fair dealing imposes certain baseline obligations on the GP in the consent solicitation process. Specifically:
• The GP must provide LPs with sufficient information to make an informed consent decision. This includes full and fair disclosure of the circumstances giving rise to the Key Person Event, the qualifications and experience of the proposed Successor Key Persons, the terms of any proposed amendment to the A&R LPA, and the consequences of failure to achieve LP consent within the Cure Period.
• The GP may not engage in coercive or manipulative tactics to obtain LP consent. This includes, without limitation, threats to withhold distributions, unreasonable conditions on consent, or tie-in arrangements that condition the consent on unrelated concessions.
• The GP must treat all LPs equitably in the solicitation process. The GP may not offer side arrangements, preferential economic terms, or other inducements to certain LPs in exchange for their consent, to the extent such arrangements would disadvantage other LPs or violate the equal treatment provisions of the A&R LPA.
Delaware courts have developed a substantial body of case law interpreting the implied covenant of good faith and fair dealing in the limited partnership context. The seminal decisions in Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. 2013), and Dieckman v. Regency GP LP, 155 A.3d 358 (Del. 2017), establish that the implied covenant fills gaps in the express terms of the partnership agreement and operates to ensure that neither party acts in a manner that would deprive the other of the fruits of the bargain. The GP should be mindful of these principles in designing and executing the consent solicitation process.
D. Carry Reallocation Considerations
Any modification of carried interest allocations among the GP's principals — specifically, the reallocation of Mr. Whitmore's eighteen percent (18%) carried interest share (representing 3.6% of net new fund profits) to Ms. Sato, Mr. Huang, or other members of the DCM team — is primarily an intra-GP matter governed by the DCM Operating Agreement. The DCM Operating Agreement establishes the internal economic arrangements among DCM's members and officers, and a reallocation of carried interest among those persons is, in the first instance, a matter of amending the DCM Operating Agreement in accordance with its terms.
However, to the extent that the carried interest reallocation is reflected in or necessitates changes to the A&R LPA — for example, by amending Schedule A of the A&R LPA to update the allocation waterfall or by modifying the fee and incentive provisions of Article VI — such changes would require LP consent at the applicable threshold under Section 14.01 of the A&R LPA. In practice, the most efficient approach is to incorporate any necessary carry reallocation provisions into the proposed First Amendment to the A&R LPA, so that the Successor Key Person approval and the carry reallocation are addressed in a single consent solicitation.
Delaware courts would analyze a carried interest reallocation under the contractual framework of both the A&R LPA and the DCM Operating Agreement. The GP should ensure that both documents are consistently amended to avoid any mismatch or ambiguity in the allocation provisions. To the extent the reallocation involves a reduction in Mr. Whitmore's economic interest, the consent and approval requirements of the DCM Operating Agreement must also be satisfied. We will review the DCM Operating Agreement separately and advise on the specific requirements applicable to the intra-GP reallocation.
VI. Risk Assessment — Failure to Cure
A. Wind-Down Scenario
In the event that no Successor Key Person is approved by the requisite LP majority within the 90-day Cure Period (or any extended period), and Limited Partners holding a majority-in-interest subsequently elect to wind down the Fund, the consequences would be severe and multifaceted. We summarize the principal risks below:
Forced Liquidation of the Portfolio. The Fund's current portfolio encompasses $2.87 billion in net asset value and $5.31 billion in gross exposure across three primary strategy buckets: equity long/short, event-driven, and credit relative value. An orderly liquidation of this portfolio — particularly in the credit relative value book, which includes structured credit, distressed debt, and other less liquid instruments — could require six to twelve (6–12) months, depending on prevailing market conditions and the willingness of counterparties to absorb the Fund's positions.
Market Impact Costs. The Fund's concentrated sector focus on asset management and banking amplifies the market impact risk of a forced liquidation. Selling a large, concentrated portfolio of financial sector equities and credit instruments into the market over a compressed timeframe would likely depress prices and generate adverse selection costs. The Fund's 1.85× gross leverage ratio further compounds this risk, as the Fund may need to reduce leverage rapidly by liquidating positions at unfavorable prices.
Fire-Sale discounts on Illiquid Positions. The credit relative value book is likely to include positions that cannot be liquidated quickly without accepting significant discounts to fair value. In a wind-down scenario, the Fund would be a known forced seller, which would further erode its negotiating position with potential purchasers.
Loss of Management Fee Income. A wind-down would result in the termination of DCM's management fee income, currently $57.4 million per annum ($14.35 million per quarter). This loss of revenue would have a direct and material impact on DCM's ability to maintain its operations, retain its investment team, and meet its own financial obligations.
Carried Interest Crystallization. A wind-down would trigger the accelerated crystallization of carried interest — the economic impact of which (positive or negative) would depend on the relationship between liquidation values and the Fund's high-water mark. Given that the current NAV per unit of $150.53 exceeds the high-water mark of $142.67, the General Partner has accrued but uncrystallized carried interest that could be realized or lost depending on liquidation outcomes.
Reputational Harm. A wind-down resulting from a failure to cure a Key Person Event would cause significant reputational harm to DCM and its principals. The fund management community and institutional investor base would view such an outcome as a governance failure, potentially affecting the ability of DCM's principals to raise capital for future investment vehicles.
