On 18 December 2015, the Cayman Islands published a bill (the
LLC Bill) for the creation of a new law
to permit the formation of a new type of vehicle in the Cayman
Islands, a Cayman Islands limited liability company (a
This is a particularly exciting development as the Cayman Islands LLC has been eagerly anticipated by the investment funds industry to provide the market with a corporate vehicle that is closely aligned with a Delaware limited liability company and which contains a number of features that make it much more flexible than a Cayman Islands exempted company (being the usual entity used for Cayman structuring purposes).
Whilst many stakeholders, particularly North American stakeholders, that are already familiar with some of the key characteristics of a Delaware LLC will no doubt welcome the introduction of this new vehicle, Harneys also expects that the introduction of the Cayman LLC will also be welcomed by clients in other jurisdictions – particularly in Asia, where there has been strong demand for a more flexible corporate offshore structure that is more aligned to the expectations of Asian stakeholders. In addition, Harneys expects that the new LLC will be very popular with stakeholders who are looking for a flexible vehicle to facilitate corporate transactions including joint venture and special purpose company structures where the LLC framework (via the LLC agreement) can be developed to suit the requirements of the particular transaction.
For example, a Cayman LLC may be operated by a majority of the members or manager(s) who do not owe any fiduciary duties to the LLC or any member or other person except, in the case of the manager(s), a duty of good faith (which duty 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 who are looking for an alternative corporate structure where the participants can operate a structure in their own interests largely without the traditional burden, fiduciary responsibilities and associated liabilities of directors of a company.
In drafting the legislative framework that will govern the formation and registration of a LLC, the drafting committee took into consideration concepts in the Delaware Limited Liability Companies Act but with modifications required to fit with existing Cayman Islands law, including for example, 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 and Harneys will provide further updates as and when this happens.
As the LLC Bill is currently drafted, it is expected that Cayman Islands LLCs will have the following key features:
(a) a LLC is a body corporate (with separate legal personality from its members) with limited liability;
(b) a LLC may be formed for any lawful business, purpose or activity;
(c) a LLC will require at least one member (there are no Cayman Islands residency requirements for members);
(d) a LLC must have a registered office in the Cayman Islands;
(e) registration is effected by payment of a fee and filing a certificate of formation (i.e. similar to a section 9 statement for an exempted limited partnership);
(f) a 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 Companies Law (current ‘foreign company’ registration) or it is an existing entity that is currently using one of these suffixes in its name;
(g) members are required to enter into a LLC agreement governed by Cayman Islands law to regulate the business or affairs of the LLC and the conduct of its business or affairs. Members are free, however, to agree amongst themselves the internal rules and regulations, subject to appropriate minimum safeguards;
(h) the LLC agreement is not required to be filed or registered with the Registrar of Companies (which is in line with current Delaware law);
(i) the LLC Bill makes provision for the vesting of management powers in members or alternately in one or more managers as set out in the LLC agreement (as is the case for members, there are no Cayman Islands residency requirements for managers). Further and as mentioned previously, the members or manager(s) do not owe any fiduciary duties to the LLC or any member or other person except, in the case of manager(s), a duty of good faith (which duty can be expanded or restricted by the express provisions of the relevant LLC agreement);
(j) subject to the terms in the LLC agreement, LLC interests are capable of withdrawal on demand of notice by members;
(k) subject to the LLC agreement, members are entitled to grant security over the whole or any part of their LLC interest and any such security interest shall have priority according to the time that the written notice of such security interest, signed by each of the secured party and the relevant member, is validly served at the registered office of the LLC, amongst other matters;
(l) the LLC is required to maintain a register of mortgages and charges in a similar manner to an exempted company under the Cayman Islands Companies Law;
(m) the LLC Bill makes provision for the creation of classes of member/interest;
(n) the liability of a member to contribute to the assets of a LLC is limited to the amount that the member has undertaken to contribute to the assets of the LLC, any other payments as set out in the LLC agreement and such other payments or return of property as required under the LLC agreement or the LLC Bill;
(o) the LLC Bill seeks to preserve the rules of equity and common law (that are not inconsistent with the provisions of the LLC Bill) as noted above whilst addressing minimum statutory duties in the context of members and managers;
(p) the LLC Bill makes provision for the applicability of other Cayman Islands laws to a LLC (therefore upon implementation of the LLC Bill into law, a LLC will automatically be incorporated into, for example, (a) the Mutual Funds Law so that a LLC can be structured as a mutual fund; (b) the Exempted Limited Partnership Law so that a LLC can be formed to act as a general partner of an exempted limited partnership); and (c) the Securities Investment Business Law so that a LLC can be formed to act as an investment manager or investment advisor to a mutual fund or general partner of an exempted limited partnership;
(q) the LLC Bill allows for the conversion of exempted companies into LLCs, reconstruction, amalgamations, mergers and consolidation and the migration of foreign LLCs into the Cayman Islands; and
(r) consistent with OECD commitments, provision is made for various registers to be maintained and, as appropriate, filed or made available to Cayman Islands authorities (being a register of members, register of managers and a register of mortgages and charges and maintaining books of account for at least 5 years.
The LLC Bill as currently drafted creates a great framework upon which to launch the new vehicle and is a welcome addition to the existing suite of Cayman vehicles, reinforcing Cayman’s position as the world’s leading offshore jurisdiction for the investment funds industry.
We will provide further updates as the LLC Bill evolves after industry consultation and implementation into law. If you have any feedback, questions or comments please do not hesitate to contact your usual Harneys contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.