Determining whether a decision-maker is a principal or agent (3)13
Assume the fact pattern and initial analysis in Example 7.28 above.
However, in this example the fund manager also has a 2 per cent investment in the fund that aligns its interests with those of the other investors. The fund manager does not have any obligation to fund losses beyond its 2 per cent investment. The investors can remove the fund manager by a simple majority vote, but only for breach of contract.
Analysis
The fund manager”s 2 per cent investment increases its exposure to variability of returns from the activities of the fund without creating exposure that is of such significance that it indicates that the fund manager is a principal. The other investors” rights to remove the fund manager are considered to be protective rights because they are exercisable only for breach of contract. In this example, although the fund manager has extensive decision-making authority and is exposed to variability of returns from its interest and remuneration, the fund manager”s exposure indicates that the fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.
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