The Cayman Islands Limited Liability Companies Law, 2016 came into force in July of last year (the "LLC Law"). The LLC Law provides for the registration of a new type of corporate vehicle in the Cayman Islands, namely the limited liability company (the "Cayman LLC"). Limited liability companies are widely used in the US and are a familiar feature in many corporate structures including investment funds, joint ventures and structured finance transactions.
The introduction of the Cayman LLC is largely a response to requests from the US investment funds industry and major US law firms. The LLC Law has been drafted using the Delaware model as a guide and will thus be familiar to US legal advisers and their clients. In particular, the ability to have similar vehicles in onshore and off shore fund structures will better align the interests of investors regardless of how or where they enter the fund, enable broadly similar documentation to be used onshore and off shore and may well be administratively more efficient.
Hybrid Vehicle: The Cayman LLC is a hybrid corporate vehicle combining many of the key characteristics of existing Cayman Islands companies and limited partnerships. Unlike a Cayman limited partnership, the Cayman LLC is a body corporate with separate legal personality. However, in common with limited partnerships, there is no concept of share capital and the interests of the members of a Cayman LLC are typically determined by reference to their capital contributions.
Registration: Registration of a Cayman LLC is effected by filing with the Registrar a registration statement signed by or on behalf of any person forming the Cayman LLC and the payment of a prescribed fee.
LLC Agreement: The LLC Law imposes a requirement that the members of a Cayman LLC enter into an agreement to regulate the business or affairs of the Cayman LLC (the "LLC Agreement") and that such agreement must be governed by Cayman Islands law. One of the attractions of the Cayman LLC is that it provides for constitutional flexibility with the members able to agree most aspects of how the Cayman LLC and its members will operate. The Cayman LLC will be bound by the terms of the LLC Agreement whether or not it is signed by the Cayman LLC.
Membership: A Cayman LLC may be formed for any lawful business, purpose or activity, whether or not for profit, provided there is always at least one member. Other than the initial member, who is admitted upon the registration of the Cayman LLC, a person may be admitted as a member either by being issued with an LLC interest or upon a transfer of a Cayman LLC interest, through a plan of merger or consolidation or in connection with the continuation of a foreign entity as a Cayman LLC in the Cayman Islands. A person ceases to be a member of a Cayman LLC upon the happening of any event provided for in the LLC Agreement.
Liability of a Member: The liability of a member to contribute to the assets of a Cayman LLC is limited to the amount that the member has undertaken to contribute, whether in the LLC Agreement or otherwise. Subject to the LLC Agreement, no member or manager of a Cayman LLC is personally liable for any debt, obligation or liability of the Cayman LLC solely by reason of being a member or acting as its manager. Subject to the LLC Agreement, a person may receive an LLC interest or be granted other rights in respect of the Cayman LLC without making any contribution or being obligated to make a contribution to the Cayman LLC.
Transfer of LLC Interests: A Cayman LLC interest is capable of being transferred in whole or in part in accordance with the LLC Law and the provisions of the LLC Agreement. An assignee of a member's LLC interest who is not admitted as a member has no right to participate in the management of the business or affairs of the Cayman LLC except as provided in the LLC Agreement or otherwise upon the approval of all of the members and in compliance with the terms of the LLC Agreement. Subject to the LLC Agreement, unless and until an assignee of a Cayman LLC interest becomes a member, the assignee has no liability as a member solely as a result of such assignment.
Distributions: The profits and losses of a Cayman LLC and distributions of cash or in kind by a Cayman LLC are allocated or paid among the members in the manner provided in the LLC Agreement. Subject to the LLC Agreement, the profits and losses and distributions of a Cayman LLC are allocated on the basis of the agreed value of the contributions made by each member. A Cayman LLC may not declare, make or pay a distribution or release a member from any obligation to the Cayman LLC if, at the time of such distribution or purported release, it is, or would as a result be, unable to pay its debts as they fall due in the ordinary course of business. A member who receives a distribution, or is purportedly released from an obligation in violation of this solvency test and who had actual knowledge of the violation at the relevant time, is liable to the Cayman LLC for the amount of such distribution or for the performance of the obligation purportedly released.
Management: The LLC Law provides for the management of the Cayman LLC to be vested in its members acting by a majority in number unless the LLC Agreement provides for all or part of the management of the Cayman LLC to be vested in a manager or managers (one or more of whom may also be members, if permitted by the LLC Agreement). Unless the LLC Agreement provides otherwise, the members acting by a majority in number or a manager appointed in accordance with the LLC Agreement have the ability to bind the Cayman LLC.
Duties Owed by Members and Managers: The rights and duties of the members and managers in a Cayman LLC are, as between themselves, determined by the LLC Agreement. Subject to the LLC Agreement, a manager does not owe any duty (fiduciary or otherwise) to the Cayman LLC or any member or other person in respect of the Cayman LLC other than a duty to act in good faith in respect of the rights, authorities or obligations which are exercised or performed or to which such manager is subject, provided that the duty of good faith may be expanded or restricted by the LLC Agreement. Further, subject to the LLC Agreement, a member does not owe any duty (fiduciary or otherwise) to the Cayman LLC or any member in exercising any of its rights or in performing any of its obligations under the LLC Agreement to the Cayman LLC or to any member. Where such member is exercising any vote, consent or approval right, it may act in its own best interests and as it sees fit even though it may not be in the best interests of the Cayman LLC or any other member.
Conversion, Continuance and Discontinuance: Existing exempted Cayman Islands companies (other than segregated portfolio companies) may convert to a Cayman LLC and a foreign entity (with separate legal personality) may apply to the Registrar for permission to continue into the Cayman Islands as a Cayman LLC. The LLC Law also contains provisions whereby a Cayman LLC may be de-registered as a Cayman LLC and continued as a foreign entity under the laws of any other jurisdiction by application to the Registrar.
The Cayman LLC lends itself to a broad range of corporate and commercial applications where operational and structural flexibility can provide advantages over more traditional companies. The Cayman LLC is a very welcome addition to the Cayman Islands' existing stable of company, limited partnership and trust vehicles and further enhances the Cayman Islands as a forward thinking and innovative place to do business. Whilst wrong to presume that the Cayman LLC will be the ideal vehicle in all situations, we certainly see it becoming a popular vehicle over time. About the Author
Richard is a Partner in the Cayman Islands office of Conyers Dill & Pearman. His practice covers a broad range of corporate and finance transactions. Richard's particular focus is on corporate finance, M&A, debt and equity issues, private equity portfolio transactions, stock exchange listings and corporate reorganisations. His clients include multinational banks, corporate groups and investment managers. Richard has been practising Cayman Islands law for more than 15 years and the laws of Bermuda and the British Virgin Islands for 7 years. He brings a commercial approach to transactions, having previously been managing director of the Cayman subsidiary of a London merchant bank and practised as a chartered accountant at a big four firm.
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