The Cayman Islands Exempted Limited Partnership Law, since its original enactment in 1991, has allowed the Cayman Islands to attract high quality business with a partnership structure that was familiar to many professionals around the world. An exempted limited partnership (ELP) is used for many different reasons including as an attractive vehicle for private equity and hedge funds. In response to requests from industry, the Cayman Islands government has recently enacted the Exempted Limited Partnership Law 2014 (ELP Law) which updates the old law to give greater freedom to the general partner (GP) and limited partners (LPs) to determine how the partnership is to operate. The changes also bring our law more closely in line with Delaware law, enabling GPs to offer their US and offshore investor base a more closely aligned product.
This note explains the implications of the key changes to the Exempted Limited Partnership Law passed by the Legislative Assembly of the Cayman Islands. The amendments will come into force upon approval by the Governor, expected in a matter of days.
Requirement of a GP to act in the interests of the ELP
The old law provided that a GP had an absolute obligation to act in good faith and in the interests of the ELP and this duty could not be varied by the limited partnership agreement (LPA). This occasionally caused conflicts of interest problems for the GP when it acted as GP to more than one fund, for example, in relation to investment opportunities. Under the ELP Law, the GP must still act in good faith but the obligation to act in the interests of the ELP can be varied by the terms of the LPA. This change goes some way to removing conflicts of interest problems for GPs and brings Cayman law closer in line with Delaware law.
Foreign partnerships can act as a GP
The ELP Law allows for a foreign limited partnership, defined as a limited partnership or limited liability partnership established in a recognised jurisdiction outside the Cayman Islands, to be the GP of an ELP. Recognised jurisdictions are to be prescribed by regulations made under the ELP Law.
Previously, a partnership established outside the Cayman Islands was not able to act as a GP of an ELP. This required clients to go through the extra expense of setting up a Cayman Islands exempted company to act as a GP or to register a corporate group entity as a foreign company in the Cayman Islands. The foreign limited partnership must register in the Cayman Islands as a foreign limited partnership, in much the same way as a foreign company makes a simple filing to register as a foreign company under
the Cayman Companies Law. The filing must include a statement as to whether the foreign limited partnership is deemed to be a separate legal person under the laws of the jurisdiction in which it is established.
This change makes structures simpler to manage and allows the same partnership to act as GP of both the onshore partnership and the ELP.
Register of Limited Partnership Interests
Under the ELP Law, the register of LPs (Register) need only record the name and address of each LP, and the date on which the LP became, or ceased to be, an LP of the ELP. Details of contributions by and distributions to LPs need no longer be recorded in this Register. Subject to any provisions of the LPA, the Register may be inspected by LPs and any other person with the consent of the GP.
The GP is still required to maintain information on distributions and contributions but this is to be kept in a separate register of contributions (Register of Contributions). Any person may have access to the Register of Contributions with the consent of the GP.
These changes give the GP the ability to prevent an LP from accessing financial information pertaining to other LPs' interests in the ELP.
Where the Register and the Register of Contributions are maintained at a place other than the registered office of the ELP, the GP is required to maintain at the registered office a record of the address where these registers are maintained.
Register of Security Interests
The GP must maintain a register of security interests over any partnership interest at the registered office of the ELP (formerly referred to as the register of mortgages over partnership interests). However, only security interests in relation to which a valid notice has been served on the registered office of the ELP are to be entered on the register. The ELP Law now prescribes the contents of a valid notice.
Widening safe harbours for LPs serving on advisory boards and rights to indemnity/exculpation
The ELP Law brings more clarity to the issue of whether serving on advisory boards or in other ancillary capacities to an ELP carries the risk of loss of statutory limited liability.
The non-exhaustive list of safe harbours for activities that an LP may carry out in relation to the business of the ELP without losing its limited liability status has been extended specifically to include serving on advisory boards or on the board of directors of a company in which the ELP has an interest (such as investment portfolio companies).
Further, the ELP Law provides that, unless otherwise indicated in the LPA, any provisions in the LPA governing the establishment and regulation of boards or committees, including any indemnity and exculpation provisions which are expressed to be in favour of those persons serving in the capacities mentioned above, will not fail purely because those persons are not party to the LPA (as would be the case usually under Cayman Islands general law). This will give comfort to those who serve in these roles as, previously, those persons could not rely on or enforce such provisions in the LPA solely by reason of the provisions being contained in the LPA.
Default provisions given statutory recognition; GP discretion to exercise
The ELP Law now provides more certainty on the enforceability of remedies for LP default contained in the LPA.
