Worldwide: Cayman LLCs vs Delaware LLCs - Areas Of Divergence

Last Updated: 25 November 2016
Article by Ogier  

Most Read Contributor in Jersey, August 2018

The Limited Liability Companies Law, 2016 of the Cayman Islands (LLC Law) created a new entity, a Cayman limited liability company (LLC), similar to its Delaware counterpart. The LLC Law includes many concepts and provisions from the Delaware Limited Liability Company Act, adapted to accommodate various principles of Cayman Islands common law and existing Cayman Islands legislation, principally the Cayman Companies Law and Exempted Limited Partnership Law.

This memorandum highlights key differences between the provisions of the LLC Law and the Delaware Act. However, this memorandum does not purport to cover all of the differences between such laws and is not to be taken as specific legal advice applicable to particular issues or circumstances. In addition, it may not be relied on as advice as to Delaware law on which Ogier is not qualified to advise. Although this memorandum may refer in certain instances to the default position under the LLC Law, the LLC Law provides considerable flexibility to vary this default position in the LLC agreement.

Issue

Delaware

Cayman

Name

Must include "LLC", "L.L.C." or "Limited Liability Company" in its name.

Not required to include "LLC", "L.L.C." or "Limited Liability Company"  in its name.

LLC agreement

No requirement to be in writing.  LLC agreement may have "as of" date which may be prior to registration.

Must be in writing.  LLC Law provides that the LLC agreement shall only be effective on date of registration of the LLC, although parties may agree that the LLC agreement shall be deemed to take effect between themselves (but not against third parties) as at an earlier date.

Member management by majority

Default position: management by members acting by majority in interest.

Default position: management by members acting by majority in number.

Duty of care/fiduciary duties

Duties (including fiduciary duties) may be expanded or restricted or eliminated by the LLC agreement; provided, that the LLC agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

Manager owes duty to act in good faith, which duty may be expanded or restricted by the LLC agreement but not eliminated.  No fiduciary duties owed by members or committee members, absent anything in the LLC agreement. LLC Law states that member may exercise voting rights in its own best interests and as it sees fit even though it may not be in the best interests of the LLC or any other member.

Statutory clawback of distributions

Clawback applies where a member receives a distribution where (i) the LLC is insolvent on a balance sheet basis (liabilities exceed the fair value of the LLC's assets) and (ii) the member knew of such insolvency at the time of the distribution.  Liability to clawback expires three years from the date of the distribution.

Clawback applies where a member receives a distribution or is released from an obligation where (i) the LLC is insolvent on a cash flow basis (unable to pay its debts as they fall due in the ordinary course of business) and (ii) the member has actual knowledge of such insolvency at the time of the distribution.  No time limitation on clawback.

Definition of manager

Statutory definition of "manager" includes a person who is named as a manager of a Delaware LLC  or designated as a manager of a Delaware LLC (although certain provisions of the Delaware LLC Law provide that the definition of a manager will be a person who "participates materially in the management of the limited liability company").

Statutory definition of "manager" includes any member or other person in whom management of the Cayman LLC is vested.

 

Repurchase of LLC interest

An LLC may acquire, by purchase, redemption or otherwise, a member's LLC interest.

An LLC may acquire, by purchase, redemption or otherwise, a member's LLC interest, subject to a cashflow-based solvency test.

Access to information

Members have the right, subject to reasonable standards in the LLC agreement, to obtain true and full information regarding the status of the business and financial condition of the LLC. The manager has the right to information reasonably related to its position. The manager may keep confidential from the members information the disclosure of which it in good faith believes is not in the best interest of the LLC.

The right of a member to receive information regarding the status of the business and financial condition of the LLC is subject to any provision to the contrary in the LLC agreement. The information rights of members and managers may be restricted in the LLC agreement.

Bankruptcy etc of member

Unless otherwise provided in the LLC agreement, a member automatically ceases to be a member on the death, bankruptcy or insolvency of such member.

Member does not automatically cease to be a member on the death, bankruptcy or insolvency of such member.

Dissolution of LLC

In accordance with the Delaware Act.

The LLC Law provides for voluntary winding up, compulsory winding up or winding up under the supervision of the court. The provisions of the Companies Law are imported into the LLC Law. It is also possible for an LLC to be struck off the register as an alternative to formal winding up, subject to reinstatement during the subsequent 10 year period. Non-petition clauses are given statutory recognition.

Dual registration

Statutory procedure for a non-US entity to be registered and exist under its original jurisdiction and under Delaware law at the same time.

No ability for an LLC to be registered in Cayman and in another jurisdiction at the same time although an LLC may be transferred by way of continuation to or from another jurisdiction or converted from an exempted company.

Series LLCs

An LLC agreement may establish one or more series of members, managers, limited liability company interests or assets. The Delaware Act provides for the debts and obligations of one series to be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series, and contains additional detailed provisions regarding the management, operation and segregation of separate series.

No series LLC provisions. LLC agreement may provide for different classes of LLC interests or groups of members, and profits and losses may be allocated among such classes or groups as the LLC agreement provides, but there is no statutory segregation.

Tax Undertaking

No similar provision in Delaware.

LLC may apply for a tax undertaking certificate from the Cayman Islands Government which provides that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciations shall apply to the LLC or to any member thereof in respect of the operations or assets of that LLC or membership interest of any member therein for a period of 50 years from the date of the undertaking.

Registered Agent

Required to have a registered agent for service of process.

Required to maintain a registered office in the Cayman Islands for service of process.  No requirement for separate registered agent.

Statutory registers

 

Required to maintain:

  • Register of members
  • Register of managers
  • Register of mortgages and charges (over the LLC's assets)
  • Register of security interests (granted by members over their LLC interests)
  • Record of contributions and return of contributions

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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