Simon Thomas examines how the Cayman Islands have fared in the face of increasing and ever-changing regulatory conditions.
The Cayman Islands continues to hold its place as the preeminent offshore jurisdiction for those looking to establish an international investment fund or to efficiently structure cross-border transactions. Its relentlessly proactive approach has ensured that the Cayman Islands legislative regime has continued to evolve to meet the global demands of its users but also to meet the ever-changing regulatory landscape for those operating in the international financial services arena. Some key examples of this approach in action are set out below.
Exempted Limited Partnerships
The Cayman Islands exempted limited partnership, the typical vehicle of choice for those looking to set up an international private equity fund, was given a facelift in July 2014 as the Cayman Islands government enacted The Exempted Limited Partnership Law, 2014 (the ELP Law). This new ELP Law brought in to force a number of positive changes to the limited partnership regime. Changes to the ELP Law made life easier for investors, managers and those advising the private equity industry. Investors allocating money to private equity funds established in Cayman will benefit from various changes including changes which clarify:
the situations whereby their limited liability status could be jeopardised by extension of the ‘safe harbour’ activities which may be conducted by limited partners without losing their limited liability status;
that limited partners (typically being passive investors), acting in that capacity, owe no fiduciary duties to the general partner, the partnership or their fellow limited partners;
that participation in an investor advisory committee will not give rise to any additional duties; and
that members of the advisory board may rely on the provisions of the limited partnership agreement (LPA) which govern the board notwithstanding that they, individually, are not a party to the LPA.
Managers of private equity funds have been handed a number of tools to make life easier in establishing and maintaining their private equity fund in Cayman including:
the ability to vary the general partner’s duty to act at all times in the interest of the exempted limited partnership (useful for those managers currently wrestling with the, sometimes competing or conflicting, interests of various vehicles within the same structure (whether parallel or alternate investment vehicles, co-investment funds or side car funds));
clarification that a floating charge may be granted over the assets of the exempted limited partnership (where previously it was considered that only a body corporate could grant such security);
the ability for a foreign limited partnership to act as general partner of a Cayman Islands exempted limited partnership;
flexibility in the maintenance of partnership records, both in terms of location (partnership records no longer have to be maintained at the registered office in Cayman) and in terms of confidentiality (limited partner inspection rights may now be as agreed between the parties in the LPA rather than mandated by statute); and
flexibility in dealing with default as harsh provisions, which might previously have been considered unenforceable as “penalty clauses”, will no longer be subject to challenge solely on that basis.
Third Party Rights
In May 2014, the Contracts (Rights of Third Parties) Law, 2014 was enacted. This, for the first time, enabled third parties (ie, persons who are not party to a contract) to rely on the terms of a Cayman Islands law-governed contract purporting to grant them rights. Previously, such a person could not enforce provisions of that contract against the parties to it.
Under this new law, provided a third party is expressly named and stated to be able to enforce rights granted to them under the contract and the law is not excluded, that third party may directly enforce their rights as if they had been a party to the agreement. Any revision to the agreement which would affect the rights of the third party can only be implemented with the consent of that third party unless the contract specifically excludes that entitlement.
The new law will have particular impact in the context of indemnities, exculpations and guarantees given under Cayman Islands law-governed limited partnership agreements, subscription agreements or investment management agreements where the beneficiaries of such rights may now include directors, officers, partners, members or affiliates of the manager despite such persons not being party to the agreement granting such rights.
Limited Liability Companies
The Cayman Islands Financial Services Legislative Committee is currently considering a draft law which would provide for the formation of a new type of Cayman Islands vehicle – an exempted limited liability company (or Cayman LLC). The Cayman LLC would be similar in many respects to a Delaware LLC - an entity having separate legal personality (like a Cayman Islands exempted company), but with certain features of a Cayman Islands exempted limited partnership (in the sense that such a company would not be constrained by requirements to maintain share capital or be limited by shares nor by guarantee but would have the freedom to contract amongst the members to determine the internal workings of the company).
A Cayman LLC would, under the draft law under consideration, have the following key features:
a separate legal entity with limited liability;
may be formed for any lawful business, purpose or activity;
will require at least one member;
registration to be effected by payment of a fee and filing a certificate of formation;
members are free to agree amongst themselves the internal workings of the Cayman LLC, with appropriate minimum safeguards.
The Cayman LLC would have certain advantages including:
simplified fund administration (ie, easier tracking and calculation of the value of a member's investment in the Cayman LLC),
more flexible corporate governance concepts, and
a closer matching of the legal framework and tax treatment applicable between the onshore and offshore investors (for example, where there are parallel onshore and offshore funds in a structure).
It is expected that the Cayman LLC will be attractive as an alternative vehicle to promoters of investment funds.
Portfolio Insurance Companies
The enactment of The Insurance (Portfolio Insurance Companies) Regulations, 2015 and certain related sections of The Insurance (Amendment) Law, 2013 in January 2015 has offered a new structuring opportunity to insurance managers in the Cayman Islands. Under this new law, a captive manager may incorporate a portfolio insurance company (or PIC) underneath a segregated portfolio company (SPC).
The PIC will be incorporated as an exempted company and the assets and liabilities of an existing insurance programme may be transferred by means of a statutory novation from the cell of an SPC to the PIC in which that cell holds shares. A new PIC may be created and registered with CIMA in much the same way as a segregated portfolio is.
Advantages of the new PIC include:
that PICs may contract with other segregated portfolios or other PICs under the same SPC or even with the controlling SPC itself (segregated portfolios could not previously do this);
increased protection against the inadvertent comingling of assets (and liabilities) amongst cells;
no need for separate licensing from CIMA (the PIC will fall under the CIMA licence of the controlling SPC);
counterparties unfamiliar with the SPC structure may be more comfortable contracting with the PIC;
ability to have different boards of directors for the PIC creating greater governance flexibility;
increased ability of the PIC to become a standalone captive;
having its own separate legal identity, a PIC may make its own US tax elections and obtain its own federal tax identification number; and
compared with other incorporated cell structures in other jurisdictions, the PIC, being a separately incorporated entity in its own right presents a more conservative option based upon clear and well-established principles of Cayman Islands corporate law.
In July 2014, the Cayman Islands enacted enabling legislation which brought into force the provisions of intergovernmental agreements (or IGAs) which had been agreed by the Cayman Islands government with the governments of the United States and the United Kingdom. The US Foreign Account Tax Compliance Act (FATCA) and the IGA entered into with the UK for the automatic exchange of information (commonly referred to as UK FATCA) have, through the agreed IGAs and the implementing regulations, imposed an obligation on certain Cayman Islands financial institutions, such as investment funds, to (a) carry out due diligence on their investors to identify certain types of direct or indirect US and UK investors, (b) to report information on such investors to the Cayman Islands Tax Information Authority (TIA) and (c) to withhold amounts payable to investors who refuse to provide information to the fund.
Pursuant to the implementing regulations in the Cayman Islands, reporting financial institutions will be required to file reports with the TIA by 31 May annually, with the first such reports due by 31 May 2015.
The Directors Registration and Licensing Law, 2014 (the Directors Law) was enacted in June 2014. The Director Law provides for the registration and licensing of individuals or companies appointed as directors of corporate mutual funds regulated by the Cayman Islands Monetary Authority (CIMA) and companies registered as ‘excluded persons’ under the Securities Investment Business Law (as amended) (SIBL) of the Cayman Islands (each, a Covered Entity).
The Directors Law also extends to directors of Covered Entities wherever those directors are resident or incorporated. It does not extend to directors of general partners of CIMA-regulated partnerships, or to trustees of CIMA-regulated unit trusts. The Directors Law distinguishes between:
professional directors – being a natural person appointed as a director of 20 or more Covered Entities,
corporate directors – being a body corporate appointed as a director of a Covered Entity, and
non-professional directors – natural persons who are not ‘professional directors’.
Non-professional directors are required to be registered with CIMA.
Professional directors are required to be licensed by CIMA unless they are affiliated with (i) an entity holding a Cayman Islands companies management licence or a mutual funds administrators licence; or (ii) fund managers of a CIMA-regulated mutual fund which fund manager is registered or licensed by one of the prescribed overseas regulatory authorities. In these latter two cases, the natural person will need to be registered with CIMA but will not be required to apply for a licence.
Corporate directors are required to be registered with the Registrar of Companies in the Cayman Islands and are required to be licensed by CIMA, though corporates which hold a Cayman Islands companies management licence or a mutual fund administrator’s licence and which provide directors to Covered Entities are not required to be separately licensed under the Directors Law. Corporate directors must have at least two natural persons on their board who meet CIMA’s fit and proper requirements and proposed new or additional appointees are required to be approved by CIMA.
Simon Thomas, Senior Associate, Campbells