Previously, default provisions were subject to challenge on the basis that they amounted to a penalty (i.e. a remedy which amounts to more than a reasonable estimate of loss caused by the default in question). The ELP Law includes a non-exhaustive list of statutorily approved default remedies which are the more common default provisions seen in LPAs.
The GP is given flexibility in whether to exercise its rights upon a default. The GP is not liable if it decides to exercise or not to exercise the default remedies of the LPA provided that such decision is made in good faith.
During the financial crisis, there were occasions when GPs did not want to enforce against defaulting LPs or only wished to proceed against some but not all, for relationship or other reasons. Under the old law, because of the GP's general obligation to act at all times in the interests of the ELP, there was some debate as to whether another LP or a liquidator could argue that the GP was liable to the ELP for any loss suffered if the GP chose not to exercise the remedies for LP default afforded to the GP under the LPA. The ELP Law removes this doubt.
Introduction of Strike Off regime for ELPs
The ELP Law introduces a strike off regime for ELPs which is very similar to that which applies to Cayman companies under the Cayman Companies Law. The regime allows ELPs to effect a soft termination by being struck off the register of ELPs without being required to fully wind up and dissolve.
If the Registrar of Exempted Limited Partnerships (Registrar) has reasonable cause to believe that the ELP is not carrying on business or is not in operation, or if a GP makes an application to the Registrar, the Registrar may strike the ELP off the Register of ELPs. It should be noted, however, that any GP, LP or creditor of an ELP that has been struck off, may apply to the court to have it restored to the register if they can show that the ELP was in fact carrying on business at the time that it was struck off. The applicant must make the restoration application within two years of the strike off date. If the prescribed two year period has elapsed, an order may be sought from Cabinet to allow the restoration as long as this is sought within a ten year period from the date the ELP was struck off the register.
The formal wind down and dissolution process is still the recommended route to follow where the ELP has assets or liabilities or has carried on substantive business. However, this change affords a simple, quick and inexpensive option for terminating a dormant ELP.
Transfer out by ELPs by way of continuation permitted
ELPs may now formally deregister in the Cayman Islands and re-domesticate to another jurisdiction.
Under the old law, there was no formal procedure to allow an ELP to transfer out of the Cayman Islands to another jurisdiction without the potentially costly and time consuming process of being dissolved and having its assets transferred to an entity in the other jurisdiction.
The ELP Law does not provide specifically for re-domestication to the Cayman Islands. This can be achieved by changing the governing law of the LPA to Cayman Islands law, making any required conforming changes to the LPA and then registering the partnership in the Cayman Islands as an ELP with the Registrar.
Powers of Attorney in the LPA and their formalities
Under the ELP Law, the LPA no longer needs to be executed as a deed and witnessed in order to make valid a power of attorney granted in it. It also allows for the grant of powers of attorney to be irrevocable without the need to satisfy the requirements that would otherwise apply under Cayman Islands law, namely that the power be granted to secure a proprietary interest or performance of obligations.
The ELP law is expressed specifically to have retroactive effect in this regard and so validates any power of attorney contained in any LPA which was executed prior to it coming into force.
Clarification of the status of LPs if the ELP ceases to have a qualifying GP
The ELP Law makes it clear that even if the ELP ceases to have a qualifying GP, the LPs still have the benefit of statutory limited liability.
The liability of LPs was previously unclear in the situation where the ELP ceased to have a qualifying GP, for example if the GP ceased to be registered as a foreign company, or was transferred by way of continuation to another jurisdiction. Often cases such as these happened because of an oversight rather than as a result of any conscious action.
Fiduciary duties of LPs
The ELP Law contains a statutory acknowledgement that an LP does not owe any fiduciary duties to the other partners or to the ELP in carrying out any of its obligations or enforcing any of its rights under the LPA (save to the extent specified in the LPA).
Admission formalities simplified
The law concerning admission of a new LP was previously unclear as to whether it was possible to admit a new LP unless it had executed a deed of adherence, or similar document, to agree to become bound by the LPA. This was particularly troublesome for fund managers using ELPs as fund vehicles.
Now the ELP Law provides that the conditions and process for admission to the ELP and the transfer of LP interests can be set out in the LPA and there is no requirement to execute a deed of adherence. In practice, many subscription agreements will have been amended to include adherence language but this change simplifies and clarifies the law in this area and will allow fund managers to determine their own admission procedures and make them uniform across both onshore and offshore platforms.
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.