The Cayman Islands Limited Liability Companies Law, 2016 (CLLC)
will take effect from July 13, 2016.
The Cayman Islands expects that the CLLC will enhance its
competitiveness by offering fund sponsors another option for
structuring their Cayman funds, with the same familiarity and
equivalence of the Delaware Limited Liability Company Act (DLLC)
used for their onshore vehicles.
This DMS Advisory primarily addresses the fiduciary
responsibilities and fund governance implications of the CLLC;
however, the CLLC is not solely intended for structuring private
funds. Like the DLLC, the CLLC can be used to engage in
virtually any lawful business activity, and structured in virtually
any manner, that best suits the needs of stakeholders.
The CLLC is a hybrid structure that combines the features of a
Cayman Islands exempted company, and a Cayman Islands exempted
limited partnership, with infinite flexibility. In responding
to investor demand for an offshore vehicle that mirrors the
structure of onshore vehicles, the architects of the CLLC stayed
close to the widely regarded and industry-leading DLLC
The CLLC is a corporate body, with a separate legal personality.
It has the flexibility to allocate profits and losses to its
members, similar to partners in an exempted limited
The CLLC will operate on the capital commitment and contribution
model used in a limited partnership structure and will be ideal for
use in private equity funds. Hedge funds will also find the CLLC
beneficial, especially in straightforward valuation and
administration of a corporate entity which represents investor
interests in a capital account, rather than a fixed number of
shares. Having said this, it is possible to draft the limited
liability company agreement of the CLLC (the "LLC
Agreement") to contemplate a fixed number of shares if desired
by the stakeholders.
The CLLC is managed by its members or by one or more managers
who are not necessarily members. It does not require a board of
directors, but this absence does not mean that appropriate fund
governance can be neglected. Indeed, its managers will have
fiduciary duties to the extent provided in the LLC Agreement, and
in cases where the CLLC is used as an investment fund registered
with the Cayman Islands Monetary Authority, it will be required to
appoint two managers who will have an equivalent role to the
directors of a registered investment fund structured as an exempted
The flexible structure of the CLLC means that the parties can
create an LLC Agreement that includes specific terms that meet the
needs of stakeholders. In this regard, the parties can agree the
scope of fiduciary duties that a manager owes to the company to
suit the commercial requirements negotiated, but there will still
be a rigid application of good governance and compliance standards
under law. Although the parties can agree to expand or
restrict the duty of good faith owed by the manager to the CLLC
(and in this regard, we expect that U.S. parties will impose the
Delaware implied covenant of good faith and fair dealing), managers
will not be able to opt out of the irreducible core standard of
willful default and fraud. This should provide assurance to
all stakeholders concerned about investor protection.
A Win-Win Proposition
The CLLC provides for conversion or merger of exempted companies
into the LLC structure and for the redomiciliation of foreign
entities into Cayman as a CLLC. This could prove an instant growth
area, once the law takes effect.
The CLLC opens the door for investors to avail themselves of
foreign tax reclaim entitlements. This will apply to Cayman funds
that convert to the CLLC structure or for a new fund launched as a
As a transparent "look-through" vehicle, the CLLC will
enable U.S. tax-exempts (and the fund manager) to benefit from tax
treaties for eligible markets other than the U.S., while being
shielded from Unrelated Business Income Tax.
Foreign investors from domiciles that allow for treaty benefits
will also be able to claim tax entitlements, and in such cases the
fund manager would be required to apply claim on behalf of any
The synergistic framework of the CLLC vis-ŕ-vis the
Delaware structure should prove highly appealing to U.S. managers
and legal counsel who may welcome the ease of drafting documents,
based on one, known legal concept.
Keys to Success
Looking ahead, the Cayman Islands will strive to make the CLLC
as ubiquitous as the DLLC by applying the same proven principles
that has made it the leading fund jurisdiction in the world:
ease of formation, reasonable fees and reliable jurisprudence.
DMS currently serves as managers to many DLLCs and will continue
acting as managers to the new CLLCs using our usual
industry-leading fund governance standards.
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.
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