On December 18 2015 a bill was published for the creation of a new law permitting formation of the new Cayman limited liability company (LLC) corporate vehicle.
The creation of the Cayman LLC is eagerly anticipated by the investment funds industry, as it will provide the market with a corporate vehicle that is closely aligned with the Delaware LLC and contains a number of features that make it much more flexible than the Cayman exempted company (the usual entity used for structuring purposes in the Cayman Islands).
Stakeholders in North America that are already familiar with the key characteristics of the Delaware LLC will no doubt welcome the introduction of this new vehicle. Further, the introduction of the Cayman LLC is expected to be welcomed by clients in other jurisdictions – particularly in Asia, where there has been strong demand for a more flexible corporate offshore structure aligned to the expectations of Asian stakeholders. In addition, the new LLC is likely to be very popular with stakeholders which are looking for a flexible vehicle to facilitate corporate transactions, including joint venture and special purpose company structures, where the LLC framework can be developed to suit the requirements of the particular transaction.
For example, it will be possible for a Cayman LLC to be operated by a majority of the members or managers who owe no fiduciary duties to the LLC or any member or other person – except, in the case of the managers, a duty of good faith (which can be expanded or restricted by the express provisions of the LLC agreement). As such, the Cayman LLC will be particularly attractive to the private equity industry, private wealth and family offices and venture capital promoters that are looking for an alternative corporate structure where the participants can operate in their own interests, largely without the traditional burdens, fiduciary responsibilities and associated liabilities of directors of a company.
In creating the legislative framework that will govern the formation and registration of the LLC vehicle, the drafting committee drew concepts from the Delaware Limited Liability Companies Act, modified to fit with existing Cayman Islands law, including the preservation of the rules of equity and common law.
Following the publication of the bill in the Cayman Islands Gazette for stakeholder consultation, it is expected that the LLC Bill will be implemented into law during the first quarter of 2016.
As the LLC Bill is currently drafted, it is expected that Cayman Islands LLCs will have the following key features:
- An LLC is a corporate body (with separate legal personality from its members) with limited liability.
- It may be formed for any lawful business, purpose or activity.
- It must have at least one member (there are no residency requirements for members).
- It must have a registered office in the Cayman Islands.
- Registration will be effected by payment of a fee and filing a certificate of formation (ie, similar to a Section 9 statement for an exempted limited partnership).
- An LLC may (but is not required to) use one of the following suffixes in its name: 'Limited Liability Company', 'LLC' or 'L.L.C.'. No other company or entity registered under the Cayman Islands Companies Law may use these suffixes in its name, unless it is or will be an entity registered under Part IX of the Cayman Islands Companies Law (current 'foreign company' registration) or it is an existing entity that uses one of these suffixes in its name.
- Members must enter into an LLC agreement governed by Cayman law to regulate the business or affairs of the LLC. However, members are free to agree among themselves the internal rules and regulations, subject to appropriate minimum safeguards.
- The LLC agreement need not be filed or registered with the registrar of companies. This is in line with current Delaware law.
- The LLC Bill provides for the vesting of management powers in members or one or more managers as set out in the LLC agreement (there are no residency requirements). Further, the members or managers owe no fiduciary duties to the LLC or any member or other person, except – in the case of managers – a duty of good faith which can be expanded or restricted by the LLC agreement.
- Subject to the terms in the LLC agreement, LLC interests are capable of withdrawal on demand of notice by members.
- Subject to the LLC agreement, members may grant security over the whole or any part of their LLC interest. The security interest will have priority based on the date that written notice – signed by the secured party and the relevant member – is validly served at the registered office of the LLC.
- An LLC must maintain a register of mortgages and charges in a similar manner to an exempted company under the Cayman Islands Companies Law.
- The LLC Bill provides for the creation of classes of member or interest.
- The liability of a member to contribute to the assets of an LLC is limited to:
- the amount that the member has undertaken to contribute;
- other payments set out in the LLC agreement; and
- other payments or return of property required under the LLC agreement or the LLC Bill.
- The LLC Bill seeks to preserve the rules of equity and common law while addressing minimum statutory duties in the context of members and managers.
- The bill provides for the applicability of other Cayman laws to an LLC. Therefore, on implementation of the LLC Bill into law, the LLC vehicle will automatically be incorporated into, for example:
- the Mutual Funds Law, so that an LLC can be structured as a mutual fund;
- the Exempted Limited Partnership Law, so that an LLC can be formed to act as a general partner of an exempted limited partnership; and
- the Securities Investment Business Law, so that an LLC can be formed to act as an investment manager or investment adviser to a mutual fund or general partner of an exempted limited partnership.
- The bill allows for:
- conversion of exempted companies into LLCs;
- mergers and consolidations; and
- migration of foreign LLCs into the Cayman Islands.
- Consistent with Organisation for Economic Cooperation and Development commitments, provision is made for various registers to be maintained and, as appropriate, filed or made available to Cayman Islands authorities. These include a register of members, register of managers and a register of mortgages and charges and a provision for account books to be maintained for at least five years.
The LLC Bill as currently drafted creates a great framework on which to launch the new vehicle. The Cayman LLC is a welcome addition to the existing suite of Cayman vehicles, reinforcing the Cayman Islands' position as the world's leading offshore jurisdiction for the investment funds industry.
For further information on this topic please contact Jonathan Culshaw or Bronwyn King at Harney Westwood & Riegels' Hong Kong office by telephone (+852 3195 7200) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact Andrew Morehouse or Matt Taber at Harney Westwood & Riegels' Grand Cayman office by telephone (+1 345 815 2946) or email (firstname.lastname@example.org or email@example.com). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
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