B. Mitigating Factors
Despite the severity of the wind-down scenario, several mitigating factors significantly reduce the likelihood of such an outcome:
Strong Fund Performance. The Fund's year-to-date net return of +5.4% (after fees) creates a favorable environment for LP engagement. Limited Partners are substantially less likely to elect a wind-down of a well-performing fund than they would be of a fund that is underperforming or in a drawdown position. The Fund's current NAV per unit of $150.53 exceeds the high-water mark of $142.67, meaning that LPs have unrealized gains that could be jeopardized by a forced liquidation.
Qualified Successor Candidates. The Fund has two strong internal candidates for the Successor Key Person designation:
Elaine R. Sato, Deputy Chief Investment Officer. Ms. Sato has been with DARF since the Fund's inception in 2017, and has nineteen (19) years of industry experience. Prior to joining DCM, she served as Senior Portfolio Manager at Brindoval Global Investments Ltd. from 2010 to 2017, where she managed equity long/short portfolios with a focus on the financial services and technology sectors. Before Brindoval, she was an analyst at Broadmark Capital Group LLC from 2005 to 2010. At DCM, Ms. Sato co-manages risk oversight with Mr. Whitmore and serves as the primary portfolio manager for the equity long/short and event-driven books. Ms. Sato is a Managing Member of DCM (holding a 10% membership interest) and has a capital commitment to the Fund of $14,350,000.
Jonathan K. Huang, Head of Credit Strategies. Mr. Huang has sixteen (16) years of industry experience and has been with DARF since 2019. Prior to joining DCM, he served as a Partner at Ashford Credit Partners LP from 2013 to 2019, where he co-managed the firm's structured credit and distressed debt portfolios. Before Ashford, he was a Vice President at Meridian Structured Finance LLC from 2008 to 2013. At DCM, Mr. Huang serves as Head of Credit Strategies and is the primary portfolio manager for the credit relative value book. Mr. Huang has a capital commitment to the Fund of $8,610,000.
Both Ms. Sato and Mr. Huang have meaningful capital commitments to the Fund, aligning their economic interests with those of the Limited Partners. Their combined tenure at DCM (seven years for Ms. Sato and five years for Mr. Huang), their experience across the Fund's three core strategy areas, and their existing portfolio management responsibilities position them well as credible successor candidates.
IAC Engagement. The five IAC members collectively hold capital commitments of $1,140,000,000, representing approximately 40.7% of voting LP commitments. As discussed in Section IV.B, early and proactive engagement with the IAC — particularly with Chair Diana Cortland of Northvale PERS — is expected to be a critical success factor. The IAC members are sophisticated institutional investors with a long-standing relationship with the Fund, and their support for the Successor Proposal would send a strong signal to the broader LP base.
Alignment of Interests. The General Partner's co-investment ($57.4 million from Mr. Whitmore, $14.35 million from Ms. Sato, and $8.61 million from Mr. Huang, totaling approximately $80.36 million) creates a meaningful alignment of interests between the GP and the LP base. The GP's principals have substantial personal capital at risk in the Fund, which reduces the perception of a principal-agent conflict and supports the case that the proposed successors are motivated to protect and enhance the value of the Fund.
C. Probability Assessment
Based on the foregoing analysis — including the qualifications of the proposed successor candidates, the Fund's strong performance, the alignment of interests between the GP and the LP base, and the anticipated engagement of the IAC — we assess the risk of a wind-down election as low, provided the General Partner acts promptly and transparently in the consent solicitation process and avoids material delays in the preparation and circulation of the Successor Proposal.
The primary risk factor is delay. The 90-day Cure Period provides limited time for proposal preparation, IAC engagement, broader LP solicitation, negotiation with IAC counsel, and consent collection. Each phase of the process requires careful coordination and timely execution. A failure to meet the recommended timeline milestones could compress the later phases of the solicitation, reduce the time available for LP deliberation, and increase the risk that the consent threshold is not achieved within the Cure Period.
A secondary risk factor is LP resistance to the proposed terms. While we do not currently anticipate material opposition to the designation of Ms. Sato and Mr. Huang as Successor Key Persons, the consent solicitation process may surface LP demands for enhanced governance protections, fee concessions, or other modifications to the A&R LPA that go beyond the minimum requirements of the Key Person cure. The GP should be prepared to negotiate in good faith on these issues while maintaining a clear focus on the primary objective of securing the 66⅔% consent threshold within the Cure Period.
A tertiary risk factor is the possibility that Mr. Whitmore's condition worsens, which could generate negative publicity and further destabilize LP confidence. While this risk is beyond the GP's control, the GP can mitigate its impact through proactive and transparent communication with the LP base.
VII. Recommended Next Steps
Based on our analysis, we recommend the following action plan, organized by phase and target date:
1. Immediate — By June 14, 2024. Prepare and deliver the formal LP notification of the Key Person Event to all forty-seven (47) Limited Partners and the five (5) IAC members. The notification should disclose the occurrence and nature of the Key Person Event, the consequent suspension of the Investment Period, and the commencement of the 90-day Cure Period. Target delivery by June 14, 2024, to provide a one-business-day buffer before the contractual deadline of June 17, 2024. Calderwood & Harkness will prepare a draft notification letter for the General Partner's review by close of business on June 12, 2024.