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
LLC).
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.
Key Features
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.