Foundation Companies (FCs) are Cayman's newest offering for private wealth and commercial structuring. Introduced by The Foundation Companies Law, 2017, which came into force on 18 October last year, FCs can function like a traditional civil law foundation but in the form and with the benefits and familiarity of a company.
What exactly are FCs?
FCs are not trusts. Rather, they are a new type of non-profit company limited by shares or guarantee, established by a person or entity known as the founder. They are incorporated and registered with the Registrar of Companies in the same way as a traditional Cayman Islands exempted company, with a certificate of incorporation providing conclusive evidence that the FC has been validly incorporated.
As a company, the FC's constitutional documents comprise a memorandum and articles of association that can be tailored to the client's particular needs. Bylaws can also be used to govern the management of the FC, although they are not mandatory and do not form part of the constitution.
The Small Print: What you Need to Know
The Foundation Companies Law sets out certain minimum requirements which must be met in order to validly incorporate an FC (or, alternatively convert an existing company into an FC).
They are as follows:
• The FC must be limited by shares or by guarantee, with or without share capital.
• The FC must have a memorandum that:
a. states that the company is an FC;
b. generally or specifically describes the objects of the FC (which can be, but do not have to be, beneficial to any other person);
c. provides for to whom and how surplus assets of the FC will be disposed of on its winding up;
d. prohibits dividends or other distributions of profits to its members or proposed members.
• The FC must have adopted articles.
• The FC must at all times have a secretary who is a ‘qualified person’ (i.e. a person licensed or permitted under the Companies Management Law (2003 Revision) to provide company management services). An assistant secretary who is not a ‘qualified person’ may also be appointed.
In addition, the following requirements should be noted:
• Just like a traditional company, an FC must have a registered office. As a matter of law, the registered office must be at the secretary's business address and so the registered office will only change with a change of secretary.
• Although an FC can exist without members, it must have at least one member on incorporation. Once the FC has been incorporated, all membership can cease provided the FC continues to have at least one ‘supervisor’. Further, if the FC ceases to have members, it cannot subsequently admit members or issue shares unless permitted to do so by the constitution.
• The ‘supervisor’ must be someone other than a member who, under the constitution, has an unconditional right to attend and vote at general meetings, whether or not they have any supervisory powers or duties. Along with the usual corporate registers, a register of supervisors must be maintained by the secretary at the registered office.
Why use an FC?
As a special type of company, FCs can provide a welcome alternative for clients. The advantages include:
• FCs eliminate the uncertainties and complexities which some associate with trusts. In particular, as a separate legal entity which can sue and be sued, the risk of adverse treatment of an FC from jurisdictions unfamiliar with trusts is reduced. Further, there is no risk of unlimited personal liability inherent in the trustee – beneficiary relationship because FCs do not have trustees. The lack of trustees also means that the complications and negotiations associated with the change of trustees throughout the life of a trust are avoided.
• Unlike many other jurisdictions who have introduced foundations into their laws in recent years, FCs are not a completely new legal construct yet to be stress-tested by our courts. Instead, the FC has its origin in our Companies Law, which applies to an FC save to the extent otherwise specified in the Foundation Companies Law. This means that clients can benefit from the certainty of long-established legislation and abundant jurisprudence available in respect of companies, rather than facing the relative unknown of a completely new legal construct.
• FCs are inherently flexible making them ideal for a wide variety of circumstances. The constitution can be drafted to fit the client's particular wishes and needs. By way of example, the constitution can give rights, powers or duties to any type of member, director, officer, supervisor, founder or other person, including but not limited to appointing and removing members, supervisors, directors or officers, making and altering bylaws and supervision of the management and operation of the FC. This can be particularly attractive where, for example, the founder is not keen on having ultimate control resting with one particular individual or group of people.
• Unlike a trust, beneficiaries can be, but do not need to be, identified from the outset and can be, but do not need to be, given rights. In fact the default position is that beneficiaries will have no rights. This may appeal to a founder who is cautious about utilising a trust structure because of, for example, the potential minefield of disclosure of information to beneficiaries or because he is unsure at the outset as to whom he may wish to benefit.
How might FCs be used?
There are numerous ways in which an FC can be utilised in private wealth and commercial structuring. In the commercial context, the FC can be utilised as a special purpose vehicle in finance transactions and their flexibility can also be very accommodating to an array of blockchain related projects and ventures.
Additionally, given that the FC has many similar advantages to that of the traditional private trust but with the added benefits of a company, the FC can be used as an alternative to a trust for succession planning purposes; for philanthropic purposes; to act as the protector or enforcer of a trust; as a private trust company; or as a more modern and flexible alternative to a civil law foundation.
Hopefully, it will be clear from the above that FCs are an exciting new addition to the Cayman Islands which can only help to increase the appeal of the Cayman Islands as an international financial centre.
Partner. Andrew specialises in all aspects of Cayman Islands and British Virgin Islands international wealth structuring for individuals and financial institutions. He is well recognised with awards and distinctions, including a STEP Founder's Award and being named in the 2018 Private Client Global Elite; a "Leading Individual" in Trusts & Private Client Legal 500 2018; and as "Highly Regarded" by IFLR 2018. He is past Chairman of STEP Cayman; a founding board member of the STEP LatAm Conference and the STEP Cayman International Wealth Structuring Forum; a member of the International Tax Planning Association and The International Academy of Estate and Trust Law and an overseas member of the Chancery Bar Association. Prior to joining Bedell Cristin, Andrew was a partner and head of the global wealth structuring group at another major Cayman Islands firm for sixteen years where he joined after thirteen years at a major London law firm.
Bermuda, British Virgin Islands, Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore.