Cayman Islands: Corporate Subscription Financings - A Sheep In Wolves' Clothing

Last Updated: 6 August 2015
Article by Ramesh Maharaj and Alexandra Woodcock

Most Read Contributor in Cayman Islands, September 2018

Convention dictates that a Cayman Islands exempted limited partnership (ELP) be utilised for offshore private equity fund subscription financings. The process is relatively straightforward. A limited partner commits to pay capital up to an agreed amount into an ELP as and when capital calls are made. The subscription agreement usually sets out the payment obligations and terms while the limited partnership agreement (LPA) empowers, at least, the general partner to make the capital calls. The LPA typically allows an ELP to grant security over the rights to make capital calls as well as the proceeds thereof to support or guarantee borrowing obligations of itself or a third party. On occasions, however, such financings may not involve an ELP but instead a Cayman Islands exempted company with limited liability (Cayco). An inconspicuous change maybe – but a distinction with a difference. This article highlights how taking subscription finance security in respect of a Cayco is different from an ELP, and offers some options for lenders and borrowers to consider. While different considerations apply, it is possible with proper Cayman Islands legal advice to get lenders comfortable.

A tale of two entities

The genesis for the different approach lies with the remedies available to a secured party upon an event of default. With an ELP, the secured party would usually be entitled to make capital calls on the limited partners of the ELP, collect the proceeds and update the books and records of the ELP accordingly. It is perfection in practice – a self-help remedy with no need to seek court consent prior to enforcement.

With a Cayco, however, section 99 of the Companies Law (2013 Revision) of the Cayman Islands (section 99) must be considered. Section 99 provides that any transfer of shares or alteration in the status of the Cayco's shareholders made after the commencement of its winding up is void unless approved by an order of the Grand Court of the Cayman Islands. If a winding-up order has been made in respect of a Cayco, thereby triggering an event of default under the loan documents, it may not be possible to update the register of shareholders of the Cayco to issue shares to investors in return for capital payments made. The argument runs that since the Cayco cannot fulfil its part of the subscription agreement, namely the issuance of shares in return for cash, the shareholder may argue the subscription agreement is 'frustrated' (although one may not view such an argument as likely to be sustainable). This does not mean the security is invalid, but simply that the self-help remedy may not be available. The approval of the Grand Court of the Cayman Islands can be sought to update the register of shareholders, however the process is not automated as compared with an ELP.

Options

How can section 99 be overcome to get lenders comfortable? Prevention is better than the cure and so, if at the outset it is anticipated that a Cayco may undertake a subscription financing during its lifetime, its subscription agreement and the articles of association should provide that shares are not required to be issued where section 99 applies. But what if one does not have the luxury of being at inception of a Cayco's life-cycle? A Cayco is fully committed and its shareholders expect to be issued with shares in return for paying their capital commitments. If so, one or more of the following is worth considering. First, issue all shares in advance. If the Cayco's shares are issued at the outset, they thereby avoid the issues caused by section 99. Second, seek consent of the shareholders for the proposed financing. This is unlikely to be attractive and is impractical where Cayco has many shareholders. Third, amend the articles of association. It may, depending on the provisions of the subscription agreement and the voting rights of the shares in Cayco, be possible to amend the articles of association without consent from all shareholders. The amendments are aimed at providing that shares need not be issued where section 99 applies. Fourth, consider springing rights. This is a variation on the option above whereby all the shares are issued at the outset, the terms of which provide an automatic springing right to the economic entitlements upon payment of the relevant subscription amounts. Finally, it may not be palatable to issue all the shares at the outset to the shareholders, and so instead the shares may be issued to a trustee. As and when capital payments are made, the appropriate number of shares in the name of the trustee are transferred to the relevant shareholder. Where section 99 applies, the shares remain with the trustee but are held for the benefit of the relevant investor until such time as the share transfer can be made.

Notice

In a subscription financing involving an ELP, the LPA must be governed by Cayman Islands law; however, the subscription agreement can be governed by any law. As a consequence, the right to call capital is a Cayman Islands situated chose in action or right and for Cayman Islands perfection purposes, a notice of the security granted in favour of a secured lender should be given to each limited partner. Under Cayman Islands law, and subject to certain exceptions, priority between successive assignees of the right to make capital calls is decided according to the timing with which notice is given to the relevant debtor or obligor; here, the shareholder (the so called 'rule in Dearle v Hall'). Under the rule in Dearle v Hall, giving notice first obtains priority.

In a subscription financing involving a Cayco, the subscription agreement may not be Cayman Islands law governed, and depending on the specifics of the relevant transaction, the right to make capital calls may not be set out in the articles of association of Cayco. If so, since there is no Cayman Islands situated chose in action or right, then arguably it is not strictly necessary for any Dearle v Hall notice of the security to be given to each shareholder. This will need to be considered on a case by case basis as other factors, such as the location of the register of shareholders, are relevant. Where the right to make capital calls is set out in the articles of association of Cayco, such right is likely to be a Cayman Islands situated chose in action or right and therefore notice should be given to shareholders of Cayco in accordance with the rule in Dearle v Hall.

Conclusion

On the face of it, a creature of statute in section 99 is a roadblock (no matter how remote the possibility) and even a showstopper. Too often, law firms are informed of advice received that a secured lender cannot be adequately protected in a subscription financing involving a Cayco; that is not correct. Careful analysis of the operations of the relevant Cayco, its articles of association and subscription documents, coupled with proper Cayman Islands legal advice, usually reveals a pathway to achieve a subscription financing for Cayco.

Previously published by Financier Worldwide.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions