"For Cause" Removal

"Termination" is a blunt word. It does not say why a manager was removed. An Investment Management Agreement can end for many reasons. One specific, examinable reason is "for cause" removal.

"For cause" removal means investors end the manager's services early. It happens only when the manager has done something seriously wrong, not just performed poorly. The workbook names the wrongs narrowly: fraud, wilful misconduct, and gross negligence, mainly.

So a manager who simply misses a hurdle rate has not, on that fact alone, given investors grounds for a for-cause removal.

Because fraud, wilful misconduct and gross negligence are facts that courts, not the fund documents, ultimately have to determine, the workbook warns that a for-cause removal can trigger long-drawn and vexatious litigation — the investor alleging cause has to make that case stand up, and the manager has every incentive to contest it.

The workbook's practical fix is procedural: suitable dispute resolution provisions through arbitration in the fund's constitutional documents can mitigate this litigation risk to some extent, giving both sides a faster, more contained forum than open court to resolve whether cause genuinely existed.

This sits within the wider context of the Investment Management Agreement's termination clause, which the workbook notes has become more heavily negotiated since the 2008 financial crisis and subsequent fund-management frauds — investors are increasingly cautious about giving managers unchecked bandwidth, and a well-drafted for-cause removal right, with a workable dispute-resolution mechanism attached, is part of how that caution gets written into the fund documents.

Investors in Meridian Growth Fund discover that its investment manager diverted Rs 8 crore of fund assets into an unrelated business the manager personally controls, concealing the transaction from the trustee and from investor reporting.

This is a clear case of alleged fraud, so investors invoke the "for cause" removal clause in the Investment Management Agreement to terminate the manager's services immediately, rather than waiting for the fund's next scheduled reporting cycle or relying on a general no-fault removal mechanism that might require a lengthy investor vote.

The manager disputes the characterisation, arguing the transaction was a permitted related-party investment under the fund documents. Because the IMA includes an arbitration clause for exactly this kind of dispute, the matter goes to arbitration rather than to court — resolving the question of whether cause genuinely existed faster than fully-contested civil litigation would have allowed, though still considerably more slowly than a straightforward, undisputed removal would have been.

Chapter 9 (Legal Documents and Negotiations — Investor Perspective), section 9.3 (The Investment Management Agreement), defines "for cause" removal directly after discussing the IMA's termination clause and investors' growing caution about manager bandwidth since 2008. Expect the three named triggers (fraud, wilful misconduct, gross negligence) tested as a list, and the arbitration mitigation tested as the workbook's own recommended fix for the litigation risk inherent in disputed-cause removals.

• "For cause" removal requires an event of default — fraud, wilful misconduct or gross negligence — not mere underperformance. A manager missing its hurdle rate consistently is a different problem, addressed through other mechanisms, not a for-cause trigger.
• Because the underlying facts are contestable, for-cause removal disputes tend to be litigation-prone — this is exactly why the workbook recommends arbitration provisions be built into the fund documents in advance.
• This clause sits inside the subscription/Investment Management Agreement's termination provisions, not as a freestanding regulatory right — its exact scope depends on how the specific fund's documents define it.
• Do not confuse for-cause removal (manager terminated by investors for default) with an investor's own default in drawdown (an investor failing to honour a capital call) — the two are opposite-direction breaches within the same fund relationship.