Julian Ashworth highlights recent legislative changes in the Cayman Islands with a focus on changes to fund legislation
The last 12 months have been, and 2012 promises to be, a busy year for legislative and regulatory developments in the Cayman Islands.
A number of legislative changes have been introduced, primarily designed to maintain the attractiveness of Cayman financial services products in the face of challenges for business from an increased range of competing jurisdictions. Additionally, the Cayman Islands Government and the Cayman Islands Monetary Authority (CIMA) have been working in conjunction with the private sector with a view to ensuring Cayman’s regulatory framework is appropriately robust and competitive.
Such developments have resulted in amendments, among others, to the Companies Law, regulatory changes for hedge funds and a new regime for mergers and consolidations in Cayman.
Master Fund Registration
In June 2011, the Cayman Islands Premier announced a proposal to require master funds in open ended master/feeder structures to register with CIMA. Various policy rationales were expressed for the amendment, including a desire to bring investment vehicles that typically hold the assets in a master-feeder fund structure within the regulatory framework.
Following several months of consultation with Government, CIMA and the financial services industry, relevant legislation was passed by Cayman's legislature in early-December and, at the time of writing, is in the process of formally being enacted into law.
The effect of the Mutual Funds (Amendment) Bill 2011 is that a significant number of new and existing master funds will need to register with CIMA. Although some master funds in open-ended master/feeder structures have historically registered with CIMA, a greater number have been structured in a manner to fall within an exemption from registration with CIMA; namely the ‘15 investor exception’.
The revised law will apply to a master fund which is "a mutual fund that is incorporated or established in the [Cayman] Islands, that holds investments and conducts trading activities and has one or more regulated feeder funds".
In practice, not all master funds established in Cayman will be captured by this amendment, and the salient features of those that are will be that such master funds (a) issue equity interests redeemable at the option of the investor(s), (b) have more than one investor and (c) have themselves one or more feeder funds which are, in turn, registered with CIMA. Master funds which are captured by the amendment will be required to file a prescribed form (to be known as a MF4), pay an annual fee of CI$2,500 (US$3,048), file audited financial statements that have been signed off by a Cayman-approved auditor and complete a FAR Form within six months of the master fund's financial year end (unless CIMA has consented to an extension). Notably, a master fund would not be required to adopt or file a separate offering document.
Existing master funds, which are caught by the revised law, will no longer be able to avail themselves of the ‘15 investor exception’ and will be required to comply with the registration requirements within 90 days (ie’ it is anticipated that they will need to register by the end of the first quarter of 2012).
The Companies Law of the Cayman Islands also received an update in 2011, with a number of changes designed to codify some common law practices, provide clarification on certain matters and address various commercial issues with a view to increasing the attractiveness of the Cayman Islands' companies law regime.
One of the most significant of these changes – and one which has been employed regularly since its implementation – is the new regime for mergers and consolidations, with a simplification and reduction of the threshold for approval. Subject to a company’s Articles, the level of shareholder approval required from each constituent company will be a special resolution of the shareholders having the right to vote (a two-thirds majority unless specifically raised by the Articles). Additionally, provisions relating to the merger of Cayman companies with overseas companies have been expanded so that such unions are permitted even when the overseas company is the surviving company. This additional flexibility means that Cayman companies looking to merge in such a manner do not have to first migrate the Cayman company to an overseas jurisdiction which permits such mergers.
The revised law also introduced the concept of ‘treasury’ shares, which is already a concept common in many other jurisdictions, such as the UK, Jersey and the British Virgin Islands. The flexibility for a company to hold its own shares in treasury, and subsequently transfer those shares (including at a discount or as a bonus), is particularly helpful in structuring corporate transactions.
With an eye towards business from Asia and the Middle East, the Companies Law changes also allow Cayman companies to have a dual name in a script other than that Roman alphabet. Notably the second name does not need to be a direct translation of the English, which is often the case in these markets, causing confusion and delays.
Paperless share transfer provisions in the Companies Law will give Cayman companies certainty as to the ability to admit their shares to listing and trading on exchanges and settlement systems in jurisdictions which either provide for or require electronic settlement and recording of share actions. Paperless share transfers were not previously prohibited under common law; however, this statutory codification is a welcome clarification.
The revised law also clarifies certain issues around the execution of deeds by Cayman companies. This development follows a 2008 ruling in the English High Court known as the Mercury Case, which had led to concern in common law jurisdictions over the practice in international commercial transactions of executing deeds and other documents by signing separate signature pages in anticipation of an imminent completion. Such a practice is expressly permitted in the Companies Law where a relevant signature page is attached to a document with the relevant party's express or implied authority which allows Cayman to maintain a commercial approach with respect to closings on time critical and multi-jurisdictional transactions.
There have also been a number of technical changes, including in connection with segregated portfolio companies. Overall the focus with segregated portfolio companies has changed from imputing liability to providing a clear recourse to resolve misattribution disputes. Directors, for example, will no longer automatically assume personal liability where there has been a failure to execute a contract so that it shows to which segregated portfolio it is attributable. The new mechanism allows directors to determine to attribute the relevant contract to the intended portfolio and notify all parties to the contract and any persons who may be adversely affected. Any objectors may apply to the Court for an order which re-attributes the contract to a particular portfolio or to the general assets.
Exempted Limited Partnership Law
In addition to the amendments made to the Companies Law, the private and public sectors have considered revisions to partnership laws with a particular emphasis on exempted limited partnerships, which are the favoured structure for private equity funds domiciled in the Cayman Islands.
A consultation process is likely to conclude shortly and it is anticipated that revisions to the Exempted Limited Partnership Law will be implemented in early-2012.
A key theme of the revision is to more closely align Cayman's exempted limited partnership law with the Delaware limited partnership model by enshrining freedom of contract principles and enabling parties to defer to a greater extent on the commercial intentions as set out in a limited partnership agreement, with appropriate statutory safeguards.
Although the law will not derogate from a general partner's duty to act in good faith, a key change will enable parties to contractually determine the extent of a general partner's duty to act in the interests of an exempted limited partnership. There will also be greater certainty around limitations on the duties of members of an advisory committee, in particular clarification that such members do not owe fiduciary duties to the partnership or any other partner, and additional express safe harbours in respect of the functions of advisory and investment committees.
From a structuring perspective, it is anticipated that a foreign limited partnership will be able to register in Cayman for the purposes of qualifying as the sole general partner of a Cayman Islands exempted limited partnership (currently, only foreign corporations may do so in addition to certain Cayman formed vehicles).
There will also be a number of technical revisions which, for example, are intended to ease the formalities associated with admission and transfer formalities.
The Year Ahead
We expect that there will be ongoing legislative and regulatory engagement in 2012 across a number of areas, including with regulators in other jurisdictions in connection with consultation on, and implementation of, onshore regulation, such as the EU's Alternative Investment Fund Managers Directive and the Foreign Account Tax Compliance Act (FATCA) in the United States, and on topical issues such as corporate governance developments. The Financial Services Legislative Committee in the Cayman Islands is also working on developing new vehicle structures to enhance Cayman's product mix, including limited liability partnership and limited liability company structures.
Despite its clear industry leadership across a range of sub-sectors, financial services legislation in the Cayman Islands continues to evolve as the jurisdiction responds to changes in the marketplace, regulatory requirements, changes in clients' needs, as well competitive challenges from existing and new financial centres. We expect that Cayman's legislative and regulatory framework will continue to adapt to meet these demands and ensure it is suitably robust, modern and measured whilst maintaining its position as the leading domicile for investment funds and international cross-border transactions in a competitive environment.
Julian Ashworth is a partner in the Cayman Islands office of Maples and Calder. He specialises in private equity and hedge fund structures and investments. Julian has worked with sponsors and institutional investors advising on the structuring and formation of private equity, hedge and hybrid funds, portfolio investments, security arrangements, secondary transactions and fund restructurings. He advises sponsors and management companies on profit sharing and funding arrangements and Cayman Islands regulatory matters. Julian is also involved in corporate finance matters, including leveraged buyouts, joint ventures, co-investments and restructuring matters.
Bermuda, British Virgin Islands, Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore.